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The case for government intervention in the SA economy

Dr Gaby Magomola when he was awarded the honorary doctorate in commerce and economics at the University of Zululand. Picture: Supplied

Dr Gaby Magomola when he was awarded the honorary doctorate in commerce and economics at the University of Zululand. Picture: Supplied

Published May 14, 2022

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Dr Gaby Magomola

Chancellor, Madame Vice Chancellor, members of the Nominating Committee, Members of Council, and faculty. I also take this moment to recognise family and friends, esteemed guests and you, my fellow graduands.

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I stand before you Chancellor and Madame Vice-Chancellor to first of all, express my humble gratitude for inviting me to the University of Zululand to accept the award of the honorary doctoral degree in Commerce and Economics conferred upon me, and secondly, to deliver the keynote address.

I am particularly humbled by the generosity of the nominating committee and the University Council and all of you who made this possible for me. It is my understanding that an honour’s degree is the highest honour that a university can bestow on anyone.

I would also like to take a moment to thank my parents and all those who have contributed to my development and influenced me in a variety of ways. A special thank you for those who helped nurture me in the Robben Island prison cells where I entered as a teenager lost in the passion for freedom from injustice. Many of these have since passed on to the next world.

It is a pleasure to be here today and to be invited to address you, and an extraordinary privilege to receive this honorary doctorate from this outstanding university. It struck me during my research to discover the fantastic service rendered by this institution to our Republic and its citizens over the years.

The University of Zululand has produced several outstanding citizens who have contributed immensely to the welfare of the country. Just as an example, Unizul has produced three of our country’s chief justices, including our esteemed chancellor.

My life has been one of active and consistent resistance against injustice and prejudice, first in the political arena, and later in the business sector. I have also lived a life of privilege and realised quite early that, with privilege, comes responsibilities. In choosing a topic to discuss this morning, I have thought deeply about our country and the debates that are raging, to find a lasting solution to our economic challenges.

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There are those who feel that government should play a more active role and yet others feel that government should be less intrusive in the economy if we are to resolve our challenges.

This reminds me of my own intensive discussions with former late President Nelson Mandela when we exchanged views on the role of government in a new South Africa shortly after his release. I was but one of many business leaders he was consulting with during that period. Prior to this, I had last seen Mandela on Robben Island Old Tronk in 1964 where some of us were kept.

The choice of my topic is the role of government in a developmental economy.

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The role of government intervention in the economy has been debated among economic theorists and academic scholars since the 18th century. There are three main angles to this debate.

The first was led by classical theory pioneers such as Adam Smith (often referred to as a the father of economics), Jean Baptiste Say (famous for Say’s law – “supply creates its own demand”), David Ricardo (a staple in international trade theory and founder of monetarism), Robert Malthus (who showed the link between population growth and economic growth) and John Stuart Mill, who developed the ideas around economies of scale, opportunity cost and comparative advantage in international trade theory.

The fundamental principle of this school of thought is that the economy is self-regulating. That is, markets can achieve maximum employment and growth on their own. According to classical theory, while conditions arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, there are self‐adjusting mechanisms in the market that rebalance the economy back to the natural level of real GDP.

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The rise of classical economic theory came at a time when Western capitalism and the industrial revolution were the order of the day and there was an overall rejection of government interference. Classical economists wanted to transition away from class-based social structures in favour of a looser market strategy, referred to as laissez-faire, or “letting things be”.

The second angle is found in the writings of John Maynard Keynes during the 1930s and 1940s that challenged the classical theory. A little-known fact about Keynes is that when the South African Reserve Bank was being established in the early 1920s, Jan Smuts asked him to be part of the committee that helped select the first governor of the SARB, William Henry Clegg.

Keynes battled against this laisser-faire mindset and would later go on to lay bare the ideas of this school of thought in his seminal work, “The General Theory of Employment, Interest and Money (1936),” a homage to Albert Einstein’s “General Theory of Relativity” in 1915. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets.

Moreover, Keynesians place a greater role for expansionary fiscal policy, with government intervening through spending and tax. Economic historians have labelled the period 1951-1973 as “The Golden Age,’’ due to relatively high average global growth; low unemployment; reduction of economic inequality and lowering of public debt. I lived through this period and can attest to the fact that there was a very low incidence of financial crises.

So, therefore, the Keynesian school is often associated with an “interventionist” approach. (Important because I want to come back to that) Finally, the monetarist school of thought introduced by Prof Milton Friedman from Chicago believed that government intervention, in the form of government spending, caused inflation.

I entered Business School in America during the mid-70s around the period that Friedman’s policies were a huge topic. Monetarists placed emphasis on the role of money, and its supply and demand, in the economy. Milton, a Nobel Prize winner became tied to the school following his seminal work with the paper “Studies in the Quantity Theory of Money (1956)” and the book “A Monetary History of the United States, 1867–1960 (1963)”. He argued that in the long run, growth in money supply increases prices but has little or no effect on growth.

In the short run, though, growth in money supply causes employment and output to increase. Friedman believed that monetary policy was so important to the health of an economy that he publicly blamed the Federal Reserve for causing the Great Depression, implying that it is up to the Federal Reserve to regulate the economy.

Both the Keynesian and Monetarist schools of thought directly impacted the way in which policy makers create fiscal and monetary policy today.

There are certain nuances between the different schools that should be considered.

Ultimately, an argument for public intervention, especially during crunch times, both at government department and state-owned entity levels make sense. Nuances of the schools of thought and the argument for intervention with regard to SA. Before the rise of classical economics, most economies followed a top-down, command-and-control, monarchic government policy system.

Classical economist developed their theories as alternatives to the protectionist and, at times, inflationary policies of the 18th century in Europe. We have already learnt from the above how classical economists favoured minimal intervention by the public sector.

They considered the core activities of the public sector to be limited to the provision of essential public works, the maintenance of law and order, and the defence of the country. In the classical model the economy can be seen as free-flowing, and prices and wages adjust freely to the ups and downs of demand over time.

In other words, when times are good, wages and prices quickly go up, and when times are bad, wages and prices freely adjust downward. The major assumption of this model is that the economy is always at full employment, meaning that all resources are utilised to full capacity. This is, however, not always the case and the situation in our country today affirms this notion.

The Keynesian school was born during and after the Great Depression. Keynes had argued that the depression was caused by lower aggregate demand in the economy, which contributed to a sharp decline in income and employment that was already well below the average.

As such, the economy reached equilibrium at low levels of economic activity and high unemployment. Under these circumstances, there is a strong case for government intervention, that is, governments should borrow more to offset the fall of spending in the private sector and/or give tax cuts and breaks.

For example, economists such as Paul Samuelson and Richard Musgrave introduced the concept of a public good, which justified the government provision of such goods. This implied that without intervention the market would under-supply such public goods.

Today, apart from the usual monetary and fiscal policy interventions, we need to call for government to fulfil an even larger social and developmental role, including infrastructure development.

The earlier literature on economic development assumed that governments had abilities that were lacking in the private sector, such as large amounts of capital and expertise. This view does not necessarily hold true today.

Some even argue that resources can be greatly mis-allocated, often as a result of ineffective government policies, inefficient administrators or just a pure lack of funding. The role of government and state-owned entities in public intervention.

To further illustrate the case for more government intervention, countries today, especially developing economies, continue to rely heavily on the public sector to provide basic services and bridging finance in times of crises.

To overcome the burden of inefficiencies, countries such as South Africa have created SOEs with specialised skills to extend the government’s ability to deliver services. Countries have also advocated for more public-private partnerships in the developmental and infrastructure space.

This approach seeks to share responsibility between the state and the private sector, and effectively optimise on the strengths that both parties bring to the table, while holding each other accountable. This view has recently been amplified by some in government who are advocating for such public-private partnership.

This view has recently been raised by some in government who are advocating for such public-private partnerships. In South Africa, the government has often intervened into the economy through spending, relief, and social support. Even though over the past 29 years government spending increased by over 1 000% from R121.2 billion in 1993/94 to R1.6 trillion today, the economy is still far from solving the unemployment, inequality, and poverty challenges.

There are still market failures that must be rectified in the economy. SOEs, such as ours, the Development Bank of Southern Africa, are an extension of government to assist attending to such market failures. Development Finance Institutions (DFIs) are specifically created to play this role. Whether this is happening at desired levels is a matter of debate and not for me to elaborate on today.

Despite ongoing government resource allocation concerns, DFIs continue to be ideally situated to play a key role in the high-risk long-term capital funding space, while most commercial banks tend to focus on short-term funding with lower risk. This is a matter I briefly dealt with in my book, Robben Island to Wall Street, published by Unisa in 2010.

Due to their nature, DFIs play an important countercyclical role in economies. In times of crises and when it matters most, they have the capacity to appropriate funding and support social and economic development, especially when the private sector is heavily constrained.

Finally, I would be remiss not to continue to advocate for a more vigorous application of the use of public procurement to drive the government’s policy of Broad-Based Black Economic Empowerment.

I am quite encouraged by the meaningful inclusion of black-owned and women-owned entities in the Renewable Energy IPP Procurement programme Round 5 during 2021. Once again, this has been made possible by the intervention of some DFIs, including the DBSA which have provided the required planning, project preparation as well as significant funding for broad-based black entities and women-owned companies.

In conclusion, the countercyclical role of government intervention, especially in times of crises and when private sector participation is limited, cannot be overemphasised. Together, with traditional fiscal and monetary policy tools, DFIs play a key role in supporting social and infrastructure development.

The infrastructure-led recovery envisioned in the economic strategy position of South Africa rests on, among other things, the continued and effective functioning of DFIs like the DBSA. The idea of private-public partnerships, a modern form of government intervention, recognises that the most effective way to achieve the economic goals set out in the national development vision requires the collaboration of both government and the private sector.

In closing, I would now like to turn my attention to the graduating class of 2022. You must be heartily congratulated for the hard work you put into your studies. The years of hard toil often at great cost to your parents and sponsors has today paid off.

We are proud of your achievements and look forward to you taking your rightful place in society to make anticipated contributions to your communities and the country at large.

As I was driving to the North Coast coming to the university and appreciating the vast mass of sugar cane fields wrapped around the rolling hills of KwaZulu-Natal, my mind raced back to the days of the great leader, Chief Albert Luthuli. I was even more touched by the sign pointing to Groutville, the former home of the anti-apartheid activist, and Nobel Peace prize laureate.

I am told that it was here that Senator Robert F. Kennedy, then privately met with the Chief in 1966. Later on this trip, Sen. Kennedy, D-N.Y in 1966 was to make what historians say was one of the best speeches of his life at the University of Cape Town, and I quote: “Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different centres of energy and daring, those ripples build a current which can sweep down the mightiest walls of oppression and resistance.”

Inspired by those words, I would like you to:

* Go out there and help heal the mindless violence that has gripped our nation. Help to bring about social cohesion, reduce tensions that engulf various sectors of our communities.

* Work together using your newfound knowledge; enhanced social values and intellect to help eradicate inequality and poverty.

* Accelerate economic progress; liberate the capacity of human talent that your studies have cultivated in you.

* Join in common purpose and be determined to build a new generation.

* Help us to re-energise our moribund industries and economy.

* Seek not to emulate our errors by acquiring stakes in other’s businesses, but rather create that which is your own.

It is you, the youth, who must take the lead; eradicate ignorance and become beacons of light. Remember, upon you is thrust a greater burden of responsibility to fix that which previous generations, including mine, have broken or destroyed.

If you do that, and inspire yourselves with a Vision of Enlightenment, you and those who follow will be hugely rewarded. Be that ripple of hope and remember; history is always the final judge of our deeds.

* This is the speech delivered by Dr Gaby Magomola when he was awarded the honorary doctoral degree in Commerce and Economics at the University of Zululand this week.

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