Globally, nation states have started to pick the economic pieces left after the titanic-like crash of the Covid-19 pandemic. Different pharmaceutical companies including Pfizer, Moderna, and AstraZeneca are scrambling to meet global demand within the shortest possible time. By February 2021, millions of vaccines have already been administered around the world, a paltry fraction of the six billion target by end of 2021.
It is not just pharmaceutical companies working around the clock to save lives. Nation states are also moving with urgency to restore and rebuild livelihoods. As they do, economists are dusting their shelves in search for the British economist John Maynard Keynes’ (1883-1946) insight on how nation states can reconstruct their economies after recession. This is the second time in a decade that policy makers and scholars are summoning Keynes from the grave, the first being the 2008 global economic crisis. Why is Keynes relevant in our times?
Keynes contented that markets do not possess the capacity to undertake allocative efficiency required after periodic uncertainties and distortions. Keynes core argument was that aggregate demand (the collective spending by households, businesses, and the government) is the most important force for any economy. Recessions distort this demand, and by implication dampen supply. Keynesianism does not see the solution for stimulating aggregate demand as a preserve of the market. If we wait for the market to re-organize the economy in the interest of full employment, we will wait for eternity. For Keynesianism, the re-balancing of the economy is achievable through increasing economic output, which is essentially increase in consumption, investment, government purchases, and net exports. This is where the state becomes a primary mover, to stimulate the above economic output measures. Even under conditions of fiscal strain, Keynes suggested that governments should accept deficit spending in the short term, to invest in labor intensive infrastructure projects for purposes of stimulating employment. This supply side intervention should be matched with lower taxes, which in turn increases disposable income in households and businesses.
South Africa is among the major casualties of the pandemic, on both health and economic fronts. By November 2020, unemployment had risen to 30.8%, from 29.1% pre-pandemic levels. Major companies which have applied for bankruptcy include Edcon (which owns Edgars and Jet), Comair (which owns Kulula, and the local operator of British Airways) and Phumelela Gaming & Leisure (South Africa’s biggest horse racing business). The Italian Prada brand closed its only shop in South Africa. Several major restaurants also went out of business. The list goes on.
To the credit of Keynesianism, the South African government has committed R500 billion to economic recovery, the largest stimulus package in the country’s history. This stimulus would be implemented in form of tax relief, wage support, funding for small business, infrastructure spending as well as economic reforms. In short, the government has ticked the right Keynesian boxes, so to speak. In theory we should expect positive outcomes from the policy decisions under implementation.
The high growth rates recorded in the 1960s in most developed countries were attributed to Keynesian economics. Since the 1970s however, declining growth levels, high unemployment and high inflation were pinned on state led distortions of the market. This was a damping of economic troubles at the feet of Keynes. Questions around the role of the state in creating market distortions became prevalent, leading to an antithesis to Keynesianism, the public choice theory. Public choice theory applies the market principle of self-interest to state bureaucracy. Which is to mean, bureaucrats are not necessarily motivated by public service, they are incentivised by selfish ambitions. Buchanan, the Nobel peace prize winner who popularised the public choice theory in the 1980s posited that this theory “replaces… romantic and illusory… notions about the workings of governments [with]… notions that embody more skepticism.”
Now to the point. South Africa’s bureaucratic efficiency has worsened over the course of the last decade. If one considers the prevailing challenges which include the systematic failure of parastatals, poor management of revenue collection, service delivery backlogs, etc, the question of state failure becomes a relevant one. State failure has also destabilised macro-economic indicators, resulting to high levels of unemployment and stubborn inequality-even before the pandemic. It follows that enriching of few individuals while majority remain impoverished is a reality in modern South Africa.
While the state has taken dramatic steps to correct market failure, the same cannot be said of the steps to reform the state itself. The South African state is more than a market facilitator. It is the largest employer in the country, and contributes significantly to wage distortion. Public servants are less incentivised to make transition to the private sector. Most entrepreneurs who receive contracts from the state (colloquially referred to as tenderpreneurs) are unable to be competitive in the market not least because the only skill required in acquiring contracts from the state is political connections. Hardly does quality or efficiency count, in transactional relations with the state. In the final analysis, the South African state reveals semblances of internal decay of sorts, and therefore ill equipped to manage itself as well the markets.
The failure of the South African state is probably the most pressing need to turn around the economy. The proposals put forward to recover the economy from the pandemic are welcome. The question therefore is not whether policy proposals will be effective tools for economic recovery, rather, whether the state will be capable to implement them. The clear answer is not in the affirmative. To be fair, the current administration has mused on some aspects of state reform, which include modernising the visa and immigration regime, centralizing of the performance standards for state owned enterprises, public sector wage reform among others. Infact, President Ramaphosa’s 2021 state of the nation address underscored ‘fighting corruption and strengthening the state’ as one of the four critical apexes of the administration, along with fighting the pandemic, focus on economic recovery, and instituting reforms for job creation. If implemented, these are major steps towards recovery and growth.
Unfortunately, economic recovery and future growth are dependent on a reformed state. It is a pipe dream to imagine the state and markets reforming at the same time. A sequencing of sorts is required. What is more, national conversation and momentum towards state reform is cautious and weak, while debates around market reform are more robust. Matter of fact, markets in post-apartheid South Africa have reformed somewhat, although for the most part reluctantly and often through cohesion by the state. No entity has been able to nudge or coerce the state. This is not to say that state reform is an impossible task. Far from that. There are ways in which state reform can take place, and consequently jumpstart economic recovery and growth. At the very minimum I make the following three propositions, which would go a long way to achieving productive state reform.
The first relates to transitioning from what political science literature refers to as limited access to open access state. The limited access state is managed by personal networks and relationships. There is sufficient data in developing countries which concludes that any state operating on the limited access principle, ultimately undermines development. It sows the seeds of its own destruction. Open access states on the contrary are more efficient and effective. An efficient state is managed by competent bureaucrats who share the idea of public good and prioritise accountability to voters.
The second transition is the focus on middle class formation. Structural poverty in South Africa does require quick wins which will enable livelihoods within the shortest time possible. But the focus on basic service delivery should not be a totalitarian vision of the state. Enabling economic framework for middle classes should be a priority for the state. Currently, while South Africa is a state with middle class, it should strive to become a middle-class society where the poor form a much smaller segment compared to the middle class. To achieve this goal, it is necessary for the state to shift its policy and ideology, so that there is a clear vision of enabling and managing a middle class economy on one hand, on the other, protecting the poor and the working classes from the vagaries of the markets. Currently, the state seems to focus on poverty alleviation, which is the bare minimum required of any state.
The third transition has to do with balancing between affirmative action and creating a proper middle class situated in the private sector. Affirmative action errs by fixating on equality of numbers rather than equality of capabilities. This fractional vision short-circuits the process which otherwise requires hard work and long-term planning. Considering the African Free Trade Area pact for example, South African labor force will need to be competitive in a continental market, if the economy will benefit from this Free Trade opportunity. This will require a level of strategic retreat from forms of protectionism which the state has employed since 1994, genuinely seeking to improve competitiveness, but often achieving the opposite.
A reformed state is not an accident. Before we talk of economic recovery, we should start a through going debate on state recovery.
Jason Musyoka (Ph.D.) is a research associate at the Department of Political Science, University of Pretoria.