Putting a microscope on SA’s economic travails – Charles Wait

CAPE TOWN — If ever you wanted an economic lodestone to guide your thinking, then hang in with the read below. It’s a precise, painstakingly-built summary of what went wrong with our economy and what is desperately and speedily needed to reconstruct our fortunes and address the Gini-coefficient. Only a die-hard communist zealot bent on the suicidal Venezuelan-type model of revolutionary economic reform, will argue that capitalism is intrinsically devoid of ethics. Veteran economist, Professor Charles Wait, says it is part of the very DNA of pragmatic economics – and it takes no great study to realise that this is part of our South African problem. Among his pre-conditions for a turn-around are a return to a value-driven society which includes a work ethic, rapidly fixing broken institutions to restore confidence and respect, understanding the vital symbiotic relationship between the public and private sectors (some hard yards to be made here), strong civilian institutions aimed at protecting the rule of law while concurrently recalibrating the culture of protest and violence. This will help keep the lights on over the long term. It’s a balanced intellectual diet that can help restore health to our shaky body politic. – Chris Bateman

By Charles Wait*

The invitation you received to tonight’s function indicated that my presentation will be one on the current state of the South African economy.

In the last two weeks, we have been bombarded by several reports and commentaries on what is in each case referred to as a technical recession.

I shall comment on the need for or the significance of the adjective – technical. The use of the adjective may leave the impression that there are also other kinds of recessions – I shall clarify that.

Once we reach that clarification you will be interested in the causes of and in the cures for this recession.

Both about causes and cures I intend to disappoint you by not presenting the information that you are expecting.

Assumption

I start with an assumption that at some stage when you have used your computer you got a message on the screen saying: “Such and such a program will remain running in the background.” My cellphone gives me a similar message.

You continued working on your computer without necessarily seeing this program on your screen.

What runs in the background?

My address tonight is structured around what runs in the background of an economy in general and specifically the South African economy.

To get to the point of dealing with what runs in the background we must look at what runs in the foreground.

Six variables in the foreground.

There are six basic variables which make up the temperature readings of any economy. Those are:

• The total output of final goods and services produced by an economy, presented to us numerically as the Gross Domestic Product, abbreviated to GDP.

This description of GDP allows me to take an initial look at the present recession

• • The recently announced recession is based on calculations regarding the growth of GDP. When the growth rate of the GDP is negative in two successive quarters that economy is labelled as one in recession. The adjective I mentioned earlier, namely technical therefore simply means that we applied the yardstick, the growth in Gross Domestic Product, and found that in two successive quarters the GDP declined compared with the previous quarter.
  • Be careful about the use of this adjective. Technical is in no way euphemistic. It is indeed a serious condition, specifically in a country like South Africa with high unemployment rates.

I interrupted my list of six variables by this consideration of the word technical. Let us go back to the list, the first one was the value of the Gross Domestic Product. The next one is

• The extent to which private households spend on their everyday needs, presented to us as Private Consumption Expenditure.
• The extent to which the business sector spends on maintaining or expanding its productive capacity, the technical term is Capital Formation, also called Investment Expenditure.
• The amount of money spent by the government sector, reported to us in government budgets and in reports by the Auditor-General.
• The value of goods and services exported.
• Finally, the value of goods and services imported.

Because of our being able to measure these variables and because markets are involved, we can present reviews of the economy on which we report on:

• Growth rates by considering the behaviour of Gross Domestic Product in a time series.
• Inflation rates by considering how retail prices for consumer goods behave, again in a time series.
• Interest rates as one of the factors that determine the willingness of business enterprises to undertake capital formation.
• The tax revenue required by government to fund its expenditure. Flowing from these estimates of expenditure we measure budget deficits or surpluses and government debt.
• The exchange rate at which we convert our export earnings to the local currency or our local currency to foreign currency to pay for our imports.
• The trade balance between export earnings and payments for imports, usually reported, after inclusion of factor payments, as the balance on the current account of the balance of payments.

Secondary indicators

Because of the level of economic activity reflected in these macroeconomic variables we also get secondary indicators such as the level of unemployment and the degree of equality in the economy, to name but two that are often and prominently reported on in South Africa.

Further, allow me to mention in passing that Gross Domestic Product is not beyond criticism as a measure of how well an economy is doing in providing for the happiness of its citizens – but that is a topic on its own and beyond the scope of this address.

Synopsis of Economics 101

Chairman, so far, a synopsis of Economics 101 lectures. Economists like to make assumptions. My assumption is that you did not come for an Economics 101 lecture. At the same time, I don’t think I would be terribly wrong in assuming that many of you came with the expectation that this address will be built around a survey with tables, graphs and some views on the above six variables which I have listed, coupled with the manifestations of the different prices or price ratios I have named and with the financial position of the public sector.

My intention is not to do that, but to use the analogy of the computer program that runs in the background.

When I use the word “program’ or “programs” I do not mean it in a literal sense but rather figuratively.

What “program” or “programs “run in the background of the economy?

Two programs

In view of the eagerness of the caterers to display their culinary expertise time will allow me to deal with two only. These “programs” make it possible for the economy to perform its function in delivering an output which is so diversified that consumers can get what they need, business people can and want to obtain capital goods like machinery, governments can legitimately or by state capture buy what they need, foreigners have their needs satisfied by exportable goods and services and, where the local economy does not deliver, it is possible to import what is required.

Set of intangibles

The first background program is a set of intangibles and the second one is what economists call institutions.

I’ll deal with each of the intangibles and institutions by referring to its nature and to comment briefly on the South African situation in that regard.

Let us deal with the intangibles first.

From tangibles to intangibles

In our daily lives, most of our time is absorbed by dealing with tangibles. We have factories, retail shops, professional practices, guest houses, each with its own tangibles.

Where do we start to identify the intangibles?

In May 2017, a group of academic researchers from several universities in the USA and Eastern Europe published an article listing the 80 economic bestsellers before 1850.

For the sake of perspective allow me to mention that Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations”, often referred to as his “Wealth of Nations” and published in 1776, is generally regarded as the first seminal text in Economics.

Not Adam Smith

The researchers, in listing economic bestsellers before 1850 do not start with Adam Smith in 1776 and do not list Smith’s “invisible hand” as the number one principle in economic life.

Aristotle 384 – 322 BC

No, they go as far back as a translation of the work of the Greek philosopher Aristotle. Aristotle lived between 384 and 322 BC and in 1469 an Italian by the name of Leonardo Bruni translated Aristotle’s Politics and Ethics, the original title in Greek: Ethica, Politica, Oeconomica.

Here, Mr Chairman, we find our first intangible namely Ethics.

Ethics, as a cornerstone of the economic system is emphasised in 1757 when Benjamin Franklin published his “Way to Wealth”, described by the researchers mentioned as “…a handbook in capitalist ethics.”

I shall not bore you with philosophical definitions and debates about the meaning of ethical behaviour. Also, not with synonyms and the thin line between synonyms

David Hume, the Scottish philosopher of the 18th Century referred to it as simply what a society accepts as right and as wrong. We may call it “the golden rule in that society.”

Instead of definitions and debates we only need to ask ourselves why we find it necessary for:

• King Reports 1 to 4.
• Newspaper headlines like: “The Hermit of Hermanus.”
• Cases of alleged price collusion ranging from mega projects like the construction of sport stadiums to an everyday essential, perhaps the only food item of our poorest of the poor, namely bread. Imagine, price collusion on the price of bread!!!
• A well-known Afrikaans journalist referring to South Africa’s civil servants as “unproductive, lazy and corrupt”, from my side, quoted with an apology to the exceptions that prove the rule. Amongst these exceptions are these brave ones who give evidence at the Zondo Commission.
• A new book under the title: The Rise of Tyranny, that tracks the patterns and repercussions of state capture.
• Media reports that imply a blind eye being turned by some auditors.
• South Africa is not the only country where these things happen. Recently a Photo-Shopped image on the front page of a German newspaper showed the CEOs of the three big vehicle manufacturers in Germany behind prison bars and with the heading “The New Diesel Filter.”

It takes two to tango

Where unethical behaviour spills over into corruption it is true that it takes two to tango. There is someone sitting across the desk when a dodgy deal is concluded.

Curricula

In our curricula in the various Faculties of Economic Sciences throughout the country and universally we have always assumed that ethical behaviour is a given and that we don’t even need to mention it. To-day most curricula have one or more modules on Ethics.

Ethics is thus the number one element of the background program without which the foreground program cannot run successfully.

Ranking for corruption

In a 2018 Report South Africa’s ranking for corruption dropped from position 45 to position 43 between 2016 and 2017. A score of 100 indicates zero corruption. There are several countries that also dropped two positions but then from a score of 88 to 86, like Norway. New Zealand dropped one position from 90 to 89.

Evidence at the State Capture Commission confirms what we heard and read over a long time about how much blood flowed from the South African economy. We have every hope that the Commission and the consequences of its findings will make the Commission more than a wall where we cry over spilt milk.

The future is not only about acting against the perpetrators of the past. The more difficult aspect is how to ensure ethical behaviour over as broad a front as possible – a task that starts in the home, the school, the church, the NGO and where ever people interact with other people or with material things.

Ideas and entrepreneurship

Next, I want to name two intangibles that go hand in hand. These two are ideas and entrepreneurship.

Everything tangible in our economic system was once an idea only. The most spectacular piece of modern technology was once an idea in someone’s mind, possibly in a much more rudimentary form. The wheel and thereafter everything that runs on wheels was once an idea only. Even the latest object on wheels, luggage, was an idea that crossed someone’s mind after another idea materialised – to put a man on the moon. These ideas, however, required entrepreneurship to be turned into viable business prospects. Ideas and entrepreneurship go hand in hand. Although we all have a meaning in mind for the term entrepreneurship, as recently as April 2018 a group of three researchers still found it necessary to research this concept and publish an article in which they try to come to grips with what entrepreneurship entails.

Whereas in the case of the first intangible, Ethics, I listed many negative manifestations; for ideas and entrepreneurship we can start on a positive note.

The Herald / SARB / Jansenville

• In The Herald in Port Elizabeth, at least once a week, a local success story is published. Someone who got an idea from observing some opportunity and turned that idea into a viable business enterprise.
  • Recently, on a Monday morning, this paper published three prominent reports in this positive spirit. I quote
    • Bay software firms making their mark.
    • PE conference to focus on latest industrial technology.
    • Determined to be part of the solution.
• The response from a largely student audience to answers by the Governor of The South African Reserve Bank during a recent public lecture at the Business School of the Nelson Mandela University. When the Governor was asked about his views and those of the Bank on unemployment his answer was that we needed more business enterprises because that is where people are productively employed. When he was asked about inequality he indicated that welfare programmes which amount to hand-outs are unsustainable unless these welfare programmes can help to uplift people from a state of dependency. These and other answers in the same spirit received an almost standing ovation.
• The success stories of emerging farmers that include women farmers. A Jansenville chicken farm was in the news recently.

My view is thus that South Africans are bright enough to generate ideas and enterprising enough to turn these ideas into success stories. The younger generation shows a keenness in this regard.

Not plain sailing

Unfortunately, it is not always plain sailing.

How many times have we not heard the Minister of Finance in the Budget Speech saying we must encourage small business, we must lower the cost of doing business in South Africa, we must simplify our regulatory frameworks and do other things with similar effects.

We have a National Development Plan that envisages a role for entrepreneurship, we had a President who had a nine-point plan of which on occasion only one point stuck in his memory.

Do these intentions not remind us of a well-known saying in English that deals with good intentions?

As part of paving the way of this process we established two unnecessary ministries, the Department of Economic Development and the Department of Small Business Development.

We need economic development and we need small business development, we do not need ministries to do the job.

The 2018 World Bank Report shows that South Africa, with 30 ministries, has the largest number of ministries among countries selected on grounds of comparability. The size of our Parliament is also considerably bigger than the Parliaments of comparable countries.

Instead of bureaucratic structures sucking up money to buy luxury cars and appoint blue light VIP protection services we should support concrete initiatives such as:

• Propella and Innoventon at the Nelson Mandela University in Port Elizabeth, Innovus and Launchlab at the University of Stellenbosch, where potential patentees can develop prototypes to test commercial viability.
• Business Partners SA whose mandate is to support small business.
• Pressure from organised business and organised agriculture for more of what the World Bank calls low-hanging fruit, namely “investor-friendly regulations”.

The second and the third elements of the background program are thus, to summarise: Ideas and Entrepreneurship.

Confidence

Allow me one more intangible: Confidence in the stability and the future of the South African state and economy.

None of the enterprises represented here to-night would have existed had someone somewhere in the past not had the confidence that such an undertaking could be a success and had later generations not had the confidence to continue with what an earlier generation initiated.

What is it that can destroy confidence?

In a 2015 Report on “…Priorities…for South Africa’s Future” an international consulting group, not a credit rating agency, writes: “Confidence concerns are rooted in…uncertainty over policy direction in critical sectors such as telecommunications and mining…” to which we can now add property rights. 

We may rightly ask what it is that can ensure confidence.

Second background program: institutions

This question brings me to the second program that runs in the background. Economists call this program institutions.

Institutions are described in a way that includes society’s formal rules such as constitutions, laws and regulations and society’s informal constraints like conventions, norms and traditions. In addition, there are the organisations that give effect to these formal and informal constraints.

Adam Smith, the Scottish moral philosopher of the late 18th century, named four functions of a government, one of which is to ensure that a legal system exists which can enforce the contractual obligations between contracting parties.

In a modern 21st century state an independent and objective legal system which ensures, amongst others, contractual rights and property rights is a cornerstone institution that instill confidence.

Any attempt at destroying the impartiality of the legal system or within the legal system the assurance of property rights flies in the face of confidence.

Confidence in the legal system goes further than the sanctity of property rights. It embraces all facets of the legal system.

In the light of the Jonas, Mentoor, Mendosa, Williams and other’s evidence at the Zondo Commission of Inquiry we see serious cracks in the SAPS, the Hawks and the National Prosecuting Authority which are the building blocks of a legal system at the levels before we get to the courts. As recently as in the 2015 Report I mentioned earlier, South Africa’s institutions were ranked in the 36th place out of 144 ranked countries and it was said that we have “…a particularly strong legal system and judiciary framework.” Returning to the Zondo Commission, this seems true of our courts but the building blocks below the courts are under great suspicion.

It will take time to ensure sound foundations at these institutions where the walls are now cracking, but it can happen provided the Zondo Commission is more than a wailing wall.

Stable and sound Monetary System

The second institution that lubricates the functioning of the economic system is a stable and sound monetary system.

The monetary system is normally the domain of the country’s central bank.

Research has shown that the stability of monetary systems is a function of the independence of the central bank.

Independent from whom or what?

Independent from political influence by the politicians of the day.

As one commentator once described it: The keys to the printing press cannot be left in the hands of people who only know how to spend money.

We are aware of the moves to nationalise the South African Reserve Bank.

Nationalisation as such is not the main concern, there are many central banks that are state-owned but that are independent from the political influence of their owners. From a confidence point of view this proposal comes at the wrong time, but the timing is probably not wrong if it can catch votes in the 2019 election.

What is the position in respect of the SARB?

The SARB’s independence is enshrined in the Constitution which states that there shall be a central bank that will perform its mandate independently without fear, favour or prejudice. In the SARB’s case this clause appears in the Constitution as well as in the SARB Act, unlike in some other countries where it appears only in the respective central bank acts.

The SARB’s independence manifests itself in at least two ways. The officials of the Bank are employees of the Bank and not of the state and are paid from the Bank’s own income. Secondly, only officials of the Bank constitute the Monetary Policy Committee.

There is a subtler aspect which lends independence to the Bank. The Constitution’s clause that deals with the relationship between the Bank and the National Treasury stipulates that there shall be regular consultation between the Governor of the Bank and the Minister of Finance.

What the Constitution does not say on this point is important. It does not say that either the Governor or the Minister acts in consultation or after consultation with each other. Each one can apply his or her own mind.

You will recall the attempt of about a year ago to have the mandate of the Bank changed and how the courts declared that effort invalid.

Like its independence the Bank’s mandate is also enshrined in the Constitution. This mandate is to protect the value of the currency in the interest of balanced and sustainable economic growth.

We must note two aspects of this mandate.

First, the Constitution does not define what it means to protect the value of the currency. The two interpretations are left to the discretion of the Bank, namely whether to protect the domestic purchasing power of the Rand, in other words to combat inflation, or whether to protect the exchange rate of the Rand.

The second aspect of the mandate is that the Bank has a sole mandate namely to protect the value of the currency, not a dual mandate to protect the value of the currency and to promote sustainable and balanced economic growth.

Where to put the emphasis at a given moment is left in the hands of the Bank and its Monetary Policy Committee of 8 persons.

The failed effort to change the mandate of the Bank was aimed at mandating the Bank to choose between inflation and economic growth and then to put pressure on the Bank to favour economic growth with expansionary monetary policy – a dangerous step that could lead to runaway inflation.

Our courts were wise enough to save us from such populism.

4th Industrial Revolution / Capitalism 4

Whether we focus on the background programs or on the foreground program makes no difference to the fact that all these programs run during what we often hear is labelled the 4th Industrial Revolution under a version of Capitalism described as Capitalism 4.

What are the implications?

The 4th Industrial Revolution is one, we are told, in which we shall see more and more computer programs doing what people are now doing.

Design, manufacturing, installation, operational and maintenance processes are digitally linked with limited human interface.

This raises our fears about unemployment.

When we changed from ox-wagons to lorries we discharged two of the three essential persons who operated an ox wagon – we created a 66% unemployment rate. What if that scared us from switching to lorries?

I recently visited the very advanced 21st century factory of Mercedes Benz in Stuttgart. Despite a body shop where you only see robot arms swinging the body parts of cars around and assembling these parts and where small automated trolleys deliver parts to the different assembly points, the factory still employs 35,000 people every day.

South Africa’s problem in this matter is mainly one of retraining the two persons who are no longer needed to operate an ox wagon to become motor mechanics or auto electricians.

I have yet to find a report on the South African economy which does not emphasise the need for skills training and which does not compare our educational system with educational systems where provision is made for skills training that starts at an early stage.

While the 4th Industrial Revolution is about the digital age and automation, Capitalism 4 is about a symbiotic relationship between government and the private sector.

Capitalism 4: symbiotic relationship

A symbiotic relationship brings us back to the earlier intangible which we named confidence.

A symbiotic relationship can only work in an atmosphere of mutual trust and transparency.

Let us look at a recent example.

The organised agricultural sector signed a Memorandum of Understanding on land reform and handed this to the Deputy President.

We must keep an eye on how this undertaking unfolds in a world where a symbiotic relationship is required.

Earlier in this address we associated a well-known Latin American dance with the negative phenomenon of corruption.

Now we can repeat, but in a positive sense, that its takes two to tango in a symbiotic relationship between the public and the private sector.

The recession

How do we relate this presentation on intangibles and institutions to the present recession?

Soft-soaped

In the foreground, this recession is soft-soaped by blaming it on drought conditions and a consequent decline in agricultural output. This effect cannot be denied.

To the extent that your enterprises are diversified you know that a slump in one activity is often compensated for by better conditions in another activity.

Why, in the case of a diversified economy like in South Africa did the other sectors of the economy not compensate for the conditions in agriculture?

Role of the background programs

Our background programs have played profound roles in answering this question.

• The long-term deterioration of ethics over a broad front
  • Ethical disgraces are quickly punished in the private sector. By the slightest leak of bad news share prices in such enterprises drop and quite often CEOs are removed – sometimes though with or without a golden handshake, and court cases follow.
  • The pace in the public sector is much slower and we are now beginning to get the facts about cover-ups. Since some years ago, the Auditor-General annual reports a concern to Parliament about irregularities reported by the Auditor-General’s office but without consequences.
  • As a country’s score on international indices of this nature deteriorates so does the confidence and the willingness of foreign investors to invest in that country. The exception that proves the rule are those foreigners who come to benefit from a lack of ethical behaviour.
• The smothering of entrepreneurship with bureaucratic red tape
• The undermining of confidence.

• Instead of steadfastly concentrating on policy as suggested in the National Development Plan, we find
  • Conflicting policy statements aimed at election gains instead of economic well-being
  • Wrecking institutions like those earlier named the building blocks of the legal system, tinkering or suggested tinkering with other institutions where nothing is broken
  • A lack of understanding of what a symbiotic relationship between government and the private sector means
    • On one platform, the President and the Deputy President assure us that no land grabs will be tolerated, on another platform a SAPS brigadier refuses to act against a court-interdicted land grab because the property is not fenced off.

In this summary of the relationship between intangibles and institutions on the one hand and the recession on the other hand we encounter a degree of darkness – darkness about the functioning of the background program.

It is therefore appropriate to quote Marianne Williamson who wrote:

How odd that we spend so much time treating the darkness, and so little time seeking the light….we do not get rid of darkness by hitting it with a baseball bat. We only get rid of darkness by turning on the light.”

The light switch

Where is that light switch mounted?

A recession as measured by GDP growth rates is a short-term issue. As soon as we have two successive quarters of positive growth we shall be out of the recession. Recessions come with more or with less serious hardships and recoveries come with more or with less prosperity, the rising tide does not necessarily raise all boats equally.

The light switch we are looking for is the one that would keep the lights on over the long term.

This switch, in the light of our analogy of the background programs, is mounted in a few places, of which I name:

• A return to a value-driven society that can take care of the Ethics issue and when it is neglected effective remedial action is taken. A return to a value-driven society includes work ethic.
• A respect for institutions that instil confidence. Don’t try to fix what is not broken, but rapidly and effectively fix the ones that are broken.
• A true understanding of a symbiotic relationship between the private and public sectors which can make them champion dancers of the tango.
• Strong civilian institutions like organised business, which seems to be a bit fragmented, Agri-SA, several Chapter 9 institutions in the Constitution and several civilian institutions aimed at protecting the rule of law.
• The match box instead of the ballot box is NOT the solution.

Mr Chairman, your Constitution repeatedly refers to REPUTABLE persons.

• Charles Wait, Prof Emeritus, Dept of Economics, Nelson Mandela University.