Economic policy failure comes in various forms. The most well known failure is when policy instruments fail in achieving the policy aims.
The present policy dilemma in South Africa comprises a policy failure at the microeconomic level owing to institutional failure since policy delivery is failing.
In contrast, macroeconomic policies are more effective in achieving policy aims.
Our exposition is concerned with this dilemma between micro and macro policy frameworks. In the following sections we discuss the elements of this dilemma and how it relates to policy failure.
The absence of a general accepted model
During the 1990s economic policies in developing and emerging economies were conducted in terms of the so-called Washington Consensus model that was propagated by The World Bank.
In principle these policy prescriptions were derived from neo-classical economics that emphasised stable and equilibrating markets. The policy advice concentrated on privatisation, trade liberalisation, the liberalisation of markets, the abolition of exchange controls and the stimulation of exports through currency depreciation.
The main advantage of this consensus model was that it offered a generally accepted policy framework to be applied by policy makers that, in many instances, were lacking policy making experience.
Many critics of this approach tend to characterise it as an application of neo-liberalism and market fundamentalism to developing countries. Latin American and many African countries applied these policies.
South Africa experimented with this consensus policy framework in a relatively less extreme way through its GEAR policy framework that replaced the RDP policy proposals envisaged in the 1994 election manifesto of the ANC.
The failure of this consensus policy model in developing countries was gradually established and by 2005 the World Bank documented the failure of this policy model in its well-known document Economic Growth in the 1990s: Learning from a Decade of Reform and reviewed by Rodrik (2006).
The main reason for the failure of the Washington Consensus is that its basic tenets were not applicable to the economic conditions in developing and emerging economy countries.
These basic tenets were derived from neo-classical economic theory in terms of which market adjustments are driven by relative price differences that are disseminated via perfectly competitive markets under conditions of full employment.
Accordingly, price differences induce substitution processes in production and consumption and factors of production as well as final goods are efficiently allocated to optimal utilisation by economic agents without delay and without cost.
In the real world of developing countries this theoretical framework is not very helpful in conducting policy making.
The real world conditions prevailing in these countries do not secure efficient markets and in many instances they are small relative to international counterparts.
The opening up of such markets in developing countries usually went hand in hand with volatile price movements as has been evident in terms of international capital flows and flexible exchange rates.
Volatile market outcomes are ineffective in disseminating information in support of the optimal allocation of scarce resources.
Moreover, in the real world we do not observe smooth and costless allocation in terms of relative price differentials. These adjustments normally come with huge costs.
In a world with so many rigidities that hamper market adjustments one cannot rely on relative price changes to induce the effective allocation of resources.
Such a world is better explained in terms of a model that assumes rigid prices and imperfect competition while relying on income driven substitution processes.
Such a theoretical framework cannot be accommodated within neo-classical economics.
It is evident that the basic analytical framework of the Washington Consensus is failing effective policy making in general, but particularly in emerging as well as developing countries.
This truth gradually enforced itself on the intellectual world during the 1990s. Moreover, there is no universally valid intellectual framework to assist policy making in a dissimilar world. The conditions in a particular country have to be assessed and the relevant economic principles have to be applied in designing a policy framework.
The international Panel on Growth, chaired by Ricardo Hausmann, that recently submitted proposals on the AGISA economic growth framework to the South African government did not subscribe to the Washington Consensus framework.
The Panel concentrated, instead, on the economic constraints that were particularly relevant to the South African economy, as described by Hausmann (2008). The policy proposals were aimed at relieving these growth constraints. This is an example of a modern departure from the Washington Consensus policy framework.
In South Africa the abandoning of the Washington Consensus left an intellectual vacuum that was rapidly exploited by opposing schools of thought.
Non-market policy frameworks of centralised control, nationalisation of certain industries, price controls and a fixed rand exchange rate entered the policy debate to oppose the typically market-oriented policy framework of the
South African government.
This situation is very similar to what existed during the pre-1994 period in South Africa when progress towards a reasonable democratic settlement was obstructed by thinking patterns that subscribed to a model which applied to a world prior to the fall of the Berlin wall.
The policy debate in South Africa concerns macro- and microeconomic aspects.
Macroeconomic policies refer to monetary and fiscal policies and in this respect the government has chosen to follow orthodox market oriented policies by following a monetary policy based on the analytical framework of flexible inflation targeting. Fiscal policy is conducted in a prudent way by controlling the budget deficit, as percentage of GDP, within a fixed band that favours surplus budgets to deficits.
In an economy that is relatively open and well integrated with the international economy, macroeconomic policy making is not independent of international market disciplines.
Moreover, as a member of the G20 world policy forum, South African policy making at the macro level is limited by the parameters that are set on a global basis in accordance with international best practices. Presently these parameters impose an orthodox market friendly policy framework.
The powerful discipline of these international market processes have revealed themselves very explicitly following the bankruptcy of the US investment bank Lehman Brothers on 14 September 2008 when the interbank money market collapsed. Policy makers were forced to act quickly and on a globally coordinated way to rescue the situation.
A more recent example is the discipline of market forces in terms of interest rate spreads on international capital markets that compelled European politicians to resolve the Greek debt problem in a market friendly manner.
As opposed to macroeconomic policies, microeconomic policies in South Africa do not have to abide by the same compelling parameters set by an internationally integrated economy and G20 membership.
This implies a policy dilemma as micro policies that are aimed at industrial development; labour market regulation, land reform and regulatory issues on businesses are open to the dominance of diverging political views within the ruling ANC party.
These diverging policy views are often compromised into a strategy that does not bode well in terms of progress in active policy making. The policy dilemma is that the outcome of these processes delays the implementation of important projects such as infrastructure development. This, in turn, impacts negatively on the achievements of macroeconomic policy variables such as GDP growth.
In other instances this leads to political infighting with devastating effects on service delivery at the local level of municipalities. The outcome is dilapidated municipal infrastructure, poor social delivery owing to incompetence, followed by civil actions by local communities in protest against non-existing public services
New millennium collectivism
This term was introduced by David Henderson (2001) to describe the new thinking in developed and developing countries that social and economic development has to come largely through delivery by government intervention.
Strong interventionist policies that aim at human and economic development have been introduced in certain Latin American countries such as Venezuela and Argentina. It would appear that these interventionist policies are particularly appealing to political leaders in Africa.
Apart from being inefficient these policies tend to favour political elites or politically well connected individuals. Our black economic empowerment programme is a typical example of this collectivism where state intervention favours political elites while imposing a tax on capital in existing firms.
New millennium collectivism is a strong contender in favour of state enterprises. In this respect it is an important opposing view to privatisation that has, probably, been overemphasised by the Washington Consensus.
The South African government has been reluctant to acknowledge the inefficiencies of public enterprises in delivering economic services. These inefficiencies are contributing towards a relatively high cost structure as is evident in terms of escalating administered prices in South Africa, particularly since 2007.
The developmental state
In the pre-1994 period the developmental state became a prominent issue in policy debates. This debate has recently resurfaced, probably under influence of the new millennium collectivism and the collapse of the Washington Consensus policy framework.
This debate, nevertheless, derives its momentum from the successful economic development in East Asia where extensive government intervention formed part of their development strategy.
South Africa can, without doubt, learn from the experience in East Asian countries in developing their economies to global players, particularly in terms of the efficiency of the East Asian public sector and its business friendly approach.
The problem is that many African countries, including South Africa, overlook the particular circumstances in these countries without taking cognisance of the vast difference between this country and East Asia, as for instance argued by Qobo (2009).
As indicated above, we suffer from extreme inefficiencies in respect of microeconomic policies in this country.
Moreover, in terms of our international commitments South Africa subscribes to orthodox best practice macroeconomic policies.
Unfortunately this macroeconomic framework is contradicted by microeconomic market unfriendly interventionist and inefficient policies.
This policy dilemma contradicts an effective developmental state.
Political elites in South Africa are particularly in favour of state activism in view of its prominence in the Asian model. In their haste to embrace state activism these elites overlook the fact that South Africa has developed a democratic society with many human liberties that are contradicting extensive state activism as practiced in East Asia.
Moreover, these countries have applied dissimilar models and experienced mixed results in terms of success. There is no general East Asian developmental state model to replace the Washington Consensus model.
Furthermore, owing to the contradictions between policy frameworks the developmental state is doomed to failure under South African conditions.
The evidence on state delivery in South Africa is appallingly disappointing.
Most government enterprises are underperforming while executives and board members earn compensation packages far in excess of the average of a JSE quoted company in the private sector.
Examples are Eskom, SAA, Spoornet and the Land Bank.
Within the government sector the poor service delivery of municipalities has triggered many civic protests.
Moreover, the state has failed in protecting its citizens effectively against crime.
Despite this poor performance record certain South African political elites are crying out for more government intervention and a prominent developmental state. Raymond Parsons (2009) convincingly argued that the time has come to claim a delivery state as opposed to a developmental state.
Parliamentary democracy as opposed to ruling party conferences
An important reason for the policy dilemma is that within the ANC, there prevails a confusion regarding the difference between party political conferences and national Parliament.
The political elites tend to hold the governing ANC party to ransom in terms of resolutions that were passed at party conferences. The misunderstanding in this instance is that this country is governed by a democratically elected Parliament.
We are not governed by ANC party conferences nor can resolutions taken at such conferences be binding on Parliamentary procedures. By elevating party political resolutions to Parliamentary equivalence, the political elites impose a limitation on Parliamentary democracy which leads to policy contradictions.
Summary and conclusion
Economic policy making in South Africa is a dissimilar process where macroeconomic policy making is conducted within the efficient limits of certain parameters imposed by our internationally integrated economy and G20 membership.
Microeconomic policy making appears to be more independent of these international disciplines and this opens the opportunity to political pressure groups to impose their policy frameworks on government.
Economic policy failure on the microeconomic level has reached an alarmingly high frequency in South Africa. It appears that there are several complicated reasons for this state of affairs.
The lack of a generally accepted policy framework is one. The dissimilar fractions within the ANC are another important reason for this development. The ANC tries to hide these diverging policy differences by scaling down on effective policy making while it encourages a growing state sector that is perceived to be a developmental state.
Unfortunately the state sector has failed dismally in terms of delivery while certain institutional aspects of this country contradict the effectiveness of a developmental state in South Africa.
References
HAUSMANN, R. (2008) Final Recommendations of the International Panel on
Growth, Working Paper.
HENDERSON, D. (2001) The Rise of New Millennium Collectivism, London:
Institute of Economic Affairs.
PARSONS. R. (2009) The Role of the State, in Parsons, R. (ed.) Zumanomics:
Which Way to Shared Prosperity in South Africa? Challenges for a New
Government, Auckland Park: Jacana, 2009:185-208.
RODRIK, D. (2006) Goodbye Washington Consensus, Hello Washington
Confusion? A Review of the World Bank’s Economic Growth in the 1990s:
Lessons from a Decade of Reform, Journal of Economic Literature,
44(4):973-987.
QOBO, M. (2009) The Developmental State Debate in South Africa, in Draper, P
and Alves, P. (eds.) Trade Reform in Southern Africa Vision 2014,
Auckland Park: Fanele: 55-80.
