ROSS HARVEY: Better governance, not spending by an inept government, will create jobs

Austerity has become a dirty word. Diehard (or “unreconstructed”) Keynesian economists sometimes insist that spending our way out of trouble is the necessary catalyst for attracting investment. In a recent Business Day column this is pretty much what Duma Gqubule argued: “Private investment follows GDP growth” (“Stop the charades and start stimulating the economy”, March 28).

But this is utopian daydreaming at best, and dangerous at worst. If the driver of GDP growth is government expenditure — worse, an ineffective and inefficient government spending money it does not have — the growth is unlikely to be sustainable, let alone labour absorptive.

It would be a different story if the government had a strong track record of smart expenditure in key growth-stimulating areas of the economy, but it does not. In fact, the expenditure on Eskom’s Medupi and Kusile coal-fired power stations (just one notable set of Soviet-style megaprojects) has been an unmitigated disaster. They have locked us into ballooning debt repayments and do not function at anywhere near optimal capacity. The debt would be understandable and perhaps even warranted if capacity was at 100%.

On the basis of past performance, it seems irrational to expect that the government would suddenly become an expert on how to spend its way out of economic trouble.

There appears to be merit to select austerity. We may not like it but there’s a reality called credit ratings agencies. When you’re two levels below investment grade, as SA is, you must play a particular tune. It is not necessarily a bad tune either.

SA cannot afford to increase its debt-to-GDP ratio, which is already at about 80%. Every time that ratio moves higher our debt becomes more expensive to service. As a proportion of the budget, debt servicing is already too high at 14%, especially amid a budget deficit.

Beyond this lie the perennial structural challenges. If not growth through government expenditure, then how? Unemployment rose to a record high of 35.3% in the last quarter of 2021, and this is the narrow definition, which does not include “discouraged” workers. The only sectors that saw increased employment year on year were agriculture, transport, finance and private households. Manufacturing employment fell 11.7%, the second-highest drop. Utilities lost 17.7%.

In a 2016 journal article Harvard economist Dani Rodrik penned the phrase “premature deindustrialisation”. Examining manufacturing value-add data, he showed that developing countries are generally transitioning out of manufacturing and into low value-add services sooner (historically) and at lower median levels of per capita income than our industrialised counterparts. This is a major concern because manufacturing has traditionally been the channel through which labour is absorbed and broad-based wealth created.

SA must focus on encouraging the conditions that enable manufacturing growth. This does not mean investing endlessly into cash-guzzling Eskom; it means pursuing green industrialisation pathways that avoid corruptible megaprojects. Peter Bruce is dead right when he says, “We should be the first serious economy to get to carbon zero. Forget gas and other substitutes. They’re expensive and dirty and corruptible.” (“We should stick to what we’re good at: mining, farming, tourism”, April 6).

Capable state

University of Cape Town professor Anton Eberhard has consistently (and persistently) shown that the Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) was a first-class example of how a procurement programme can be efficiently, transparently and accountably run. There is no good reason the ceiling threshold for independent power production should not be eradicated.

But addressing the challenge of premature deindustrialisation requires us to locate SA within the framework provided by Daron Acemoglu and James Robinson in The Narrow Corridor. Their argument is simple: for countries to attain sustained, dynamic, broad-based economic development, two independent indicators of good governance have to be in place. Specifically, governments need to build capable states that are highly effective at delivering services, budgeting accountably and spending responsibly.

Citizens should simultaneously be increasingly strengthened to hold their governments to account. They call this the “red queen” effect. If citizens are powerless to check the power of the state, states such as Russia “do what they will and the weak suffer as they must” (as Thucydides put it). And the rest of the world stands idly by as Ukrainians suffer untold terror, pain and hardship.

So where does SA stand on these two governance performance variables? We developed a “governance coefficient” to quantify (at least in proxy terms) the Acemoglu Robinson framework. In 1996 SA outperformed its African peers. Government effectiveness was at 1.02 (on a scale of -2.5 to 2.5), and citizen voice and accountability at 0.841 (also on a scale of -2.5 to 2.5). GDP per capita was $3,494. Neither governance score in 1996 was earth-shattering, but it was a promising baseline. 

What’s clear for SA is the deterioration. By 2020 Mauritius outperformed us by some distance, while we joined the likes of Namibia, Ghana, Botswana and the Seychelles. Government effectiveness dropped to 0.299, while voice and accountability dropped to 0.697. If you run these figures alongside the Armed Conflict Location & Event Data Project’s figures of political violence, SA looks rather depressing (as evidenced by the scenes of insurrection in July 2021).

Preventing corruption

The upshot is that SA’s GDP per capita has only grown to $5,090 in 28 years, an increase of just about $1,500. Norway scores 1.937 on government effectiveness and 1.725 on voice and accountability, and thus enjoys a per capita GDP of $67,294. That is 13.2 times SA’s.

Of course, GDP per capita doesn’t tell us anything about income distribution, and SA remains among the world’s most unequal countries. Yet it does show that unless government effectiveness improves and citizens become stronger at preventing corruption and demanding accountability, growth-enhancing investment is unlikely to be forthcoming.

This is why diehard Keynesians are wrong about SA spending its way out of trouble. We must start by signalling (and executing) fiscal discipline, and complementing this with improved governance at every level. There was a time in recent memory when receiving a qualified audit was at least an embarrassment. Impunity has since grown so brazen that municipal managers stay in their roles even when they oversee the collapse of critical infrastructure. Even when the government spends, businesses consequently cannot thrive because service delivery at the local level (where it really matters) is largely nonexistent. 

What Gqubule is correct about, though, is that increasing the repo rate to quell import-driven inflation is “like a parent punishing the wrong child”. We do have to make capital less expensive to borrow locally. Complemented by improved governance, this would provide the initial conditions required to attract the kind of investment that could drive green industrialisation and address our primary problem of premature deindustrialisation.

• Dr Harvey is director of research & programmes at Good Governance Africa.