Rhetoric aside, what we had was compromise

The economic and social policy framework in SA since the advent of democracy has been described as a "class compromise".

None of business, labour or government would view the entire policy package as ideal. But, collectively, the policies created an environment in which their constituencies could achieve most of their major goals.

Policies implemented were a far cry from the "neoliberal" policy agenda as alleged by some critics. The government did adopt some market-friendly policies, including relatively conservative monetary and fiscal policies.

But it also introduced policies that were decidedly business unfriendly. These included labour-market regulations that favoured organised labour and limited the ability of businesses to hire and fire workers. The government retained a key role for itself in the economy. It paid only lip service to privatisation, and quickly backed away from tentative steps in this direction by repurchasing previously privatised stakes in South African Airways and the Airports Company SA.

This policy mix produced results that all the most influential constituencies could be reasonably satisfied with. University of Cape Town economist Nicoli Nattrass has shown that profits’ share of gross domestic product grew from 1990 to 2010. At the same time, real wages per worker rose 60%. The economy grew 3.2% a year from 1994 to last year. The combination of faster growth, higher company profitability and more efficient tax collection meant state revenue rose 2.5 times in real terms by last year.

This increased tax revenue and lower interest payments on reduced government debt gave the government more resources to combat poverty. Nattrass shows real wages and profits could rise simultaneously because businesses became more capital intensive. Employers replaced higher-paid workers with machines, thereby increasing output per worker and raising overall business profitability.

But this meant only a modest increase in jobs, which could not keep pace with a growing workforce. The cost of SA’s "class compromise" was paid by the growing number of unemployed.

Since 2008, growth has stagnated. Between 2008 and last year, it averaged just 2.2% and the economy is again slowing.

SA’s "class compromise" is starting to come apart. We see this most clearly in high government budget deficits. The South African Revenue Service is no longer able to produce substantial increases in tax revenue to cover increased public spending. The final figures for the 2013-14 fiscal year show that the government spent R173bn more than it received in revenue.

Organised labour is becoming frustrated. Prolonged strikes, the emergence of a new powerful union in the mining sector, and growing friction within the ANC-Cosatu alliance are evidence of stresses in the post-1994 "compromise". And the government is losing patience with organised labour.

Business is also unhappy and this is reflected in the low level of investment. Low interest rates, a booming stock market and a much more competitive exchange rate have done little to persuade businesses to expand locally. Many businesses have adopted a holding position in SA, looking to the faster-growing countries of the rest of Africa and elsewhere to drive revenue.

For ideological reasons, the government refuses to allow significant business involvement in infrastructure provision — even though the inadequacies of state provision are a brake on economic growth. Instead, the government is seeking to expand its role in the economy. This is demonstrated by recent legislation, which not only guarantees the government a free 20% stake in all new gas and oil production, but also allows it to expand its stake to 100% at a "negotiated", not market, price. This regulation will shut down any private exploration or investment in shale gas. The government appears to believe this is a price worth paying to advance its own role in the economy.

With the election over, we will soon see whether the players will seek to restore the post-1994 "class compromise", or whether it will continue to unravel. The direction followed will perhaps be most easily signposted by what happens to economic growth.

Faster growth will be both the consequence of better policies and the catalyst for achieving other goals. The government has ambitious plans. For example, the National Development Plan calls for a 70% rise in university enrolments by 2030. Such ambitions cannot be realised unless the economy grows much faster and generates the needed tax revenue. Such growth is also required to create the jobs needed to reduce unemployment meaningfully.

In the absence of growth, the government, business and labour will compete for shares of the economic pie that are inadequate to meet all our needs. Compromises by all are needed if we are to escape the closing jaws of the economic stagnation trap.

BY GAVIN KEETON

Keeton is with the economics department at Rhodes University.

Article Source: http://www.bdlive.co.za