Do not waste time pondering the minutiae of Ramaphosa’s Economic Reconstruction and Recovery Plan (ERRP). There is only one way to create wealth for all: freedom from anti-growth spending, controls and taxes. The ERRP must be judged by how well it measures up.
The only way to know that is to see where it will take the country on the annual Economic Freedom of the World Index (EFW) (here). This is the internationally recognised measure of the extent to which economic systems are free or unfree. The world’s experience shows that if you move up the Index and become more free, even if you start low, you prosper. If you move down, even if you start high, you stagnate.
Our past does not make us an exception. The laws of economics, like the laws of physics, apply regardless of the past.
Towards the end of apartheid, we went down the EFW Index to below the 100th freest economy on earth, so we stagnated. Then under Mandela, we rose to be about the 40th freest economy, so we created wealth and jobs. Our ranking flattened during the Mbeki years, so we had low growth. We collapsed back to below 100th during the Zuma years, so we stagnated again.
Now that we know what’s needed, what should we expect?
Our monster problem is that we are 15% to 20% poorer because of the Covid-19 lockdown.
At the 1% growth rate during recent years, it will take 15 years to get back to where we were. At the 3% envisaged, it will take until about 2027. On the other hand, with bold liberalisation, we could grow at 7%, which would have us fully recovered in three years. It would take 10 years to double our wealth and 20 years to quadruple it. High growth is spontaneously transformative and slashes unemployment.
Sadly or happily, depending on your perspective, the ERRP is a fruit salad of good, bad and indifferent ideas. Keeping the best for last, President Ramaphosa devoted most of his time to a long list of everything the government will do – the proverbial all things to all men, or what Ed Stoddard and Tim Cohen (DM) called “an old wish list in new packaging”.
The last of four “focus areas” promises reductions in spending and debt, and market barriers slashed by 50%. There are some welcome specifics, such as early completion of digital migration and sale of spectrum (ie ending retarded use of air waves), and “reprioritising” government spending. Without the needed detail, it promises “reforms to unlock investment and growth”. It will “reindustrialise our economy, focusing on growing small businesses”.
There was much that is mushy, like perpetuating failed State Owned Enterprises instead of closing superfluous and selling viable ones. There is a Trump-like myth that “localisation” is better than exports. The law of comparative advantage means that we should export what we are good at in order to import what we are bad at. The objective of export earnings is to maximise what can be imported.
Eskom will be unbundled into power generation, long-distance transmission and local distribution, which is a good idea if we join the rest of the world by allowing electricity trading. But it will serve little purpose since the Plan perpetuates the outmoded idea of allowing generation for own-use only – Eskom’s monopsony will endure.
The rest is a list of old, mostly failed policies expected to have new benefits, and new ones with limited prospects. What they have in common is the belief that government spending creates wealth and jobs, whereas in reality it reallocates wealth from wealth-producing to wealth-consuming activities.
Laudably, the Plan highlights the need to reduce horrific unemployment levels. Realistic aspects propose real jobs from small and big businesses employment. The flawed parts propose government programmes. Whether spending on X by taking from Y creates net employment is unknowable.
What we know is that wages forced above market rates by labour laws increase unemployment. Eustace Davie of the Free Market Foundation suggests a brilliant right to work solution: give the unemployed Job Seeker’s Exemption Certificates (JSECs). They would exempt destitute people from labour laws that drive up the cost, risk and difficulty of employment. The unemployed will be free to take whatever job they wish, subject to prescribed working condition protections. DM/BM