By Ebrahim-Khalil Hassen · 27 Nov 2014
Have we reached the end of the road for redistribution in South Africa? Recent publications by the World Bank and the South African Communist Party (SACP) suggest that the time for redistribution may well be over. The oddness of the pairing - usually with different ideological stances - is remarkable in itself, but the underlying logic for reaching the conclusion is even more remarkable.
The policy recommendation is similar. After a strong focus on expanding services, South Africa must now focus on the economy. The detailed proposals from the SACP differ from the standard set of recommendations from the World Bank, but the argument that we have reached the limits of redistribution in South Africa is a common thread. The solutions for the SACP is to be found in policies aimed at industrialisation and infrastructure development. For the World Bank’s part, there are no detailed proposals in its report, but a general call for inclusive economic growth and a warning that the fiscal limits have been reached.
There are, of course, important differences as well, but they share a remarkable circumvention: the failure to unpack how the poor, especially the young and unemployed, will be able to participate in the envisaged economic reforms.
The publication of the World Bank report, “South Africa Economic Update: Fiscal Policy and Redistribution in an Unequal Society”, provides an important analysis of the impact of government expenditure on the poor and for the first time, provides incidence reports on taxation, which shows that personal income tax is progressive. The study uses methodologies used in other countries, which allows for comparisons.
South Africa is an outlier. The impact of government spending on the poor in South Africa has the biggest impact on inequality when compared to other countries. But, we still remain the most unequal country compared to others in the sample.
The paradox of having a redistributive fiscal outcome with social grants having the biggest impact alongside very high levels of inequality is an important one. The World Bank uses this finding to argue that redistributive efforts via government spending are unlikely to lead to major changes in inequality. In other words, the bank is arguing that social grants reduce inequality, but play a limited role in economic growth. The evidence however shows that social grants play a role in supporting poorer people’s involvement in the economy.
Importantly, the World Bank combines good redistributive impacts with a warning that South Africa is required to “consolidate its fiscal position” and ultimately suggests that the answer lies in inclusive economic growth. But while saying so, the World Bank also pays scant attention to the highly concentrated nature of the South African economy, which is the major obstacle to inclusive economic growth.
The South African Communist Party (SACP) recently published a policy document titled: "Going to the Root: A Radical Second Phase of the National Democratic Revolution - Its Context, Content and Our Strategic Tasks”. The core distinction it makes is a division between the first and second phases of transformation. During the “first phase” it is argued that radical changes to political rights and redistributive efforts have resulted in major improvements in service delivery. However, it argues that despite these improvements in service delivery, inequality and unemployment remain extremely high.
To rectify this failure a “second phase” is needed. The SACP makes a call for “radical economic transformation”, which includes an attempt to grow the capitalist economy whilst also nurturing the solidarity economy. The “second phase” is about radical economic transformation with industrial policy and infrastructure development playing a foundational role in supporting structural change.
The starting points for the World Bank and the SACP may be different, but the underlying message is the same. South Africa needs to focus on the economy and the time and space for expanding redistribution is limited.
It is worth noting that this is not the first time that the World Bank and the SACP have been in agreement. The SACP also endorsed the World Bank inspired Growth, Employment and Redistribution (GEAR) plan. This is factually correct, but what is of broader interest is the fact that eighteen years later, the same argument, which brought these strange bedfellows together, is being repeated. Just as in 1994, the argument is that restructuring government finances combined with market-based reforms will lead to higher economic growth and greater social equity. The variables are obviously different, but the underlying logic is jarringly similar: (a) social spending has limited impact and (b) economic restructuring will stimulate growth and inclusion.
However, we know that the GEAR policy failed to deliver on the anticipated levels of economic growth and employment. It did not increase investment levels either. In fact, major increases to the social grant system only occurred after the GEAR period with supporters arguing that this was due to the fiscal space created by GEAR and critics arguing that it was due to GEAR’s failure to create employment.
Taken together and perhaps unwittingly the reports reduce the space for redistributive projects with the promise of greater equality depending on programmes to improve economic inclusion. In arguing this point, the core question of how poor people are supposed to share the benefits of economic reform remains unsatisfactorily answered.
Specifically, the relationship between the agency of the poor and the structure of the economy is glossed over. Unemployment data provides an important reminder of the interaction between structure and agency. Youth unemployment best illustrates this.
In South Africa, there are over three million unemployed young people who are not employed or in education and training. It’s not just that these young people merely have limited opportunities to enter their first job; they can be more accurately described as being structurally excluded. Importantly, they receive no social security support.
Government interventions to reduce youth unemployment exist and in several instances are producing encouraging results. However, scaling these programmes to have substantial impacts requires expanding government budgets. Moreover, as analysis undertaken by the Basic Income Grant Coalition indicates, expanding social security to this group in South Africa would provide a foundation on which programmes such as improved education, public works and entry into education and jobs are much more likely to succeed.
Expanding the social security system will require more public money and a radical reprioritisation of existing spending. The outcome of expanding social security would however result in greater participation in the economy through employment and potentially youth enterprises. A credible case for expanding the redistributive role of fiscal policy is thus made.
The SACP may repudiate this on the basis that its discussion document contains strategies to address youth unemployment. For instance, it argues for a continued and expanded role for public works as part of a strategy for “decommodification of work”. However, a much bolder strategy of government supporting the “right to work” through an expansion of the Community Works Programme (CWP) would have a more significant and lasting effect as opposed to simply increasing the existing Expanded Public Works Programme (EPWP). The shift from short-term work on public works under the EPWP, to regular work under the CWP offers greater prospects for improving the agency of the young and unemployed to enter the economy, and arguably also strengthens the non-state sector. Here again, the costs of scaling the CWP would be large, but affordable provided a significant reprioritisation of existing spending is undertaken.
Simply stated, without an effective and sustainable redistributive strategy – either through an expansion of social security or a reimagined public works programme – the likelihood of youth participating and benefiting from economic reforms is unlikely. It is the link between government usage of its resources to improve the prospect of people participating in the economy, and the restructuring of the economy that must be sustained. It harks back to the principle contained in the Reconstruction and Development Programme (RDP) to link development to growth.
Rapid structural change in the economy is obviously needed. Industrial policy and infrastructure development programmes are intended to do just that. However, even here the links between these programmes and more egalitarian wealth distribution are tenuous. Start-up and smaller businesses would be hard pressed to find direct support through the current suite of industrial policy schemes, and larger businesses will benefit more from the infrastructure plan. Here again, redistribution matters.
The redistribution of market-based opportunities for firms is a subject not discussed in our economic policies. However, across the globe procurement policies, taxation, competition policy, supplier development programmes and other instruments are more aggressively utilised by government to support the entry of smaller firms and their continuation. Here again, it requires a reprioritisation of spending and more importantly, a reorientation in policy.
The biggest challenge however remains that much of what is being proposed rests on South Africa rapidly improving its economic growth rate to at least 4,5% per annum, or more ambitiously to 7% over a sustained period. The likelihood of this occurring is extremely slim precisely due to low levels of economic participation. In a context where rapid economic growth will not be achieved, the role of government to strengthen economic participation is foundational. In particular, it requires us to develop policies that improve prospects for economic inclusion even under conditions of low economic growth.
The danger of the SACP and World Bank asking us to focus on economic transformation alone is not only that the possibility of a stronger redistributive stance recedes. Without linking redistributive instruments to economic strategies, South Africa will fail to provide the ways and means for excluded people and firms to craft strategies to participate in economic growth. The challenge is not simply more money, but rather better programmes and a radical reprioritisation of existing spending. Surely, the more people are enabled to participate in the economy the prospects for sustained economic transformation increase?
Redistribution of Existing Wealth Will Fail
>>"In particular, it requires us to develop policies that improve prospects for economic inclusion even under conditions of low economic growth."
I get the impression that you rather have policies of economic exclusion in mind.
You by implication urge the government to exclude "rich South Africans" from participating in the economy and to replace them with "poor South Africans".
One don't need to be a rocket scientist to realise that disinvestment in the South African economy will automatically follow and as a result more people will be competing for even less opportunities in an ever shrinking economy.
This is exactly what is happening with policies such as cadre deployment, BBEE, Employment Equity, tenders and State procurement arrangements that corrupted both the private and public sectors.
And from 2015 higher taxes to fund rising social grants, more free services, better health care for the poor and improved education outcomes, as well as the repayment of the credit used to finance counter cyclical infrastructure development spending from 2009 - 2014, will also play a destructive role in the SA economy.
Higher taxes and higher interest rates on consumer credit mean that consumers will have less money in pocket to maintain, let alone stimulate, demand and more money will be leaving the country. The balance of payments will be negatively influenced. Our credit ratings into junk-bond status will follow and the value of the Rand will diminish.
Rising food prices are one of the results of high inflation. The food security of by far the majority of South African households is at stake.
>>"The biggest challenge however remains that much of what is being proposed rests on South Africa rapidly improving its economic growth rate to at least 4,5% per annum, or more ambitiously to 7% over a sustained period."
Seven percent (7%) annual growth means that the South African economy will double in merely one decade (10 years) creating the much needed opportunities to reduce poverty, unemployment and inequality.
>>"The likelihood of this occurring is extremely slim precisely due to low levels of economic participation."
Yes it is indeed slim but not for that reason alone.
Low levels of economic participation by whom?
The communist inspired and racist National Democratic Revolution and the objective of an "national democratic society" without private property and no property rights for individuals will most definitely not unlock private sector investment. The NDR destroys trust between the parties. With no business confidence nothing spectacular can happen.
The SACP intellectually misled ANC will cancel the NDR and the "radical second transition" if they are in fact serious about combating hunger, disease, unemployment, poverty and inequality.
>>"The challenge is not simply more money, but rather better programmes and a radical reprioritisation of existing spending."
You will have to investigate the current priority list before you can make such dire conclusion.
You will have to correctly identify current redistribution programmers before you can make such dire conclusion.
Democracy dictates that afterwards you will have to convince a political formation with meaningful voter support to implement your ideas.
>>"Surely, the more people are enabled to participate in the economy the prospects for sustained economic transformation increase?"
Nobody is barred from "participating" except those that are among others banned for life from the labour market by racist labour legislation.
I believe that policies of economic exclusion and "economic transformation" that threatens or discriminates against certain people, or excludes private property rights and other freedoms, will never be sustainable.
Thanks for reading and commenting.
1. Higher taxation benefits big business as well. This is because infrastructure spending will benefit them disproportionally.
2. On who benefits: You argue that my suggestions would exclude "rich South Africans". I would argue that the top 10% of income earners will continue to grow their wealth regardless of policy direction. It is the middle income earners and the low income earners that will struggle. Improving the prospects of low income and middle income households building assets is essential to growing the economy in a more equitable manner.
SACP and World Bank
Thanks to Hassen for engaging with the SACP document. However, he seriously misreads the major thrust of our argument. The SACP isn't arguing for a re-straining of redistribution, but rather noting that within the current monopoly capital-driven growth path the significant redistributive effort underway since 1994 will continue to be undermined and overwhelmed.
A radical change in the productive economy is imperative. Apart from the transformation of the mainstream economy, the SACP document is arguing for a different understanding of what is meant by productive, or useful work. Which is where the call for a "solidarity" economy comes in, relatively de-linked from the ravages of the capitalist market-place, not least the capitalist labour market.
Contrary to Hassen's assertion, the SACP believes that it is the Community Work Programme that particularly needs to be significantly upscaled, along with other public employment programmes within umbrella of the expanded public works programme. Although the right to work is not explicitly mentioned, we agree with Hassen that through the upscaling of CWP along with transforming, indeed socializing, the "mainstream" economy, a major advance towards achieving the critical socialist principle of "the right to work" can be realized in practice and not just as a slogan.
There is much else besides where Hassen has misread the SACP discussion paper. As opposed to the World Bank, the SACP believes that redistribution needs to be expanded significantly - not least through (an increasingly threatened, by the way) implementation of a National Health Insurance system. Thanks again for the thoughtful engagement - let's keep the debate going.
SACP on Redistribution
Thanks to Cronin for the comment.
There are indeed different readings of the SACP document, however I wish to make three points:
1. There is a substantive difference between expansion of public works - which almost everyone agrees with - and a call for "right to work" - which is an expansion of redistribution. The SACP is indeed calling for an up-scaling of public works, but not for a "right to work".
2. Is the delivery of services "redistribution"? This thought just came to me in reading the comment. Providing services is incredibly important, as it provides poor households with shelter, water, electricity - it has a use value, but not an exchange value.
3. Structural reforms are needed. The question of how people participate in these reforms remains unanswered, and this is the major challenge we all need to focus on. I have no quick fixes for this, but both the industrial and infrastructure programme have few linkages to the excluded.
4. The SACP document sequence is clear. First, structural transformation and after that poverty and inequality will be reduced. The starting point is doubtful one, and makes equality contingent on growth and structural transformation. The starting point should be a redistributive programme that enhances participation in the economy by improving agency of people. This is not to ignore structural reality, but rather fostering possibilities for participation.
See also http://www.sacsis.org.za/site/article/2148 for a more general critique of the ANC policy.
Natural redistribution of money
Redistribution of money could happen quite naturally if the money system was reformed to accord with the fact that we now have a fiat currency not one based on a commodity such as gold. Economic activity consists quite simply of the voluntary exchange of goods and services. Literally everybody, unless they are severely disabled in some way, is capable of entering into this activity. It is in fact an activity which is essential for human survival. It is however an activity which is logistically very difficult to execute because finding a person with matching needs and potential offerings is not easy. The level of difficulty was significantly reduced however when the concept of a general purpose means of exchange [GPME] was accepted. Suddenly you could get something that you wanted by giving its owner sufficient GMPE in exchange for the desired item and the erstwhile owner could then exchange the received GPME with somebody else to gain possession of something that they wanted. The whole exchange process was still fully completed but suddenly it was relieved of one of the major inherent difficulties. As a natural consequence of this, GPMEâ€™s, now known as money, became regarded as an integral and, in a sense, an essential part of any economic exchange. For ease of understanding it is worth noting that when money is used in the exchange process special terminology is used to distinguish between the two halves of a completed exchange. When somebody uses money to acquire an item they are a purchaser, or some other similar term, and when somebody receives money for an item they are a seller, or some other similar term. There was a downside to the general acceptance of the GPME concept however and this arose out of efforts to ensure that the users of GPMEâ€™s need never fear that their GPMEâ€™s would lose exchangeable value. This required that the GMPEâ€™s, i.e. the money, had real economic value besides being a GPME. This meant that a GPME had also to be a real exchangeable good in itself. Thus it was that goods such as precious metals like gold became used as GPMEâ€™s. The consequence of GMPEâ€™s having real value right from the time of issuance was that GMPEâ€™s had to be earned from others who already had them. This requirement inevitably gave rise to poverty for some people as entry into the exchange process now required prior possession of GPMEâ€™s either by the entrant themselves or by their possible exchange partner(s). Thus a poor person who lived in a poor community had very little chance of ever being able to enter into a completed exchange process involving GMPEâ€™s as they were highly unlikely to find someone to enter into the process with them who was already in possession of the necessary GMPEâ€™s. Things are, potentially, different now however as we are blessed with a fiat currency. A fiat currency is not legally bound to the intrinsic value of a physical, and therefore limited, commodity such as gold but instead derives its value from the value of the first completed exchange in which it participates. Fiat currencies are never compelled to be linked to an exchangeable good like gold. Fiat currencies are just recordings of value and thus open the way to money playing its primary role for everybody, whether they have any money or not, and that is, to facilitate exchanges of real goods and services. Our trouble is that although we have a fiat currency our money system has not currently been adjusted to exploit the opportunity that a fiat currency provides. The money system thus continues, in many ways, to function as if the currency was based on a commodity, i.e. gold. So right now our money cannot wholly fulfill its primary role for everyone. Under the current money system any person, who is without sufficient money to enter into an exchange, is unable to do so because they cannot be issued with new money to make a purchase even if they could subsequently sell something of value equal to that of the newly issued money. A commodity based currency also plays this exchange facilitative role but only to a limited extent. The limitation derives from the fact that when a unit of a commodity based currency is introduction into circulation it already has to have a real fraction of the commodity linked to it. Thus it cannot just be issued to someone who needs it to enter into an exchange except as charity or as a gift. This is because the receiver has not earned it through an exchange, equivalent in value, of goods and/or services. New units of a fiat currency on the other hand can be issued to any one who needs them, to enter into an exchange, because the value of the units derives not from a commodity such as gold but from the completion of the first exchange in which the newly issued currency participates, i.e. purchase followed by a sale of value, equivalent to the newly issued currency, by its receiver.