The way out of our troubles – Politicsweb, 6 April 2016

John Kane-Berman on the social, attitudinal, and economic changes this country needs.

A speech by John Kane-Berman at the Free Market Foundation on Weds, 6 April 2016 

The Liberal Way Out - and Up

In his letter inviting me to give the Zach de Beer Memorial Lecture, his former colleague Brian Benfield suggested that I use it "to send a message to our "governing classes"'.

That message is simple: we cannot go on like this.

It goes without saying that corruption and the problems of "state capture" must be rooted out.  We also need a stronger parliamentary system. By that I mean one in which ministers are held properly accountable by Parliament and in which members of Parliament are accountable to constituencies rather than to the headquarters of one or another party. Our two ruling parties - the African National Congress and the South African Communist Party - need to abandon their revolutionary agendas and graduate into the world of modern liberal industrial democracy.

It would also be quite nice if they got divorced. A government which regarded itself as subordinate to, rather than above, the law would help too. So would a president who took his constitutional obligations seriously.  These are all pretty much necessary conditions for both political and economic success. Tonight, however, I want to focus less on the political than on some of the social, attitudinal, and economic changes this country needs.

Let's start with some facts. Our growth rate of GDP per head in the last 42 years has averaged O.6%. This performance beats that of Venezuela, but it is a tenth of the rate of Botswana, right next door to us. We are beaten not only by fast-growing countries such as China and India, but also by Australia, Brazil, Chile, Denmark, Egypt, and so on down the alphabet to Uganda, the UK and the US - the last two of which have been growing at three times our rate.

Our worst growth performance was in the last 10 years of the apartheid era, but the early promise of the post-apartheid era is now dissipating as confidence wanes and even our own companies seek their fortunes elsewhere. Since 1994 unemployment has risen from 3.7 to 8.2 million. Our current unemployment rate is higher than that of Greece.

Two thirds of young Africans are jobless. Our schooling system reproduces racial inequality: last year the matric maths pass rate for Africans was 26%, and for whites 85%. To reduce unemployment and stimulate robust growth, we need investment levels at 30% of GDP. Our current level is 20% whereas that of India is 34%. We don't need international credit ratings agencies to tell us that this economy is in trouble. And the reason is that we are pursuing policies that handicap most of our people and in the process damage the economy.

The only good news on the job front is what President Jacob Zuma said in his state-of-the nation address earlier this year: "To achieve our objectives of creating jobs, reducing inequality, and pushing back the frontiers of poverty, we need faster economic growth. When the economy grows fast, it delivers jobs. Workers earn wages and businesses make profits. The tax base expands and allows government to increase the social wage. We must act decisively to remove domestic constraints to growth. We cannot change the global economic conditions, but we can do a lot to change the local conditions."

Not much there to dispute. Whether Mr Zuma meant any of it, I have no idea. One never does with him. Maybe the paragraph was just put there by the finance minister to impress the ratings agencies. But local conditions need to change more radically than either Mr Zuma or Mr Pravin Gordhan imagines if we are to halt the country's downward slide. We need an entirely new paradigm, based on classical liberalism. 

I use the term "classical liberalism" - sometimes known as libertarianism - to differentiate it from American "liberalism", which envisages a far more intrusive state than the classical liberals did. What parties on the Right, and parties on the Left, have in common is that they want a powerful state - the Right to impose certain values and norms, the Left to bring about material equality.

Classical liberals are in the middle: they cherish individual liberty over state power. This does not mean a weak state. It means a state whose reach is efficacious but limited to doing what only the state can do.

Most liberals will agree that the power of the state to interfere with the courts, or the press, or freedom of association should be limited. Political freedom, in other words, is not widely contested in the realm of ideas, although this does not remove the need for vigilance.  Economic freedom, however, is hugely contested.

The African National Congress (ANC) deprecates what it calls the "neo-liberal" limited state. It calls instead for "active, intensive, and effective intervention" by the state in the causes of poverty and unemployment. But all its interventions are themselves one of the main reasons for the persistence of these problems.     

By contrast, a classically liberal state gives us a much better chance of combating poverty and unemployment. Even before the ANC came to power 22 years ago, the South African Institute of Race Relations identified poverty and unemployment as the biggest problems it would face.

We also argued that there was both a need, and an opportunity, for a political party to make the unemployed its main constituency, and the combating of unemployment its main focus. We further argued that the real alternative to apartheid was not another form of social and racial engineering, but a society prizing economic as well as political freedom.
This was of course a minority viewpoint. It probably still is. The apartheid system was so extensive that it seemed perfectly logical to assume that the best way to undo its effects was a kind of reverse engineering. That's what we've had with all our racial and other interventionist legislation, not forgetting the rise in government spending from a quarter to a third of GDP. We've succeeded in reducing the impact of poverty only by spending 59% of the budget on social grants and other components of the social wage. This includes things such as the free schooling now available to three quarters of schoolchildren.  

Socialists and other interventionists, among them those favouring strong welfare states, have long since captured the moral high ground. The way to deal with poverty, they argue, is for a "caring" state to act against it rather than leave people to the mercies of an impersonal "market", or a hand that you cannot even see. Many liberals in South Africa would agree.

But the "caring" state comes at a price. We have seen this in Greece and other countries with big budget deficits. We are now seeing it here. Fifteen years ago there were 312 people employed in this country for every 100 on social grants.

Now, because we have extended social security faster than we have generated jobs, there are only 86 people employed for every 100 on social grants. The National Development Programme adopted in 2012 warned that South Africa might one day not have enough taxpayers to finance its social security commitments. Since then the risk of running out of taxpayers has increased. The solution is not to stop the grants, but to get more people into work. This involves removing barriers to market entry. But it also necessitates revitalising a culture in which everyone able to work feels moral obligation, and peer pressure, to do so.

Like the US, the European Union, and other countries, we are now a welfare state.  Much of Europe seems to assume that their standards of living are high enough for them not to worry too much about sacrificing growth. But we are a poorer country, and we have established a welfare state before we have got rich enough to do so. Sweden, which seems to be everyone's favourite welfare state, made itself rich through capitalism and classical liberalism before it became a welfare state. But affordability problems have more recently forced even Sweden to cut back the state and liberalise economically.  

Part of South Africa's problem is that a welfare state is built into our constitution, with its long list of "socio-economic" rights. Nobody has explained how these will be financed with an economy facing stagflation - yet another reason for a paradigm shift in policy.

One of the reasons for our poor record in generating jobs is the excessive regulation of our labour market. We are now in for even more regulation, with the introduction of a national minimum wage. But minimum wages for some mean fewer jobs for others.

Those who oppose minimum wage laws are accused of having a "devil-take-the-hindmost" attitude to people struggling on low wages. But actually it is those making this accusation who have adopted precisely that attitude towards all the people who will be priced out of jobs. Markets can be harsh. But the best hope for South Africa's jobless, as I will argue in more detail in a moment, is to make it easier for them to enter those markets. As Zach de Beer put it to me many years ago in a round-table discussion on liberalism I chaired for BusinessDay, "The free market is simply an aspect of personal freedom, which must include economic freedom."

Unlike political beliefs or ideologies which start with notions of the common good, or class struggle, or racial theories, classical liberalism starts with the individual. First and foremost, he is an individual, entitled to be treated as such rather than as a member of any particular group. His personal rights, liberties, dignity, and freedoms are fundamental. So is the principle of equality before the law.

Legislation which discriminates against an individual on grounds of race violates both the principle of equality before the law and his dignity. As we learned during apartheid days, laws designed to give privileges to chosen groups always have as their victims individual human beings.

The same is true of post-apartheid racial laws. They have benefited some, but they have hurt many more, especially those most heavily dependent on state-run services. Apart from being illiberal, our post-apartheid racial laws are unnecessary: if you want to help the disadvantaged, there are better ways of doing so that also have the attraction of being colour blind. Obviously, many people may not actually be blind to colour or race. The point, however, is that the law should be.  

This, along with the rule of law, is one of the defining characteristics of the classically liberal state. But so is the idea of individual liberty, and in particular the notion that the individual should be free to do as he pleases - except that in exercising his rights, and enjoying his freedoms, he must not undermine the ability of others to do the same. The role of the state is to protect my rights and freedoms from invasion by others, just as I must be prevented from invading theirs. This of course goes back to John Stuart Mill, if not earlier.

It has numerous implications. One is that the freedom of the individual is the natural state of affairs, with all derogations requiring justification. The second is that there should be no walls between political and economic freedom. The third is that the individual is a better judge of his own interests than a state which might claim to be promoting the common good but which in practice is more likely to be promoting particular interests. The fourth is that individuals can take responsibility for their own lives. The less free they are, the less responsibility they can exercise.  

Classical liberalism celebrates the ability of individuals to look after themselves. The manner in which millions of ordinary people rendered the pass laws unworkable, and so eventually forced PW Botha's government to repeal them in 1986, shows what I mean. So does the story of how black workers won labour rights for themselves in the 1970s by joining unions despite the risk of dismissal or arrest.

This "silent revolution" wrought by ordinary people did as much to destroy the apartheid system as anything else. They were the architects of their own liberation. Parties which proclaim themselves to be the "vanguards" of some or other class, or governments which proclaim the need to "empower" people by passing laws, fail to recognise the ability of people to empower themselves. Or perhaps they feel threatened by it. 

Either way, there is a fundamental conflict between the liberal concept of the state and the state as an instrument of social engineering. Far from promoting individual ownership, land reform means that the state expropriates white farm land and rents it to blacks. "Emerging" farmers are not those who have pulled themselves up by their own bootstraps, but those who benefit from one or another land reform programme run by the state. Black economic empowerment (BEE) has little to do with what black people achieve, but everything to do with how many points whites can get by doing things for them.   

Although South Africans console themselves by saying we have "great policies but poor implementation", black economic empowerment was flawed from the start. Back in 2001, the Black Economic Empowerment Commission headed by Cyril Ramaphosa identified poverty, unemployment, and inequality as major problems. Quite right.
The commission then asserted, without evidence, that markets reinforced inequalities, so that empowerment had to be driven by the state. The commission contended, again without arguing its case, that South Africa "cannot attain sustained levels of economic growth…without deliberate measures by the state to include black people in the economy on a massive scale". 

Since then spending on BEE deals has reached R750 billion, but unemployment has more than doubled. A study produced for the government in 2008 said that if South Africa had an employment rate equivalent to those of other countries at our stage of economic development, we would have another six million people in jobs.

It added: "They would be predominantly African, women, young, and with no post-matric education." Think of all the lost production arising from the fact that these millions are not working. But think also of the lost human endeavour and the waste of human potential. Even on its own terms, BEE has failed. 

The unemployment numbers may be huge, but they are merely statistics. Each jobless person,  however, is an individual. So too are all the members of their families.  Dating back at least 15 years, opinion surveys show that most people in this country think unemployment is by far its most serious problem. Is this because they read that in the newspapers or hear about it on the radio? I doubt it. It's because they see it, or personally experience it, daily at first hand. 

Their best hope is not a state committed to increasing its own power. It is one which allows and encourages individuals to realise their own potential. Let us start with property. In 1776, the same year in which the Americans proclaimed the God-given and "unalienable" rights of man, 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…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."  

What flows from this is that without capital or education, the poor have nothing to exploit but their own willingness to work. Yet our industrial relations system denies them this opportunity. We condemn slavery because we don't think any man should be able to confiscate another man's labour. But then we pass laws restricting his right to sell his labour. Either way, he earns no money. He is consigned to permanent poverty. Our labour market has been configured to protect organised labour and big business to the detriment of small business and the unemployed. This unjust system needs to be challenged and eroded until it becomes a dead letter and/or is repealed.        

Our Constitution contains just about every right anyone could wish for, but it omits one of the most fundamental: the right to embark upon employment free of restrictions laid down by trade unions, bargaining councils, employer organisations, or labour ministers. This is the first addition we need to our Bill of Rights. The second would guarantee the right to earn money. This is so taken for granted that we do not stop to think that our labour laws make this impossible for millions of people by erecting, and then raising, barriers to market entry.  

Do not forget that unemployment insurance in South Africa covers only those who lose their jobs, and then only for a limited time. A third of unemployed people have never worked, so they are not eligible for unemployment insurance payouts anyway. And two thirds of the unemployed have been unemployed for more than a year, so they are unlikely ever to get jobs. Some will be supported by family members, pensioners included. Some will depend on social grants paid to their own children. Millions will be dependent on subsistence agriculture to feed themselves and their families. Some may turn to stock theft and other types of crime.  

Rather than allow this state of affairs to continue, we need a policy which enables the poor to find work, and so take the first step out of poverty. For most individuals, holding down their first paying job is the foundation of upward mobility. They will learn skills on the job, and become contributors to national output, not merely consumers of the income of others. Nothing else will help as much in reducing crime, restoring dignity, promoting self-esteem, and fostering family life. Having one's own money is one of the most liberating things of all.

Given our high unemployment, and the low education levels of most of the jobless, their earnings in a deregulated labour market are likely to be low. I hear the cry, "sweatshops!" But a sweatshop is the bottom rung of the ladder of upward mobility. And low-wage jobs in cities and towns allow poor people to escape rural drudgery. Better to spin or weave cotton in the shade than pick it in the blazing sun, half the time bent double.

The government wants to create 300 000 black peasant farmers, but poor people continue to leave the rural areas for cities and small towns. Many have clearly decided that life even in a shack settlement is better than rural hardship where they have to walk maybe half a mile to the nearest dam or spring with a plastic container on their head to collect water.

The present devastating drought will accelerate the urbanising trend. This makes it more urgent than ever to liberalise our labour market so that employers in our cities can satisfy the demand for jobs. They must be able to enter into private voluntary contracts with workers, free of external interference.      

Of all the liberalising reforms South Africa needs, liberalisation of the labour market is the most important. On its own, however, this is not sufficient. Some 80% of public schools are "dysfunctional".  More and more parents are therefore sending their children to former model-C or independent schools.

Although still small, the numbers of the latter are growing. Most are run by trusts or churches or other non-profit institutions, but two listed companies are also in the schooling business. One way of enabling more parents to choose independent schools over failing state schools is for the state to provide them with vouchers to pay the fees. The state would keep paying for school education, but it would gradually stop running the schools itself as private providers take over. 

Demand for independent education is growing all over the world, not least in China, India, Pakistan, Afghanistan, South America, and Africa, where parents seek better education for their children than the state provides. Various surveys have shown that vouchers are especially popular among black parents in the US. They see them as a means of buying their way out of bad government schools in the inner cities and putting their children into better schools in the suburbs. Swedish education runs on a voucher system. Last year the Institute published a paper on how a voucher system would work. My point this evening is simply to put it forward as a means of empowering poorer families to exercise the choice about their children's schooling which is now available only to the middle class. 

Apart from liberalising the labour market to allow them to get into it, using vouchers to empower parents to buy better education for their children is one of the best things that can be done to brighten their futures. We should also explore ways of enabling more people to buy private health care. The proportion of the population covered by medical aid schemes has been stuck at around 16% for nearly 20 years. Vouchers provided by the state would enable everyone to buy private health care. They would do so via an expanded medical aid system offering more low-cost options than is currently permissible. This would promote entrepreneurship and give poor people more choice.     

One of the ANC's main political successes has been to secure wide support for its policies of "redress". Even so, they are objectionable on the grounds that they are racially defined.  Another objection is that they focus on previous "disadvantage", not on current "disadvantage". This has perverse implications for "born frees" - children born after 1994. We are telling them that because their parents were victims of discrimination, they themselves have been born not free but into victimhood.

But at what stage will policy stop treating born frees as victims? Affirmative action and black economic empowerment (BEE) legislation is being tightened up. It therefore looks as if today's born frees are going to be treated for most of their adult lives as "disadvantaged" people entitled to preferences which the state will arrange for them. Making them thus dependent on the state is not conducive to encouraging them to become go-getting entrepreneurs.  

White "born frees", on the other hand, are being told, "You cannot expect any help from affirmative action and BEE policies, so you had better look out for yourself and become an entrepreneur."  Policies which encourage white, but discourage black, entrepreneurship are economically damaging. Such policies also risk perpetuating racial stereotypes and racial  inequalities - white self-reliance and black dependency. The previous government stifled black and promoted white entrepreneurship. Although for different reasons, the present government risks doing the same thing.    

I first went to interview Cyril Ramaphosa as a journalist in the early 1980s. He didn't have the vote, and he was subject to various discriminatory laws, but he didn't strike me as a victim. He was busy organising a trade union on the mines even though many other unionists said this was impossible. Despite their warnings, it wasn't long before he was negotiating wage deals in the mining industry. Yet Mr Ramaphosa, a success story dating back 30 years, is still entitled to racial preferencing to help him overcome his previous "disadvantage".

I wrote dozens of articles in various newspapers describing how shack dwellers on the Cape Flats in the 1980s helped to destroy the pass laws. Every time the government demolished their shacks and shipped them off to the Transkei they came straight back to Cape Town and rebuilt the shacks. They too refused to be victims. So also did Habbakuk Shikwane, the famous cane furniture manufacturer who died recently. According to City Press, he "refused to allow his passion for business to be extinguished by apartheid".  

Yet because we treat people not as individuals but as members of groups, because we believe that only the intervention of the state can somehow "liberate" them from "disadvantage", we cannot say to them, "You are a success story. You don't need anyone's help.  Congratulations!"  Moreover, because we are so focused on redress for previous disadvantage, we do next to nothing to rectify the current disabilities affecting born frees.

As I have already noted, these include poor education and exclusion from the labour market. Some of the requirements of our empowerment and procurement legislation may also deter investors, with the result that economic growth is undermined. But because this legislation is seen as essential to addressing the results of previous disadvantage, we don't pay sufficient attention to the risk that it may be perpetuating current disadvantage, notably unemployment.       

Mr Ramaphosa and his BEE commission got things exactly back to front in 2001. They said we would not attain sustained growth without "deliberate measures by the state to include black people in the economy on a massive scale". South African economic history shows the reverse. It was the annual average economic growth rate of 6% in the 1960s which spelt the beginning of the end of apartheid.

This was because by 1970, rapid growth had caused the white labour surplus to dry up, so eroding the industrial colour bar. As more skilled jobs were opened to blacks, the bargaining power of black workers and their unions increased.  So did the pressures for a stable urban work force with political rights. In the end economic liberalisation turned into political liberalisation. 

The only means of speeding up the rate of absorption of black people into the economy today is growth rates of 6% or more. Faster growth necessitates comprehensive economic liberalisation. This includes putting property rights beyond question and repealing the regulations that handicap this economy. It further means abandoning the idea that the government has the knowledge to "create industrialists" or pick "winners". It should rather ensure that the overall policy environment is such as to encourage risk-taking profit-seeking entrepreneurship among people of all races, among businesses of all sizes, in all parts of the country, and in all sectors of the economy.

And it means strengthening the market economy. Evidence from around the world collated by Neil Emerick shows that there is a close correlation between economic freedom and growth. Between 1990 and 2010 the "least free" countries 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 $38 000 – almost 7 times as much. 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 10 times as much. Poor people are better off in rich than in poor countries. So poor countries must make themselves rich.

For that to happen here the state needs to be cut down to size, and to get out of the way. It must enforce contracts, prevent cartels from manipulating markets, combat inflation, enact rules to ensure road safety and occupational health, and combat crime - in short, do all the things associated with the notion of the "nightwatchman" state. But it must also divest itself of airlines and all the other enterprises and functions the private sector can take over.

The fewer regulatory and licensing powers the state possesses, the fewer will be the opportunities for "state capture" and other forms of malfeasance. The more that can be left to the market, the better. Markets can quickly correct themselves. Government bureaucracies cannot. They are run by people as fallible as the rest of us. The only difference is that these fallible, ordinary, people have extraordinary power.   

Three things define the liberal state. The first is that it is cautious about using its power. The interventionist state, confident of its own wisdom, will intervene whenever it feels intervention is desirable or fashionable or expedient. But the liberal state, sceptical about its own wisdom, will regulate only when absolutely necessary. The second point about the liberal state is that it is frugal. Recognising the right of the individual to enjoy the fruits of his labours, it will take away in taxes only as much as it needs to perform its limited core functions of protecting life, liberty, and property. 

The third point is that the liberal state seeks not to empower itself but to allow individuals maximum scope to pursue their own interests, prosperity, and happiness. This will also reduce the burden on the state, freeing resources for those in greatest need: our hundreds of thousands of orphaned children, the illiterate, the elderly poor, and those too sick or disabled to work. Moreover they could be assisted on a completely colour-blind basis, since our social security system already operates thus. It focuses on current, not previous, disadvantage.        

In conclusion, let us remember that the name of the game is power. Interventionists seek to empower the state, classical liberals to liberate the individual. We remember Lord Acton's warning: all power tends to corrupt, and absolute power corrupts absolutely. Everyone recognises that this calls for vigilance.  But we need also to ensure that we are equally vigilant against those, some of them in positions of power in this country, who take the view that all power is delightful, and absolute power is absolutely delightful. 

* The above is based on the first Zach De Beer Memorial Lecture delivered by John Kane-Berman on 10th March in honour of the former leader of the Progressive Federal Party. The lecture was repeated at the Free Market Foundation on 6th April.

Kane-Berman is a policy fellow at the Institute of Race Relations, a think-tank promoting political and economic freedom.

Read the speech on Politicsweb here

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