Chapter 3 – ECONOMY
note: The bullet
points below are supported by addendums and attachments.
If you want employment, you must have growth.
If you want growth, you must understand the
determinants of growth and you must implement pro-growth policies regardless of
whether they meet, in the short term especially, developmental goals.
Growth requires economic freedom. The
cornerstones of economic freedom are: personal choice, voluntary exchange,
freedom to compete, and security of privately owned property.
Aim high: 10% growth is better than 5.4%, and is
Addendum 1: Growth
Habits of Highly Effective Countries: Lessons for
South Africa by Leon Louw
(to be couriered)
Economic Freedom of the World: 2011 South African
edition by James Gwartney
et al (to be couriered)
Growth requires secure and plentiful
electricity. The world’s
experience shows that private investment and management of electricity
generation, transmission and distribution are essential because of the critical
role played by competition in ensuring the lowest prices, timely investment,
availability of capital, and continuity of supply.
Addendum 2: Energy
See also FMF
submission to the NDP on Chapter 4 – ECONOMIC INFRASTRUCTURE
Growth results in full employment, which in the
long run ensures “decent” jobs, increased wages, and improved living
conditions. Focus on growth, growth, growth (and therefore jobs, jobs, jobs),
not income gaps and decent jobs.
Job creation should be left to the private
sector as government is a net consumer of wealth and can only “create” jobs at
Addendum 3: Jobs
Jobs Jobs Jobs compiled by Temba Nolutshungu (to be couriered)
Are equal incomes a good
idea? by Vivian Atud (attached)
First prize: Abolish inflexible labour
Alternatively: Exempt the unemployed and SMMEs
from inflexible labour legislation; review existing labour legislation.
Addendum 4: Labour legislation
Jobs Jobs Jobs compiled by Temba Nolutshungu (to be couriered)
FMF submissions on
labour legislation (attached)
Government’s primary economic role is to create
an environment in which the private sector can flourish. This includes less
government intervention, legislative certainty, lower taxes, low inflation, sound
money, rule of law, security of property rights, an independent judiciary, and
Stop causing unemployment with inflexible labour
legislation, excessive red tape, proposed legislation to zone townships (which
could put 1 million informal traders out of business); stop harassing street
traders who are trying to feed their families by doing an honest day’s work.
Do not make laws that favour vested interests.
Do not make laws that allow discretionary
powers, increase uncertainty, and encourage corruption.
A fundamental mindset change is required to
understand that government does more for the poor by doing less; government and
the ruling party must understand that an economy cannot be “planned” – they
must choose freedom over control.
Addendum 5: Government’s role
Jobs Jobs Jobs compiled by Temba Nolutshungu (to be couriered)
Releasing the positive energies of all South Africans by Eustace Davie
Lowering costs in
the economy and of government
Lower costs in the economy by abolishing red
tape and subjecting all existing and proposed legislation to cost-benefit
Union excesses are costing South Africa billions
and ensuring the unemployed remain unemployed: repeal the power to extend statutory
bargaining agreements to non-parties; abolish the general unfair dismissal
regime – with provisions against victimisation and discrimination remaining in
place; introduce mandatory polling (balloting) to limit strikes and, in
particular, strike violence; impose union liability, albeit circumscribed, for
injury and loss caused by striking.
Curtail government spending / expenses by
reducing the size of the state, by contracting out services (worldwide this
results in a 20-40% reduction in costs), by increasing efficiency, by reducing
red tape, by ending corruption, by privatising state owned enterprises (SOEs),
and by avoiding legislation (and regulation) that increases the size and role
of the state.
Government should be funders of rather than
providers of healthcare and education ie it should fund the indigent
(preferably via health and education vouchers) rather than running hospitals
and schools, both of which are better managed by the private sector.
Avoid contradictory policy objectives, even if
this is politically unpopular (by way of example: Competition policy).
Addendum 6: Lowering costs in the economy and of
Jobs Jobs Jobs compiled by Temba Nolutshungu (to be couriered)
In praise of private infrastructure by Steve Hanke
Good Law Project report
Types of Privatisation report & examples of cost savings
Heart of the Nation by Frances Kendall (to be couriered)
Beware exponential demand and creating a culture
of dependency; think hand-up not hand-out; social grants hinder the
entrepreneurial spirit and create a culture of entitlement in which exponential
demand can never be met.
Target the needy more carefully; assist only the
indigent via vouchers or smart cards. Allow the poor to generate their own
Instead of perpetual welfare with ever
increasing numbers of recipients, give poor people (on a strict means tested
basis) shares in state enterprises such as was done in the Czech Republic.
Jobs Jobs Jobs compiled by Temba Nolutshungu – The futility of state welfare (to be couriered)
First prize: Privatise SOEs by giving “democracy
dividends” to workers or the poor. Distribute vouchers to citizens on a
non-racial means-tested basis that would exclude the relatively affluent. These
vouchers would entitle recipients to a specific share in the state industries.
The vouchers could be made exchangeable for units in participating unit trusts
or directly for shares in particular state corporations, thereby ensuring an
interest in a spread of investments.
Alternatively: End statutory monopolies and
allow the private sector to compete on equal terms with SOEs, resulting in
lower prices, greater choice, and greater efficiency; make it clear to SOEs
that there will be no more bailouts.
From poverty to property: Themba Sono’s five steps to
real transformation by
Themba Sono (to be couriered)
(Special Economic Zones)
First prize: Turn South Africa into a Freedom
Alternatively: Introduce “offshore” Freedom
Zones as opposed to mini-South Africas masquerading as Special Economic Zones.
FMF submission on
Special Economic Zones (attached)
Understand that ALL taxes are paid by
individuals; company tax is paid via lower wages to workers, higher prices to
consumers, lower dividends to investors.
Understand that profits are essential for higher
wages, worker benefits, maintenance and expansion, lower prices to consumers,
R&D, etc. Do not punish companies (in other words, workers and consumers)
for making profits.
First prize: Do away with all taxes except
income tax, which should be low and flat with a generous allowance that
excludes the poor. The world’s experience promises increased compliance and
revenues from low, flat taxes.
Alternatively: Lower and simplify ALL taxes.
South Africa should adopt a flat tax by Eustace Davie (attached)
Land reform and
Free black South Africans from house arrest by
removing the pre-emptive clauses (which, for example, prevent recipients from
generating an income via their biggest asset) from all RDP title deeds thereby
giving 3.4 million black families parity with whites in respect of property
rights and transforming “dead capital” into “dynamic capital”.
Think housing vouchers for the indigent rather
than building houses for the poor. Recipients could spend their vouchers on
upgrading existing shacks in squatter camps (the state could supply
infrastructure to shack cities), building their own houses on site-n-service
plots allocated to them, renting accommodation from the private sector. This
would ensure choice, diversity, and better “spatial transformation”.
By statutory decree, convert all lawfully
occupied council-owned urban plots (no-one knows how many, but the number could
be as high as 10 million) to full freehold title, thus granting black South
Africans the same land rights as whites and releasing around R1 trillion into
the economy (assuming 10 million properties worth R100,000 each). While
recipients may not qualify for mortgages, as the owners of an asset they will
qualify for many other benefits from financial institutions.
Accurately and honestly identify state owned
land, especially “reserve land”, and liberate it into the economy by giving it
to poor families.
See FMF submission
to the NDP on Chapter 8 – HUMAN SETTLEMENTS
State intervention in the mineral sector, in the form of special taxes
and forced beneficiation, is nationalisation in disguise.
Excessive taxation is bad for any industry including the mining industry
(in other words, for employees, consumers and investors); lower taxes (see
Mining companies should not be made responsible for ensuring
beneficiation as a condition of mining licenses; the state should not require
companies to explore, mine and beneficiate; if beneficiation is profitable, it
will attract investors.
South Africa’s ports have more capacity than its rails, in other words,
rails create a bottleneck for mines trying to get their goods to market. First
prize: Privatise Transnet. Alternatively: Allow the private sector to utilise
the rail network in the same way that the electricity grid should be utilised
by independent power producers.
Free the economy and the mining sector from government (and parastatal)
intervention; do not allow Transnet a regulatory role in which it prevents coal
exports if Eskom’s demands have not first been met by the mines.
Create certainty for the industry and investors by stating clearly and
repeatedly that property rights are enshrined in the Constitution and will not
be undermined, either by claiming mining rights are not property rights, or
forcing the industry to reduce holdings in companies to below 50%.
Create certainty for the industry and investors by ensuring officials do
not have discretionary powers, for example, the Energy Appeal Board has
discretionary powers over 17 issues.
Ensure energy and water security by allowing
the private sector to invest in their provision.
Undermining mineral rights: An international
comparison by Johan
Biermann (to be couriered)
Governments and central banks are not in a
position to create wealth directly – creating money is not creating wealth. Do
not increase the base money supply at a higher rate than the increase in GDP.
Do not debase the rand, which sends confusing
signals to entrepreneurs and industry, and creates uncertainty for investors
Abolish exchange controls.
Allow the market to determine interest rates.
Make the rand strong by backing notes and coins
in circulation 100% with gold. Persuade BRIC to do the same.
Real money by Richard Grant (to be couriered)
Exchange controls are an apartheid relic and should be
abolished by Jasson Urbach
SA should think big and establish a gold-backed rand by Eustace Davie (attached)
The NDP’s observation that “full
employment, decent work and sustainable livelihoods” with “improving living
standards and … dignified existence for all” can be achieved only if there is a
high rate of economic growth, is the core idea, the importance of which cannot
be overemphasised. The world’s experience shows conclusively that these are two
sides of a coin. Social objectives have never been achieved anywhere without
high growth resulting in national prosperity. Conversely, there has never been
prosperity without these objectives being advanced. The only confusion that
arises in international literature on this point relates to inequality. It is
often asserted that inequality tends to increase with prosperity. This is a
dangerous illusion, which derives from misleading conceptions of “equality”, on
one hand, and a failure to consider enormous improvements in absolute as
opposed to relative conditions for lower income groups.
Poverty and inequality
There is a near universal propensity to
speak of the supposed need to eliminate “poverty and inequality”. The
Commission echoes this phrase uncritically. Unfortunately the phrase is
profoundly flawed and misleading. “Poverty” and “inequality” are often used
even and unfortunately in scholarly literature as if they are two sides of a
coin. It is suggested that there should be little or any concern with
inequality and uncompromised attention paid to alleviating poverty, even if
doing so increases inequality.
is a dangerously ambiguous term. To most people it means what has been termed
to minimise ambiguity “grinding poverty” or “destitution”. In its other
meaning, poverty is purely a relative term, which should enjoy little or no
attention in government policy. Millionaires are poor compared to billionaires,
and billionaires poor compared to multi-billionaires. As a relative term, “the poor” in rich
countries refer to people who are amongst the wealthiest on earth. The poorest
10 per cent in rich countries would, if they were a separate country, have
higher per capita incomes than the richest 10 per cent in poor countries.
is a destructive tendency in many countries towards obsession with the rich at
the expense of concern for the poor. As
Abraham Lincoln observed, “You do not help the poor by pulling down the rich”.
South Africa has not escaped this destructive tendency. There are passages in
the NDP which show that the Commission’s primary concern is the alleviation of
poverty – which should rather be referred to as destitution – than with
reducing inequality. It is respectfully suggested that relative incomes should
be of no concern and the NDP should target only rapidly improving conditions
for low-income people regardless of levels of inequality as measured by, for
instance, the gini co-efficient to which the NPC refers. It is extremely
probable that any policy aimed at reducing inequality will, in the real world,
undermine the prospect of eliminating poverty / destitution as envisaged.
converse is equally true, namely that policies that benefit the poor will also
benefit the rich. The idea that wealth accumulation by a few should be
discouraged is an unwitting attack on the poor. Fortunately the NDP in all its
references to the need for growth, entrepreneurship and incentives, neither
states nor implies that wealth per se at the upper end has to be discouraged
except to the extent that it calls for a reduction in the gini co-efficient.
Determinants of growth
The Commission envisages accelerated growth
which is ambitious by current standards (5.4 per cent) but modest by what is
readily achievable (10 per cent). The Commission calls for policies that will
result in such growth without being specific. In other words, it envisages a
constructive dialogue on how these targets are to be achieved in practice. It
is respectfully suggested that there is no reason why the economy should grow
at only 5.4 per cent in the world and the continent in which a growing number
of countries are achieving much higher growth rates.
Africa has had a failed and embarrassing succession of growth and job creation
targets. The reason they have not been achieved is simply that they were
accompanied by desire rather than policy. The desire for growth and jobs, and
specified targets, do not by themselves change anything. Positive results
cannot be achieved by “talking up” the economy. The only way to achieve high
growth at 10 per cent or more is to have policies that result in growth.
that are likely to result in general prosperity and ones that are unlikely to
do so, are not “rocket science”. The empirical evidence worldwide is
straightforward and incontestable: general prosperity will result from, and
only from, freer market policies (as defined by recognised criteria cited
below). Conversely, it is clear that broad-based prosperity and empowerment are
extremely unlikely if the economy is relatively unfree.
rhetoric to the contrary, there are virtually no exceptions. It is mistakenly
believed, for instance, that the world’s celebrated winners such as China,
Sweden, Singapore, South Korea, Uganda, Botswana and Mauritius are examples of
non-market prosperity due to successful government intervention in the economy.
The fact is that they are either amongst the freest economies on earth
(according to recognised and independent indices), or are transforming rapidly
towards free market policies. This is not an ideological statement, it is simply
the other hand, countries whose economies are objectively classified as less
free, or transforming from more towards less economic freedom, stagnate or
contract at the direct expense of poverty alleviation. That the poor are the
primary victims of low economic growth and interventionism explains why they
always and everywhere risk and often lose their lives to flee from less to more
economic freedom. Cuba’s and Mexico’s poor flee to America, whereas America’s
poor (who are amongst the richest people on earth) never flee the other way. No
one escaped from West to East Germany, and no one flees from South to North
Korea, India to Pakistan, or Botswana to Zimbabwe.
empirical and independent evidence for these observations is readily and freely
the twilight years of apartheid, South Africa’s score on all indices measuring
personal, social and economic freedom declined. Accordingly and predictably the
economy stagnated so that per capita incomes in 1994 were, in
inflation-adjusted currency, the same as they were a generation before – the
majority of South Africans had experienced no improvement in living standards
for 25 years. After 1994, the government, to its credit, pursued policies that
modestly improved our scores on all relevant indices and we were rewarded by a
decade of growth. Unfortunately, positive trends on all relevant indices
plateaued and started declining around 2007. This, as opposed to the so-called
international financial crisis, is the most probable explanation for retarded
growth and increased unemployment in this country. Amongst the reasons why the
financial crisis cannot be regarded as a determinant is that it is a crisis
confined to a minority of the world’s countries, namely (a) those few that were
heavily invested in sub-prime mortgage derivatives, and (b) a few European
countries with a “sovereign debt crisis” (that is to say, countries whose
governments are insolvent due to profligate financial policies).
the government is serious about ending poverty, it should set as a firm
national goal the attainment of improved scores on the indices listed in the
footnote above. To do that, the government should reverse the deluge of
regulation and red tape that has characterised the past few years, familiarise
itself with the specific components of the indices, and resolutely implement
reforms shown to be statistically significant in the definitive analysis that
compares the decisive determinants of prosperity internationally with South
NDP espouses lower population growth rates. We point out that the idea that the
rate of population growth detracts from the rate of economic growth and job
creation is a myth derived from a false assumption of a static economy in which
a fixed cake is to be divided amongst fewer or more people. This is not the
place to elaborate on more sophisticated aspects of population income and
demography and it is suggested the NDP should not concern itself with the matter. The fact is that countries’ economic growth
rates sore or plummet depending on their economic policies regardless of
demography. Myths regarding population and welfare coincide with such myths as
country size or natural resources being significant determinants. No more than
a casual glance at changes in economic growth and employment rates in
well-known and more obscure countries is necessary for it to be clear that
countries like Mauritius, Hong Kong, China, Argentina, Ghana and many others
can shift virtually overnight from stagnation to prosperity with no demographic
change. Dramatic shifts in a country’s fortunes have one cause and one cause
only, namely economic policy, and always and everywhere countries with higher
scores on economic freedom indices outperform ones with lower scores.
the real world there is nowhere else to go. It appears from the modest language
in the NDP that the Commission, or at least most if its members, are aware of
this. What the country needs in its present desperate crisis is for this to be
spelt out loudly, clearly and unambiguously. The country cannot afford beating about the bush. The government knows
from the world’s experience what it needs to do and it should get on with doing
so resolutely. The modest shift from the centrally-planned, regulated and
largely nationalised apartheid regime towards a market economy ended a
generation of stagnation and resulted in decent rates of economic growth in the
mid-1990s. Instead of reversing what has been achieved the time has come for
the government to build on its own early success and to do much more of what it
has already shown to be effective.
Preface to the South African Edition of Economic Freedom of the World
As the cry goes out for “Economic freedom in our lifetime”, it is
crucially important we share a common understanding of the idea. This is not an
easy task. Commentators across the ideological spectrum claim the term as their
own, or attribute different meanings to the words.
Isaiah Berlin, for example,
framed the debate in terms of ‘positive’ and ‘negative’ freedoms. Positive
liberty expressed the idea of being free to accomplish the goals one sets for
oneself, or the degree to which that is possible. Negative liberty, on the
other hand, he defined as freedom from restriction or coercion by other people.
It is a more restricted form of freedom, and includes don’t steal, don’t commit
fraud, don’t harm others and so on.
Positive liberty can lead
to claims for social rights such as housing, education and health care. Social
rights that a government can provide only because they are paid for by other
members of society. If you have the right to a house, someone has to pay to
provide the materials and time required to build that house. Similarly, with
health-care, education, or the growing number of other claims laid against the
state. If you believe that these claims are valid, it’s difficult to know how
far government would go before there would be no more taxes it could impose.
The classical liberal view
of economic freedom is narrower. It takes the long-standing, human tradition of
private property and argues for its incorporation in political institutions.
Under the classical view, individuals are free to trade their private resources
with other similarly free agents, without restriction from third-parties.
These two definitions of
economic freedom are miles apart, and are the two extremes that fuel
contemporary political debate. To inform this debate, it’s important to
understand what each definition of economic freedom would have as its result.
It was this question that inspired the development and continued publication of
the Economic Freedom of the World report.
It is two decades since
Michael Walker of the Fraser Institute in Vancouver debated this idea with the
great economist Milton Friedman and agreed that a formal definition – suitable
for academic analyses – was required. Today this definition finds expression in
a report that draws its data from credible and public reports – such as the
World Bank Development Indicators and the Global Competitiveness Report – and
incorporates this data into a useable index with five important categories.
The categories answer a
simple question: To what degree does the individual decide (or to put it another
way, to what degree does the state intervene) in certain economic decisions?
The category headings are (a) Size of Government (b) Judicial Systems (c) Sound
Money (d) Freedom to Trade with Foreigners, and (e) Regulation of Credit,
Labour and Business. All these categories analyze, from slightly different
angles, the degree to which we are allowed to hold property and trade it with
In 2011, South Africa
continues its trend toward higher levels of government intervention and slips
four places further down the Economic Freedom rankings to 87th. Top of the
freedom list is Hong Kong, Singapore, New Zealand, Switzerland and Australia.
Significantly, the United States drops two places to 10th. At the bottom of the
list we find Democratic Republic of Congo, Angola, Venezuela, Myanmar and
The 2008/2009 period was
particularly dramatic in economic terms as governments transferred massive
financial debts to their own books and attempted interventions on an
unprecedented scale. These actions may be viewed harshly by future generations
as the sovereign debt crisis plays itself out. The increased level of
intervention shows up in lower scores across the board in this year’s report.
The World score for ‘Size of Government’ has fallen from 6.4 to 6.3. More
importantly, ‘Freedom to Trade with Foreigners’ fell from 6.7 to 6.5 – a
portent of protectionism, tried and failed during the last great depression.
Unfortunately, South Africa
continues its 50 year-old tradition of heavy-handed state intervention. We rank
113th in terms of Size of Government. The large involvement in the economy by
our parastatals and relatively high tax rates contribute to our poor ranking in
South Africa drops an
incredible 55 places to 107th in the regulation of private credit — a function
of our National Credit Act. We also remain poor performers relative to the rest
of the world in terms of labour law. In the Hiring and Firing category, we rank
123rd. For Collective Bargaining, we’re 119th, and Bureacracy Costs leaves us
at 103rd. If nothing else, these results show that the entire country is being
harmed by the amount of red-tape imposed on its entrepreneurs.
The FMF makes its own
contribution to the Economic Freedom of the World project in the form of a
software program, included in disk form with this report. The program is also
available from the web site www.freetheworld.com.
All the data available from
the report is present in the software version. For the last two years it has
also included the entire set of data from the World Bank Development
Indicators. This software makes it easy for researchers to test the economic
freedom variables against real-life outcomes. For example: Does more economic
freedom create longer, healthier lives and higher levels of income? (The answer
– by the way – is yes to both.) Using statistical correlation, we can learn
from those countries that have implemented successful policies, rather than
those that continue to increase the role of their governments to the detriment
of their citizens.
The Economic Freedom of the
World report plays an important part in the on-going debate about our political
institutions and the role government should play in our economic lives. South
Africa should carefully monitor its policy options in light of the devastating
poverty and unemployment so prevalent in our society. Though history plays a
role, it cannot be perpetually blamed for disappointing policy.
Addendum 2: Energy
Although there are references to the need
for additional electricity generation, the Commission does not appear to be
aware of how serious the problem is. Regarding it as a looming national
catastrophe, is no exaggeration. The simple fact is that none of the growth,
employment and other targets in the NDP are possible without rapid and
substantially increased electricity generation. The blackouts in 2008 cost the
country R120 billion. Few people realise how pervasive the impact has been and
will be indefinitely into the future in the absence of fundamentally changed
shortage of energy and energy insecurity means not just fewer mines – the NDP
envisages more – and existing mines producing less, but less of everything
else: less property development, factories, appliance sales, low-cost
production and consumption, less agricultural development. Energy saving
measures such as turning off geysers, using low-energy lighting, better
insulated houses, offices and factories, hybrid cars and the like are often
misleadingly spoken of as if they are innately virtuous. They aren’t. They are
higher cost, wasteful and inconvenient ways of doing things.
though this is, it pales into insignificance compared to the absolute cap
imposed on all the objectives in the NDP by the electricity crisis. From an
environmental and cost perspective billions of rands have been invested in
greenhouse gas generating liquid fuel capacity to cope with blackouts in
thousands of factories, office blocks, farms, shopping centres and private
homes. Every one of these and every litre of fuel is pure loss to the economy
and impacts disproportionately on the outlook for the destitute and unemployed.
“Faster economic growth and higher investment and employment” are simply
impossible without adequate, reliable and competitively priced electricity.
Commission calls for “Eskom’s system operator, planning, power procurement,
power purchasing and power contracting functions” to be transferred to an
(ISMO), and for “accelerated” Independent Power Producers (IPPs). Given the
calamitous state of affairs this should be and was until recently acknowledged
by the government as a sina qua non.
However, the new Act appears to reflect a shift in the opposite direction
namely towards making only minor changes to the status quo. Unless the Commission’s recommendation is implemented,
and unless it is regarded as a first step towards more substantial long term
pro-market reform, everything else the Commission proposes has zero prospect of
Calling for rational and responsible
environmental policies is often confused, usually maliciously, with scepticism
or denialism. We are an economic policy and not a science institute. As such we
take no position on scientific aspects of climate change debate. We do
encourage the government to take the debate seriously, especially in view of
the fact that a growing number of scientists are concerned about the
politicisation and the ideologically motivated manipulation of science.
we are to achieve high economic growth, job creation and poverty alleviation,
it is important for the government to keep a cool head on the matter of global
warming. The reason why terminology has shifted from “global warming” to
“climate change” appears to be that global warming predictions have simply not
materialised. The new terminology embraces anything and everything that could
happen to the environment and, by definition, suggests no particular
environmental policy. There has always been and will always be climate change.
the truth about climate science and all the uncertainties surrounding it, there
are certainties regarding the economics of the matter. The most obvious
certainty is that every measure intended to change our effect on the climate
comes at a cost – there is no such thing as a free lunch. Unfortunately, the
cost of climate change policies tends to be enormous. We encourage the
Commission to pay more attention to this aspect of the matter. At what cost to
the country, especially the poor, are we to adopt emissions and other controls,
to generate energy by means of “renewables”, and so on?
“environmentally friendly” policies are not only extremely costly, especially
for developing countries such as ours, but tend to be imported unquestioningly
from the world’s richest countries. We must ensure that we do not become the
victims of a new kind of colonisation and imperialism, which has aptly been
called “eco imperialism”.
of job creation (extract from Jobs Jobs Jobs)
There is widespread denial about the fact that labour laws cause
unemployment because they increase the cost, risk and difficulty of employing
people. There are no ‘free lunches’. All benefits have costs, and the cost of
making things better for people with jobs through protectionist labour laws is
that things are made worse for people without jobs. Mandated ‘living’ wages and
‘decent’ jobs for some subject others to zero wages and destitution; one
person’s minimum wage is another’s zero wage. The choice for less-preferred
workers is not between high pay and low pay, but high pay and no pay.
There is no need to ‘create’
jobs; jobs exist to the extent that there are unsatisfied human desires. All
policy-makers have to do is discontinue measures that separate the people with
jobs from people wanting jobs. Labour is no ‘special case’. It is subject, like
everything else traded, to the ‘price mechanism’, whereby people buy less of
what costs more. The only way to have full employment and high wages (with
splendid working conditions) simultaneously is to have pro-market policies with
more investors increasing demand for labour.
Labour policy, in particular, and
economic policy in general are the main determinants of high or low rates of
unemployment and economic growth. Since policies are a matter of choice and not
destiny, the government and the electorate decide whether their country
prospers or stagnates.
Ironically, the most vocal
critics and enemies of people who create wealth and jobs (employers) tend to be
people who do neither (government and trade unions).
needs a certain number of government employees in order to function. However,
there is an insidious notion that government job creation actually generates an
increase in employment. Indeed the NDP states, “The public service typically
plays an important role in employment creation”. Rarely does the public debate
focus on how employment in other sectors is affected when the government draws
these individuals from productive sectors of society. These effects are
important but, unfortunately, less visible because they are spread among
hundreds, if not thousands, of employers.
importantly, government itself is not a producer
of any real wealth. To get its hands on any funding for infrastructure or any
government programme, the government first has to divert it from
wealth-generating activities. This undermines the real wealth generators and
weakens the whole wealth-generation process. Indeed, government revenue
is derived from three sources: taxpayers, the
central bank and borrowing. Drawing on each of these sources to finance the
public sector wage bill is not without its problems. In simple terms taking
increasing amounts of money from taxpayers penalises productive and efficient
entities in the economy. If the central bank is asked to provide easy money the
likely consequence is inflation (which disproportionately affects poor people).
And borrowing money has long-term debt repayment implications.
a nation, we undoubtedly need government employees for such things as national
defence, police protection, and administering our court system. But it is a
fallacy that government can reduce unemployment by employing more individuals
in the civil service or by instituting special programs. Government needs to
reduce spending and taxes in order to leave income in the hands of individuals
who earned it and who can spend it much more efficiently than the government
Public Works Programme
The Commission calls for a
broadened public works programme to “cover 2 million full time equivalent jobs
by 2020”. We point out that the assumption that a public works programme is
good for its employees means that employment under identical conditions in the
private sector would be equally virtuous. It should be a non-negotiable
condition of labour policy that there are no differential conditions for
government and private employment.
Addendum 4: Labour legislation
Unemployment and labour law
The NDP mentions but does not
elaborate the need for labour policy to be addressed if its job creation
targets are to be met. Given the climate of opinion, the participative nature
of the Commission itself, and the powerful vested interests in existing labour
policy, the Commission’s timid approach is understandable, but if it and the
government are serious about a substantial reduction in unemployment, they will
have to confront the reality that existing labour policies increase the cost,
risk and difficulty of employing people to such an extent that substantial job
creation will not happen. Labour policy is reminiscent of the
“king has no clothes” parable. Every informed person knows that the high rate
of unemployment is due primarily to labour policy for the benefit of people
with jobs at the expense of people without jobs, yet almost no-one is willing
to say so. Most people skirt the issue and beat about the bush in the vain hope
that a miracle will occur.
the tenacity of the problem, a practical and potentially politically acceptable
compromise has been proposed by Eustace Davie in Jobs Jobs Jobs, namely to forget about the ongoing dialogue
regarding wages and working conditions for the employed. That occurs between
two less relevant parties, employers and employees, to the exclusion of those
about whom the Commission anguishes, the unemployed. Davie’s proposal is that
the government concerns itself with the latter by a simple yet effective
mechanism, namely to grant job seekers an exemption certificate from labour law
that entitles them to take whatever employment they wish. Although the right to
work should be an absolute right, there will be predictable those misplaced
concern about “exploitation” of people with exemption certificates. To placate
this concern, Davie suggests departmentally specified controls such as the
minimum period for which people must have been unemployed, the minimum
conditions on which they may take employment, and the maximum period for such
employment. He spells out compellingly what additional benefit there might be
such as youth, over half of whom have never had a job, gaining on the job
experience that will render them more employable subsequently without the need
There ain’t no such thing as
a free lunch (extract from FMF submissions on labour legislation
The discourse on
labour law and policy tends to focus on details at the expense of basic truths.
Arguably, the only “law” of economics that is incontestable is that “there
ain’t no such thing as a free lunch” (TANSTAAFL). The implication of this law
is of critical importance in South Africa since it is seldom acknowledged,
especially in the context of labour. An inescapable fact is that all benefits
have costs and that the benefit of improved working conditions, wages and job
security is achieved by having fewer jobs, less investment, lower growth,
substitution of technology for labour, and worse conditions for all nonformal
employment. President Zuma has declared job creation as the leading national
priority. Economic theory and the world’s experience suggest that all the jobs
he envisages can be created with relative ease and certainty. The challenge is
not how to increase employment, but whether the government is willing
politically to implement measures that will do so.
The measures necessary to increase employment are
mercifully straightforward yet lamentably difficult to achieve politically.
Laws and policies that increase the cost, risk and difficulty of employing
people, as the proposed measures do, necessarily have benefits for a privileged
few at the expense of the unemployed and prosperity in general.
Given the priority of job creation, our proposal is
that the existing measures should not be considered for implementation in
isolation, but that the government should undertake a comprehensive review of
laws and policies, and retain only those that will reduce unemployment
immediately and improve working conditions, incomes and job security by virtue
of increased demand for labour rather than draconian legislation.
Increased demand for labour, namely conditions that
promote capital formation, skills, and the desire for hiring more employees, is
the only sustainable means of achieving two otherwise irreconcilable
objectives: more jobs and improved working conditions. In a static or low
growth economy, one of these can be achieved only at the expense of the other
and both can be achieved only under conditions of economic prosperity.
It is therefore recommended that the envisaged
measures not be proceeded with. Instead they should be included in a comprehensive
response to the President’s call for “jobs, jobs, jobs”. It is recommended that
the government include in such a comprehensive policy review, not only all
existing and proposed labour law and policy, but all other measures that are of
direct relevance. Such other measures include the proposal repeated by the
President in his two State of the Nation addresses, by Minister Ebrahim Patel
and others, that there should be a review of laws and policies impacting small
business so that it is easier for small business to operate and prosper in
general and so that small businesses create more jobs in particular.
Comprehensive review of measures to increase employment should consider all
disincentives to savings and investment, both by local and foreign investors.
There are two broad categories of policy available to
government if it wants to create jobs. The first is to discontinue measures
that discourage and penalise employment, and the second is to implement new
measures that encourage and reward employment, including self-employment.
Africa’s labour laws in an international context (extract from Jobs Jobs Jobs)
South Africa’s labour market competitiveness is lagging behind the
developing world. The World Economic Forum ranks South Africa as the 7th-worst
country out of 139 countries in the world in terms of its labour laws and
regulations. This has created two significant problems for the country: the
highest unemployment rate in the world (because labour laws and regulations do
not promote job creation) and low rates of economic growth (because South
Africa’s labour force is unproductive in comparison with its peers, the rest of
the developing world).
Two sets of laws are particularly
problematic. Firstly, collective bargaining (i.e. the legal process by which
business, trade unions and government agree on wage escalations, as opposed to
market forces) has caused wage escalations to exceed labour productivity growth
over the past 15 years. Secondly, dismissal protections (i.e. legal protections
afforded to employees that protect them from dismissal despite performing
poorly on the job) have caused labour productivity, on average, to be very low.
In order to boost employment and raise economic growth rates, South Africa
requires changes to labour laws and regulations that would promote high labour
productivity and a concrete, market-based link between productivity and
The labour market in South Africa
is politically sensitive for many historical reasons. The system of apartheid
started as a government policy to exclude blacks from the labour force, so
apartheid was, in its essential form, a highly restrictive labour policy.
Liberalising the labour market is viewed with great suspicion, especially by
black trade unions, which fear that liberalising reforms will revive the
apartheid labour system. But the apartheid labour system was not a free market
system by any measure. In fact, South Africa has not had a relatively free
labour market since the 1890s.
5: Government’s role
Effective and capable government
The NDP uses strong language to describe
government inadequacies in important contexts. What is missing, with respect,
is a proposal that this is inevitable if government tries to do too much,
especially when it does what private people and private companies are perfectly
willing and able to do adequately and efficiently. A big part of the solution
is to confine government to legitimate “core functions”, and in those functions
to outsource competitively. Government should simply get out of doing that for
which it is manifestly unnecessary such as broadcasting and airlines. Both
divesting government of what there is no need for it to do and outsourcing what
it retains constitute phenomenal opportunities for B-BBEE.
remarkable solution to mass unemployment (extract from Jobs Jobs Jobs)
Hong Kong, a former British colony and now a special
administrative region of China, demonstrated to the world how economic freedom
reduces high unemployment and brings about numerous other benefits. The region
has a history of applying policies that are consistent with economic freedom
and this has had substantially positive economic consequences for its people
and helped the territory to overcome formidable difficulties such as having to
accommodate thousands of refugees who had fled from China and Vietnam.
We find in Hong Kong a deliberate
effort to remove government’s heavy hand from economic activity so as to allow
entrepreneurs to innovate and employ the country’s human and material resources
to the best advantage of all concerned. The results have been spectacularly
successful and worthy of emulation. The ‘economic miracle’ of high growth and
development absorbed the huge number of unemployed refugees at such a rapid
rate that, by the 1980s, employers were complaining of a shortage of labour.
In a 1998 article, renowned
economist Milton Friedman reported that “in 1960 ... the average per capita
income in Hong Kong was 28 per cent of that in Great Britain; by 1996, it had
risen to 137 per cent of that in Britain”. He concluded that “the only
plausible explanation for the different rates of growth is socialism in
Britain, free enterprise and free markets in Hong Kong”.
It seems clear that if South
Africa had, in 1960, adopted and continued through to today a similar level of
economic freedom to that followed by Hong Kong, South Africans could have had
an average GDP per capita comparable to that of Hong Kong and no mass
Hong Kong’s economic history
vividly demonstrates that with the right policies in place an economy will grow
rapidly. It also demonstrates that entrepreneurs, except if they are prevented
from doing so by statutory barriers, will employ all available labour.
6: Lowering costs in the economy and of government
The NDP stresses the “need to lower costs
in the economy, especially as these costs contribute towards limiting
employment growth and raising costs for poor households”. The NDP does not
mention specific ways of lowering such costs except by way of a few general
propositions that may lower costs such as unbundling Eskom.
policy has been characterised by a deluge of cost-raising measures that are
especially devastating for poor households and anti-employment. If NDP
objectives are to be achieved, it is essential, as the document itself states,
for government to attack specifics honestly and resolutely. General amorphous
propositions are not enough. Some of the measures that will have to be
addressed will not be easy for government because they have been introduced
recently in the obviously mistaken view that they are in the interests of
stated beneficiaries. The measures to which we refer are those that have
swamped the economy with massive and costly amounts of red tape, and increased
cost, risk and difficulty of doing business enormously.
most fundamental point of economics, that all benefits have costs, has to be
faced head on. The inescapable fact is that all benefits in such measures as
FICA, FAIS, NCA, CPA and various labour laws, impose enormous costs which
impact on and are passed disproportionately if not exclusively to the
unemployed and the poor.
course we realise how politically difficult it will be for government t
critically re-examine the enormous cost-raising impacts of these and other
recent measures, but the tough reality is that their adverse impact on
prosperity in general and the poor and unemployed in particular means that NDP
and government policy objectives cannot be taken seriously and cannot be
achieved without such measures being scrapped or relaxed to a large extent.
The NDP envisages policies that will boost
“entrepreneurialism”, creativity and enterprise. A precondition for this to happen
is for the deluge of regulation and controls that have characterised recent
years to be stopped and reversed. The New Growth Path announced a red-tape
alleviation policy, as did President Zuma in his state of the nation address.
In fact the opposite has happened.
The consequence has been that South Africa is declining on the Doing Business
Index. The problem with most calls for red tape reduction is that they remain
abstractions. We are not aware of a single instance in which specific examples
have been mentioned accompanied by concrete proposals. If this serious matter
is to be addressed, and entrepreneurship is to flourish in South Africa,
specifically for small businesses owned by black South Africans, we need to
move beyond generalities into specifics. To that end we mention three
illustrative examples: the Consumer Protection Act (CPA), the National Credit
Act (NCA), and the Financial Advisory and Intermediary Services Act (FAIS). We
mention these three specifically because they are relatively new and they have
been virtually unanimously lauded as heaping benefits on consumers.
It would be
easier for us to mention examples inherited from the past, but we believe it is
important to stop the process of burying our heads in the sand. The most recent
of these, the CPA, is praised by virtually all commentators by virtue of its
seemingly lavish benefits for consumers. We are unaware of a single commentator
asking the most fundamental question, namely at whose cost do consumers get
these benefits. The knee-jerk response might be at the cost of unscrupulous
suppliers. But this is not so. The rate of return for businesses is not going
to go down. It will stay roughly the same as it has always done. In short,
every benefit enjoyed by consumers is paid for by them and the question to be
asked is whether consumers would be willing to pay the price if they knew that
that is what they are doing.
Consider one of
the provisions in this context, namely the prohibition of voetstoots sales. This has the seductive though disastrous effect
of every product bought by a consumer carrying a full warranty against defects
at the time of sale or arising within six months. We could provide the economic
analysis of this, but use instead an anecdotal illustration. Before the Act, a
peasant farmer in a rural area of KZN could purchase an old “bakkie” for
R10,000 on the understanding that the small used vehicle dealer would not be
responsible for defects. The peasant farmer would be free to pay more in order
to get a warranty or to rely on his or her knowledge of vehicle maintenance and
repair and/or local “backyard” mechanics using cheap used parts. The Act has
the unavoidable impact that it is no longer viable to sell the vehicle for less
than substantially more, perhaps R50-60,000. In other words, the Act completely
and fatally prices low-income consumers out of the market. Apart from the
direct economic impact, there are secondary economic and social impacts.
Low-income people are rendered less competitive and productive, and people will
use unsafe vehicles for longer rather than trading them in.
impact of the Act is that the market for trade-ins and used equipment of all
kinds, not just vehicles, from microwaves to mining equipment, is going to
contract dramatically. It no longer makes sense to trade in a vehicle because
the price paid to the consumer will now be substantially less than can be
obtained by a private sale where voestoots
is allowed. This will not only devastate the used product market for suppliers and
consumers, but subject consumers to extraordinary inconvenience and
inefficiency. They will now have to find buyers themselves by whatever means
they can and will get much less for what they sell.
of the Act have similar anti-consumer and anti-small business impacts such as
consumers being forced to pay for the risk and cost to suppliers of cooling off
periods. It is important to appreciate that none of this has a significant
impact on high-income consumers. They will scarcely notice the new law except
when they want to abuse suppliers, which they will be able to do by virtue of
their greater sophistication and knowledge of the law. Less sophisticated
consumers will be unaware of the law and be in no position to enforce their
so-called “protection”. The only implication of the law for them is that they
will be paying much more than they would otherwise have done.
NCA, its effects are similar. It has often been observed that during the months
preceding the Act there was a deluge of credit extension. The reason was simply
that the credit providers wanted to enter credit agreements before the Act came
into effect. Again, high income people will be unaware of any significant
impact. For low income people it is a different story entirely. The greater
cost, risk and difficulty of granting credit has the necessary and unavoidable
impact of driving low and middle income people out of the market for credit.
For them, the doors have shut. They have been driven back into the hands of loan
sharks that characterised apartheid era credit laws.
should be wary of being told by established financial institutions that they
welcomed the law. What they welcome is that “fly-by-night operators”, “loan
sharks”, “bucket shops”, and “rats and mice” have been driven from the market.
Such derogatory terms are in truth synonyms for small, innovative, dynamic and
competitive enterprises which the NDP wants to stimulate. In addition, they
have not been driven from the market at all, instead they have been driven
underground into the illegal and “informal” sector.
The FAIS Act
also raises the cost, risk and difficulty of providing financial products and
services, which means that all marginal businesses, products and consumers are
driven from the (lawful) market.
The underground, informal and black markets that are boosted by such policies,
serve the interests of unlawful operators, but they are no substitute for
legality not only for the obvious reasons, but because such measures reduce the
absolute size of the market and thus the economy at the disproportionate
expense of the poor.
We repeat that
these are recent illustrative examples. There are literally thousands of
statutes, regulations, ordnances, by laws, proclamations, directives, guidelines
and the like that should, along with the three measures mentioned, be
critically and systematically re-examined and subjected to a regulatory impact
analyses (extract from Good Law Project report)
The feasibility/desirability test is an aspect of modern jurisprudence,
and entails not only a cost-benefit analysis, it encompasses, inter alia, the notion of compliance costs and the State’s capacity to
enforce the law. All new laws should be subjected to a cost-benefit analysis prior
to being tabled.
the laws that govern the labour market (extract from Jobs Jobs Jobs)
The solution to our terrible levels of unemployment lies neither
in systems of exemptions, whether for young people or others, nor in an
Deeper structural changes to our
labour law are required, but this will only be a part of the solution –
monetary and fiscal policy is equally important. The proposals may not resonate
with the Tripartite Alliance, but they help us to understand the work we still
have to do if our levels of employment are to improve.
There are four fundamental
changes required to our labour law:
– The repeal of the power to extend
statutory bargaining agreements to non-parties.
– The abolition of the general unfair dismissal
regime – with provisions against victimisation and discrimination remaining in
– The introduction of mandatory polling
(balloting) to limit strikes and, in particular, strike violence.
– The imposition of union liability, albeit
circumscribed, for injury and loss caused by striking.
Only by these means will we liberate the unemployed from the
burdens cast on them by big capital and big labour.
contracting out (extract from Types of Privatisation report)
reduce its cost of providing a service in three main ways:
Disengagement – government simply stops
providing the service. This ought to be considered first, as it offers the
largest savings. Where a residual real need for such a service remains, private
sector entrepreneurs then move in to meet that need.
Partial privatisation by contracting out – a local authority establishes with a private organisation a
contract to provide a service. The contract regulates the standard of service.
The local authority remains responsible and accountable to its constituents for
the service that is being provided. The local authority may or may not continue
to collect rates, taxes and other fees directly from the community – such
collection can also be contracted out. (Worldwide, contracting out results in
20-40% reduction in costs to local governments.)
Full privatisation – government
transfers a public entity, activity or property permanently to the private
sector, but may decide to regulate aspects of service delivery.
The NPC is correct in its belief that South
African companies need “closer alignment” to be efficient and competitive.
However, our competition policy, in its efforts to both promote lower prices
for consumers and “promote greater
spread of ownership”, has snowballed to the point where it has arguably become
anti-competitive. There are many popular myths regarding its recent work, the
best known of which is the widespread belief that it protected consumers from
high bread prices by imposing a R1 billion fine on a company that supposedly
“fixed” the bread price. What the Competition Commission did, in fact, was to
curtail selling bread more cheaply.
In poultry too,
for instance, independent producers established “closer alignment” with the
sole purpose and effect of increasing efficiency and lowering prices by such
measures as joint buying and marketing. This was prohibited with the effect
that independent producers have been disadvantaged, marginal producers put out
of business and prices to consumers increased.
NPC is correct that South African companies should cooperate to be locally and
internationally competitive and efficient. In order for that to happen,
competition policy needs to be seriously reconsidered. Competition policy has,
in our respectful opinion “gone off the rails” by being obsessed with business
structure and behaviour. It should instead be exclusively consumer focussed in
that any form of inter-company collaboration that is intended to increase
competitiveness, thereby benefiting the consumer, should be allowed.
The Act governing competition policy states that the purpose of the Act
- To promote the efficiency, adaptability and
development of the economy.
- To promote employment and advance the social
welfare of South Africans.
- To expand opportunities for South African
participation in world markets and recognise the role of foreign competition in
ensure that small and medium-sized enterprises have an equitable opportunity to
participate in the economy. (Likely to result
in higher prices for consumers.)
promote greater spread of ownership, in particular to increase the ownership
stakes of historically disadvantaged persons. (Likely to result in higher prices for consumers.)
7: Mineral resources
The NDP wants the country to benefit from soaring natural resource demand
worldwide. Changes in mineral and mining policy in recent years coincided
dramatically and tragically with the opposite, namely reduced investment,
production, employment and foreign exchange earnings. Current debates regarding
the security of minerals, of mine ownership and investment, and threats of
increased measures to “milk” as much revenue as possible, are acknowledged,
though not in such direct terms, by the Commission to be counterproductive.
With reckless talk about nationalisation seemingly behind us, or at least
receding, the time has come for the government to announce bold and firm
policies to make investment in mining and mineral production lucrative and
secure. We have already missed the recent minerals boom, and as the Commission
states, we must ensure that we do not miss the next bonanza.
The NDP calls for increased exports
“focusing on those areas where South Africa already has the endowments and
comparative advantage”. We believe that it is important and to the Commission’s
credit that it does not speak glibly of “beneficiation”. There is a lot of
loose talk in SA about a supposed need to beneficiate the resources we produce.
There is absolutely no advantage in the world of business and economics when it
comes to processing and production for countries that produce resources. All
resources trade throughout the world and for everybody at prices determined
spontaneously on international markets. Whether countries have resources or not
is, from a processing and manufacturing perspective, completely irrelevant.
Mauritius is one of the world’s biggest producers of wool products despite
having no sheep. Austria and Israel are the world’s biggest diamond cutters
despite having no diamond mines. Whether we are the best place to refine gold
or produce gold Rolex watches has absolutely nothing to do with whether we
produce gold. All that matters is whether we are good at it or bad at it, and
the Commission is correct in proposing increased production and exports where,
and only where, we have a comparative advantage.
8: Monetary policy
The NDP refers to a “balancing act” between the need to curb inflation and
economic growth. The assumption that there is a trade off is derived from
dubious and discredited neo-Keynesian theory. This is not the place for a
treatise on the subject, but it should be noted that Keynesian monetary policy
was about employment and not growth – it was a formula for reducing real wages
during periods of high unemployment when it was politically impossible to
reduce nominal wages, as it is in SA. In this Keysianism was, contrary to
pseudo Keynesian mythology, a pro market policy according to which increased
demand for labour would be a consequence of reducing the cost of labour.
There is much
confusion over monetary “stimulation” in which it is easily forgotten that all
a government or central bank can do is divert wealth from A to B. Governments
and central banks are not in a position to create wealth directly – creating
money is not creating wealth as anyone in possession of a valueless 150
trillion dollar Zimbabwean bank note should know. The problem with monetary
stimulation is that it necessarily and unavoidably distorts the economy in a
way that can be sustained only if there is continued and accelerated erosion of
the monetary base. It is clear from the world’s experience that the best
monetary policy is that in which the central bank maintains a stable value for
the currency and leaves other aspects of macro and micro economic policy to
agencies such as the NPC.
The NDP refers
to an “overvalued rand”. It speaks however of the exchange rate having
“weakened sharply”. We are in no position to state whether or not the rand is
overvalued and our view is that there is no objective criterion by which anyone
can make an informed assertion on the matter. What everyone knows is that the
sole purpose of exchange control is to overvalue the currency, whether or not
it has that or the opposite effect – no-one knows.
It is strange
that the view is commonly expressed, as it is in the NDP, that the rand is
overvalued, and yet the NDP does not call for the abolition of exchange control
the sole purpose of which is overvaluation. Surely the time is long overdue for
exchange control to be abolished and for SA to join a growing number of serious
economies that have enough confidence in themselves and their currencies.
Comments on Submission: National Development Plan - ECONOMY AND EMPLOYMENT