Too Many Carrots and Too Few Sticks

Too Many Carrots and Too Few Sticks

Michael Nassen Smith and Carilee Osborne | Amandla 64 | June 2019

In his opening speech at the October 2018 Jobs Summit, President Ramaphosa made the following comments:

“The social partners have agreed that this Presidential Jobs Summit will emerge with a framework agreement that is both ambitious and realisable. It is the product of intensive engagement among the social partners over several months, in a spirit of cooperation, consensus building to address a problem that affects all of us. Importantly, the framework provides the outline of an emerging social compact to grow an inclusive economy and fundamentally transform our society. One of the great difficulties we have faced in recent years is that cooperation between communities, labour, business and government has weakened, making it difficult to advance the collective interest…It was by working together that we managed to overcome apartheid, that we brought an end to an intractable conflict that had raged for generations, and were able to write a democratic Constitution that guarantees the equal rights of all.”

The passage gives us insight into the methods of change that Ramaphosa believes will rescue the South African economy – a series of negotiations, concessions and bargains that result in a “social compact”. This compact would supposedly stimulate private sector investment and economic growth, and resolve issues of poverty, unemployment and inequality. The compact is an integral part of Ramaphosa’s promise of a “renewal”, a “New Dawn.”

Not since the democratic transition have words like “renewal” been so prevalent. Given his role as a chief negotiator in those anxious times, it is not surprising that Ramaphosa locates his current call for a social compact within the context of the transition. In referencing this process so plainly, Ramaphosa is suggesting he is capable of achieving similar feats today.

From RDP to Gear

Yet rhetorical and actual parallels to the transition also offer warnings for the left. In the 1990s, left forces within and outside the incipient ANC government maintained that transformation of social and economic conditions in South Africa required mass public investment and ambitious redistributive policies. These policies were outlined in Merg’s Growth for All and within Cosatu’s (and later the ANC’s) RDP. Prepared behind closed doors, Gear replaced these with a homegrown structural adjustment program, including:

• Neoliberal macroeconomic policies. These included privatisation / corporatisation, relaxed capital controls, commitment to inflation targeting and low budget deficits.
• Formally redistributive efforts contained in piecemeal concessions to labour regulations and Black Economic Empowerment (BEE).

BEE claiming to be transformation

BEE was formalised during the Mbeki years. It was a redistributive strategy originally conceived by capital – Anglo American in particular. The idea was simple: attract a small number of politically connected black people into your business and champion yourself as a leader of transformation. Ramaphosa himself was an early beneficiary of this process.

The “social compact” of the transition period, of which Gear was a product, preserved the interests of the Minerals-Energy Complex (MEC). This compact has been usefully described by Moeletsi Mbeki as the “transformation equation”: parliamentary democracy + globalisation + BEE = transformation.

The “transformation equation” clearly favoured finance and mining capital and politically connected budding black entrepreneurs. But it was rationalised with the view that capital-friendly policies would stimulate investment, growth and redistribution. Conservative economists and the business-friendly press went to work entrenching this into popular economic discourse. As Marx wrote:

“though [the capitalist] chanted to us the whole creed of the economists, in reality, he says, he would not give a brass farthing for it. He leaves this and all such like subterfuges and juggling tricks to the professors of Political Economy, who are paid for it.”

Bitter fruits of “transformation”

We are still saddled with the wisdom of the “professors of Political Economy” today, even as it is clear that their advice was unsound. Indeed, the “transformation equation” has produced widening inequality, low growth rates and deindustrialisation. BEE has merely succeeded in creating a black bourgeoise with diametrically opposed interests to the black working class.

In recent years, this class has been vicious and ambitious in pursuing its accumulation agenda, whether through the state or within the private sector. All the while, finance and mining capital have made high profits with no corresponding increase in fixed investment. This is due largely to the rise of the shareholder value movement and financialisation.

The liberalisation and narrow redistributive efforts were set in motion by the bargains struck at the transition. They have laid the foundations for both our current economic crisis and our struggles with state capture. The rapid expansion of the financial sector and MEC core at the expense of manufacturing has led to harmful deindustrialisation and made our massive unemployment problem worse. Moreover, state privatisation combined with BEE has led to corruption on a grand scale, aided and abetted by the private sector, including KPMG and the like.

As Karl von Holdt succinctly puts it:

“corruption is a mechanism of class formation, rather than primarily a moral or criminal issue. The defining social process in post-apartheid South Africa is the formation of a new black elite…But the formal economic sectors are dominated by established business and corporations, opportunities are few, demand is high and competition is fierce. In this context, the state is the location of jobs, revenue, contracts, tenders and licensing and is an obvious resource in the formation of a new elite.”

Back to the future

With all this in mind, it would be irrational to return to the bargaining mix that defined the transition. However, a number of signs indicate that this is precisely where the “social compact” of the New Dawn is heading.

In late 2018, Reserve Bank Chief Lesetja Kganyago vigorously affirmed his commitment to inflation targeting. He labelled those calling for a review of the mandate of our central bank dangerous “populists”.

More recently, Treasury hosted a meeting on economic policy which was unrepresentative of progressive voices. Neither local progressive economists, nor organised labour, were invited to participate. Those who proposed economic orthodoxy were given ample space to influence policy. Since then, the most significant policy statement was the 2019 budget speech, which saw a slash in spending, no corporate tax increases and hints at privatisation of State Owned Enterprises. “Fiscal prudence is the road to economic recovery,” said the minister, indicating the treasury’s unwavering belief in orthodoxy.

In the business press in particular, the conversation around macroeconomic policy seems to turn on the need to end the so-called “investment strike” and find that magic bullet of “investor confidence”. The assumption underpinning this is that post-apartheid economic policy has been a burden to big capital and undermined its interests. Apart from certain key sectors, this characterisation of the fortunes of capital is simply not accurate.

Big capital continues to profit

The MEC continues to reap benefits from the state through, for example, major electricity subsidies. A number of local and international banks have been accused of manipulating the rand (some of these have admitted to doing so and others have paid fines in the US to this effect). Private companies have been the benefactors of major overpricing of outsourced government goods; according to the former chief procurement officer at Treasury, as much as 40% of the government’s R600 billion in outsourced goods and services spend is a result of overpricing. Lax capital and exchange controls have allowed for significant capital flight and illicit financial flows continue to go unchecked.

Finally, South Africa’s corporate tax rate remains at half of what it was in 1994. As Patrick Bond has written, indicating the class character of fiscal policy, “Although in nominal terms corporate tax contributions to the state rose by just 6% (from R217 billion to R230 billion) over the past two years, the revenue from VAT soared by 21% from R298-billion to R360-billion in the same period.” 

In sum, the social compact that has characterised the post-apartheid political economy is one that has allowed for new patterns of class formation to take hold. These fundamentally undermine the interests of the working class. It has also laid the ground for the breakdown of the state. Elite class power is represented by the contradictory interests of the new black elite and mining and finance capital. Faith in this social compact leaves that power unchecked. This is potentially fatal.

The left cannot allow for a return to the macroeconomic mix that brought us to the precipice. Yet we will continue to slide in this direction unless we strengthen progressive forces politically.  Power determines the results of bargaining processes. And power needs to be built across the political and intellectual spectrum.

In 1994, after years of struggle, and due perhaps to shock, the left inside and outside the alliance, did not act with enough vigour and resist. With lessons clear, let us not also follow the professors of political economy and repeat history.

Michael Nassen Smith is the Deputy Director, and Carilee Osborne is a Researcher, at the Institute for African Alternatives (IFAA).