Posts Tagged ‘Pravin Gordhan’
Late last night, South African president Jacob Zuma fired Pravin Gordhan and Mcebisi Jonas as Minister and Deputy Minister of Finance, and appointed Malusi Gigaba (pictured) and Sifiso Buthelezi in their place. With this move, he has gained the keys to Treasury. Aside from Finance ministry, Zuma appointed 18 new ministers and deputy ministers, including Fikile Mbalula, the former Minister of Sport, as Minister of Police. Bathabile Dlamini, Minister of Social Development, whose incompetence was recently exposed when her actions risked the well-being of 17 million South Africans, remains in her portfolio.
It all sounds so familiar. In December 2015, Zuma fired then Minister of Finance Nhlanhla Nene and replaced him with Desmond van Rooyen. After the rand plummeted more than 5%, Zuma was forced to reverse his decision and appoint Pravin Gordhan in the position three days later.
I wrote a post immediately after the appointment of Van Rooyen. Most of the points I raised there are now valid again. Zuma has captured Treasury – with a Zuma-loyalist in charge, he can now sign off on projects that benefit him and his backers, the Guptas.
The question, again, is what to do. And again I have to say, I don’t know. I see calls on social media for mass action, but I am not too sure Zuma and his cronies would pay much attention. Blog posts, I fear, will also not have much of an impact. What I will do, however, is to encourage Treasury employees, many who are brilliant economists and also good friends, to remain in office, despite the obvious challenges that they will face with a Zuma-loyalist at the helm. How long, though, can one remain honourable and incorruptible in an environment where you might become complicit in whatever shady nuclear or other deals Zuma has up his sleeve?
What this reminds me of is a tweet by veteran Zimbabwean businessman Trevor Ncube:
Many South African friends ask me: “Why did Zimbabweans allow Mugabe to destroy the country? My answer: it was a process not an event.
— Trevor Ncube (@TrevorNcube) December 10, 2015
If something doesn’t happen soon to reverse this process of decline – and this can only happen when Zuma is gone, although that will only be a start – we risk destroying the progress we’ve made since 1994. The irresponsible actions of last night will hurt the economy badly, from a weakening currency (which has already fallen by more than 3%) to almost definite downgrade, which means more money spent on paying loans than building roads, houses and clinics. And if Zuma’s pet projects, like a nuclear deal with Russia, is signed, the cost for South African taxpayers – and the opportunity costs for South Africa’s poor – will be horrific.
Prepare for a bumpy ride.
It is difficult to find fault with the 2013 National Budget Speech of yesterday. Min Pravin Gordhan delivered what is certainly a sound and realistic attempt at what he calls “ensuring value for money”. There was tough talk on corruption (“Let me be frank. This is a difficult task with too many points of resistance! … There are too many people who have a stake in keeping the system the way it is. Our solutions, hitherto, have not matched the size and complexity of the challenge. As much as I want, I cannot simply wave a magic wand to make these problems disappear.”) and a new Chief Procurement Office has been set up to reduce these inefficiencies. There is an attempt to reduce the budget deficit to keep government debt below or on the 40% debt to GDP ratio. And there was renewed emphasis on achieving the long-run goals of the excellent National Development Plan.
But there is also much to learn from what is not said. For the first time in five years, there was not a single mention of land reform or redistribution. Min Gordhan does well to acknowledge that growth opportunities are in cities and that spending should be targeted to improve urban areas, although his spending projections does not reflect these sentiments: The Department of Rural Development and Land Reform (R8.9 billion) still receives a greater share of the pie than the Department of Tourism (R1.3 billion), which is responsible for a growing industry and contributes more to GDP than agriculture, the Department of Energy (R6.7 billion), the Department of Public Works (R7.7 billion) and the Department of Science and Technology (R5 billion). This allocation is in addition to the R5.7 billion for the Department of Agriculture, Forestry and Fisheries, even though, as the Department for Rural Development acknowledges, “agriculture is the primary economic activity in rural areas” (page 787). It is clear that rural areas still receive proportionately more than they contribute to GDP or are likely to contribute in future.
Instead, if Min Gordhan is serious about improving competitiveness and productivity, there are more obvious spending priorities. While enough has been written about education, another source of competitiveness that receives scant attention in the Speech – actually, only one reference – is spending on Science and Technology. As history shows us (read Joel Mokyr’s The Gifts of Athena, for example), it’s through scientific innovations that improve both labour productivity and total factor productivity, in other words, that allows us to produce more things with fewer inputs. Adaptation is especially important: Japan and South Korea’s success was first due to successful adaptation of American technology. This allowed them to move to the technology frontier and only then would they begin to innovate and expand the frontier. This process is however not decoupled from education: as James Bessen shows in a recent paper in the Journal of Economic History, the massive productivity gains in the late nineteenth century weaving industry in England was not only due to more machines, or better machines, but also because workers became more adept at using the new technologies. High-tech tractors on large, commercial farms don’t require the traditional skills of tractor drivers anymore, but rather the skills of someone that can read GPS coordinates and monitor computer screens. Such technological shifts necessitates investment in scientific infrastructure that can help with broad based technical education, and not just pockets of excellence. If South African labour is to be more competitive, we must learn to adapt these new technologies.
Unfortunately, Science and Technology is at the back of the spending queue. A commendable R1.9 billion has been allocated to the Square Kilometre Array Project, a flagship project showcasing South Africa’s astronomy and engineering skills that has been lauded by the South African media. But this leaves little room for any other investment in science infrastructure. In fact, “over the medium term, R279.5 million has been allocated for infrastructure required to provide the scientific community with research and development facilities that are state of the art to ensure the country’s global competitiveness in research, development and innovation” (page 811 of the ENE). To put that into perspective, that is marginally more than the state spent on the president’s retirement home in Nkandla.
A competitive economy requires large-scale investments in science and technology infrastructure that will allow South Africans to adopt and adapt new technologies. The Budget of 2013 does not reflect this reality.
The 2012 Budget Speech by Pravin Gordhan delivered few surprises. Aside from his request for members of parliament to stop whistling at the high proposed capital gains taxes, or his attempts at reading Zulu proverbs (Uzothola kanjani uhleli ekhoneni, or How far will you get if you are sitting in your corner), the budget did what it was supposed to do: begin the slow process of roping in anti-cyclical fiscal policy (i.e. a lower budget surplus and debt) now that the economy is growing again. Minister Gordhan, as per usual, increased sin taxes (R36 on tax for a bottle of brandy!) and announced tax reductions (which are mostly the result of bracket creep). Surprisingly, the increases in the social grants are all below inflation rates, marking what I believe is a significant step in rewarding productive activity rather than hand-outs. All in all, I think, he did pretty well.
What made his task difficult, of course, was the emphasis on infrastructure investment, as outlined in Zuma’s State of the Nation address. Minister Gordhan took some time to explain the various sources of infrastructure finance: while government (through the budget) will continue to finance social infrastructure like schools, clinics and courts, investment in economic infrastructure is (mostly) outsourced to the parastatals. Eskom and Transnet will receive little government transfers to finance their massive investment programmes, while telecommunications infrastructure will also be financed by the private operators.
The devil is in the detail, though. Sentech will receive R800 million “for the dual illumination of analogue and digital television, and for digital broadcasting infrastructure”. While there was no mention of South African Airways’ request for R5.6 billion, there was also no mention that SAA will privatise, except to say “our airlines industry has several private sector players”. R5.8 billion will be spent on the Gauteng Freeway Improvement Programme, which effectively mean that the rest of South Africa (which is responsible for 60% of our GDP, and thus tax revenue) will pay for congestion in one province. As Roelof Botha argues convincingly, toll roads are the best way to ensure that the users of the service pays. (He also notes that the top quintile of income earners will carry the heaviest burden, meaning that toll roads are fairer than relying on the general budget.)
But perhaps the main infrastructure-related item was not all the hype about expenditure, but the mention of an increase in 20c on the fuel levy (plus an additional 8c for the Road Accident Fund). Fuel remains an important input into South African production, especially in the two sectors which the Minister singled out as key sectors of the future: agriculture and manufacturing. Of course, increasing the fuel price will create the incentive to shift away from its use, but there really are no viable short-run solutions yet. If the plan is to move from road transportation to rail, then we should not be expanding highways and building new roads where cars require fuel (at least for the next five years) to operate. I suspect the increase in the fuel levy is an easy way to earn revenue – a cash cow – but it creates all sorts of price distortions (inflation!) which eliminate most of the benefits of the greater revenue. Moreover, because the poor spend more on transport as a share of their budget, they will bear more of the burden, exacerbating inequality.
Trade makes society prosperous. But trade is only viable when transport is cheap. A large fuel levy will discourage transport and trade, except if there are alternatives available. At the moment, there are few. Mr Gordhan would do well to consider his own Zulu proverb: How far will you get if you are sitting in your corner (without cheap transportation to get you to work or make your business grow)?