Honourable President Ramaphosa, former President Motlanthe, distinguished guests, comrades…
Let me begin on a lighter note with a disclaimer that having had that encounter with the Gupta’s doesn’t make me an expert on state capture!
What I have been asked to talk about here today is how state capture has impacted on our socio-economic transition. I will focus on the state, on the economy, and on broader society, looking at how state capture has seriously weakened those institutions required for nation-building, service delivery, and inclusive growth.
The core argument of the short paper is that state capture has seriously weakened the state, reduced business and investor confidence, caused policy uncertainty, and undermined levels of state legitimacy to compact with private sector. This has in turn weakened its capacity to grow output and jobs.
In this sense, state capture reinforced and exacerbated the contradictions and weaknesses in our political economy. Dismantling state capture will not necessarily address these contradictions and structural weaknesses, but will create the conditions under which these weaknesses can then be tackled. In other words, the dismantling of abusive patronage networks is a necessary but insufficient condition for fundamental change.
This paper flights some of the actions that are needed to rebuild trust and cohesion, and to address the structural weaknesses that in a very real sense allowed state capture to take root and flourish. In doing this I will identify some of the risks that present, and how these can be mitigated. Importantly, I will draw attention to the new forms of agency that require to be mobilized to give renewed impetus to our socio-economic transition.
The captured state
Any modern industrialized economy requires robust engagement between the state and private sector around interests and policy perspectives. This should be an ordinary part of the social contract between the state and its citizens, and mechanisms and institutions require to be developed to allow such organized and transparent engagement. But it would be naïve to think that all engagements between business and government take place through collective, public processes: there are also specific issues that affect small groups or individual businesses, there are issues that require resolution of competing claims or interests, there are decisions to be taken which bring benefits to some and costs to others. With the award of a mining licence, zoning of business rights or the selection of a supplier through a tender process, there are winners and losers. And here a line has to be drawn between legitimate and proper representation of interests and the abuse of influence or connectedness.
What we have witnessed in South Africa especially over the past decade has been the systemic abuse of influence by connected patronage interests. This abuse went all the way to interference in executive appointments in Cabinet and interference in the appointments of Board Directors and executive management in the SOCs. Resources were diverted from service delivery to private wealth acquisition – not unlike the pre-industrial structures of political and commercial power that Karl Marx described in the nineteenth century as “primitive accumulation”.
Both the strategic and technical capacity of the state was weakened as meritocracy was subordinated to the deployment and appointment of “enablers” of capture at executive, administrative and technical levels. Hard skills in corporate governance, finance, supply chain, risk, and the technical professions were hollowed out, as state institutions were repurposed away from their service delivery mandates. These losses incurred by state inefficiencies resulted in fewer resources available for pro-poor and anti-inequality fiscal expenditure.
And as cases of corruption and capture became public knowledge (as in the case of South Africa with its free press and robust civil society), there was/has been the corresponding loss of state legitimacy required to lead society behind a common purpose. This has directly undermined social coherence and fuelled mistrust, which in turn was used to weaken institutions meant to fight crime, corruption, and state capture opposed to the state capture project.
The economic impact
Daron Acemoglu and James Robinson’s 2012 book on Why Nations Fail explores the implications of state capture for long-term growth and development. They put the emphasis not so much on the interaction between people in these networks of privilege as on the institutions that lie behind the networks. Societies remain poor if their political institutions are shaped to “extract” and protect wealth and privilege; they grow and become prosperous if institutional arrangements are “inclusive” and reward innovation and enterprise.
Ruchir Sharma (2016) in his book “Rise and Fall of Nations: Forces of Change in the Post-Crisis World” makes a similar point that institutions themselves reflect the economic structure of the country. Where wealth is created primarily through innovation and productivity gains, societies tend to have strong and enduring institutions. Where wealth is created primarily through rent-seeking, institutions will always be under threat as elites compete for the spoils. In this respect, state capture reflects the structural weaknesses of the economy, and the structural weaknesses are reinforced and reproduced through state capture. This presents something of “a chicken and the egg” paradox – strong inclusive institutions are required to restructure an economy towards more shared and sustained prosperity, but elite and corrupt interests controlling rents actively resist structural and institutional change.
In the South African case, the past decade has seriously set us back in our efforts to restructure and transform the economy. Just how weak our economic position has become is revealed in the following stats. For a number of decades before 2010, SA growth closely tracked world GDP growth, reflecting its status as a commodities exporter. But since 2010, SA’s growth has lagged the rest of the world and is getting worse. It was 2.6 percentage points behind the world average growth rate in 2017. SA’s growth has consistently been below that of other emerging economies, and the rest of sub-Saharan Africa. Sustained low growth has resulted in reduced revenue and less space for substantial fiscal stimulation to kick-start the economy.
In the last four years, SA has fallen from the 2nd biggest recipient of FDI in Africa to the 6th biggest, receiving only 4% of FDI into Africa in 2016, down from 11% in 2013. Business confidence has drifted down and at the end of 2017 was t its lowest point in 16 years, barring the few months after the financial crisis. The banking sector has reported a marked decline in take-up of credit over the course of 2017.
Perceptions about political instability, about the lack of policy certainty, as well as rising costs and ease of doing business has resulted in South African firms investing in liquid financial markets and fixed investment abroad. South Africa’s fixed capital investment as a percentage of GDP stands at 19% and had contracted for six of the last nine quarters ending 2017. Fixed investment in China stands at 47% of GDP and South Korea at 30%.
Abhorrent levels of inequality have continued unabated. Consistent with the thinking of Thomas Pikkety, it is evident when looking at inequality in SA that incomes from assets (savings, houses, pensions, investments, shares etc) have grown faster than wage income. In other words, growth (even the little we have had) has benefitted those already endowed with assets (ie white South Africans).
Secondly, as the SA economy has restructured from a low skills mining, agriculture and manufacturing economy towards a high skill services economy, the rates of return to skilled workers have been higher. The salaries of skilled people have increased roughly twice as fast as the salaries of unskilled people. Simply because skills are in short supply, the salaries of skilled people have gone up faster. This has been exacerbated by our poor education and training outcomes. In other words, inequality has gone up because of the failure of the education system to produce sufficient numbers of skilled people – as well as our reluctance to import skills. This is directly linked to the incapacity of the captured state to rally the whole of society behind fixing the education system.
With economic stagnation, growing inequality and unemployment, social discontent has increased, not only among the unemployed but also among the working and middle classes who saw living standards decline. This discontent has fuelled the rise of anti-democratic populism, which has especially taken only root amongst the youth.
The growth of populism is not only a South African phenomenon. Social anxiety associated with the objective and near universal decline in middle class and working class living standards post Great Recession has directly fuelled the backlash against democracy across the globe. And following a decade of low growth, a hollowed out, inefficient and fiscally starved state has been unable to diffuse the growing resentment against elites and technocrats.
Yascha Mounk distinguishes three primary dangers of populism, (1) Firstly, populism, both left and right wing varieties, defines enemies as opposed to political adversaries, which can then be vilified and dehumanized. (2) Secondly, populists claim to speak “for the people”, and “once you’ve said that you alone speak for the whole of the people, any form of opposition to you immediately becomes illegitimate…allowing you to abolish independent institutions like the courts, to suppress critical voices in the press, and to concentrate more and more power in your own hands” (3) Thirdly, populists do not just provide ideological alternatives within the democratic system; they reject the democratic system itself.
In the SA context, rising youth unemployment and increased social discontent has fed the growth of populism both within and outside the ANC; together with a developing narrative that Constitutional provisions, a free media, and an independent judiciary were constraints to transformation. The discourse of indigenization was used to extend and consolidate abusive patronage networks, and undermine Constitutionally-provided checks and balances. Fortunately, our institutions of democratic accountability proved resilient, supported by a core network both within the Alliance and civil society. But high levels of social discontent remain, as do the objective conditions fuelling these growing populist sentiments, which could still be manipulated by those with everything to lose as the abusive patronage networks get dissembled.
Components for a disruptive and well-considered socio-economic transition
The co-incidence of unfavourable global conditions and the growing recognition that we are stuck in a high inequality-low growth trap, suggests that we urgently construct a new consensus to transform the economy towards more equal and higher growth.
Four sets of actions are needed to address institutional and structural constraints to inclusive growth:
1. Dismantling abusive patronage networks
Key to any efforts to build a new consensus for inclusive growth will be to:
- Firstly, dismantle the deeply embedded patronage networks that have eroded public service delivery, interfered with good governance and accountability, and destroyed the legitimacy of the state.
- Besides just dismantling the high profile networks, key too will be to address the conditions that enabled the institutionalisation of these networks. This is central to preventing new networks from being established.
- Thirdly, it is important to focus on the less high profile but equally damaging networks that express in local and regional politics and governance institutions, and that continue to undermine service delivery for the poor and vulnerable.(hidden state capture)
- Fourthly, the security cluster which was found to be complicit in the state capture project needs to be overhauled, and new checks and balances put in place to ensure that the security cluster impartially upholds the rule of law as prescribed in the Constitution.
- Fifthly, the cleaning up of the SOEs which begun in earnest must be accelerated, to become the front-line forces of the developmental state, rather than the liability they have become.
2. Building a compact for inclusive growth
As has been argued, South Africa is characterized by economic stagnation, low fixed investment, growing wealth and income inequality, and rising unemployment.
The last 24 years have seen significant changes in the pattern of earnings, though less so in patterns of wealth. The income earned by black people has gone from roughly one third to just over half of national income over the past twenty years. Black South Africans now constitute about half of the top 10% of income earners but only a quarter of the top 1% of earners. But black unemployment, and levels of inequality have not reduced. And while the black share of income has increased, the black share of wealth in the economy has not increased.
To address this requires both investment-led growth and active redistributory measures. Economic growth without transformation will reproduce and exacerbate inequalities which in itself will make growth unsustainable. Transformation without net growth in investment and output will see unemployment and poverty increase, and will over time reduce the fiscal redistribution capacity of the state. Reduced wealth will also increase elite conflict, making consensus more difficult to manage.
Lessons from the high growth Asean bloc over the past few decades offer useful insights: high levels of investment in fixed capital in the productive economy; high levels of investment in R&D and technology; a strong focus on exports; a strong focus on human capability; a pragmatic (trade-led) approach to international relations; greater emphasis on meritocracy and technocracy; and close collaboration between the state and private sector.
Four change levers require to be activated to kick-start inclusive growth:
- Identifying and working with the state and private sector role-players to resolve constraints to competitiveness and investment (costs and reliable supply of electricity, logistics costs, costs of broadband, skills, regulations, infrastructure, finance etc).
- Working with our HEIs, DST, the science councils and the private sector to expand new technological capacities and knowledge. Key to this will be to develop fiscal instruments that incentivize investment in R&D and innovation, as well as initiatives with the banking sector to expand access to financial instruments such as venture capital for technology development and start-ups.
- Supporting the development and implementation of industry level compacts that are able to broker trade-offs that achieve productivity gains, strengthened competitiveness, and transformation outcomes.
- Building new state capabilities for economic restructuring (facilitation of industry level compacts, structuring industrial and innovation incentives, public-private investment structuring, international trade negotiations, and influencing multi-lateral agenda setting).
3. Creating a national obsession with education and skills development
Good quality basic education is both a development goal itself and a crucial ingredient of economic development. Good quality basic education is crucial to the supply of skills necessary to run a modern, complex, competitive and expanding economy.
Basic education (numeracy, literacy, and other cognitive skills) is essential to vocational skilling. A broken education/skills pipeline (with resulting scarce skills) has five major consequences:
- Firstly, high income returns to skills exacerbates income inequality
- Secondly, the system directly reproduces social inequality through streaming learners from poor rural and township schools (and TVET colleges) towards unemployment, while streaming the children of elites towards highly paid professional and technical vocations.
- Thirdly, high returns to skills reduces competitiveness with countries that do not suffer from scarce skills
- Fourthly, shortages of skilled workers are a constraint on sustainable growth
- Fifthly, the shortage of skilled workers reduces the effectiveness of government bureaucracies
The Education/Skills pipeline in South Africa needs to be fixed as a central component of the consensus for inclusive growth. Despite the relatively high fiscal allocations to the sector, our basic education system has very poor learner outcomes by international comparison (in literacy, numeracy, problem solving and especially maths and science). This requires a new national obsession with fixing our broken education and skills pipeline. It will also require innovative solutions to deal with current labour market deficiencies around skills availability and costs while our education system is being revitalized.
Three change levers for the sector require to be activated:
- Strengthening school (and TVET) performance monitoring and accountability (holding the DBE/DHET and school principals more accountable for learner performance);
- Rapidly improving the capacity of school leadership and educators (including competency testing of school principals and teachers; importing maths and science teachers as necessary; fresh approaches to teacher re-training and development; and
- Aligning the skills pipeline with the labour market demands of a dynamic and rapidly transforming economy, and addressing urgent skills gaps (for example through skills importation).
4. Building a high performance state
There are a number of challenges that require to be urgently addressed if we are to improve state performance, including state co-ordination and coherence failures; weak policy execution; corruption; the hollowing out of capacity; fiscal risks; and the legitimacy of the state to mobilize society and strategically-significant stakeholders behind key programmes.
Four change levers are proposed:
- Restructuring and rationalizing the state, including consolidating the number of ministries to derive efficiencies, avoid duplication, and strengthen co-ordination.
- Re-looking at the devolution of functions and capacity across the three spheres. Urgent here will be to develop practical solutions to address the service delivery challenges presented by the increasing number of unviable municipalities that are incapable of playing the developmental role they were established to perform.
- Gearing South Africa’s metros to contribute more to national investment and revenue targets, and address growing challenges associated with rapid urbanization.
- Supporting the restructuring of SOCs. Besides being repurposed for corruption, entities such as ESKOM, by way of example, simply have too much unhealthy spread in the energy sector, controlling generation, transmission and distribution. This mitigates against competitiveness and efficiencies in the energy sector, the costs of which are passed on to both consumers and the shareholder (in this case Treasury). Similar inefficiencies exist in other SOCs such as SAA, Transnet, PRASA, and others. The Telkom experience offers valuable lessons of models for co-investment with the private sector.
I will conclude with some thoughts on agency. Brokering a new consensus for inclusive growth will require new levels of leadership vigour across political formations as well as business, labour and civil society. This leadership is critical to address the trust deficit and negotiate the trade-offs necessary for inclusive growth.
This requires fresh thinking on agency, and about the specific and complementary roles of the state, markets, and civil society. Specifically, what is required is (1) a strong state which can lead economic restructuring, deconcentrate economic ownership and grow productivity in new sectors and new entrant firms, as well as mitigate the social impacts of vulnerability and deprivation; (2) a strong and dynamic private sector which can continually innovate and grow productivity to retain and increase market competitiveness; (3) a strong civil society which can champion socio-economic justice, defend democracy, and guard against corrupt capture by elites (often under the guise of indigenization); and (4) political leadership capable of putting the interests of long term prosperity above short term expediency and the immediate needs of political-business complexes, and which is trusted by all strategically significant role-players in the economy.
Some of the critical elements of this eco-system are in place. Civil society organizations and pro-democracy institutions in South Africa remain strong and vibrant. But more needs to be done to build a more coherent vision within civil society, as well as begin expanding the focus from anti-corruption and democratic accountability to increasingly take up issues of socio-economic justice.
Some components of the private sector remain robust, especially in the financial services sector. But other historically competitive sectors like manufacturing, mining, and agriculture have lost competitiveness on the back of rising input costs, and reduced market share (arising partly from reduced tariff and duties protection). Firms have also invested insufficiently in retooling and in innovation and technology, both as a result of policy uncertainty and also due to the more lucrative returns from liquid financial markets. Twenty-four years into democracy, South Africa has largely failed to develop a patriotic and innovative private sector, and in the context of building a more inclusive economy, a socially conscious private sector.
Without a new vision of where we are going, without a trust-based model of economic governance, and the necessary coherence, co-ordinating capacity, and accountability, the new consensus that is being proposed will be still born. The current optimism associated with the leadership transition must urgently translate into a coherent programme.
Dynamics within the governing party will be a major deal breaker. The ANC remains highly fractured around competing patronage interests, with these contestations continuing to find expression in state governance and functionality. This undermines the legitimacy required to lead society, and negates its potential role as the modern prince leading the transition to a more just and equal society.