Big Business Should Get with the Programme

By Ebrahim-Khalil Hassen · 20 May 2009

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Picture credit: United Nations
Picture credit: United Nations

The ultimate conceit in policy debates is to dismiss one’s adversaries with the words: "They just don't get it." In the run up to the elections this year and on the occasion of Cabinet announcements, a common refrain from private sector commentators is that the ‘left’ simply does not get it.

The central argument presented is that the market offers the best options for continued success. The corollaries to this argument are that change takes time, but also that the state should not extend its limited capacity into areas that are the preserve of markets. Consequently, the slogan to galvanise organised business is one of ‘continuity in economic policy’. Sometimes, the slogan is even more blunt, save us from economic populism, or from the 'loony left'.  The commentators in the private sector are, however, aware that their statements carry the disciplining powers of the market, as evidenced by market reactions to the procedural resignation of Minister Trevor Manuel, when President Thabo Mbeki resigned.

In substantiating the need for continuity in economic policy, several arguments are presented. The most important is that macroeconomic management has been a success. Indeed, had our markets not been subjected to exchange control regulations, undoubtedly our financial sector would have been more exposed to the international financial crisis that plays out. Similarly, public expenditure has had moderate increases since 2000, which has allowed government to expand its services, even if questions can be raised about choices made and the impact that has been achieved. Underlying this has been a period of economic growth, which is likely to end as we enter a recession. 

However, even the most sanguine of readings of the economy must come undone when viewed against South Africa’s development outcomes. The official data on development outcomes are contested, but represent probably the best information available. The data tells us that income inequality not only started out high, but has also remained resistant to processes of democratisation.

Put in perspective, this means that the top 10% income quintile received 72,5% of the country’s total income in 2007, while the bottom 10% received a minuscule 0,6%. In comparison to other countries, South Africa ranks amongst the most unequal, with a Gini Coefficient standing at 0,6. 

The official poverty data shows a small decline in the poverty headcount ratio of less than 10% across several poverty lines between 1995 and 2007. That translates to approximately 4,5 out of every 10 South Africans living below the poverty line. One of the important features of this decline is that even households that are above the poverty line are likely to fall back into poverty should households experience negative shocks.

In other words, it is doubtful that democracy has brought with it strong prospects for long-run upward mobility. This assessment is true even for the so-called 'black diamonds' who have entered the middle class on the back of high levels of debt, but more importantly, without an asset portfolio, thus making them vulnerable to a range of negative shocks. 

The full extent of the problem, however, hits home when one considers the levels of unemployment in South Africa. The official unemployment rate stands at 23,5%. The unemployment rate however does not include discouraged workers, which are a staggering 1,2 million people in the latest data on jobs, which is perhaps the most visible indicator of the poverty trap in our country. In addition to crafting saving and accumulation strategies for intergenerational and structural movements out of poverty, jobs obviously remain the most important means for escaping poverty and getting these jobs requires investment.

In praising the macroeconomic performance of government, however, private sector financiers have not invested sufficiently to ensure that enough jobs are created. In fact, the private sector's share of gross fixed capital formation has fallen between 2005 and 2008, whilst the share for government and public corporations has increased. The private sector remains the biggest contributor to fixed investment. Arguably market conditions and the unavailability of infrastructure by the public sector may have limited expansion. However, at the level of economic strategy, one of the key intended responses of the private sector is ‘crowding in’ once public sector investment has declined, but the opposite is occurring. 

Given these outcomes (based on official data), is it then not unreasonable and strident to call for continuity in economic policy? Private sector commentators might at this juncture remind us that reforms require time and excessive spending carries the burden of debt. The spectre of a ballooning budget, however, detracts from the central issue of poverty traps. The passage of time is not on the side of the poor, regardless of debt costs. Based on data in KwaZulu-Natal, several studies provide evidence of poverty traps, meaning that over time, the incomes of the more will not converge towards a higher level. 

Unfortunately, national level panel data is not available to generalise these findings. However, there are a multitude of micro-level studies being undertaken by a new generation of students that provide support for the hypothesis that apart from causes associated with apartheid; the process of economic reform has impacted negatively on the poor.  Whilst the influential business aligned research institute the Centre for Development and Enterprise, might not agree with the causality of poverty traps, it too, has argued in its research on youth unemployment that it constitutes a "continuing structure of disadvantage." Taken together, there is strong and compelling evidence that opening markets would constitute an ineffective response to the structural nature of poverty in South Africa. 

Yet, evidence abounds outside of research, of the breakdown of social cohesion. The continuation of often short-lived service delivery protests, sits cheek-by-jowl with the permanency of more organised social movements. These forms of protest are infinitely more promising because they indicate participation, rather than the ghastly violence associated with xenophobia that we have witnessed. The linkages between this breakdown of social cohesion and the rise of the left in the tripartite ANC-SACP-COSATU alliance are not often made, but provide an important backdrop to explain changes in the balance of power within the dominant African National Congress. In some respects, it suggests that powerful political players are beginning to 'get it', in that without significant changes we will not reach the goals of halving poverty and unemployment by 2014 on the current trajectory. It also provides a challenge to the view that with the rise of the so-called 'welfare state' in South Africa, demands for opportunity and access would diminish. 

One conclusion that can be reached out of this analysis is that the private sector have not been attuned to the social and economic dynamics of a reform process that they supported. This is evidenced in the private sector effectively disengaging from debates on public policy on key social and economic reform processes. 

The disengagement is substantial, with key private sector commentators, in the experience of the author, not even following publicly available proposals from civil society that a decade later, have a large imprint on the ANC’s election manifesto. 

Another conceit to avoid would be to “paint everyone with the same brush.” Important interventions by some companies and business-aligned organisations in providing training and entrepreneurial development suggest that there are sections in the private sector that have a wider vision of the future. However, these voices remain marginal, as do those of entrepreneurs. Instead, the charge has been led by commentators in banks and investment houses, whose general frame of reference, due to the positions they hold, show a prefence for large formal companies and the need for making investment decisions with short time horizons.

A grave miscalculation is that by creating black economic empowerment deals, the thirst for economic reconstruction would be satiated.

On the contrary, had they not had vested interests, the change that is needed would enthuse free marketers. One reading of the ANC is about it breaking the vested interests that are in our economy. From tackling import parity pricing, to dismantling pricing cartels, the suggested changes are about opening spaces for smaller players in the economy. In an ironic twist, the so-called shift to the left could, as a key project, ensure markets that are more free where the power balance shifts away from dominant firms, thus creating opportunities, fair prices and jobs. However, in other areas, government will need to respond to significant market failures including how health insurance is provided -- and in its own backyard, changing the behaviour of development finance institutions, like the Industrial Development Cooperation. 

These criticisms could be viewed as dismissing the leading private sector commentators as "simply not getting it," but rather, it raises the wider concern that in a democracy, powerful voices need not only power, but also evidence based policy proposals that imagine a more equal future. The current simplistic retreat to ideological rancour and fear mongering about a shift to the left, is not even a poor substitute for a private sector capable of engagements in policy debates around economic inclusion. What is needed is for farsighted and entrepreneurial business leaders to reframe the private sector.

Hassen is the founder of Zapreneur and Proposal Desk, both websites aimed at answering the question, "Can the Internet help South African small business?"

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