Toespraak deur Kuben Naidoo, hoof van die sekretariaat van die Nasionale Beplanningskommissie, tydens die Sake24 Ekonoom van die Jaar-geleentheid op 13 Junie.
"Goeie aand dames and here, my Afrikaans is nie goed genoeg on die hele verspraak in Afrikaans te gee. Verskoon my aseblief as ek praat in Engels.
Good evening ladies and gentlemen. Thank you for inviting me to address this prestigious awards evening tonight. It is an honour to be in the company of the some of the best economists, a profession that I pretend to dabble in from time to time. Let me start by congratulating the nominees and winners of the awards of offer tonight. You have demonstrated qualities recognised by your own peers as sterling, outstanding and path breaking. Well done. May your success serve as inspiration for the many others who peddle this craft.
Let me begin by reading a quotation from Nobel Prize for Economics winner in 1974, Friedrich Hayek. He stated at the awards banquet, that if he had been consulted whether to establish a Nobel Prize in economics he would "have decidedly advised against it primarily because "the Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.
Economists occupy a special place in our society. For much of the past three decades, they have been central to policy making in countries as diverse as the USA and China, India and Britain. What is it about economists that give them this special aura to be so influential? Are they the smartest people in the world? Is economics the Holy Grail linking the natural sciences to the social sciences through the language of mathematics? Is it because they are seers, able to foretell the fortunes of individuals, countries and firms? Are economists our modern day sangomas, using pseudo science to predict the future?
I don’t know the answer to this question, and since I pretend to be an economist, I could say on the one hand A on the other hand B, question, increasing my chances of being right. I have huge respect for economists and for the economics profession. If I didn’t I wouldn’t be here tonight. But it is clear that the state of our profession is not healthy. Allow me to read an extract from Paul Krugman writing on the state of the economics profession in the New York Times in 2009.
It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro”, Olivier Blanchard of M.I.T., then the chief economist of the IMF, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association.
In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.
In 2008, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened in 2008.
And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever.
What happened to the economics profession? And where does it go from here?
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.
Given the importance of economics in our society and to policy making and given that we have lost our way, there is an urgent need for the profession to rediscover its core, re-find its ethical mooring and re-establish its credibility. Economics has to be more than predicting the GDP growth rate or taking an informed bet on the next interest rate hike. There is so much more to economics than that. How do we finance quality health care for 50 million South Africans in a sustainable and efficient manner?
How do grow labour intensive manufacturing in South Africa? Can we find models of black economic empowerment that does not amount to rent-seeking? These are the types of questions that economists ought to be discussing and providing advice to society.
Economics is a unique subject. It does have strong theoretical and mathematical underpinnings. However, it is also a deeply empirical subject. The Nobel Prize for Economics was introduced in 1969. In the first 30 years, most winners won for their work on the theory of markets, exchange and society. In the past decade, most winners have won for their empirical work, drawing policy lessons from empirical analysis of the data. Some of the most exciting work in economics today covers issues of governance of common resources such as the atmosphere or the oceans, game theory, the theoretical underpinnings of credit and insurance markets and welfare economics.
Let us not forget that the subject of economics is about meeting unlimited needs with limited means. Implicit in this definition is a set of values, values about needs, values involving people, their lives, their behaviour and their wants. Economics is inherently about distribution of assets, of resources, of surplus value. For most of its history, economics was concerned almost exclusively with the concept of full employment.
Leftist economists argue that neo-classical economics is inherently flawed, that capitalism is about unlimited accumulation, greed that will eventually lead to collapse of the system. I disagree strongly. As early as Adam Smith, proponents of free markets understood that for capitalism to survive, it the spoils of productivity growth have to be shared between capital, labour and society. All the neo-classical economists understood that there was an ethic in the free market system that would work against unlimited accumulation, that it is in the interests of capital to ensure that workers wages are rising in real terms, that the poor have a social safety net. It is in the interests of even the most rabid free marketers that there be some sort of unemployment insurance, mainly because it improves the functioning of markets, allowing inefficient firms to close and others to reopen. Without social security, the creative destruction of market economies works less well. It is in the interests of the owners of production for the poor to receive good quality education, free if possible.
Marx was wrong in predicting that capitalism would eat itself, as a hungry, vicious dog would eat itself when it runs out of food. Capitalism has been remarkably resilient, being able to learn lessons from crises; adapt and move forward. In my view, the creation of the modern welfare state, which I would include the United State, is a direct outcome of the great depression, rising inequality and misallocation of resources in the 1920s. Capitalism did not, as predicted, die. It evolved. It evolved social security, medicare and unemployment insurance. The disaster of World War 2 gave rise to the Bretton Woods institutions and global debt finance to rebuild battered economies. Successful market-based economies are fundamentally built on notions of social solidarity.
The golden era of capitalism for me is not the period 1974 to 2008. It is the period before that. Between 1954 and 1974, western economies grew by an average of 5.4 percent and the unemployment rate in the US averaged 1.3 percent, yes 1.3 percent. During this period, inflation was higher than today, at 3.3 percent. The tax to GDP ratio was higher. Global trade was a smaller share of GDP and inequality declined substantially.
From the late 1970s, fiscal populism of the right wing took charge. Tax rates were cut, especially for the rich and capital became more global. Social entitlements were not cut. The result was rapid economic growth, though not as fast as the earlier period, but rising indebtedness, more volatility and rising inequality. In the past thirty years, half of all increase in income in the US accrued to the top 1 percent of people. The middle 70 percent of the US population have seen a real increase in incomes of just 18 percent over a 40 year period. For the top 1 percent, the figure is close to 500 percent.
Capitalism is again in crisis. How will it respond? Will it become the hungry dog that eats itself, collapsing the system or will it evolve. How will it evolve to move forward to continue to be a system that continues to put bread on peoples’ table? To the right, the answer is fiscal austerity. Cut the social entitlements they cry. They ignore the facts of the past three decades.
So the left are wedded to a 19th century analysis of capitalism that is so outdated, it belongs in a museum. The right’s response is so crass, so naive that if they had their way, capitalism will indeed eat itself. I draw four lessons for economists and policy makers from the recent financial crisis.
Firstly, going into a crisis with low levels of public debt is the smart thing to do. In South Africa, we have done well on this front, thanks to sound macroeconomic management by the ANC government.
Secondly, good social security systems combined with strongly pro-poor education systems have benefits that reach the entire society because it enables markets to function better, more dynamically and in more innovative ways. The problem in the US that the poorest half of the population, that’s a lot of people, have poor quality education. The success for Germany is that their social model allows wages to fall in a crisis without job losses because f their social safety nets.
Thirdly, banks should be tightly regulated because they carry an implicit subsidy from the state meaning that their profits are private wealth but their losses are social costs. Even in South Africa, if one of the big banks were to fail, we would have no choice but to bail them out because if we don’t, the interbank market would cease, lending would seize up and the economy would grind to a halt. In this regard, I believe that South Africa is excellently placed. Our banking sector is sound and well regulated.
Four, inequality matters. Inequality results in a misallocation of resources that negatively affects the whole of society. Inequality raises the costs structure of the entire economy, resulting in a mismatch between consumption and earnings, resolved by debt.
The response to this should be progressive tax systems. The higher the level of inequality, the steeper the progressivity of the tax system should be. Put differently, someone has to save the dog from himself.
So to conclude this part of my speech tonight, I am a firm supporter of free markets, but I believe that for markets to function well, you need a capable state able, willing to effect redress where necessary, to regulate effectively, to ensure high quality education and a social safety net and to save the dog from eating himself. Unfettered markets are as dangerous to society as North Korean dictators are to theirs.
Allow me to turn to the work of the National Planning Commission.
The National Planning Commission is a new institution. The Commission was appointed on 10 May 2011. The Commission is an advisory body, tasked with advising the President and South Africa on issues impacting on long term development. When the commission was inaugurated, the President asked the commission to take a critical, independent and long term view of South Africa’s challenges; to be bold and brave and unbeholden to party politics. This is both a huge and unique mandate.
In June 2011, the Commission released a diagnostic report. This report set out the overriding objectives of a national plan which is the eradication of poverty and reduction of inequality by 2030. The diagnostic report was a frank and honest assessment of our country, setting out nine key challenges. Of these nine, we concluded that two were more important – the fact that too few people work and that the quality of school education for black learners remained poor. Other challenges we identified included our infrastructure backlogs, the unsustainable use of natural resources, the spatial divides that exclude the poor from economic advancement and the uneven quality of our public services.
Following a national road show on the diagnostic document, South Africans asked us to add four new areas to our list of nine challenges. These are the rural economy, social protection, citizen safety and South Africa in the region and the world. In general, the public welcomed the diagnostic report as a frank and accurate account of our successes and failings, providing a useful basis to start working on a plan to remedy the situation.
In November 2011, the National Planning Commission released a draft Vision Statement and a draft National Development Plan for public consideration. The Plan draws attention to matters that are both immediately within the grasp of government, and those that will shape development over the next twenty or so years, that the government in South Africa as governments elsewhere will have to confront. The plan can be summarised as follows:
It can be summarised as:
• The need to unite South Africans of all races and classes around a common programme to eliminate poverty and reduce inequality.
• The need for citizens to be active in their own development, in strengthening democracy and in holding their government accountable.
• The need for a capable state able to drive a developmental agenda.
• The need to focus on key capabilities of both people and the country. These capabilities include skills, infrastructure, social security, strong institutions and partnerships both within the country and with key international partners.
• The need to raise economic growth, promote exports and make the economy more labour absorbing.
• The need for strong leadership throughout society to work together to solve our problems.
The plan provides both a high level strategy for the country and detailed plans in 13 critical areas. So as you can see, the type of planning that we are doing is not Goss planning from the Soviet Union. It is around identifying the key challenges, developing workable solutions, mobilising society behind these solutions and building the capacity to implement the solutions.
While South Africa has made remarkable progress since 1994 in democratising the state, building solid institutions of governance and deracialising our society, we have not made sufficient progress in reducing poverty and inequality. The principle reason is that too few South Africans work. And since the origins of economics are largely about full employment, economics has much to offer in the plan.
Our analysis of the economy is that the economy is caught in a low growth, middle income trap. Features of this trap include uncompetitive product markets, uncompetitive labour markets, low savings and hence reliance of on foreign capital inflows, foreign capital inflows then reinforce the oligopolistic nature of the economy. Added to this, we have a poor skills profile. The net effect is low levels of investment, low levels of employment and low GDP growth.
Can we break this cycle? Yes, but even with the best will in the world, it will take both effort and time. Our strategy to break this cycle is fairly simple. We need to export more, to generate surpluses to raise investment. Higher investment, combined with better skills will lead to higher employment and productivity. Rising productivity is a necessary condition for rising incomes and living standards. Implicit in this strategy are four enabling reforms. Firstly, we need to become globally competitive in at least a handful of sectors. Secondly, we need to improve the functioning of the labour market to ease access to new entrants and ensure that wage increases are in line with productivity growth. Thirdly, in the short term, we need to intervene to fill the gap in low skill, labour intensive manufacturing. Fourthly, we need much better outputs from our education and training system.
Ladies and gentlemen, there are untangibles that need to be dealt with too. Presently, we have low levels of trust and respect amongst the major social partners. Government does not trust business and has a relationship with labour best described as dysfunctional despite alliances. Business does not trust government and has little respect for the challenges that government faces.
To state the obvious, unions don’t trust business. The net effect of this mistrust is low levels of investment, short term perspectives in business, amongst unionists and even in public policy. Ladies and gentlemen, it is inconceivable that a country as fractured as ours will make progress if we are not able to build up the trust required to carry us forward.
I am hopeful. Remember the miracle in 1994 came about precisely because leaders from all sides put their narrow short term interests aside for a big, bold brave jump into democracy. Back in the 1980s, levels of trust were probably even lower than today.
In South Africa, we need a new type of social compact to renew our bonds. The content of this social compact is best articulated by what Mr Malema calls economic freedom. We do need a second transition aimed at giving jobs and hope to millions of young people. We have to convince the top 20 percent of the population, most of you here tonight, that your lives will be better off if the bottom half of the income spectrum was better off. We also have to convince the bottom half of the income spectrum that their lives are only likely to be better off if they work with the top 20 percent, and not by demonising them into fleeing. This is the new social compact that we need.
I believe that it is eminently doable and this is what the core role of the planning commission is. So yes, we will debate and
make recommendations on whether to build a new fuel refinery or to change the system of local government. But to make progress in South Africa, we need a firm grasp of the big picture; that we are all in this ship together, united in our diversity.
Again, allow me to congratulate the winners and to thank Sake 24 for inviting me to address you tonight.
Let me to leave you with the words of US economist Brad de Long, if you’ve reached the point where you don’t pay attention to anything that might disturb your orthodoxy, you’re not doing science, you’re not even pursuing a discipline. All you’re doing is perpetuating a smug, closed-minded sect."
