State’s role in development starts with good governance

State’s role in development starts with good governance BritoThe debate about the role of the state in driving development is receding from the centre of policy thinking in the developing world, with the pendulum swinging to free markets and liberalisation. This is especially so as pressure intensifies for structural reforms to stimulate growth.

Any mention of the “developmental state” in SA today is likely to induce a yawn, especially in the context of intimations of state capture by business people with links to President Jacob Zuma’s family. This and the waning hope in the state’s capacities to drive long-term change is foreclosing any creative thinking about the appropriate role of the state in driving a credible developmental agenda.

This, however, remains an important goal to pursue in the face of deep-seated socioeconomic difficulties confronting SA. In thinking about lessons SA can draw from other countries that have experimented with development models, Vivek Chibber, the Marxist sociologist from the University of New York, offered some interesting perspectives at a public lecture co-hosted by the University of Johannesburg and the Mapungubwe Institute for Strategic Reflection.

Chibber made a forceful point that the state needs to play a central role in driving economic development in SA, taking cues from India and South Korea on what should and should not be done. He explained that these two countries exhibited commonalities and systematic divergences.

In both cases, he said, the state played a piloting role, but India later diverged from this path in ways that delayed its industrialisation. Chibber attributes the shift in India to the refusal of its private sector to be yoked under the state’s disciplinary hand.

According to him, structural change and development are driven by the kinds of industrial planning in which subsidies and other incentives could be given by the state to the private sector in exchange for performance outcomes. Where such outcomes are not forthcoming, the state should use the stick to corral the private sector.

Raghuram Rajan, the governor of the Reserve Bank of India, takes a different, yet also rather extreme view. In a lecture two weeks ago, Rajan made a spirited case for free markets and suggested the state should simply get out of the way.

This view is informed by a heuristic bias that government failures are the only stumbling block to growth and development, and is blind to the persistence of market failures, especially in undertaking investment in new areas of innovation or even undertaking industrial upgrading.

Buoyed by India’s high-growth performance, Rajan sees the state’s role as limited to facilitating the dynamism of the private sector. On industrial policy, he argues: “Let us not encourage anything; that might be the surest way of killing it. Instead, let us make sure we create a good business environment that can support any kind of activity, and then let our myriad entrepreneurs figure out what new and interesting businesses they will create…. Similarly, let us enable business activity, but not impose too much design on it.”

Many of the things Rajan proposes are sensible and have been put into effect in other countries with success: improving productivity and competitiveness; building infrastructure; improving human capital with better schools, colleges, vocational and on-the-job training; simplifying business regulation and taxation; and improving access to finance to stimulate entrepreneurship. But this is only half the story if we are to improve inclusive development in the long term.

There is room for industrial policy measures of a soft kind that rely more on public investment in innovation and strategic collaboration between the state and business in improving economy-wide competitiveness. Pragmatic thinkers on industrial policy make a convincing point that to produce better outcomes, private initiative should be realised within a framework that encourages diversification and technological dynamism.

Further, market forces and private enterprise should be unleashed alongside an intelligent co-ordinating role for the state in the infrastructure and productive spheres.

To ensure that growth is inclusive, the state has an important role to play in the economy. Policy sequencing in SA is key. Urgently, we need bold structural reforms to get the macroeconomic environment back into shape. Further, there is a need to take determined measures to improve institutional and technical capacities within the state, restructure the operating environment of state-owned enterprises, parlay investments into infrastructure to lift confidence, and explore creative and productive avenues to co-invest with the private sector.

In her work, The Entrepreneurial State, Sussex-based economist Mariana Mazzucato argues for a different conceptualisation of the role of the state in driving long-term development. Despite her proclivities towards an activist state, she argues that the idea of “picking winners” is a narrow way of thinking about industrial policy. She proposes instead that the state should focus its efforts on nurturing technological change through public investments; creating a network of willing market agents that can collaborate with the state including through private-public partnerships; and experiment, learning and even failing — all in the direction of creating positive outcomes, from which taxpayers can reap some of the rewards from the upside, rather than just derisking the downside.

Currently, it is difficult to achieve any of this in SA in light of the fact that there is a lack of policy credibility and the democratic state is gradually being transformed into a mafia state. The dearth of technical capacity within the state is another constraint.

For the state to be effective, ethics of governance, beginning with the president and the executive, must be improved drastically. This requires some broadly shared expectation of the kind of leaders that are appointed in the various spheres of government. Meritocracy in the public sector should be entrenched. The level of qualification, experience and standing of politicians in society should be important considerations. Such leadership would need to be driven by a moral imperative of improving the living standards of the citizens and building institutions that enable them to achieve this goal.

As Lee Kuan Yew, the founder of modern Singapore, once stressed: “To get good government, you must have good people in charge of government.” In his view, there is a need for both the right institutions and the right calibre of leaders and technocrats in order to get a credible government. For example, SA has a most progressive Constitution on paper, and an impressive array of institutions, but the quality of political leadership and depth of technocracy at the top level leave much to be desired.

SA is still a long way from becoming a developmental state in view of its teething problems. We don’t have elites who are driven by long-term developmental considerations. Instead, they are predatory. President Jacob Zuma’s relationship with the Gupta family might be the face of this tendency, but the rot in the state is much deeper.

We have no idea yet of the extent of the plundering that is taking place under the radar in public institutions including state-owned enterprises. Improving governance and making it more transparent and accountable, insulating the state from corruptive influences, and suffusing it with the right competencies, would provide a sound basis for building a developmental state.

Article was originally published on Business Day Live 22 March 2016

Clear signal is needed to keep the investment gateway open

Clear signal is needed to keep the investment gateway open

Recent events confirm that SA’s perceived receptiveness towards foreign direct investment (FDI) is declining. As a result, some foreigners are disillusioned and look to better growth prospects elsewhere in Africa. The case of European Union (EU) investors — our single largest source by far — confirms this: aggregate EU FDI stocks in SA declined 23{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in 2010-12, when their global FDI stocks increased. And that was before the legislative barrage unleashed before last year’s elections.

Cape Town South Africa

Photo: Jeffrey Barbee,

As our economy is plagued by high unemployment, social discord, low growth, and rising political populism, the signal failure to retain, let alone ignite, foreign investor interest from our major source is disturbing. But why is this the case? And will the Promotion and Protection of Investment Bill, soon to be presented to the Cabinet, change this?

Our politics have changed sharply in recent months. The African National Congress (ANC), harried by the populist Economic Freedom Fighters, is struggling to respond. Unfortunately, sensible, orthodox economic policies don’t buy votes. But the ANC is also responding to its own constituencies, large parts of which seek redistribution of wealth, or favour inward-looking, state-driven industrial policies. Substantial segments of the formal business community, hit by rising costs and regulatory uncertainty, also seek to keep the South African market as closed as possible.

The trade unions are ideologically committed to inward-looking policy approaches. The mood in many townships seems to have turned against foreign immigrants and is reinforced politically by the approach of next year’s municipal elections.

As a result, advocates of liberal economic policy approaches are in an increasingly small minority. The legislative results are rapidly mounting up: a minerals bill rewrite generating huge uncertainty in our core economic sector; announcements about land ownership and reform that have the same effect in the farming sector; foreign private security providers may shortly be obliged to sell 51{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of their assets to locals; proposals to oblige foreign shop owners to transfer their proprietary secrets to locals; a revised black economic empowerment law that will make it more difficult and punitive for businesses (local and foreign) to operate; an expropriation bill whose outcome is uncertain; increasing hurdles for skilled foreigners to acquire work permits; and increasing tariff barriers.

The cumulative effect of this list is breath-taking. The South African “gateway to Africa” is becoming the gatekeeper. Strategically, this is a dangerous drift as, without our gateway status, it is not at all clear what our role in the regional and global economies would be. Also, how will our economy be affected if our African trading partners implement similar policies, or our global trading partners retaliate?

To round it off, our political elite has almost overnight taken on predatory dimensions, threatening core institutions, cementing investors’ worst fears about the legislative barrage, and inviting comparisons to oligarchical Russia. Are any assets safe in this legislative and political environment? Would you invest your money in a country in such circumstances? Foreign investors, who have many other options, are now openly asking this question. We are not China; our market is not big enough to ignore foreign investors’ concerns. We are at the cusp of a crucial turning point.

Enter the Promotion and Protection of Investment Bill. The first version, released for public comment last November, confirmed some investors’ worst fears. Expropriation was redefined to allow the state to in effect transfer custody of seized assets to deserving beneficiaries (the “custodial clause”), thereby avoiding the need to pay compensation as the state would not own the assets. This clause has reportedly been removed, but the overall treatment of expropriation remains uncertain.

The draft bill provided for foreigners to be subjected to an undefined “screening” test to ensure their investments would not violate economic or social policy goals. Several countries operate screening systems, a growing practice in light of the global expansion of many state-owned enterprises. Australia’s systems, for example, give wide discretion to the finance minister to block investments if they are deemed not to be in the national interest.

More thought needs to be given to such comparisons. Australia remains open to FDI and has strong domestic institutions anchored in democratic norms. The Australian state is not about to become predatory; hopefully SA’s will not either but its future is far less certain. Therefore, different approaches are required here.

On the plus side, the bill would entrench dispute settlement with foreign investors in SA’s legal system. This would bring the long-running bilateral investment treaty saga to a close and end the circumstance in which they enjoyed more rights than domestic investors through their recourse to international arbitration panels. SA’s legal system and judiciary have proved their independence and durability. But if a predatory elite captures SA’s democracy, the consequences for the judiciary will be uncertain. The bill could then be a pyrrhic victory.

The bill has since been debated behind closed doors in the National Economic Development and Labour Council. The resulting version is reportedly on its way to the Cabinet. How should it respond?

First, it should reflect on whether SA truly requires FDI, and in what quantities, in relation to our economic and social challenges. Second, and assuming it does the right thing by concluding that SA must remain open to FDI to cement our gateway status, the next debate should be over what safeguards really need to be in the bill in order to prevent egregious abuses by foreigners. Screening should be contemplated but must be subject to checks and balances to minimise ministerial discretion and over politicisation. This power should reside in the National Treasury, the only ministry with an economy-wide view as opposed to narrower, sectoral approaches.

Third, this debate should be predicated on a fundamental principle: foreigners should be subject to the same laws as domestic investors. Therefore, we should not single foreigners out for “special treatment”, such as technology transfer conditions or performance requirements.

Different government departments are experimenting with expropriation provisions, generating considerable uncertainty. So, finally, the Cabinet needs to send clear signals about how expropriation will be treated in the Expropriation Bill, and in the plethora of legislative actions under way. The conversation needs to take place now and a clear signal sent. Investors are risk averse and this signalling would restore their confidence in SA.

This article was originally published by Businesday Live on the 10th March 2015. The authors are Peter Draper and Azwimphelele Langalanga, researcher at the South African Institute of International Affairs.