Economic Policy since the transition: Socially oriented to Market oriented

Zunaid Moola, Deputy Editor of New Agenda, presented this paper at the IFAA Forum in March 2017. Zunaid discusses shifts in government economic policy away from the progressive and socially oriented RDP and MERG report to the free-market and neoliberal GEAR. 

As we look back to 1994, it is useful firstly to understand the context in which the transition occurred. The global status quo then, as now, was that of a unipolar world. The Soviet Union collapsed in 1989 which made the U.S. the sole super power. This altered the relations with smaller countries who no longer had the choice of aligning themselves with an alternative political system. A capitalist world order was established which meant that the U. S. and its major allies used their hegemonic power to impose conditions on small and medium countries with regard to how they frame their national development objectives. This was the era in which neoliberalism became the dominant ideology, an all – encompassing system that prescribed how the economies of countries should be structured. The underlying purpose of this ideology is to ensure that the greatest possible number of countries entrench an order in which the gains from economic activity flow to corporations and their representatives. We will spell out the details of neoliberal policies in one of the sections below.

The Vision and Plan of MERG

The conditions of life under Apartheid are well known, having been documented in much detail during the years of the struggle. It is this that formed the starting point of the MERG (Macro Economic Research Group) when it was set up in 1991 – 1992. MERG was tasked with developing a new macroeconomic policy framework for South Africa. It was comprised of economists from several countries who were grouped into teams with South African economists. Each team dealt with a particular area of economic policy.
The work of MERG was guided by the enormous challenge a new, democratically elected government would face as it set out to dismantle the structural barriers erected by Apartheid over a period of more than 40 years. The point of departure for MERG was that social development should be the priority with the economy then organized to generate the resources that would be required. It supported this approach by arguing that social development in itself could be a strong stimulus to growth. Building schools, houses, hospitals and clinics, and infrastructure for public transport, energy, water and sewerage, are all labour intensive activities. They would create jobs and generate taxes. It is useful to see how MERG conceptualized this.
MERG sought to combine the components of macro-economic policy into a coherent framework wherein a high level of coordination could be achieved between them.

Thus, at the implementation level, the five components, namely:
1. Monetary Policy
2. Fiscal Policy
3. Trade and Industrial Policy
4. Labour Market Policy
5. Rural Development Policy

would be brought into sync with one another. Fiscal policy would firstly deal with the expenditure side. On the assumption that finance was not available, monetary policy would be required to secure funds either by printing or borrowing. Through Trade and Industrial policy, government would promote the formation of small and medium sized enterprises who, in partnership with larger established businesses, would have a mandate to supply the inputs and finished goods for the massive social development programmes as well as consumer goods. The objectives of Labour Market policy would be to undertake the full range of skills development and training programmes to meet the needs of the social, business and government sectors while entrenching workers rights. Finally, Rural Development policy would focus on improving living conditions for the vast number of South Africa’s poorest and most marginalized people and for achieving food security.

With regard to the financing of this socio-economic renewal, the models created by MERG showed a deficit for the first 10 years as expenditure exceeded revenue. In response to the criticism they received for this, they argued that deficits are firstly, not necessarily bad if the money is directed into productive investments and, secondly, the deficit would decline over time as tax revenues increased from all sources i.e. workers wages, enterprise profits and households.
The complete program of MERG was published in a book titled Making Democracy Work. It was presented to Trevor Manuel who, as head of the Economic Development Unit, received it on behalf of the ANC at an official ceremony. After the elections in 1994, with the completion of its work, MERG was dissolved. But there was strong agreement that there was a need for the organization to continue as another entity. Subsequently, the National Institute for Economic Policy (NIEP) was created. One of the first initiatives of NIEP was to set up a training program in Parliament which it called the Service Program. MP’s were offered a series of workshops to raise their levels of knowledge of economics and to provide them with an understanding of the policies that needed to be adopted for economic growth. NIEP also opened an office in Johannesburg where it continued to do groundbreaking research until it closed in 2004.

The Reconstruction and Development Programme (RDP)

MERG started its work in 1992. In 1994, shortly after the transition to political democracy, the ANC began holding a series of consultations with its allies and several civic organizations to spell out a vision for an economic development plan. Going back to the tradition that was rooted in the Freedom Charter of 1955, the RDP laid out a policy framework on how to tackle the abject conditions wrought by decades of Apartheid. Like MERG, the RDP made social development a major plank of its programme. It noted that it is not merely the lack of income which determines poverty. For millions of citizens, very basic needs were unmet. In its preface, the RDP asserted that attacking poverty and deprivation is the first priority of the democratic government. It addressed issues of social, institutional, environmental and macro-economic sustainability in an integrated manner, with specific attention to affordability.
In attacking poverty and deprivation, the RDP aimed to set South Africa firmly on the road to:
 eliminating hunger
 providing land and housing to all
 providing access to safe water and sanitation for all
 ensuring the availability of affordable and sustainable energy source
 eliminating illiteracy
 raising the quality of education and training for children and adults
 protecting the environment
 improving health services and making them accessible to all.

On the state of the economy at the time, the RDP noted the following features: low growth and investment, falling real incomes and high unemployment. The country was also not able to compete effectively in world markets, relied too much on exporting gold and other minerals and was dominated by a few large conglomerates. Manufacturing industries were under-developed and there were weak links between small and large business. The RDP pointed to the situation for women as particularly appalling. They were excluded from important areas of economic control and were employed in the lowest paying industries or as domestic workers and in subsistence farming.

The Programme targeted several main sectors for ending poverty, creating jobs and meeting basic needs. Among its other goals were the following:
 address the structural problems of the economy
 build the economy as well as that of Southern Africa and integrate South Africa into the world economy
 protect worker rights
 develop human resources
 end all discrimination based on race, sex, ethnicity, disability, religion and language.
 make the economy democratic by involving all stake holders including trade unions and small business in an open and transparent process of economic decision making.

These goals were to be achieved by giving a strong mandate to specific sectors. The following is a brief description of the policies proposed for the key sectors:
Industry, Trade and Commerce
The RDP aimed to achieve 5% growth of the economy and to create between 300,000 and 500,000 jobs in industry, trade and commerce within five years through these areas
 Trade Policy
To reduce protection in a way that does not severely disrupt employment while also making it a successful trading country
Changes in Institutions and Government Departments
To introduce a National Economic Forum and other similar structures that would establish a tradition of negotiation
The Corporate Sector
Create mechanisms for empowering black people, especially black women, and promote more competition in the big business sector.
Development of Small, Medium and Micro Businesses
To get more people to participate in the economy, create jobs and spread income and also to improve the efficiency of the economy.
Better Use of Technology
Mining and Mineral rights should be returned to the state to allow open access to mineral resources that will involve consultation with all stake holders. In addition, policy must also address
 more effective marketing of our minerals
 more use of our minerals in local manufacturing (beneficiation)
 workplace democracy for miners
 participation of miners in the financial affairs of mining companies
 strengthening of tri-partite structures such as the Mining Summit
 better accommodation for miners, closer to mining sites
 improvements in the health and safety system
 protection of the environment
 promotion of co-operation in the Southern African region.
Agriculture, Fisheries and Forestry
The RDP aimed to increase production and employment in agriculture through the development of commercial agriculture. At the same time it called for the need to change ownership through land reform and to improve support for small scale agriculture, especially for women in agriculture.
To provide affordable food so that the basic needs of all South Africans can be met.
Extend full worker rights to farm workers and improve their working and living conditions.
Restructure the fishing industry so that poor coastal communities have access to ocean resources that are sustainably managed
Tighter government control and better management of our forestry resources
Tourism
The potential of tourism for employment and foreign exchange makes it a priority sector but the industry would have to be restructured to take full advantage of the country’s extraordinary human and natural resources.
Community partnerships were vital here to generate incomes through the development of tourism in SA and linking it with the rest of Southern Africa. This must be done however, with full protection of our natural environment.
Upgrading Infrastructure
An infrastructural development programme that will contribute broadly to economic development and social upliftment at the same time. Telecommunications and information technology, for example, should also help upgrade education and health care. Or improving transport systems not only for urban centres but to also to link rural areas.
Reform of the Financial Sector
While the financial sector is quite developed and modern, it is highly concentrated in ownership. This is true for banks, insurance companies and the stock exchange. Changes are needed in order to…
 improve the level of savings in the country
 prevent discrimination with regard to access to finance
 In addition, creation of a special Bank for home ownership and for setting up Community Banks. Pension and provident funds should be made more accountable and the illegal flow of money out of the country must be brought under control through tougher regulations.
Labour and Worker Rights
The basic rights of workers to organise and to strike will be guaranteed.
Structures will be set up to ensure collective bargaining and full worker participation at national level, industry level and at the workplace so that workers can play a full role in the reconstruction and development of our country.
Workers’ skills will be upgraded and affirmative action programmes adopted.
The new government will also ratify (recognise and support) the International Conventions of the International Labour Organisation.
Hold consultations on the restructuring of the Department of Manpower, the Unemployment Insurance Board, The Workers’ Compensation Commission, and other bodies that affect workers and their conditions.
Southern African Regional Policy
As part of the Southern African region the RDP advocated strongly for the development of trade, investment, labour standards, technical cooperation, electricity and telecommunications systems.
The RDP proposed government support for bodies that promote regional co-operation and co-ordination and for programmes and projects that benefit the people of this region.
Financing the RDP

The RDP did not see their document as merely a list of demands but a carefully considered programme that could be financed over a 5 to 10 year period.
They envisaged funding it through the following:
 Carefully considered savings made in government expenditure
 Removing the unnecessary duplication of government functions from the Apartheid period
 Improving the efficiency of government expenditure and targeting RDP priorities.
 Increased tax revenue that will result from rising incomes through higher employment and growth in business enterprises
 A careful review of the tax system to make it simpler, fairer and more effective. It is not the intention of the RDP to raise taxes.
 A Reconstruction Bond to encourage people to invest in RDP programmes for a market-related return on their investment.
 Carefully and wisely considered assistance from the international community.
 A disciplined approach to finance and money to avoid inflation which destroys the living standards of the majority of the population
Selected RDP Goals Housing: Provide well-located and affordable shelter for all by the year 2003. Build one million houses in five years Water: Supply 20 to 30 liters of clean water each day to every person in two years and 50 to 60 liters per day within five years from a point no more than 200 meters from their dwelling. Electricity: Supply 2.5 million more households and all schools and clinics with electricity by the year 2000. Health care: Give free medical care to children under 6 years and to homeless children; improve maternity care for women; organize programs to prevent and treat major diseases like TB and AIDS. Land reform: Implement land reform based on redistribution of residential and productive land to those who need it but cannot afford it and restitution to those who lost land because of apartheid laws. Job Creation through public works: A national public works program to provide basic needs such as water supply, sewerage and roads and at the same time create jobs, particularly in poor and rural areas. Social security and social welfare: A new system to provide for all people regardless of their race, gender or physical disability. A pension system to meet the needs of works in the formal and informal sectors. Education and training: Literacy for all, equal opportunity, 10 years of free and compulsory education, class sizes of no more than 40 pupils, training workers to meet the challenges of the new political and economic conditions.

The Growth, Employment and Redistribution Policy (GEAR)

In 1996 the government published its new economic policy document which came to be known as GEAR – Growth, Employment and Redistribution. It marked a dramatic shift in thinking from the RDP and, predictably, was severely criticized by trade unions and civic organizations. The economic rationale for GEAR was that a new course had to be chartered to increase growth, reduce government expenditure, halt the depreciation of the Rand and build up foreign reserves.

The main elements of the GEAR policy were:
 a faster fiscal deficit reduction programme to contain debt service obligations, counter inflation and free resources for investment;
 an exchange rate policy to keep the real effective rate stable at a competitive level;
 consistent monetary policy to prevent a resurgence of inflation;
 a further step in the gradual relaxation of exchange controls;
 a reduction in tariffs to contain input prices and facilitate industrial restructuring, compensating partially for the exchange rate depreciation;
 tax incentives to stimulate new investment in competitive and labour absorbing projects;
 speeding up the restructuring of state assets to optimise investment resources;
 an expansionary infrastructure programme to address service deficiencies and backlogs;
 an appropriately structured flexibility within the collective bargaining system;
 a strengthened levy system to fund training on a scale commensurate with needs;
 an expansion of trade and investment flows in Southern Africa; and a commitment to the implementation of stable and coordinated policies.
Despite heavy criticism from progressive sections of society, g

overnment remained committed to its implementation. Ministers from the frontline departments said repeatedly that GEAR was non-negotiable. When it was adopted, the South African government became notorious for being one of the only countries in the world to impose a structural adjustment program (SAP) on its citizens. SAPs are what the World Bank and IMF impose on highly indebted countries seeking financial rescue packages or on emerging economies who apply for development loans. They are comprised of several austere prescriptions of what governments are required to do as a condition for getting loans. Generally, these include:
 Reduce government expenditure (invariably entails cutting social spending)
 Trade liberalization (remove tariff barriers for imported goods)
 Free floating exchange rates (letting the Rand find its value through the market)
 Flexible labour markets (don’t regulate wages)
 Privatization of state enterprises and other assets
 Lifting of exchange controls (no or little restrictions on money taken out of the country)
Some analysts strongly feel that the adoption of GEAR caused the alliance to split irreparably as some partners felt this was a betrayal of all the ideals which the liberation movement struggled for in the decades leading up to the transition to democracy.

What did GEAR achieve and what is the current landscape of economic policy in South Africa?

GEAR set a target of 6% average growth per annum with 400,000 new jobs added each year which was to be achieved through expansion of new investment, especially foreign direct investment. The thinking of those who formulated the policy was that this expansion of investment would induce rapid growth, leading to job creation and a reduction in inequality which, in turn, would bring about higher levels of the provision of services.

The target growth rates in investment and job creation were never achieved between 1996 – 2002. The budget deficit (as a proportion of GDP) was reduced but interest rates increased, employment fell, inflation rose at first but dropped marginally and the Rand depreciated.
The accompanying article by James Heinz gives a short snapshot of the results of GEAR from 1996 – 2002.

ASGISA and NDP
Fifteen years later, the economy has shown no appreciable change. GEAR was subsequently replaced by ASGISA (Accelerated and Shared Growth Initiative for SA) and then by the NDP (National Development Plan). With ASGISA, government consulted with a range of stakeholders. The ASGISA Task Force led by the Deputy President included the Ministers of Finance; Trade and Industry; and Public Enterprises; the Premiers of Gauteng and Eastern Cape provinces; and the Mayor of Johannesburg who represented the South African Local Government Association. Many other ministers and their departments were included in the discussions, as were organised business and labour, religious leaders, youth, and women in various groupings and forums. Government also consulted with domestic and international experts.
ASGISA identified six ‘binding constraints’ which prevent South Africa from achieving the desired growth rate:
 The relative volatility of the currency
 The cost, efficiency and capacity of the national logistics system
 Shortages of suitably skilled labour, and the spatial distortions of apartheid affecting low-skilled labour costs
 Barriers to entry, limits to competition and limited new investment opportunities
 The regulatory environment and the burden on small and medium enterprises (SMEs)
 Deficiencies in state organisation, capacity and leadership.
It would be difficult to find evidence that these constraints have been removed or substantially eased.
In May 2010 President Jacob Zuma appointed the National Planning Commission, an advisory body made up of 26 experts drawn largely from outside the government, to draft a vision and national development plan.
The commission’s Diagnostic Report, released in June 2011, set out South Africa’s achievements and shortcomings since 1994. It identified a failure to implement policies and an absence of broad partnerships as the main reasons for slow progress, and set out nine primary challenges:
1. Too few people work. 2. The quality of school education for black people is poor. 3. Infrastructure is poorly located, inadequate and under-maintained. 4. Spatial divides hobble inclusive development. 5. The economy is unsustainably resource intensive. 6. The public health system cannot meet demand or sustain quality. 7. Public services are uneven and often of poor quality. 8. Corruption levels are high. 9. South Africa remains a divided society
The vision sketched in the NDP encompasses the following
 The creation of eleven million new jobs bringing unemployment down, even for an expanded population, to no more than 6%
 The elimination of poverty across the majority of the population
 The reduction of the Gini coefficient for income from an outrageous 0.7 to an, admittedly, far from acceptable level of 0.6
 A notable reduction in corruption and corresponding increase in government capacity and efficacy
 A national health service provided through the public sector free at the point of delivery with a focus on primary and preventative care.
 A major expansion in provision of basic needs such as housing, water, electrification, education and other elements of social and economic infrastructure
 And considerable progress in a shift towards a green economy with the adoption of new renewable technologies.
Government and supporters of the NDP would likely argue that it is in the process of being implemented and therefore too early to assess the results. The NDP received nods of approval from most mainstream economists as well as from a few internationally acclaimed economists such as Joseph Stiglitz. Several progressive organizations, however, dismiss it as but a continuation of neo-liberal economic policy, albeit with a few elements of the transformative vision articulated in both the MERG and RDP policy proposals.

Conclusion

At the most elementary level, economic policy is concerned with two broad goals: growth and development. Increasingly, however, the premises of growth are being questioned – growth to what end and for whom? The state of the world’s natural environment places the mantra of growth on trial. There is also evidence from many countries that in more recent times growth has not led to the creation of a significant number of jobs. This is especially true since the era of financialization. Moreover, in countries where economic conditions are characterized by high levels of unemployment, poverty and inequality the burning issues call for something that is more responsive to the basic needs that go unsatisfied in the midst of plenty. In such situations, and here we are talking about most of the people on this planet, it would make much more sense if growth were to be hinged to redistribution, equity and social justice than to merely record an increase in GDP.
The question of growth for what end thus takes centre stage: whether we should make social justice, equity, environmental protection and general well-being the paramount objectives in our systems of production and exchange rather than treat them as mere by-products?

South Africa represents such a country where after 20 years of political democracy, social justice is a mirage that moves ever further away with each step we take in our journey towards expiation of the past. It is necessary to consider what it is that has brought us to this desolate state. Many possible explanations are, and have been, proffered. Can any one of them be identified as the main culprit? Corruption is an eminent candidate. When hundreds of millions are siphoned from government vaults whole neighbourhoods are left poorer. When massive profits are expatriated, levels of investment are bound to fall over time. When cheaper imported goods are allowed to flood the market, the manufacturing industry collapses. But when the wrong economic policy is adopted year after year, large sections of a country’s population suffer prolonged periods of deprivation of their most basic needs which affects generations to come.

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