Can a 'developmental state' grow and prosper?

The much-touted R100 monthly Basic Income Grant to all 42 million South Africans would absorb tax revenues of R50.4 billion a year. That's about 17% of government's current R300 billion budget, until increased under pressure. SA Council of Churches spokesman Father Joe Mdhlela says South Africa is not a poor country and we have the resources to achieve this goal – it is simply a question of priorities.

But South Africa is indeed a poor country, at least relative to 48 countries including Africa's Botswana and Mauritius. Their GDP income per person in 2001 exceeded our $4068 (in 1995 US dollars). The resources necessary to achieve a Basic Income Grant would jeopardise the growing of the economic 'cake' – a far more important goal. And already GDP is barely growing – a mere 2.2% in 2001, or 1.1% per capita after factoring in population growth. Instead of institutionalising a general 'dole' and taking over half a century to double our real wealth we could do it every decade with 8% annual growth. That way everyone gains and we don't have to uplift the poor at the expense of the somewhat less poor.

Former Economist-journalist Phillippe Legrain's book 'Open World: The Truth about Globalisation' concluded that globalisation is a powerful force for human betterment. Its economic integration promotes growth and benefits the poor, and as a result global inequality has been falling since 1980 for the first time in 200 years. Countries can choose whether to participate but if they do not their citizens lose the benefits of the process. The people who are being left behind are victims not of globalisation, but of a lack of globalisation.

President Thabo Mbeki recently spelt out in Geneva his understanding of the so-called Washington Consensus. Policy prescriptions supposedly needed to stimulate economic growth included trade liberalisation, fiscal discipline and "sound" macroeconomic policy, privatisation, deregulation, tax reform, absence of civil strife, democracy, promotion of inward investment, secure property rights, avoidance of "crony capitalism', and adherence to various standards for banking, financial and other markets.

We can set alongside this list what Andre Astrow of the Economist Intelligence Unit cited as preventing South Africa from generating enough growth to make meaningful inroads into unemployment. He identified political hegemony, the policy on Zimbabwe, crime, rand volatility, low foreign reserves, exchange controls, the over-regulated and restrictive labour market, poor handling of Aids, slow privatisation, poor social service delivery, skills shortages, emigration, immigration policies, and business-harmful legislation.

Some local economists express confidence that the government will not yield to pressures to abandon its commitment to GEAR and a free market economic approach. But there are few signs of any such commitment being put into effect. On the contrary, in word and deed the government is constructing a 'developmental state'. "We will not support the proposition that the state is the problem and that we should rely solely and exclusively on the market to solve the problems facing our people – we are not market fundamentalists," President Mbeki told parliament in February as he listed and implicitly rejected opposition urgings to privatise, deregulate, loosen labour market rigidities, reduce taxes and abolish exchange controls. Government plans to raise real government spending 4.7% in each of the next three years. But it's not bigger government that makes an economy grow faster. Quite the opposite.

The proposed Basic Income Grant is an outright tax transfer from Peter to Paul. It is unlikely to create extra jobs or wealth or boost economic growth. Nor are costly public works programmes to dig holes or fence highways at taxpayers' expense. But do growth and development have to be 'either-or' opposites? Perhaps there's a way to tax the productive and redistribute to the needy without undermining the morale and efforts of both groups. While we know market capitalism does generate untold wealth, we don't know of other more 'developmental' ways to do that.

Johan Norberg, author of 'In Defence of Global Capitalism', describes the Nike footwear factory outside Vietnam's capital Ho Chi Minh. Workers came initially on foot, then by bike, then on scooters, and now by car. Formerly child-fieldworkers themselves, now they send their own children to school. The party officials have been convinced by Nike that 'ruthless multinational capitalists' are better than the state at providing workers with high wages and a good and healthy workplace. How long will it take anti-capitalists to learn that lesson?

In a South African version, KZN's Taiwanese textile manufacturers are considering moving shop to Lesotho or Namibia rather than raise wage levels to new statutory minimum levels. Employees of loss-making Mooi River Textiles chose to accept 30% wage reductions and a three-year wage freeze to save the firm and their jobs. Firms and employees are flexible where labour law is not.

Meanwhile SA has embarked on a crusade to harmonise our rigid labour policies with Botswana, Namibia, Lesotho and Swaziland. Perhaps it is regarded as nobly humanitarian to standardise African employment policies around what the International Labour Organisation calls one of the most progressive labour dispensations in the world. But success will bring the presumably unintended effect of reducing textiles manufacture and employment in Southern Africa. Is that what we want?

Maybe 'developmental' regulation of the productive sector redistributes wealth towards someone's notion of what's fair. However, it also destroys incentives and impairs economic growth. It is hard to see how such policies can ever promote growth and prosperity. We can only count on the market to achieve such goals.

Author: Dr Jim Harris is a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and they are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\22 July 2003

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