Novel solutions for poverty reduction

Summary - South Africa has undergone vast changes for the better but we still face many difficult problems. Three major problem areas – medical services, education and crime – can be alleviated by substantial changes in budgetary policy. State medical institutions suffer from vast under-funding, and dissatisfaction is so widespread that it is not surprising that many doctors and nurses have emigrated. Education is in chaos. Former education minister Kader Asmal tampered with the syllabi, retrenched and then recalled experienced teachers, disastrously merged universities with technical colleges, and reduced universities’ subsidies while increasing political influence over them. Teachers complain of ‘laughable’ salaries. Crime is a nationwide concern. A farmer is murdered ever 2,4 days, hijackings and armed robberies are commonplace, and the gaols are overflowing. Yet we have lower levels of policing than many developed countries, and our police are so badly paid that many have either had to leave the force or moonlight. Tight national budgets have made it impossible for these three essential services to function properly. It is important to note that the ANC government inherited a disastrously high public debt, which it has, to its credit, brought down to manageable levels. But it is time now for the government to move on, and to deal with the crisis in the essential services sector. The logical solution is simple: we must increase spending on these areas substantially. Tax levels are already high, so tax is not a promising source of additional revenue. The alternative is to borrow more, though that would increase interest payments and debt/GDP ratios (and violate the 6 per cent Maastricht ratio). Increased spending is also dismissed as inflationary. However, this implies that the government should do nothing about the huge under-spending on essential services – a situation which one dearly hopes will not continue for much longer. Thus South Africa finds itself in a tight corner, along with many other African countries which have long been agitating for cancellation of their stifling debts. The public debt that accrued during the previous regime is held for the most part by institutions that lent money with abandon to the old homeland governments, usually at very high interest rates. The question is whether this debt – an apartheid albatross around the financial neck of the new government – should not be restructured on the basis of the current lower interest rates. This would lower the present debt/GDP ratio and allow the minister to release tax revenues for much more important and urgent matters. The minister should also review all remuneration drawn from tax revenues. It is no secret that salaries in all branches of the public service have become alarmingly distorted. There is no justification for paying a small-town mayor more than the president. The real cancer to the body economic, however, is the unemployment rate, and it cannot be remedied through short-term measures. It will require much longer-term planning and very large sums of money, which would put an extraordinary burden on government. However, the government could start by clearing the country of illegal immigrants, unknown millions of whom have crossed our porous borders with impunity. Then there is the massive problem of the squatter camps that sprawl around the edges of our cities and towns. This is not a task for the private sector. The government cannot allow the cities to be defaced in this way forever. The crux of the matter is that the inhabitants of the squatter camps must be able to earn a living. There is no point in supplying housing to people who are unemployed and cannot pay the rent. Two studies on South Africa’s labour problem, both published decades ago, warrant attention. The first, by Dr JE Holloway in 1932, concluded that it was necessary to develop the skills of those in the towns while simultaneously creating conditions favourable to making a living on the land. The second, the Tomlinson Commission report, which was published in Verwoerd’s time, argued forcefully for the economic development of the homelands. However, Verwoerd dismissed the proposal outright. Today, although the problem is infinitely more complex than it was in the 1930s or 1950s, the recommendations of these two reports remain valid. A very large percentage of squatter-camp inhabitants moved in from the rural areas, where they had been subsistence farmers for generations. The only possible long-term solution is to create conditions that would entice them to return to the land to farm on a more economical basis. However, that will necessitate planning and organisation on a scale never before attempted in this country, and financing on a scale that is also beyond the capabilities of our national budget or financial institutions. Proper planning by agricultural economists is the key to success. The first step should be a land conference initiated by the government, following which the strategy and logistics should be in the hands of a small group of experts. On that basis, the world’s large financial institutions may be persuaded to provide the necessary capital.

Some time in 1947 JH Hofmeyr, Smuts’ brilliant right hand man and perhaps the greatest liberal the country has ever known, told an admiring foreign visitor that South Africa was “a hot-bed of racism”. Little did he know that much worse was soon to come, racism that would last for another forty long years, racism that would only be reversed to some extent thereafter.

He died a year later. It is not difficult to imagine how he would have condemned the system of apartheid foisted on the country by a succession of governments after 1948, and the many restrictive laws that affected the lives of people in every respect. The eventual souring of international relations and the persistent pressures from inside brought the system down abruptly in 1990.

The subsequent changes were immediate and dramatic. Despite the many shocks of a socio-political kind, the economy by and large held its own, and today commentators can point to a surprising and generally satisfactory and uninterrupted positive growth rate. It hovered between only one and three per cent but it showed that the economy was not stagnating. This happened in the face of many adjustments forced on the system, especially those resulting from the new restrictive labour laws that have as much an ideological basis as many laws of the past. But it is a different ideology. While past legislation bluntly discriminated on the basis of colour, there are many commentators who see a subliminal undermining of the private enterprise system in current labour laws.

Race still largely determines policy in sensitive areas, so much so that the spectre of apartheid in reverse has been raised. If Hofmeyr could have witnessed events since 1994, he would certainly have been disappointed in many respects. He would doubtless praise the welcome change in the fortunes of black people. But he would be cautiously circumspect on more mundane matters. Or, perhaps not cautiously so, for his liberal philosophy of live and let live would have led him to scrutinise the nature and objectives of some of the new policies. He would censure the many appointments made to high positions on the basis of colour, not merit. But this is nothing new. In the post-Hofmeyr era many top appointments weren’t made on the basis of merit. Hofmeyr’s financial conservatism would cause him to question the suspiciously fast emergence of a new middle class, however important it may be for the proper functioning of an economic system. The distortions in the salary structures at the various levels of the civil service would horrify him. And so would the machinations, futile experiments and employment policy of Kadar Asmal, immediate past minister of education, a portfolio that Hofmeyr had himself held with distinction for many years.

South Africa has undergone vast changes for the better. About that there is little doubt, despite the many and difficult problems still facing us. These can only be alleviated through medium and long term measures, provided there is the political will to do so. Fortunately the country has for the first time a president with an appreciation of matters economic, about which he is clearly well-informed: better than most of his predecessors. It is indeed fortunate, for the massive problems mentioned below are all largely of an economic nature.

Medium term problems

Although the government received 70 per cent of the support of those who voted in the last election, only some 39 per cent of the electorate cast their vote. A 70 per cent count from 39 per cent amounts to only 28 per cent government support from the electorate. This was the true result of the election. It does not suggest massive support for the ruling party. What it does suggest in part is a reluctance of voters in the larger ethnic groups to vote against the government, a reluctance born of the hardships endured by the large number of unemployed. These hardships were not supposed to occur under a black government.

Many of the causes of these hardships are of a medium term nature. They could be alleviated by appropriate but very substantial changes in budgetary policy. They fall into three categories: medical services, education, and the battle against crime (police and correctional services). We touch only briefly on each of them here.

Medical services1. The dissatisfaction with state medical services is so wide, the decisions and decrees of the department of health so ill-informed and unwise, the treatment meted out to patients at some state hospitals so shocking, and the departmental policies towards our medical profession so abominable that it is not surprising that so many highly qualified medical personnel have left the country. State medical institutions suffer from vast under-funding, the latest proof of which is the decision to suspend the specialist services of the famous Red Cross children’s hospital in Cape Town, the only institution of its kind on the African continent. To somewhat relieve the shortage of doctors, a number of black students were sent to Cuba for medical training at great cost to the taxpayer. This happens in a country whose medical schools have been generally recognised as among the best in the world.

Education. In the new cabinet South Africa has been mercifully rescued from a minister of education who arrogated to himself the right to tamper with school syllabuses and systems, to the detriment of the children and the despair of teachers and parents. He rode rough-shod over sensitive areas such as religious instruction in schools, and changed his mind so often on basic educational issues that schools had difficulty keeping up with his latest insights. In the process thousands of teachers were retrenched, and some later recalled. Education is in chaos, and teachers talk of “laughable salaries”.

Worst of all was his decision to merge certain universities with technical colleges, institutions that are as different as chalk and cheese. Obviously not realising that the economic future of the country depends on good education and training, he reduced university subsidies and caused some of them to scale down their activities. Recent statistics suggest that government support has been monotonically downwards over the past few years, while ministerial political influence over university affairs has been increasing steadily.

Prevention of crime. Over the past ten years more than 1500 farmers have been murdered, giving a rough average of one murder every 2,4 days. In the cities — both the suburbs and townships — hijacking of cars and armed robbery are everyday occurrences. The gaols are filled to 280 per cent of capacity. Per thousand of the population South Africa has always — even in the days of apartheid — had one of the lowest levels of policing, lower than many a developed country. Ideological appointments in high places over the past decade caused many experienced men to leave the force and make way for novices. The process was accelerated by keeping salaries so low that members either had to leave or openly engage in a second job in violation of the rules of the force.

Poverty and the national budget

Tight national budgets made it impossible for these three absolutely essential services to function properly. Their personnel are underpaid, and many thousands of well-trained people have left for other occupations, or to go overseas where their expertise is recognised.

A finger must necessarily be pointed at the national budget. But one has to be careful in laying the blame. The ANC government inherited the worst budgetary situation the country has ever had, with a disastrously high public debt that swallowed much of the national revenue to very high interest payments. This was an unwelcome legacy of the past, when homeland2 governments were virtually given a blank cheque. They borrowed from the banks with impunity and accumulated debts which in the end became the responsibility of the national government.

The manner in which the new government handled the situation will forever stand to its credit. With defence expenditures cut to the bone, and other measures, it managed to bring the public debt/GDP ratio down to more manageable levels. It also brought discipline into the budgetary process and thus gained the respect of the business sector.

But it is now time to move on. The government should recognise the crisis in the essential services sector for what it is and give it serious attention. Tax levels are already high, so the possibility of creaming more revenue off private business and individuals is not promising. The only alternative is to borrow more. But that would push the country back to increasing levels of debt/GDP ratios and interest payments, as before. It would also violate the Maastricht dictum of not exceeding a deficit/GDP ratio of 6 per cent, which we have been able to maintain.

This earned us the accolades of the international community, and widespread respect for our minister of finance. There is, however, nothing sacred about Maastricht. It is a largely arbitrary ratio which has been questioned critically by many economists in Europe. It was said to bind countries to restrict their budgets at times when they can least afford to. This has been shown to be the case for France and Germany, the two giants in the European community. They have both already overstepped the prescribed limit.3

If South Africa were to ignore Maastricht it would lose face internationally. By toeing the line, however, the government is impoverishing a class of its people that constitute most of the infra-structural backbone of the country. The national budget has been unable to deliver a satisfactory minimum standard of services.

The horrors of spending

The logical conclusion is simple: levels of spending on these areas must be increased substantially. That is unlikely to happen, for increased spending would be dismissed as inflationary.

The matter is, however, not that clear cut. Inflation follows when an increase in government non-tax spending — an increase in the money supply — takes place in an economy with high employment and little unused capacity — not when there is large-scale unemployment and increased output in response to an increase in demand following the increase in official spending. Depending on the configuration resulting from the various sector-wise increases in demand, relative prices will change — some more so than others — leading to an increase in the average level of prices. But that is not inflation proper. It is a mere change in the relative price structure, determined by how swiftly and how adequately markets respond to increases in demand.

If, in a “thought experiment”, we assumed that tomorrow our 35 per cent unemployment rate should magically drop to a manageable, say, 5 per cent rate, the money supply necessary to finance that level of activity would be substantially higher than before. That puts a new stamp on the level of the money supply as a criterion of inflation. If increases in the money supply are set off against increased activity in the real sphere, the result need not be inflationary. Conversely, a stable money supply and a high velocity of circulation — largely camouflaged statistically — could be inflationary and totally undetected to the extent that such high levels of circulation result from large intra-bank transfers, and consequently an almost constant aggregate liquidity.

The “overall demand for money” is a vague but fundamental concept that encompasses the extent to which the money supply is adequate to finance activity in the real sphere. We need not go back to Davanzati in 1588 who first distinguished between the real and monetary spheres; there is a more telling reference to it in our own time when Milton Friedman pointed out that the money supply in the United States was inadequate in the early 1930s. The Federal Reserve system failed to support the ailing banking system on the eve of the Great Depression, and thus starved the economy of its means of payment.

Applied to a country with massive unemployment, the argument that increases in the money supply necessarily lead to inflation, implies that increases in the money supply should not outstrip the growth rate of the GDP. Put differently, the ex post GDP should tie down the ex ante money supply. In the case of South Africa, it implies that the authorities should do nothing about the huge under-spending on essential services — a situation which one dearly hopes will not continue for the foreseeable future.

One cannot escape the conclusion that the many urgent needs of the economy can only be supplied through an increase in government spending. If done from tax revenue, it would be robbing Peter to pay Paul. But Peter does not have that much left to offer. The other alternative, deficit finance, would be unacceptable, not simply because it is contra-Maastricht, but primarily because it would increase the debt/GDP ratio back to high levels and cripple the budget with high interest payments. This puts South Africa in a very tight corner, along with many other African countries which have long been agitating for a cancellation of their stifling debts.

Those holding the increased public debt that accrued during the previous regime are mostly the institutions that had been lending with abandon to the old homeland governments, no doubt at the high interest rates of the time. The very high rates during the 1980s and beyond had been engineered by the Reserve Bank as the only supposedly real antidote to inflation. Statistics show that it had no such effect. Inflation rose irrespective of the interest rate policies of the Reserve Bank. What the high rates did in fact cause was a substantial and sustained inflow of funds to the banking system at the expense of the borrowers — a transfer of wealth from the poor to the rich.

The extent of the transfer was directly related to the interest rate levels. Today’s taxpayer is footing a bill caused by the ridiculously high interest rates of the apartheid years. The question arises as to whether this debt — an apartheid albatross around the financial neck of the new government — should not be restructured on the basis of the current lower interest rates. It would be an interesting exercise to calculate the effect this would have in lowering the current debt/GDP ratio. It would allow the minister to release tax revenues for much more important and urgent matters.

The minister should further use his authority to scrutinise the overall structure of all remuneration drawn from tax revenues. It is no secret that the rates of remuneration in apparently all branches of the public service — at all three levels — have become alarmingly distorted. There is no justification for the mayor of a small town to receive an annual salary higher than that of the president of the country. There is also no justification for the head of a chaotically run department in a municipality receiving an annual salary of R800 000, plus a bonus of R130 000. The many examples of this kind have raised suspicion in the minds of the tax-paying public that the urge to transform South African society has given rise to inequities and gross inefficiencies due primarily to poor administration.

Long term problems

These are all extremely worrying issues that could be largely alleviated, if not remedied, through appropriate short term actions on the part of the authorities. But the real cancer to the body economic cannot be excised in this manner, or in the short run. To markedly reduce an unemployment rate of around 35 per cent calls for much long-term planning and very large sums of money, both of which would put an extraordinary burden on the government.

It could start by clearing the country of illegal immigrants. Of these there are an unknown number of millions who have crossed the extended and porous South African borders with ease and impunity. Then there is the massive problem of the squatter camps which sprawl around all the cities and many smaller towns. Here is the most irksome legacy of apartheid. When the controls were relaxed, people flocked in their thousands to the urban areas, causing in the process a major structural disruption in the economy. It materially raised the poverty levels in the country. Indeed, since the African National Congress (ANC) took over ten years ago, poverty has worsened, a result of letting people move around freely, as in any normal society.

The reduction of massive unemployment cannot be the task of the private sector. The private sector can only make a marginal difference during the course of ordinary cycles of economic expansion. The South African government is faced with a huge problem. For one thing, it does not lie within the purview of government to embark on productive activity, at least not in a private enterprise economy. Yet it must do something. It cannot let the festering sores of sprawling squatter camps continue to deface the cities forever. The most that government can do is to create conditions that would draw squatters away from the cities to areas where they could earn a living for themselves, at least above the level of subsistence farming.

That is the essence of the matter. They must be able to earn a living. It is no use supplying housing to urban dwellers who are not engaged in gainful employment. They must be able to afford the monthly rent.

The Holloway and Tomlinson reports

Many studies have been published and official commissions of enquiry appointed during the twentieth century on the labour problem in South Africa. They almost all suffer from a bias towards a separation of the races4, particularly so after 1948. But two could be identified for special attention.

The first is a report chaired by that intrepid economist and top civil servant, Dr JE Holloway. In 1932 his report, UG22 of 1932, sounded a novel note on the labour question. After 62 interview sessions with mostly black witnesses — a remarkable feat in the 1930s — in all four of the then provinces, he came to a conclusion that was far ahead of his time. He said two things: first, segregation of the races would be “uneconomical even if possible”. However, he continued, “nobody advocates this”. It says much about the spirit of the times. But little could he imagine that 16 years later it would constitute the very foundation stone of government policy for the next forty years.

Holloway’s second point is of even greater relevance today. He recognised the fact that some black people were living in the cities and towns, and others in the vast, undeveloped rural areas. It was necessary, he continued, to develop the skills of those in the towns and at the same time create conditions favourable to making a living on the land. That would motivate people to stay on the land, rather than moving to the towns and eking out a living there as unskilled workers.5

The other report is the most extensive and incisive study that was ever undertaken on the labour question in South Africa. It is the multi-volume work of the Tomlinson commission which was published soon after Verwoerd became prime minister. Although Tomlinson, a noted agricultural economist, laboured under the shadow of the policy of segregation, he came out forcefully for the economic development of what later became the homelands. This Verwoerd dismissed outright. He decreed that the homelands had to develop without outside investment.

Tomlinson was, of course, right — as an economist, that is. No proposal for economic advancement there, or anywhere, could be faulted. It was long overdue in the rural areas. Its success depended critically on a total determination on the part of the government to pursue such a huge project — such huge projects in the various territories — right to the end, with all that this entailed by way of heavy capital investment in infrastructure, industry and commerce. But that kind of capital would not have been forthcoming.

Perhaps it was ruled out for political reasons. It was the time of the cold war between the West and Soviet Russia. The Soviets were making increasingly succesful inroads into areas of Western influence throughout the African continent, and there existed the very real danger that the Russians would step in with tantalising offers — as they had done for the building of the Aswan dam on the Nile when the United States turned down Nasser’s request for assistance.

A new start

That is now history. The Berlin Wall is down, and international relations have changed for the better. We might with profit reconsider the positive aspects of the reports of Holloway and Tomlinson. They were in many ways complementary. Tomlinson, of course, had to toe the official line, but he favoured economic advancement. Holloway’s conclusions were wider: do not segregate, develop.

But the scene has since changed beyond recognition. The problem is now infinitely more complex than it ever was in the 1930s and even 1950s. The sprawling squatter camps house hundreds of thousands of people that have been uprooted in the hope of finding employment in the cities and towns. There is a huge excess supply of labour — largely unskilled labour — that must be drawn back into the money economy through gainful employment. This the government cannot provide. It is not its function to do so in a private enterprise economy. The government could provide this function in a socialist economy, but the results would be the same as those witnessed at the end of the 20th century. Private business is not in a position to solve the problem of mass unemployment.

A very large percentage of these people moved in from the rural areas where they had been subsistence farmers for generations. The only possible long term solution would be to create conditions that would entice them to return to the land. We are in essence back to the recommendations of Holloway and Tomlinson, except that the task has now taken on gigantic proportions. It would call for planning and organisation on a scale never before attempted in South Africa — in that order, before attempting to find the necessary finance, which would also be beyond the capabilities of South African financial institutions, let alone the national budget.

Proper and incisive prior planning would determine the outcome. This is an area for specialists. It would be primarily the task of agricultural economists to determine matters such as the carrying capacity of the land in the different areas, the nature of land use, the provision of infrastructure, the formation of viable communities, co-operation with tribal conventions, and so on.6 The recent spectacularly disastrous land restitution cases where people with insufficient knowledge — or no knowledge — of farming were handed well-run farms that were soon run into the ground, have proved beyond doubt the dire need for handing land only to people who may be expected to make a success of the complex business of farming, whether individually or in groups.

It is a move that should be initiated by the government, and then allowed to develop along lines laid down by experts.

This could be determined at a land conference in which the input of civil servants should be limited to outlining the activities of the departments of land use and agriculture.7 The follow-up should be in the hands of a small group of experts who should determine the strategy and the logistics of making the rural areas attractive to those wishing to farm on a more economical basis than subsistence farming. Only with well-laid plans could one expect the world’s large financial institutions to consider providing capital for projects of this kind. It is only financing on this scale that would create conditions that would lure people back to the land.

Endnotes
1. The state ignores the disastrous Aids problem as a purely medical one, with dire economic consequences that will inevitably follow.
2. Formerly known as native reserves, they were euphemistically labelled “homelands” by the Verwoerd government.
3. Internationally determined arithmetical ratios for one or other economic activity has proved to be a dubious exercise. The IMF initially laid down the rule that countries were not to devalue their currencies by more than 10 per cent without the permission of the Fund. The very next year France devalued the franc by more than 10 per cent. Much the same has already happened to the Maastricht rule.
4. Let us not forget that perhaps the very first advocate of separation was Sir Theophilus Shepstone, governor of Natal in the late 19th century.
5. Holloway was a close adviser to the government for about a quarter of a century. One may safely assume that his reasoning in the report was behind the creation of the Reserves in 1936. Also, that his literally life-long defence of gold as the cornerstone of “honest money” caused the government not to follow Britain off gold in 1932. The strong South African rand had ruinous consequences for exports, particularly in the mining and agricultural sectors. Holloway held a doctorate from the London School of Economics and served as director of Census and Statistics and, later, secretary for finance — after a distinguished brief career as an academic at the university of Pretoria.
6. Many other kinds of expert would also be required to participate, e.g. town planners, architects, environmentalists, legal experts, the business sector, economists, anthropologists, etc. But it would be agricultural economists that would determine in the first instance the overall viability of projects.
7. It should not adopt the procedures followed at a high-level conference on inflation staged by the government in the 1980s. The procedure at this conference involved delegates — trusted economists — reading the morning’s newspapers. During the afternoon there were group discussions on particular topics under the chairmanship of reliable economists. The concluding session comprised an overall review of the discussions by another safe personality. Critical questions were smothered in the group discussions. Everybody left the conference none the wiser.