Research and Policy Brief: Back from the Brink - 22nd November 2013.

Annual South African mirror briefing by John Kane-Berman, the Chief Executive of the South African Institute of Race Relations in Pretoria on 1st November, Johannesburg on 5th November, and Cape Town on 7th November 2013.

As the 20th anniversary of the handover of power from South Africa's white minority to its black majority approaches, newspapers are compiling lists of pluses and minuses to be published in April or May next year -  27th April being the anniversary of the first universal-franchise election, and 12th May the date on which F W de Klerk handed over to Nelson Mandela at the Union Buildings, an event I was fortunate enough to witness.

That event signified a new era. But it was also the culmination of a process of liberalisation that had begun a quarter of a century earlier, when Prime Minister John Vorster said in 1967 that Maoris could be included in New Zealand rugby teams playing the Springboks. Other changes followed: recognising black trade union rights in 1979, reintroducing black homeownership in 1983, and abolishing the pass laws in 1986, to name but some. These changes were dismissed as cosmetic by all except the white right, which predicted that they would eventually have precisely the outcome I witnessed at the Union Buildings in 1994.

There are three lessons in this. First: something seemingly unimportant - limited desegregation in sport - can herald a process of fundamental change. Second: once that process begins, it is difficult to stop. Third: apparently reactionary leaders - John Vorster, PW Botha, and later FW de Klerk - can turn out to be reformers.      

My own organisation gets into trouble with white organisations by pointing out that the white minority has actually done quite well in maintaining its living standards. They started off the new era with most of the country's assets, physical, financial, and intellectual. By and large those assets are still intact, although land claims and policies now put them under threat.  

Given the pervasiveness of discrimination in the apartheid era - its cruelties, indignities, injustice, and sheer inhumanity - whites have much to be thankful for. That they were finally induced to surrender power without a fight does not alter this. Nor does it detract from the validity of the campaigns that the Solidarity trade union has mounted against discrimination, including its recent successful case taking up the cudgels for coloured warders against the employment equity policy of the Department of Correctional Services.  

Last month the Institute got into trouble with the Democratic Alliance (DA) for pointing to some of the socio-economic successes under African National Congress (ANC) rule - housing delivery, provision of more electricity, and so on. There was nothing especially new new about the data we put out. So why are we talking about the need to pull the country back from the brink .

One reason is that there is no end in sight to corruption, poor schooling and  public health care, the looting of public resources, or high crime and rising unemployment. The second is that we are heading in the wrong direction, with more and more policies of the kind that have already damaged investment and growth. The National Development Plan (NDP) recognises some of our problems. It fails, however, to suggest much that is fundamentally different.

So that is what I'm going to do. I will first suggest a dozen components of a new set of policies. Next I will put them into a different ideological framework. My third task will be to look at factors that will favour them. Fourth, I will set out what needs to be done to bring about policy change. And, finally, whether we can learn from the past.

Top of the list of new policies has to be: go for growth. Not as one among other objectives, but as the overriding priority. Faster growth, and only faster growth, offers hope to our eight million unemployed.  It translates into more jobs, not deliberately, but as a spin-off of the wealth-seeking process. Seeking to reduce poverty and inequality at the same time as pursuing growth will retard growth. So a choice has to be made. The NDP  ducks that choice. The two countries that have seen the greatest reduction in the numbers of people in poverty in the last two decades - almost billion people between them - are China and India. Both grew at annual averages touching 8%, thanks largely to economic liberalisation.

The cure for poverty is money. It can be stolen, printed, redistributed, or earned. Only the last of these really works. So: remove all barriers that stop poor people earning money. Remove the impediments that employers face in hiring them. The second of my set of policies is then: liberalise the labour market. It is just about the least efficient on the planet. Liberalisation means scrapping most of our labour law, except for basic health and safety requirements.   

Many of the supposedly "pro-poor" policies beloved of development agencies rely on the state as agent. But the poor must become their own agents. So: let them use the only asset they have - their own labour. In 1776 Adam Smith wrote the following in The Wealth of Nations: "The property which every man has is his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strengths and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him."

The denial to any man of the opportunity to earn a living, and to better himself and his family by his own efforts, is one of the worst violations of human rights in the world. That it is so widely practised by governments of both Left and Right does not alter this. What South Africa needs, as part of labour law liberalisation, is a constitutional amendment protecting the right to work - free of hindrance by government, trade unions, employer organisations, or bargaining councils. We can thus price the poor into jobs instead of out of them.

Number three reform is education.  Growing demand for both private schooling and places in suburban government schools tells us that black parents know the government is incapable of fixing township schools. The solution is privatisation and consumer choice. South Africa has between 4 000 and 5 000 private, or independent, schools. A growing number cater for the poor. We need more of these. So: auction off as many government schools as possible to the private sector. We already have two listed companies running schools as businesses. Why only two? Township schools could also be sold to the non-profit sector: NGOs, local chambers of commerce, churches, trusts, groups of parents, or even trade unions. School buildings could be used as security for loans to build classrooms, playing fields, and hostels.  

Each child would be given a voucher to buy education from whatever school he and his parents chose. The voucher would be the same as current per capita state spending on schooling - about R10 000 per pupil per year. A growing number of private schools charge less than this. So do some government schools. Competition among schools for voucher-bearing pupil-customers would force up standards.

Can private education work for the poor? India has hundreds of thousands of private schools, producing better results than government schools. Voucher systems operate also in parts of Africa, Chile, and Colombia. There is particular demand in the US among parents of inner-city black youth. There are now 32 school voucher programmes in 16 American states.     

Fourth on my list is health. The same principle would apply - the state pays for health care, but the private sector takes over the provision thereof. A private ambulance had to be called to save Nelson Mandela's life when his army ambulance broke down in June this year. Nothing could better symbolise the difference between public and private provision in all walks of life right across the country. Failing public hospitals could be auctioned off to private hospital groups. Patients would be armed with vouchers enabling them to buy basic health services - such as screening and testing - from private providers. State-funded medical insurance would then pay for necessary hospitalisation or specialised treatment.       

A couple of Wits academics recently said introducing profit into education was outrageous. Not too outrageous, however, for the supposedly socialistic Swedes, who run plenty of profit-making schools. Newspaper stories demand that private healthcare companies put "people before profits". Well, food is more important than either health care or education. And guess what? The whole process of feeding 53 million South Africans every day, from the planting of seeds to the loading of supermarket trolleys, operates on the profit motive. We are spoiled for choice all over the country. There is a simple reason: we have no ministry of food -  not yet, anyway. If we had such a ministry it would have to be paid for, so prices would go up. Supermarkets would be as inviting as public hospitals. Shops would run out of food. Of course, many people cannot afford to buy much food. But that is not a market problem. It is a poverty problem - which, given high unemployment, is dealt with by social grants.  

When education and health care have been privatised to the extent that they are running as efficiently as food production and distribution, we could get rid of all our departments of education and health. They wouldn't even be needed to distribute vouchers: parents could simply take their own and their children's IDs to the nearest 24-hour filling station, or other outlet, and get a smartcard supplied by the National Treasury.

A greater role for the private sector in both education and health care brings us to the fifth item on my list: privatisation of South Africa's state-owned companies. Start with South African Airways. It's nothing but a government vanity project. Put it up for auction. Do the same with all other companies when there is no compelling reason to retain state ownership. Governments have no business being in business. It conflicts with their role as regulators. It is also unfair competition because they can offload their losses on to the taxpayer, which real businesses cannot.  

The Airports Company of South Africa should be broken up. If the Johannesburg, Cape Town, and Durban airports were sold to different companies, they could compete with one another for international airlines, lowering costs, reducing baggage theft, and bringing in more foreign tourists. Nor should the breakup of state monopolies stop there. All of Eskom's power stations should be sold to private investors. Put a limit on the number each could own to avoid replacing a public with a private monopoly. Private investors would be encouraged to build additional power stations, nuclear, coal, or whatever - using their own money. They would then compete with one another to supply electricity to the national grid.

Before Margaret Thatcher sold them off, the British nationalised industries were losing £50 million a week. After she sold them they paid £60 million a week in taxes. Part of the reason for China's success is massive privatisation: the number of state-owned enterprises was reduced from 120 000 in the mid-1990s to 32 000 in 2004.

The handmaiden of privatisation - number six on my list - is wholesale deregulation. If we want to unleash the energies and drive of the private sector we have to unshackle it. Like restrictions on free speech and other political freedoms, economic restrictions in the form of regulation should be kept to a minimum.    

Getting rid of regulators means leaving decisions to markets - which are more objective, free of bias, possessed of more information than any bureaucrat, and able quickly to reverse wrong decisions. Moreover, unlike regulators, markets cannot be bribed. Nor can they be subordinated to the requirements of cadres deployed to advance political agendas.

Seven is trade liberalisation. All the theory and all the evidence shows that free trade means greater prosperity. Global competition means lower prices and therefore better-off consumers everywhere.

Number eight is redesign of land reform.  First, transfer communally-owned land in the former homelands to its occupants.  Second, put a stop to the restitution process.  Most claims have already been settled. The ones outstanding could be settled not by land transfers but by financial compensation, which is the choice of 92% of claimants anyway. Three, end the wasteful redistribution process. The 30% target may already have been met if purchases on the open market are taken into account.  

Also requiring redesign are our policies supposedly targeting the disadvantaged - preferential procurement, employment equity, and black economic empowerment. This is ninth on my list. State interventions to assist the disadvantaged should focus not on previous, racially defined, disadvantage but on current disadvantage. Overwhelmingly this is unemployment,  poverty, ignorance, and disease, all of which need the remedies I've already described.  

There is no need for race to play any further role. Social grants are already colour blind. Empowering the poor with education and health vouchers would be colour blind too. Removal of race from procurement would lower costs, improve competition, and speed up infrastructure provision. Getting rid of employment equity and replacing it with colour-blind hiring and promotion policies would revitalise the public service. The overriding policy of going for growth necessitates encouraging all entrepreneurship and investment, big and small, black and white. So scrap all the BEE charters, codes, and scorecards.  

Number ten on my list is the professionalisation of the civil service, not least the police. No more cadre deployment, or political appointments, or affirmative action. Choose only on merit. Above all, there would have to be accountability. Say no more.

Accountability must apply in politics too. This is eleventh on my list. Cut the National Assembly from 400 to 200 members, all of them elected on the present proportional representation system. The National Council of Provinces would be replaced by a 200-member chamber elected on a constituency system. All legislation would require the assent of both houses. This formula would give us the best of both worlds: accountability to constituencies, plus adequate representation for minority parties. 

Number twelve? Decentralisation. Devolve power - and accountability - from the centre to  the lowest appropriate level of government. Cities and provinces should compete with one another for business. This would reduce corruption and encourage deregulation. The government wants to get local communities involved in local policing forums. Very good idea: let them elect their local station commander, give him a sheriff's badge, set his performance criteria, and fire him if he doesn't measure up.                          

So that's my list. Sounds rather fanciful, does it not? It also necessitates an about-turn in the current policy thrust. Well, that's the whole point. It's how we get back from the brink. It would be easy to propose tweaks here and there. No doubt we will get some tweaks. Some will improve policy. Some will make it worse. But the overall thrust of more centralisation, more regulation, more state control, and more interference will not change unless: 

1. The contradictions and costs of current policies are relentlessly exposed, and

2. We hold out a vision of something infinitely better.  

The contradictions and costs are becoming increasingly obvious, not least to people in government. Among them is the governor of the South African Reserve Bank, who is now quite a strong critic of our collective bargaining system. The finance minister has to tot up the costs of a bloated, profligate, and unaccountable public service. He has also to find money to subsidise SAA and others. He knows that our fiscal and foreign deficits are unsustainable. Though it shies away from endorsing the obvious alternative, the NDP is aware of the costs of failing state institutions. By pursuing mutually contradictory objectives, the NDP is setting up more contradictions. As these intensify, the pressure for something fundamentally different will intensify. The likely failure of the new employment incentive to make much dent in unemployment will intensify pressures for labour market reform. Maybe the government's apparent determination to introduce the incentive in defiance of Cosatu will turn out to have been a harbinger of something more, like Mr Vorster's Maori concession. Perhaps Cosatu's opposition to this minor reform arises from fear that it might turn out to be the thin end of a wedge. Let us hope so.    

However,  exposing contradictions is not enough. We must also hold out a vision of something fundamentally different, no matter how fanciful this might seem at first. There is a powerful consensus in the country for the active and interventionist developmental state that the NDP favours. This document has been so well marketed that business and the media think it a panacea. The critique the Institute has made of it barely gets a mention in the media. This is no doubt because our critique goes too far outside the intellectual comfort zone of the media. Never mind. The worm will turn. It will turn for the simple reason that the real fantasy is that the NDP can actually bring about the 30% investment, 5.4% growth, zero poverty, and 6% unemployment to which it aspires. These targets are so much more ambitious than the country's track record to date, that they cannot be achieved without fundamentally different policies. And that's where the Institute comes in. 

Moreover, we've been here before. Scroll back to June 1985. Our monitoring of policy developments had convinced us that the "entire edifice" of apartheid was "crumbling". We were sometimes ridiculed for this view, not least because reform appeared to have stalled. Violence was on the increase and, just as now, the country was crying out for leadership. But the response of Mr Botha's government was to declare a state of emergency. The Institute   dismissed this as an expedient, not a solution. Young blacks would rather die than wait endlessly for the day when racial laws ceased to rule their lives. 

So we produced a ten-point plan, which included

= lifting the state of emergency

= systematic dismantling of the detention-without-trial laws

= scrapping apartheid in education

= repealing the pass laws the moment Parliament reconvened

= terminating forced removals with immediate effect

= restoring citizenship to blacks who had lost it via the homeland independence policy, and  

= immediate public commitment to the end of political apartheid plus negotiations with the widest possible range of black leaders about a new constitution.  

We published this ourselves and in the Financial Mail, in July 1985. Though our ideas were not intrinsically radical, they seemed radical in relation to policies then prevailing. In fact, we admitted that there was not much chance they would be adopted.    

Early the following year, however, the Institute was asked to brief a special cabinet committee appointed to investigate political rights for Africans. This was an opportunity too good to miss. We were told the reformers in the Cabinet hoped we would supply arguments to strengthen their hands against the hardliners. We spoke frankly to seven or eight ministers for a couple of hours, and afterwards were thanked for having been so frank.

I drew an important lesson from this experience. The Institute had previously criticised all sorts of government policies in the most forthright terms, while also calling for the bans on the ANC and other organisations to be lifted. None of this stopped the cabinet committee from soliciting our views. Far from it. They sought our views precisely because we had spoken out so strongly in public, and in print. Now the government wanted to hear more. So if you want to be taken seriously, you must put forward a clear alternative. No pussyfooting.

Well, you know the rest. In 1986 the much-maligned Mr Botha repealed the pass laws. A bunch of National Party MPs congratulated one another on this step. One, Albert Nothnagel, had the honesty literally to cross the floor of the house and commend Helen Suzman, who had fought a long battle in Parliament to get rid of these laws, which were the very foundation of the apartheid system.  

And, of course, on 2nd February 1990, Mr de Klerk announced a package of political liberalisation measures beyond what anyone then thought possible. There followed the  negotiations that led to the new constitution. This was not conceived in a vacuum. It was based in part upon liberal principles familiar across the South African political spectrum. Why? Because people such as Mrs Suzman and her party, organisations such as the Institute, and liberal newspapers and universities had spent a great deal of energy promoting them. Where would the country be today if the liberals had left that battle of ideas to Marxists?   

Which brings us back to the present. And to my 12- point plan. Does it still seen so fanciful?

Comparing our 10-point plan of the 1985 and today's 12-point plan, what they have in common is political and economic liberalisation. More than that, they are coherent sets of ideas that reinforce one another.

And so we come to the battle of ideas. Why is it important? How do we wage it? Who is the target market? How do we win it? Before going any further I must correct the title of this talk. It's not only, or even mainly, about what the government must do to turn things around. Others can play a part too.     

Ideas are critical. They predate policies. And they last longer. Think of the ideas underlying Christianity. Or the idea of justice. The dominance of Marxist ideas in academia and church helps explain the hostility in South Africa to business. Think of the current globally dominant idea: climate change. Now that it is so widely accepted, governments can impose carbon taxes and extract even more from consumers to subsidise wind farms and the like.

Dr Verwoerd was well aware of the power of ideas. That is why he set up the South African Bureau of Racial Affairs (Sabra) as an apartheid think-tank to counteract the liberal ideas of the South African Institute of Race Relations. 

In South Africa the currently dominant idea is that apartheid distorted the society so radically, and caused such injustice, that the only way to counteract its effects is a similar process of social and racial engineering. This idea is so understandable, so apparently logical, and so powerful that business, along with much of the media and most NGOs, endorses the current thrust of racial engineering. So does the official opposition, which is moving closer to the ANC on racial policy. The Institute, by contrast, has maintained all along that the real alternative to apartheid is not another kind of social and racial engineering but economic and political freedom. We stated this in 1994 and nothing has happened to change that standpoint.

When the Progressive Party was launched in 1959 Harry Oppenheimer said that the number of seats it won mattered less than the slow drip feed of liberal ideas into the bloodstream of the body politic. This battle has to be fought all over again.

Part of this battle is a defensive one - to protect  such vital institutions as an independent judiciary and legal profession, a free press, and independent civil society. Defence of the rule of law is paramount. If my checklist has not focused on political freedoms, it's not because they aren't important. It's rather because they have a much wider support base than do economic freedoms. Also, because it is the latter whose importance I'm concerned with today.  In prosecuting the battle for economic liberalisation, we are armed with powerful sets of facts. On the one hand: details of all the disasters that command economies inflicted on their people, behind the Iron Curtain, in many parts of Africa, and more recently in Venezuela. On the other hand: all the data showing correlations between freedom, growth, and prosperity.

I'm indebted here to Neil Emerick of the Free Market Foundation for presenting some telling statistics on the impact of economic freedom at a recent seminar hosted by the Institute. He grouped countries into categories from the least free to the most free. Between 1990 and 2010, the  "least free" experienced growth in GDP per head at an annual average of 1.6%. The "most free" clocked up 3.6% - more than double. As a result of these different growth performances, the least free countries recorded GDP per head in 2010 of $5 200, while the most free recorded almost $38 000 - almost seven times as much. The least free showed life expectancy in 2010 at 62 years, the most free at 80. So people in the richest and fastest-growing countries live almost 20 years longer than in the poorest. Moreover, the average per capita income of the poorest 10% of the population in the least free countries was $1 200, whereas in the most free it was nearly $12 000 - almost ten times as much.

Poor people are better off in rich than in poor countries. Poor countries must therefore make themselves rich. It's as simple as that. And it's a stark choice: growth, not engineering.  

Our rate of growth in GDP per head over this period was 1.3%. GNP per head in 2010 was about $10  000,  and life expectancy was 51. 

We have performed better since 2000 than in the preceding decade. Low life expectancy is mainly the result of AIDS. But we now sit with growth at around 3%, and investment levels . There are now at 20% of GDP instead of the 30% required. The reasons are to be found in our very low - sometimes rock-bottom - rankings in world competitive tables in such areas as costs of crime, quality of education, and labour market efficiency. These outweigh our high rankings in auditing standards, availability of financial services, and quality of air transport infrastructure. That South Africa, with its treasure house of minerals, sits at number 64 out of 96 on the Fraser Institute's rankings of attractiveness for mining investment is the most telling - and damming - example of the opportunity cost of our current policy thrust.

All the items on my checklist are designed to dig us out of this trap. They are based not only on some of the statistical measures I've given you, but also on the logic of the classically liberal ideal.     

This holds that there is no distinction between economic and political freedom. If I may speak freely, why may I not work or trade freely? I must be free to enjoy the fruits of my labours, so the State may take away only such taxes as are essential to provide public goods. These include police and defence, and legal institutions to uphold rights and adjudicate disputes. The classically liberal state is not a weak state, but an efficacious state that confines itself to its core functions. It is also a state that regards itself as subordinate to the law. The rule of law holds that no man may be punished except by due process of law. But it also holds that law, rather than ministerial whim, should determine who gets or does not get such a thing as a mining licence.   

A humble state also gets out of the way of the imagination, drive, and creativity of the individual. He can write what he likes, he can sculpt what he likes, and he can invent what he likes. Enter the entrepreneur. Enter the man who has amassed his savings and wants to augment his wealth by providing goods or services in the expectation that he will be able to sell them to others at a price that both will find acceptable.  Adam Smith stated that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."          

Sounds shocking! How can we all benefit when entrepreneurs pursue their own interests? But Smith was uttering one of the most profound insights in all of economic thought. And the proof of the paradox is in the eating. In societies which target wealth creation directly, the poor benefit as a spin-off effect. But they benefit more than in societies that target them directly, because in such societies the spin-off effect is often the destruction of the wealth creation process. And in the worst cases, political and economic freedom disappear. This is the crux of the matter.  

We need a new way of thinking about the poor. Not as people for whom the state does things, but as people whom the state enables to do things for themselves. Let them enter the labour market. Give them vouchers to let them buy education and health care. Give subsistence farmers in homelands the land they live on. Stop wasting money subsidising airlines most of them will never fly in. Cut tariff barriers to lower the prices of the clothing they buy. Stop chasing away investors who could push up the country's growth rate and lift them into jobs.    

So we have quite a battle of ideas ahead of us! Who is the target market? Everyone. Politicians of all parties, civil servants, the media, business, students, and the public at large. You never know where you might find allies. As I've pointed out, the Institute found in the past that there was a ready market for some of its ideas in the National Party government. I once served on the board of an organisation called the New Era Schools Trust (NEST) which aimed to build multiracial schools when it was still unlawful to do so. We got quiet encouragement from senior men in the Broederbond and in the Cabinet.   

Nearly all the reforms that liberal institutions, liberal politicians, and liberal newspapers pushed for - repeal of the pass laws, removal of the industrial colour bar, recognition of black trade union rights, the end of detention without trial, repeal of the Group Areas Act, granting of homeownership rights to blacks, and the end of forced removals, to name but the most important - were implemented before the ANC came to power. Though many factors played a role in these changes, they all came about through the parliamentary process.

The fact that they did so come about testified to the staying power of the liberal idea. Back in 1955, in her presidential address to the Institute, Dr Ellen Hellmann pointed to the dominating contradiction of the South African political economy. On the one hand: attempts to enforce racial separation and entrench white supremacy. On the other: the pressure of the forces generated by an expanding industrial economy. In the end, the economy triumphed. It was the need for growth that finally forced the National Party to embark on its path of economic liberalisation in the early 1970s.

We  are now in the midst of another contradiction. On the one hand: growing recognition that unemployment necessitates faster growth. On the other: the piling on, one after another, of policies, uncertainties, and disincentives that will continue the slow strangulation of our economy. Sooner or later, the ANC government, like its predecessor, will be forced to resolve this contradiction by economic liberalisation.  

In conclusion, if we want to hasten this process we must hammer home the single most important of all the ideas I've put forward: the idea of growth. It's under threat not only from current policies, but also from populists, greens, and the ideology of the developmental state. Only growth can unlock the productive potential of our millions of unemployed. Only private enterprise can  generate growth. And only economic liberalisation supported by sound institutions will enable private enterprise to do that job. So business is critical - an idea the ruling alliance has yet to grasp, and must be helped to grasp.   

It's time business now put its mouth where its money is and joined this battle of ideas. For reasons we all know, business in South Africa has for too long been on the defensive. It should stop buying into poor policies and impossible plans. Instead  it should be far more aggressive in putting the case for growth, and in demanding the space to produce that growth.