Do Ramaphosa's advisors get it right?

RW Johnson's assesses the PEAC's "Briefing Notes on Key Policy Questions for South Africa’s Economic Recovery"

In the rather distressing section of the Presidential Economic Advisors’ Report [1] dealing with local government there is a remark about how many dysfunctional municipalities, lacking skills, expertise and capacity of any kind, spend large amounts on consultants.

However, even if the consultants do their job well little is gained since the gap between them on the one hand and their audience on the other is such that there is no skills transfer at all. As one imagines this worthy and reasonably sophisticated document being circulated to the cabinet, one wonders whether something similar will not be true there too.

Advice 1: Go slower

The main finding of the PEAC to make the press has been their argument that the Treasury has been far too tough in aiming to stabilise the national debt at 87% of GDP. To achieve this, they argue, would require such severe cuts as to be damaging to prospects of economic recovery. Following the work of Philip Burger, they show that stabilising at 87% would require the country to run a primary budget surplus of 7% for a while and then 6% for a longer period. Even an IMF structural adjustment plan – an SAP – would require only a 4% primary surplus, so better to stick to that 4% level, allow the debt to balloon to 100% of GDP, and then slowly reel it in over a longer period.

This will, they warn, be quite tough enough and it will have to be accompanied by “visible restructuring, including wage bill reduction and restructuring and privatization of the SOEs”. Plus sweeping reforms in mining, energy, agriculture, agro-processing etc. They warn that the government will have to be particularly tough about reducing the public service wage bill and they are also clearly nervous that just 16 million wage earners are somehow paying for 18 million welfare recipients. They recommend that the number of welfare recipients be reduced and increases in welfare payments be kept to a nominal 1% or 2%. They also warn that temporary Covid-19 grants should not be made permanent and that no new grants should be announced.

The immediate effect of the report was for Tito Mboweni to put back a week his Medium Term Budget Policy Statement, presumably to phase in these slightly less demanding targets. But one can’t help wondering about the wisdom of the report.

The problem of rationality

Partly, this is to do with rationality. At almost every point the PEAC is pointing to bizarre irrationalities in South Africa. You have more welfare recipients who get money for doing nothing than you have wage-earners who earn their keep? Amazing. Your public servants saw their salaries increase by 66% in real terms during the past decade? Fantastic. And this means they are far better paid than private sector workers who are more productive? Extraordinary. You are providing free university education although Britain and America can’t afford it? Remarkable. And so on.

If you keep this in mind while reading the PEAC proposals, which are highly rational, it has a strange, almost giddying effect. What chance does mere rationality have here? Take the public servants’ 66% increase, for example. This was one of the biggest social changes in the country in that period. Did anyone plan it? No. It just grew like Topsy.

Lots of people who ought to know better dressed up in red t-shirts and toyi-toyied for the rights of the “exploited workers”, when actually it was all about already well-paid, indeed overpaid, professionals. A complete and painful charade. Somehow it came as no surprise to learn that a whole one fifth of the public service regularly call in sick. Since a 20% sickness rate is not credible, that just means paid holidays.

This affects one’s judgement about the wisdom of putting a brake on austerity. After all, we have arrived at the point we are at now because ministers of finance – particularly Pravin Gordhan – took the easy way out for the last decade, never biting the bullet and allowing fantastical increases to public service and SOE salaries, year after year. Now, at very long last, the Treasury is girding itself to make real cuts. Is it really wise to immediately tell them to go slow? This is a political, not an economic point.

Advice 2: Tough reforms within a long haul

However, let us concede that point. But note that allowing the debt to rise to 100% of GDP means that annual debt repayments will rise to swallow almost 25% of budget revenue and that this straitjacket will have to be worn for a long period of years. Are we really likely to maintain such an extended period of economic discipline?

Moreover, note that the PEAC makes it plain that there will be a long tough battle to push public sector wages down again and that meanwhile that wage bill plus debt interest payments plus welfare payments, health and education will use up the whole of the budget.

So if there is going to be any investment, it is going to have to come from the private sector, which has some R10 trillion in available funds. This will go into completely restructuring the energy sector, ports, airports, railways and the municipalities.

“Over the past couple of years South Africa has seen structural policies moving in the wrong direction, its institutional fabric being eroded and endowments being misused for non-productive purposes”, the PEAC says. What this boils down to is that the government has squandered its resources by paying public sector and SOE workers far too much, paying itself far too much, giving away further huge sums to welfare recipients and allowing massive amounts to be stolen. At the end of this beggar’s banquet only the private sector has got any money left – and huge amounts of that have flown abroad.

What the PEAC does not spell out – but which is quite implicit – is that this implies the de facto privatization of almost all the projects thus financed. True, they talk about the need for “a centralised long-term planning framework” but it is absurd to imagine that the private sector, which is providing all the cash, will not also call the shots – probably requiring long-term rents or tolls from their investments. In any case, the PEAC is quite frank that most of the SOEs will, for the same reasons, need to be privatized.

This may be rational enough but the PEAC seem to assume that the entire body of ANC ideology – not to mention the NDR – can be quietly ditched even as the government imposes long-term austerity and sits hard on Cosatu and the public service unions. The PEAC cheerfully tells the government “Get over the ideology about the state. This is not about more or less state but a smarter state.”

One can imagine the enthusiasm with which a Blade Nzimande or a Gwede Mantashe responds to this. The very best of luck with that, one feels. To put it bluntly, the PEAC may have sensible economic suggestions but it doesn’t seem to have a political brain at all.

The incapable state

This impression strengthens as one gets to the section on “Building state capacity” which is full of energetic buzzwords and phrases like “critical mission objective”. This whole section is a waste of breath.

It would have been better to start with the question “Why does state capacity need to be re-built ?” Because, of course, the ANC inherited a reasonably capable state. The damage was done right away, under the Mandela administration when Thabo Mbeki was in charge. His advisers told him that the more the ANC wanted to do, the more essential it was that the government keep the maximum amount of skills and expertise in the civil service. To which, however, Mbeki’s response was that the comrades wanted those jobs. In addition he convinced himself that the idea that the comrades didn’t have the necessary skills was just “an urban legend”.

That was the fatal moment. Essentially the ANC traded away its long-term ability to do things in order to buy popularity with the new bureaucratic bourgeoisie. Ever since then that bourgeoisie has swollen in numbers and wealth until it dominates the state and society.

It is no accident that everyone is now telling the government that it has to cut it back hard or go down with the ship. But there are real questions whether the government even dares to take on such a trial of strength. As the sorcerer’s apprentice knows, it is extremely difficult to get the genie back into the bottle.

The failure of local government

There is much of interest in the PEAC report. It quotes the COGTA figures that only 7% of municipalities in South Africa are doing well on implementation. Another 30% are reasonably functional, 32% are almost dysfunctional and 31% are completely dysfunctional. Without doubt the situation has deteriorated since those figures were released – today even “jewel in the crown” municipalities like Graaff-Reinet are struggling to survive. Indeed, even major metros like Durban, Jo’burg and Pretoria are in trouble.

At this point it is worth glancing at local government in the rest of Africa. Almost everywhere it is a mess. Generally, it fails except possibly in the one or two biggest cities. That is par for this course.

Accordingly, it is best to skip the sections on municipal government and, a fortiori, the enthusiastic nonsense written about “Unlocking the District Development Model”. This DDM model is based on the dubious assumption that improving co-ordination between the levels of government, and grouping several failing municipalities together, will help.

This is pointless. Lack of co-ordination is not the main problem. Grouping several failures together just gives you a bigger failure. And we have already seen whole provinces – Free State, Mpumalanga, North West – become corrupt fiefdoms in which all the mayors are simply clients of the ruthless provincial premier.

The point is that, as PEAC says, “Not much has been done to arrest the decline in skills at local government or to undertake a process to build dynamic capabilities”. The picture is, indeed, one of steady and headlong regression. It would be more honest to accept the fact that South Africa is becoming a country of four or five large metropoles, with a consequent flood of population to them and the death of most smaller towns.

The 7% of municipalities that work properly are virtually all in the Western Cape and the real drama is whether the other large metropoles (other than Cape Town) can be prevented from collapse. Playing around with DDM is re-arranging the deckchairs on the deck of the Titanic.

Advice 3: Food for thought

Finally, the PEAC is interesting about agriculture. As it points out, the ANC government immediately withdrew all manner of support from farmers – they lost their research facilities and subsidies, were made to pay rates, had all manner of restrictive labour laws imposed on them etc. Many farmers went bust, others were forced out and at the end of this Darwinian process only the most efficient large farmers survived.

This was extremely lucky for all of us. On a reduced acreage these remaining farmers more than doubled their productivity and, overall, agricultural production has almost doubled since 1994. Over 80% of all agricultural production derives from just 40,122 farms, especially some 2,000 mega-farms. Over two million small scale and subsistence farmers together produce less than 20%.

This is how the country is fed. All that the government’s agricultural policies have achieved is to make the government – and the country – ever more dependent on a small number of wealthy white farmers and farming corporations. But no one in their right mind would want to change this. We are just about the last country in Africa which can feed itself.

These figures also bespeak the complete failure of land reform. Everywhere in the world there is a tendency to larger farms and South Africa is no exception. The government’s fixation with helping small black farmers is thus largely a wasted effort. And by far the most successful land reform efforts have been made by white farmers themselves, sponsoring and encouraging black farmers on the margins of their own farms. If the government was serious, it would work with the farmers to spread this model. A figure it should never forget is that twenty years after the Zimbabwean “land reform” 60% of Zimbabwe’s population goes hungry.

How much notice the government takes of the PEAC report we shall soon know. Immediately, Ramaphosa has renewed the Covid-19 grants for another three months, which they would probably have recommended against. No one knows where the money for that will come from.

Ramaphosa has also announced a vast public works programme which the PEAC would probably have warned against too. (No one knows where the money for this will come from either.) Such programmes are short-term and often have few lasting results. Far more serious would be schemes to increase private sector employment but the government seems to regard local businessmen, like local farmers, as Martians with whom it can’t deal.

The take-aways

So, as the CNN anchors say, what are the take-aways? They are several. In general, it is later than you think and certainly later than Ramaphosa thinks. He seems to be off in his own timetable which is set mainly by his endless compacting exercises. He lives in a world of Nedlac, Command Councils and endless monitoring committees. This world bears little relation to reality and it moves at a glacial pace. Unfortunately, South Africa’s economic and social crisis moves at a far faster tempo and the disjuncture is growing.

Secondly, South Africa’s runaway urbanization process is way beyond the government’s control and all the talk about the District Development Model should probably be forgotten. It is merely a stage in the government’s slow realisation that it has lost control of most of what is happening on the ground. If you have a hopeless civil service and a hopeless police force it is difficult to see how this could be otherwise. In many African countries the government controls only the road between the presidential palace and the airport. (A different sort of take-away – the get-away.)

Once again, of course, Ramaphosa has talked the language of reform without actually producing any reforms. What is truly amazing is the way that the government never misses an opportunity to miss an opportunity.

How to miss an opportunity

SAA is a case in point. Over 20 years ago BA offered to buy 51% of it. Such a sale would have netted a handy sum and guaranteed SAA’s future in perpetuity as part of a major world network. BA would have ensured that its standards stayed high and that it had the best planes.

Instead the government indignantly refused so BA partnered with Comair and cut into SAA’s dominant position in the domestic market. Meanwhile the government ran SAA into the ground. No serious country, after all, would have allowed someone like Dudu Myeni to take charge of the national airline.

By some miracle, however. Emirates offered a deal to SAA which would have saved the day. This was turned down. Now SAA is bankrupt and worthless and meanwhile Qatar Airways has partnered with Airlink, creating another major private competitor. The government is now looking around desperately for anyone willing to buy all or part of SAA. It has thrown away all its opportunities and may now get nothing for a once valuable asset.

But the same is true of almost all the SOEs. If, say, Eskom or Denel or the SABC had been privatized in the 1990s they would have provided a huge financial windfall for the government and all those enterprises would be humming along now. We would have no power cuts, no huge Eskom debt mortgaging our future and unemployment would be lower.

Wherever one looks, it is the same story of huge missed opportunities. Our universities were the best in Africa in 1994 and could have aimed at ever higher standards and become the training ground of the all-Africa elite, pulling in large amounts of foreign money as they did so. Instead they chose to lower standards, admit hordes of ineducable students and watch their facilities get trashed in mindless protests.

The question now is whether the government will continue on this path when it comes to its own necessary retreat. It is, after all, clear enough that government health and educational facilities are very poor, that the police and armed services add little value and that the SOEs are generally holding the economy back. Quite clearly the state needs to shrink to a size where it can at least form a few basic functions well and allow the market to look after the rest. This may not be an ideal result but it would work and it’s what has happened anyway in much of Africa.

So the question is whether the state will recognize this, retreat in good order and earn the plaudits of international investors by making it clear that market criteria will rule. The alternative is to behave as it has with SAA: refuse sensible alternatives, be forced to retreat anyway as government fails in one area after another, clinging to one’s ideology amidst a gathering chaos. Pity the PEAC didn’t tackle that one.

[1] South Africa Presidential Economic Advisory Council, Briefing Notes on Key Policy Questions for South Africa’s Economic Recovery, October 2020.