The G-20 and Modernizing South Africa: a discussion on a democratic developmental state, our national security priorities and lessons from China

©Andre ZAAIMAN

“The fundamentals do apply; as time goes by ….”
(From Casablanca: Play it Sam)

Prolegomenon

The G-20 Summit in Hangzhou, China has just ended.

It is safe to say that China has successfully consolidated its position as an emergent economy carving out a role for itself in future global economic governance. In the medium to long term term, it wants to turn the G-20 into a new mechanism for the governance of the global economy. This is in some measure the consolidation and success of a developmental process that started in 1978. What this experience teaches us is that China understands revolution and economics; especially capitalist economics. So did Karl Marx.

But this is not where the story ends – the future is an open book.

What we can learn from China thus far also includes uncomfortable lessons: revolutions take place incrementally and cumulatively and this must occur in an orderly fashion. This seems like a paradox. But the fundamental reason is simple: human beings and capabilities are both central to the process but both are slow to adapt. The architect of this transformation – the Communist Party under DENG Xiaoping – cautioned his countrymen to be patient but focused; to spend their time learning from the West as they began modernizing and building their own economy. He specifically forbade them to engage in impatient provocations and empty slogans which will lead to distraction, misadventures and ruin. His advice can be summarized in one of his many popular sayings: “seek truth from the facts”. Reality matters. Don’t try to fight when you are weak. Build your capabilities first because slogans don’t feed hungry stomachs or calm angry people.

Nor do they defeat your enemies: real or imagined.

The refrain coming out of China in 2016 is simple: we need an interconnected, (meaning open); innovation driven (meaning learning, change and invention); inclusive (meaning the idea of a rising tide that lifts all the boats equally no matter their size or position, not geo-political blocs in confrontation, and development that involves all people); and invigorated economy (meaning a new round of growth and development). The G-20 agrees.

This represents good news but also a puzzle that must be investigated and explained.

China is ruled by a Communist Party. It is neither calling for socialism nor for a confrontation with the West. It has a modernized economy and military. It is at pains to build a new Great Power relationship with USA and the West – its biggest trading partner and known in South Africa as “white monopoly capital” – based on the principle of cooperation and mutual respect. Chinese President XI Jinping repeated his mantra for a new kind of Great Power relationship between the USA and the People’s Republic of China: no confrontation; mutual respect; no conflict; and cooperation.

Compare that with South Africa: it is ruled by a democratically elected Government. It’s public discourse is peppered with anti-imperialist slogans, confrontational and antagonistic rhetoric. It’s economy is comparatively the size of a pea and its military stuck in the past based on outdated concepts, systems and infrastructure. Some senior officials are even full of bravado boasting that China – and “us” – are changing the world. Equally striking was the determined and icy way in which the US President turned his back at the end of the group photo session, on the South African President – Jacob ZUMA – placed next to him. It was clearly a blunt message.

In the ways of the Chinese proverb: this is all very interesting.

One clear lesson stems from all of this for South Africa in 2016: we are dangerously inept at learning.

Learning from History

This discussion will be oriented towards the following two-part question: a) What can we learn from this G-20 Summit and from China’s developmental experience in general; and b) what does this imply for our national security.

A critical strategic question South Africa faces about its future is the resolution of its developmental problem within the constraints of contemporary geo-politics and political-economics – the art of the possible – and the historical context of racial dispossession and oppression. Critical other real-world constraints to consider include a democratized domestic polity; environmental factors such as climate change and over-population; human-machine integration and its effects on labour (the Fourth Industrial Revolution); weak regional, intra-African integration and coordination; and open, interconnected international trade and competition dominated by the West but challenged – with increased intensity – from the East.

With regards to the latter, we place particular emphasis on “competition and open trade”. These political-economic, geo-political and contextual factors should not be ignored as they present both new threats and new opportunities. Successful revolutions take place because of popular support, the wide-spread legitimacy of the leadership, and organized capabilities that can implement a clear strategy in a particular context. The real world matters and as Nobel Prize winners in behavioral economics Amos TVERSKY and Daniel KAHNEMAN so cogently argued in their analysis of “Bernoulli’s Error”: where one starts matters and matters more than what we think.

We – a personal opinion – define South Africa’s primary national security priorities as follows:

1.Alignment and synchronization of the economy and society with the polity (not vice versa)
2. Modernization of the economy – a technologically advanced, competitive and inclusive economy
3. Modernization of society – building a learning society (see Kenneth ARROW and Joseph STIGLITZ)
4. Undoing the two-economy hierarchy encapsulated in the phrase “undoing the legacies of slavery, colonialism and apartheid “: and one integrated, modernized and competitive economy
5. Continuous renewal and integration of the African continent and its regional and continental institutions

If we want to address these priorities we need to also evaluate the current geo-political realities and discern key trends and developments that will impact on the choices and decisions we make. It also requires that we address certain popular but dysfunctional myths about ourselves, our past and present – particularly how and why we got to the present we are in. We need to get real.

It is on all of these above issues that we will expand, elaborate on and hope to stimulate an interesting and rational discussion about. So we should emphasize that we aim to have a rational discussion and not an exchange of beliefs, a lecture or grandstanding.

 

Outline of an historical Model out of Underdevelopment:

How then did countries that were historically underdeveloped, catch-up with those that were developed?
Judging from the number of nations lifted out of poverty, the re-industrialization plan known as the Marshall Plan, was probably the most successful development project in human history. Contrast this with its precursor – the Morgenthau Plan. The latter was aimed at German de-industrialization (much of the thinking of Structural Adjustment Programs in the 1990’s was based on this), whilst the former was aimed at re-industrializing Germany after its defeat in the Second World War.

One of the fundamental insights behind the Marshall Plan was that the economic activities in the countryside were qualitatively different from those in the cities. Japan, South Korea and more recently the Peoples Republic of China have all followed key prescripts from the general model that emerged and because the purpose of this talk is not to bog down in a technical discussion on trade policy, supply and value chains etc. we provide the following brief overview and pointers:

In his famous June 1947 speech at Harvard, United States Secretary of State George Marshall (later awarded the Nobel Peace Prize) stressed that “the farmer has always produced the foodstuffs to exchange with the city dweller for the other necessities of life”. This division of labour, i.e., between activities with increasing returns in the cities and activities with diminishing returns in the countryside, “is the basis of our modern civilization” said Marshall, adding that at that time, it was threatened with breakdown.

But in the South African context, the “catch-up” from underdevelopment to development is three-fold:

1. The Second economy (black, underdeveloped and dispossessed) has to catch-up with the First economy – white, male, oligarchic and polluting)

2. The South African economy as a whole has to become integrated overcoming its racialized and gendered past (black and gender exclusion, labour exploitation and concentrated ownership). An important Caveat: given the requisite ecology of organizations in terms of size in a globalized economy, we absolutely also need mega–enterprises competing globally
3. The economy has to be modernized: become – into the future – competitive to ensure sustainable, sustained growth. This presents us with additional complexities and significant opportunities.

The policy measures for catching-up in the capitalist mode, is well-known and proven. It was followed in one way or another by all countries that became developed. This includes both America (Hamilton) and China (Deng).

But those countries all adhered to three principles in doing so:

Learning and learning fast and wide in order to catch-up, adapt and innovate
Applying the prescripts intelligently in their particular contexts and conditions
Building the requisite and right capabilities – not rhetorics

This “formula” includes inter alia the following policy prescriptions; an iron cage:

1. Continuity of policy measures and policy toolkit, from England in 1485 (under Henry VII) to South Korea in the 1960s to China in the 1980’s and Ethiopia in the 2000’s, is a mandatory passage point for economic development. These policy prescriptions, implemented in a targeted, continuous and consistent manner, include the following (taken verbatim from the literature with a few alterations and additions here and there for contextual relevance):
2. Discontinuity of outdated policies and practices with particular focus on:
a) Recognition of wealth-creating synergies clustered around activities with increasing returns and continuous mechanization – we add technological integration and innovation and learning (Stiglitz). This also implies clearly that we cannot go on with the business model of cheap labor: it is redundant and dysfunctional, politically unsustainable in a democracy and economically unsustainable in an open, globalized economy.
b) Recognition that we – collectively – are in the wrong business by conscious targeting, support and protection of activities generating increasing returns. This is a fundamental problem in South Africa; we do not seem to know, strategically, what business we should be in as we are engaged in a racialized fight about the existing business/economy (the one we should not be in)
3. Production, innovation and learning-oriented policies and practices – creating a new economy – with particular focus on:
a. Granting of temporary monopolies/patents/protection to targeted activities in certain geographical areas
b. Recognition of development as a synergetic phenomenon and, consequently, of the
c. Need for a diversified manufacturing sector, ‘maximizing the division of labour’ (Serra, 1613) and drawing on observations of the Dutch Republic and Venice (the two primary innovators of the model).
d. This meant the following measures had to be understood and enforced (meaning as part of a Social Compact):
e. Accumulation of empirical evidence showed that the manufacturing sector solved three policy problems (that  historically, were endemic to Africa) : increasing national value added (GDP), increasing employment, and balance-of-payment problems.
f. Attraction of foreigners to work in targeted activities (historically, religious persecution was important).
g. Weakening in an organized manner, of landed interests (from England under Henry VII to South Korea). Physiocracy was a reflection of the landowners’ rebellion against this policy
h. Tax breaks for targeted activities.
i. Cheap credit for targeted activities.
j. Export subsidies for targeted activities.
k. Strong support for the agricultural sector, in spite of its clearly being seen as incapable of independently bringing the nation out of poverty: we need massive investments in the rural areas
l. Emphasis on learning and education (United Kingdom apprentice system under Elizabeth I).
m. Patent protection for valuable knowledge (Venice from the 1490s).
n. Export taxes/bans on raw materials to make them more expensive for competing nations (starting with
Henry VII in late 1400s, whose policy was very effective in severely damaging the wool industry in Medici
Florence).

In its simplest form, this argument is born out of the role of increasing and diminishing returns in trade theory as the starting points for virtuous and vicious circles of growth or poverty. A praxis ignoring these mechanisms may cause factor price polarization rather than factor price equalization. Serra (1613) first established increasing returns, virtuous circles and large economic diversity as necessary elements for wealth creation. This principle was used almost continuously – with brief interruptions – until it was abandoned with the emergence of the ‘Washington Consensus’ and Structural Adjustment in the 1980/90’s (Marshall Plan to Morgenthau Plan)
The praxis of economic development has been to assimilate and produce less efficient ‘copies’ of the economic structure of wealthy nations. (We need to be building Africa’s cars, trains, ships, computers etc –
not just assembling the cars of others or importing their trains from the West or East)

A word on modernization, revolution, learning and innovation:

The notion of transformation in South Africa is often reduced to race and sometimes gender. These are important components of transformation but the concept also means much more and is not to be equated with affirmative action. The latter assumes that the institution is fine but the racial and/or gender profiles not.

The idea of transformation is much more related to deep and profound change – similar to a metamorphisis – and in the language of politics; revolutionary. This is also what we mean by modernization. It implies discontinuity, rupture and structural or underlying changes.

Entrepreneurs understand this kind of profound change or revolution as it forms part of the canon of economic theory where it is known as disruptive innovation, creative destruction and unlearning/learning.

But as South Africans we are in general, slow learners sometimes seemingly dangerously inept at it when compared to countries such as China. Modernization will however require very fast individual and collective learning: a learning society. The world around us is driven by continuous and rapid,disruptive innovation: and the G-20 believes this to be an even more important driver of growth (which in turn requires competitiveness) into the future.

This type of change is not always easy; especially in the beginning.

Even the well-known economic theorist John Maynard Keynes emphasised both the importance and difficulty of profound (conceptual) change and fast learning in economics. He had the following to say in his book The General Theory of Employment, Interest and Money (1935):

“The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author’s assault upon them is to be successful, a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

Politicians should therefore understand that good entrepreneurs actually understand revolution – albeit in a different context and in the language of economic theory. And entrepreneurs must understand that the status quo in the context of rapid and ongoing innovation – social, economic, political, industrial or technological – is as life threatening to the survival or competitiveness of their enterprises as it is to our whole political-economy. Excellent entrepreneurs therefore not only tolerate discontinuity; they sometimes seek creative destruction and disruption.

In order to modernize its economy, South Africa will need a whole new crop of of risk-taking, original-thinking and fast-learning entrepreneurs: not just managers of businesses or administrators of bureaucracies.

Conclusion:

The Outline for the Historical Model comes almost verbatim out of the existing academic literature. This is done with a purpose: all successful “catch-up” countries studied and learned from this, the exceptions being Venice and the Dutch Republic who were the innovators.

South Africa can – in our view – choose to modernize its economy and society to bring these inline with its modernized political system – successfully achieved in 1996 – and in this way also transform its new economy away from its racialized and gendered past towards a better future. Or it can just sink into a destructive racialized battle for the old economy – outdated, undiversified, exclusive and tiny – and the road to ruin. We can learn from China that such a revolution does not occur overnight and must be orderly nor is it achieved through insults and mudslinging or rhetorical sloganeering. A new economy has to constructed otherwise it will not exist.

So we need to get real: seeking truth from facts.

Please therefore engage this canon of literature in political-economics and development theory for the technical arguments. References for this and further reading will be supplied upon written request after the Discussion to Registered Delegates

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