Johan Fourie's blog

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The rhetoric of economic transformation

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Spot the entrepreneur: Oprah is not fabulously wealthy because of redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

Spot the entrepreneur: Oprah is not fabulously wealthy because of the redistribution of wealth, but because she was a more innovative and efficient entrepreneur than her talk-show competitors

This week, Jacob Zuma, appointed for a  second term as president of South Africa, announced his cabinet. He will have 35 ministers and one deputy-president: I’m happy to see Pravin Gordhan move to the Ministry of Co-operative Governance and Traditional Affairs, where he can only improve the inter-governmental workings of provinces and municipalities.  Nhlanhla Neneis is our new Minister of Finance. He has been schooled for this position, but it remains to be seen if he can withstand the pressure to relax the fiscal reigns as Gordhan and Trevor Manuel did before him. Naledi Pandor returns to Science and Technology, a capable minister for an important if peripheral post, and Aaron Motsoaledi can continue the good work he has been doing in healthcare.

But, as expected, Zuma also rewarded his allies with new and important positions, in spite of some having atrocious track records. All and sundry agree that Tina Joemat-Pettersen had a terrible first term as Minister of Agriculture, Forestry and Fisheries (AFF). She has returned, now as Minister of Energy, a vital portfolio given South Africa’s inability to supply enough electricity for its growing demand. A sinister commentator might say that this appointment paves the way for even bigger corruption scandals in a department where massive public investments are urgently needed – think nuclear or fracking. The new minister in agriculture is Senzeni Zonkwana, long-serving head of the National Union of Mineworkers and president of the South African Communist Party. His deputy will be Bheki Cele, who was the National Commissioner of the South African Police Service until October 2011, when he was suspended from duty, due to allegations of corruption.

The appointments in the Agriculture, Forestry and Fisheries portfolio signal a strong emphasis by the president on land reform, which is part of his vision to ‘transform the economy’. Here’s an excerpt from his inaugural address:

Economic transformation will take centre-stage during this new term of government as we put the economy on an inclusive growth path. As the National Development Plan outlines, the structure of the economy will be transformed through industrialisation, broad-based black economic empowerment and through strengthening and expanding the role of the state in the economy.

So let me ask the obvious question: Is this really the best way to transform an economy? Does history suggest that this is indeed a road to economic transformation? Are there not better alternatives available?

But perhaps it’s best to start with a question of definition: what is ‘economic transformation’? I suspect it is not ‘transformation’ in the sense of an ‘industrial revolution’ that our president refers to. Because if you want an industrial revolution – as happened in England in the nineteenth century, and in the US in the early twentieth century, and in several Asian economies at the end of the twentieth century, and is happening in China now – it is not with affirmative action or expanding the role of the state in the economy where you would start. Instead, economic transformation is about encouraging entrepreneurs to imitate or innovate ideas, processes and technologies that will help businesses become more productive. It is the farmer adding another tractor and harvester, a digital irrigation system and genetically-modified seeds. It is the miner using improved drilling equipment, a more efficient air ventilation system, and more affordable railway transport to the ports. It is the retailer building a better distribution network, using cellphones for digital payments, finding markets that are underserviced. It is the software programmer writing a new app that allow millions of users to save time and money.

The rise of inventors like James Hargreaves (Spinning Jenny), Henry Ford (assembly plant), Kiichiro Toyoda (founder of Toyota) or Yang Yuanqing (CEO of Lenovo Computers, the frugal innovator as The Economist notes) did not come about because of broad-based empowerment policies or a bigger state. It was because the incentives of those societies allowed inventors and innovators to prosper from their brilliant ideas, sometimes with state aid, yes, but the entrepreneur, not the politician, was always the most important. The reason England experienced an Industrial Revolution was due to relative factor prices (high wages, cheap energy -> incentives) and the scientific revolution and the ideology of the Enlightenment (generation of useful knowledge, a patent system that protected new innovations and free-trade economic policies -> rhetoric). To transform, entrepreneurs must make use of comparative advantages and be encouraged to do so (or, at least, not be prevented from doing so).

There are, of course, many countries that have tried to follow different routes. Latin American countries are infamous for attempting state-sponsored industrialisation, and failing. Russia, through mass murder and communist policies, transformed their economy from agriculture to industrial at the start of the twentieth century, only to stagnate later. Communist China before the market reforms was a basket case with a few rich state officials (much like North Korea today). Closer to home, Ghana, Nigeria, Kenya and Tanzania are growing rapidly not because of a larger state, but because their entrepreneurs are finding opportunities to exploit.

The policies proposed by president Zuma are, ironically, exactly the opposite of what is written in the NDP. The South Africa of 2014, it seems, believes that we can grow prosperity through a large state and the transfer of wealth. We won’t: not because we are somehow incapable of making it happen, but simply because it has never worked before. This is harsh, but true. Yet – I understand the reason for this sentiment. Our massive inequality and the populist appeal of ‘economic revolutionaries’ will make a large state that can ‘redress’ the past appealing. The truth is that our woeful education system and rigid labour laws make it difficult for the poorest to take advantage of market opportunities, which leaves them with little alternative but to absorb the populist sentiments. If you were poorly-educated, living in poverty and hopelessness, would the illusions of prosperity that the populists promise not seem very real too?

There are no easy answers. If we stay the course of a market approach, there is little doubt that inequality will remain, simply because of the massive inequalities in education. If we choose to encourage entrepreneurship, for example, many of those entrepreneurs may be white South Africans (people like Koos Bekker) who will become extraordinarily rich (Naspers is now the largest internet company outside China and the US). Even though this will boost economic growth and reduce poverty (which is the reason the US is rich), it won’t affect the distribution of income (which is the reason America is also massively unequal).

Instead, we have decided on a different type of economic transformation: redistribute existing wealth. In some sectors this will be relatively successful: Naspers has, for example, made thousands of black South Africans prosperous by offering them shares at discounted rates several years ago. This is black economic empowerment at its best. But the economic transformation the president envisages is, most likely, not limited to such slow adjustments of our income distribution, especially if change needs to happen within the political deadline of five years. So instead of encouraging imitation and innovation of our entrepreneurs, we could expect to see policies that attempt to transform ownership. Expect agriculture to see the first of these radical transformations.

Thomas Piketty argues that inequality exists because capital grows faster than the economy. This implies that the rewards to the owners of capital (rent from land, buildings, equipment) grow faster than the returns to workers (wages). While this may be true, it is a very static way to explain the exponential growth the world has seen over the last two centuries. Here’s Deirdre McCloskey’s view neatly summarised by Evan Davis:

McCloskey has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’

That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.

Professor McCloskey has a point, of course. Think of the Bill Gates and Steve Jobs, big wealth accumulators in recent times. It wasn’t the magic of compound interest on capital that made them rich; it was intellectual property. They created billions of dollars of business from virtually nothing at all. If you measure the profits as a return on the small amount of initial capital invested, then it looks huge; but capital was no more important an ingredient of the original Apple or Microsoft than cookies or cucumbers.

And to me, this is one big distinction at the heart of the wealth equality debate: whether capital — past accumulation of savings — gets to devour the future, or whether the future is created afresh by each generation. This argument is a struggle between those who think riches are created from riches, and those who think riches are created from rags. Are big profits best viewed as a generous return on capital, in the way that worries Piketty? Or as coming from innovation that ultimately benefits us all?

Capital and saving will not make South Africa prosperous, regardless of whether it is in rich or poor, black or white hands. If we want our children’s children to be better off, we need to design policies that encourage our farmers, miners, retailers and software programmers (and talk-show hosts!) to invest in innovation. And we need our leaders, especially the president, to change the discourse on economic transformation away from the redistribution of wealth towards the empowerment of entrepreneurs.

3 Responses

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  1. I agree with this article. The economy cannot be uplifted through taking from one to give to another. Taking wealth from one group and giving it to another group who may not have the means to multiply this wealth and may only deplete it will ultimately damage the economy. Quality education is key in creating opportunities for innovation and uplifting those living in poverty, people in South Africa should be taught that working hard is important in creating a better future for their communities. Relying solely on the government for grants and jobs will not create a better economy for the country.


    October 12, 2014 at 15:25

    • I am highly impressed by the content of this article and your ability to speak the cold truth. Yes all these policies are great when proclaimed by the government but what use are they to us the ordinary citizen if they are not implemented?

      Thato m

      October 14, 2014 at 00:38

  2. Spot on !! JV

    Jasper Vlok

    May 28, 2014 at 18:09

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