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2007 ANC DISCUSSION PAPER: Economic Transformation for a National Democratic Society (30 March 2007) Building a Developmental State as an Instrument of Economic Liberation

 

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ANC DISCUSSION PAPER: Economic Transformation for a National Democratic Society 

(30 March 2007)

Building a Developmental State as an Instrument of Economic Liberation 

 

Compiled by André ZAAIMAN (AZ)

 

The developmental state and the market economy

The economics of the public and private sectors and their interaction is not a simple matter that can be resolved by fixed ideological schemes. 

At each stage of development, new challenges and problems are encountered; unfamiliar choices and policy considerations must be addressed. The questions posed by the current development of the economy, particularly in the context of economic globalization, cannot necessarily be answered by the lessons of past experience.

[This means by convention or what we termed Western economic orthodoxy AZ]

Nevertheless, it remains true that throughout history and in all societies the state has played a fundamental and decisive, albeit changing role in shaping the structure and output of the economy. To do so, states have used a wide variety of instruments and policies, including the regulation of industry and trade, the redistribution of incomes and assets, the use of fiscal and monetary policies and direct state ownership of the means of production. In the twentieth century, the developing countries that succeeded in promoting industrialization, sustained growth and development have all had in common developmental states that played a leading role in infrastructure development programs and which had an active industrial strategy. 

[The critical point is one of sequencing: first development, then liberalization. That is why protecting strategic industries and retooling them for future competitiveness, is a standard procedure in all developmental states: China, having developed from 1980 – 2016, is now in a position to compete and hence they now fight for “free” trade. South Africa is in an entirely different phase of development (pre-development) and therefore needs different policies and strategies and cannot JUST follow what the Chinese are saying now in 2018 AZ]

The national democratic society that we envisage requires a market that is as efficient as possible; a market that is shorn of the racial and gender exclusions that characterized apartheid colonialism and freed from the barriers to entry and competition that the economy endured under colonial capitalism.

But our approach to economic transformation proceeds from the understanding that the changes we seek will not emerge spontaneously from the ‘invisible hand’ of the market. People acting collectively in the spirit of human solidarity must shape the contours of economic development. In this process the state must play a central and strategic role. 

[We will distribute two short, seminal texts shortly: Antonio SERRA (1613)  and Friedrich LIST (1930) – when the Chinese emphasize “innovation-driven growth” as XI Jinping does, they base some of their thinking on this foundational text of LIST. AZ]

Therefore, a national democratic society requires a state that is able to use a variety of strategic capacities [This should read capabilities AZ] to shape the development of the economy. The NDR seeks to build on the best traditions of a developmental state, represented by an efficient state that guides national economic development by mobilizing the resources of society and directing them toward the realization of common goals. It also seeks to build on the best traditions of social democracy, represented by popular democracy which places the needs of the poor and social issues such as decent work, social solidarity, health care, education and a social safety net at the top of the national agenda. [Hence a Democratic Developmental State and not the authoritarian models of the East-Asian Tigers or the Chinese AZ]

Building a state which can act in a truly developmental way, which can play a leading and strategic role in shaping the economy, is not an easy or simple task. [It is not merely a State with professional, technocrats in the liberal vein (although the civil servants must obviously competent and professional)  it is a state that is singularly focused on development and in the pursuit of this strategic, political-economic objective AZ]

It requires hard work and ongoing assessment of the attributes and capabilities that we need, and adjustments to the institutional arrangements that will help build them. In other words, we cannot simply proclaim the existence of a developmental state: it must be painstakingly constructed. Building on the democratic state that we have constructed over the last ten years and more, our movement must pay particular attention to building the strategic, organizational and technical attributes of our national democratic state.

Strategic capacity of the developmental state

The strategic capacity of the developmental state is its ability to lead in the definition of a common national agenda, mobilize all of society to take part in the implementation of this agenda and direct society’s resources – including those of the state and private and social capital – towards this shared program. [This is the strategic-political and Intellectual-ideological task of the leadership AZ]

In many international cases, the developmental state’s strategic capacity has been fostered in the context of a high degree of integration between business and government, a relatively homogenous society (without strong religious, racial or ethnic) and a powerful and dominating state apparatus, where democratic rights are often sacrificed at the altar of developmental priorities.

The South African developmental state has different advantages and challenges. While we seek to engage private capital strategically, in South Africa the developmental state must be buttressed and guided by a mass-based, democratic liberation movement in a context in which the economy is still dominated by a developed, but largely white, capitalist class. [The two-economies thesis AZ] We are also operating in a complex and heterogeneous society, in which building social cohesion is both an end in itself and a necessary condition for economic development.

In this context our commitment to a democratic approach in shaping economic development is both a fundamental principle of our movement and a necessary condition for accelerated and shared growth. Indeed, the starting point of the state’s strategic capacity is its ability to build on popular legitimacy, deriving from the state’s democratic nature.

As a multi-class movement, the ANC is required to master the science and art of crafting long and short term common platforms to ensure that all the motive forces of the NDR move in the same direction. We do acknowledge that, at times, the narrow self interest of a particular class and stratum or group may not necessarily coincide with that of other classes and may, in some instances, even be contradictory. Based on this perspective, it is the role and duty of the ANC to formulate a common national vision for development, which is biased towards the needs of the poor.

The realization of our developmental objectives requires us to build a people’s contract around which various social forces can unite. A social compact of this nature would be led by the developmental state, but require compromises from all sides. It is a partnership that must be built around united action: the mobilization of resources and energy in support of clearly defined implementation programs, rather than abstract ideological unity that is, in any case, likely to be elusive.

[Restoring trust of the people and rebuilding their commitment to the liberation movement is therefore of critical importance AZ]

The maturity of the developmental state’s strategic capacity will be evident in how we approach these democratic challenges. We must conduct a thorough assessment of the lessons of the various summits and institutions that aim to build the people’s contract. A number of high level discussion and forums have resulted in strategic agreement, but we have not been able to ensure the consistent implementation of detailed programs. The developmental state must begin to play a much stronger role in establishing clear, measurable and time-bound targets for common programs, and monitoring their implementation.

Organizational and technical capacity of the developmental state

The second attribute of the developmental state is its organizational capacity: ensuring that the structures and systems of the state do facilitate the realization of the agenda we have set. In order to realize its leadership role the developmental state must have internal cohesion and integrity.

In this regard, the issues of macro-organization of the state must continue to receive attention, including the allocation of responsibilities across the spheres of government. As part of the debate about the appropriate governance model for provincial and local government, issues around the ability of the state to lead economic development must come to the fore. [Our Municipalities are generally weak and ideologically confused about their critical role in a democratic developmental state AZ]

A strengthened role for the central organs of state will be an important part of building the organizational capacity of the developmental state. Further work is required to create an institutional centre for government-wide economic planning. Such a centre should have the necessary resources and authority to ensure that long and medium term economic planning is conducted and implemented. In other words, within the context of a democratic mandate giving rise to a people’s contract, it is vital that we build the capacity of the centre to determine the direction of transformation (as part of a harmonized inter-governmental plan) as well as the pace of transformation (as part of a synchronized program of implementation). [This became the National Planning Commission and NDP; the former having missed the political essence of the developmental project  (the strategic component) and therefore turning the latter into a technocratic document and a plan-on-a-shelf AZ]

Another area that requires further work is the macro-structure of ministries, portfolios and departments, which have not been fundamentally altered during the era of liberation. The question needs to be posed as to whether portfolios are structured in the best way to deliver the results we need.

The developmental state’s technical capacity concerns its ability to translate broad objectives into programs and projects and to ensure their implementation. Economic growth and development require an improvement in the overall quality and reliability of government services, from sewerage and waste disposal, to electricity generation, to spatial planning. Effective capacity to carry out the core functions of the state, including the provision of economic and social services will be an important determinant of the implementation of our transformation program. [The strategic nature of what became known as “service-delivery AZ]

Another important part of technical capacity is the state’s capacity to plan and monitor the implementation of its programs. The creation of a common framework for government planning across all three spheres is an important task. Whilst the legislative and policy instruments are in place (including the Municipal Integrated Development Plans), far more work is needed to align and harmonize planning and implementation through effective and well-managed inter-governmental relations.

All of these tasks require a stronger emphasis on the state’s human capacity to carry out its work. Amongst the critical factors that should be considered are [These requirements neglected the political and ideological dimensions which resulted in a rudderless state reducing its understanding of its role to that of neutral  “service-delivery AZ]

  1. Establishing uniform and high entrance requirements and standards of employment in the public service.
  2. Ensuring better training of currently employed public servants.
  3. Developing better recruitment and retention strategies for the public sector, and reducing the extent of ‘job-hopping’.
  4. Emphasizing professional skills, rather than political connections in the appointment of public servants.
  5. A special focus on building the technical capacity of the state to engage with and understand the dynamic economic and institutional developments within critical sectors of the economy. 
  6. Ensuring adequate numbers of personnel to ensure delivery, particularly in the case of front line staff in areas such as health, education and policing.

Whilst building the requisite technical capacity amongst the managers and other state professionals we should also pay attention to the mobilization of state workers as a cadre for development. In part this concerns the mindset and values of both public representatives and appointed officials, which should clearly take on board the principles of Batho Pele. It also concerns the ability of the state to mobilize this cadre around a common program. [This is the crux AZ]

Another critical aspect of the state’s organizational and technical capacity will be our ability to ensure consistency and continuity of policy regardless of the personnel deployed to implement decisions in a particular portfolio or sphere. In this regard, the ANC must have the ability to ensure that its policies – and not the whims or pet projects of individuals – are the determining factor in a transparent, reliable and predictable policy framework.

The role of state-owned enterprises

As we noted above, the state has a variety of instruments and strategies to influence the shape of economic development. 

One of these is state ownership and control of public enterprises. The RDP called for the ‘balance of evidence’ to guide economic policy decisions, including on the increase of the public sector in some areas to give effect to strategic goals through appropriate institutions, or its reduction in other areas to enhance efficiency or other objectives.

Given South Africa’s current challenges, the developmental state should maintain its strategic role in shaping the development of a number of key economic sectors, including through continued ownership of State Owned Enterprises (SOE’s). These sectors include the energy complex and the national transport and logistics system, where an ongoing strategic role is envisaged for Eskom and Transnet. 

We should consider the best means to enhance the strategic role of these and other public enterprises, utilities and agencies across all spheres of government. [Please see the post on Ethiopian Airlines AZ] 

Public sector institutions which control and allocate capital also contribute directly to the economic and social objectives of the developmental state. 

These include the state’s development finance institutions (such as the IDC or Umsobomvu), social investment institutions (such as the PIC and union-based pension funds) and regulatory agencies. These need to act in concert to back our overarching developmental approach, particularly as it relates to employment creation, the transfer of resources from the first to the second economy, the objectives of broad-based BEE, as well as the industrial strategy objectives we set in relation to particular economic sectors.

Whilst playing a strategic public role, SOE’s must continue to be dynamic, adaptable, commercially viable and financially sustainable [Once development has been achieved, these SOE’s are often privatized and the State therefore incubates and readies them for global competitiveness – see Ethiopian Airlines AZ]

Indeed, their ability to raise capital on global markets is central to their strategic public role, and this depends on their adherence to well-established financial and accounting norms.

However, although SOE’s must operate efficiently within the market, the rules they follow are not determined by the logic of the market place alone. The public enterprise cannot act solely in order to maximize profit: if this were the case it would be indistinguishable from a private enterprise. On the contrary, the SOE should have a clear public strategic purpose. This requires active and effective regulation on the part of the government and SOE participation in the formulation and implementation of economic and industrial policies.

Infrastructure investment program

The most immediate challenge facing the developmental state is the implementation of our ambitious infrastructure investment program, which will test its organizational, technical and strategic capabilities. Our ability to ensure that the infrastructure program acts as a catalyst towards the broader development of the economy will be a critical marker of the progress we are making in building a developmental state that can truly act as an instrument of economic liberation.

Amongst the key elements of the investment program are:

  1. Upgrading bulk water supply infrastructure and further rollout of basic water and sanitation facilities to the poorest communities.
  2. Increasing electricity capacity by building coal, hydro and nuclear power stations, and the expansion of transmission capacity.
  3. Large investments to upgrade our transport infrastructure, including roads, rail and ports. Investments in our communications infrastructure, including through measures to improve broadband connectivity
  4. Broadening the scope of our housing program, including through the enhancement of the housing subsidy and other measures to improve the quality of social housing and the building of integrated human settlements.
  5. Improvements in the infrastructure related to the 2010 soccer world cup.

Investments such as these, as well as the work of ongoing maintenance and upgrade of our infrastructure are not a once-off event. At the conclusion of the current investment program, we will need to develop a further set of investments between 2009 and the conclusion of the second decade of freedom. As such it is critical that we constantly assess the lessons of the current program and simultaneously develop strategies to improve our implementation in the next phase.

The main questions to be asked is whether the roll-out of infrastructure programs and projects will be integrated, whether there will be a mutually reinforcing relationship between these programs and other policies, such as skills development, industrial strategy and macro-economic management, so that infrastructure investment acts as a catalyst for broader economic transformation objectives. In this endeavor industrial strategy must play a central role to unblock constraints and facilitate policy responses to build the capacity of local suppliers of semi-processed materials, capital goods and other inputs needed to meet the demands of this and future cycles of investment.

We also need to focus our attention on the direct and indirect contribution of the investment program towards our goals of halving unemployment and poverty. Where possible – and without compromising the primary objectives of each investment – we should ensure that the program contributes to the development of labour intensive technologies and that opportunities for employment creation are strengthened. It may be the case that critical skills cannot be developed fast enough to supply the full demand in this round of the investment programs, we must focus on building our capacity to supply the required artisans, engineers and project managers.

The role of the private sector

The approach of the liberation movement to the private sector is informed by our understanding of the national democratic society as including a market based system that encourages competition and promotes labour-absorbing activity. Whilst the state plays a decisive role in shaping economic development, the private sector is the main engine of investment, growth and employment creation. [This is a critical point AZ] Since the democratic breakthrough, the ANC-led government has created excellent conditions for it to fulfill this role.

South Africa’s private sector, perhaps more than during any previous era, operates in a globally defined terrain: technological advancement has created a global economic system that increasingly works as ‘a unit in real time on a planetary scale’. The advantages of this are limitless.

On the other hand, these opportunities can be abused through financial systems in which paper money begets paper money: with new ingenious ways found to extract so-called shareholder value that has little bearing on actual production. This also creates an environment for a pervasive short-termism that can hold back the development of productive forces. Related to this is the growing tendency to sustain and justify staggering packages and astonishing lifestyles of corporate executives and so-called celebrities, with levels of inequality that are reminiscent of the eras of slavery and feudalism.

In some areas, markets have responded well to the new potential thrown up by economic and social transformation in the era of liberation. In other areas, the response of the private sector has been less effective:

a. The debate over investible capital allocated towards social and economic infrastructure (initiated at the 2003 Growth and Development Summit) remains unresolved. The conclusion of a comprehensive approach to the provision of low cost housing, and the construction of mixed income neighborhoods, suffers from a similar inertia.

b. In many instances, markets have not responded efficiently to the opportunities presented by government’s infrastructure investments. South African firms took too long to start ramping up their capacity with the result that the country is now importing many inputs and materials required – for example cement for use in our construction projects – thereby exporting jobs unnecessarily.

c. A range of temporary supply bottlenecks have arisen over the last few years, also pointing to poor planning and inadequate responses on the part of the private sector, and a general failure to anticipate the impact of the growth of the black middle strata. Examples, range from basic consumer goods (such as foodstuffs and carbonated soft drinks) to important economic inputs, such as refined petroleum or household gas.

d. In some cases, the private sector’s response to skills development and black economic empowerment policies appear unenthusiastic at best, showing an unwillingness to accept that these policies are in the long-term interest of business itself.

With the attainment of peace and the launch of programs of reconstruction and development in most of sub-Saharan Africa, similar trends – in terms of infrastructure development and changes in social structure leading to higher aggregate demand – should be expected. And the challenge in this regard is whether the private sector in our country is sufficiently geared, from the point of view of commercial self-interest, to plan for and utilize these opportunities.

In responding to these challenges, the ANC and the democratic state must ask how we act more effectively to mobilize the private sector behind the objectives of economic transformation. On its part, the private sector needs to ask itself whether it has not been somewhat lethargic and perhaps even pessimistic in its assessment of the trajectory of growth in our country and the rest of the sub- continent, thus falling short when major positive changes start to manifest.

Summary of Key Points

Our approach to economic transformation proceeds from the understanding that the changes we seek cannot emerge spontaneously from the ‘invisible hand’ of the market. The state must play a strategic role in shaping the contours of economic development. The developmental state is one that is capable of leading in the definition of a common national agenda, mobilizing all of society to take part in its implementation and directing society’s resources towards this common program.

The maturity of the developmental state’s strategic capacity will be evident in how we build a broad front around a common vision of economic transformation. 

A strengthened role for the central organs of state will be an important part of building the organizational capacity of the developmental state. The ability of the centre to determine the direction of transformation (as part of a harmonized inter-governmental plan) as well as the pace of transformation (as part of a synchronized program of implementation) are key.

The developmental state should maintain its strategic role in shaping the development of a number of key economic sectors, including through continued ownership of State Owned Enterprises (SOE’s). These sectors include the energy complex and the national transport and logistics system, where an ongoing strategic role is envisaged for publicly owned entities such as Eskom and Transnet.

Our capacity to ensure that the infrastructure program acts as a catalyst towards the broader development of the economy will be a critical marker of the progress we are making in building a developmental state. The key factor here is our ability to ensure that the programs we implement are mutually reinforcing.

The ANC and the democratic state must ask how we act more effectively to mobilize the private sector behind the objectives of economic transformation. On its part, the private sector needs to ask itself whether it has not been somewhat lethargic and perhaps even pessimistic in its assessment of the trajectory of growth in our country and the rest of the sub-continent, thus falling short when major positive changes start to manifest. 

[1. The project of building a democratic developmental state must regain its centrality in the thinking of the ANC and in its 2019 Election Manifesto.

2. There is no empirical data that supports a successful developmental path that under current assumptions, deviates significantly from the key prescripts of the developmental state that dates back not only to post-WW2 Japan (Chalmers JOHNSON) but in fact to Venice in 1613 (Antonio SERRA)

3. The sequencing is first development (protecting and nurturing strategic industries) and then liberalization for competitiveness. The idea that infant industries can compete with China, the USA or Western Europe – all of whom followed this model and all of whom now adhere to free trade fundamentalism – does not hold any water.

South Africa and Africa will face another round of de-industrialization if it is not careful and does not regain the initiative over its development agenda.

According to Friedrich LIST “the grand characteristic of List’s system is nationality. His edifice is built upon the idea of nations as they are. Contrary to the usual course of economists, who study how mankind can attain to a condition of well-being, List shows how a nation in given circumstances, can by means of agriculture, manufacturing industry, and commerce, reach a state of prosperity, civilization and power.

He protests against the empty theory which overlooks nationality and national interests; or which, if it considers, defaces them by cosmopolitical views.

He contends that the School, by which term he designates the disciples of Adam Smith and Say, erroneously assumes a state of things as realized which is yet to come; for, admitting the existence of an universal association and the certainty of perpetual peace, we cannot extract from such a false hypothesis the doctrine of free trade, as a principle or an economical theory.

List insists upon the necessity of acknowledging that the nation intervenes between man and mankind, with its particular language, its literature, its history, its habits, its laws, its institutions, its right to existence, to independence, to progress, and to a distinct territory; in a word, its personality, and all the rights and duties it involves.

Restrictions (now called Protectionism AZ) he acknowledges, impose at times an inconvenience in the increased price of commodities; but that evil soon finds ample compensation in the durable increase of productive power; a power much more valuable than the values it creates. As to the application of restrictive measures, it will be noted with what caution he proposes and would enforce them. They must be em ployed, he says, with discretion, and be reserved for important industries, the success of which is necessary to the national welfare; protection must be accorded only so far as it is useful for the industrial education of a nation; that end obtained, protection must cease. Protection is the means, liberty, the end. AZ]

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

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 megaenterprises 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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