Vol.1 No.2, 01 June 2001

A Four-Step Programme to Transform South Africa

by Richard Douthwaite

Introduction:

Most people who were involved in the anti-apartheid struggle are disappointed about how little progress it has been possible for the country to make since 1994. They recognise that the policies imposed on the country by the World Bank, the IMF and the global economic system generally have prevented the necessary radical changes from being carried out and share Dennis Brutus' view that these institutions are a new kind of tyranny.

This paper suggests four steps that would free South Africa from that tyranny and enable it to achieve its full potential. The steps are:

STEP 1. Restore the Financial Rand

Comment: This proposal involves keeping flows of money from imports, exports, tourism and interest payments - current account flows - apart from flows of investors' capital. It does this by operating two foreign currency exchanges, with independent exchange rates, one for each type of flow, exactly as happened when the Financial Rand system operated in the apartheid era. The point of keeping the flows apart is that, at present, if there is an inflow of capital to the country - perhaps to buy a South African company - the increased availability of foreign currency means that the strength of the Rand increases and that, as a result, South African exporters get fewer Rands for the foreign currency they bring home. This naturally hurts them. It also hurts companies producing for the home market, because competing imports become cheaper.

If the flows are kept separate, however, each exchange rate adjusts so that export earnings always equal the cost of imports, and inflows of capital always equal outflows. This gives the government much more freedom of action. It means, for example, that if something happens which causes a lot of South Africans to try to move their capital overseas, the exchange rate in terms of dollars or pounds they will get for their money will rise to discourage them without putting up the exchange rate that other South Africans have to pay to get foreign currency to buy imported goods. Consequently, this proposal would allow the government to adopt policies that benefitted its own people but which upset international and domestic investors. It would cease to matter whether a foreign company decided to invest in South Africa or not as all its decision to do so would mean would be that people who wished to move their capital out of the country would get more foreign currency in exchange. It would be the same with foreign loans - they would simply improve the terms on which the better-off could move their capital offshore.

STEP 2. Strip the commercial banks of their power to create money and have the government create it by spending it into circulation instead.

Comment: Like other industrialised countries, South Africa allows its commercial banks to create around 95% of all the money in circulation in the country. The banks do so by granting their customers loans without taking the money their customers borrow from anyone else's account. (The remaining 5% is the value of the notes and coins issued by the central bank) Because the banks charge interest on the money they create in this way, allowing them this privilege boils down to giving these private financial institutions a massive subsidy.

Much more seriously, this system of creating currency also makes the economic system very unstable. This is because unless the volume of bank lending increases year after year, the amount of money in circulation in South Africa will fall. This, in turn, will mean that less buying and selling can be carried on, jobs will be lost, investment will decline and the economy will enter a recession. To avoid such a situation, the government has to adjust its policies to ensure that people are sufficiently confident about their futures and that of the economy as a whole to continue to wish to borrow on an increasing scale. Naturally, this puts a serious constraint on the government's freedom of action as the interests of potential borrowers, who are always the better-off, have to be put before those of any other group.

If, however, the government created the money itself and spent it into circulation, the money supply would not contract if investor confidence fell. Money would stay in circulation permanently unless the government itself decided to tax some of it away, perhaps to prevent the economy overheating. This would make the economic system very stable because, if one industrial sector declined, the same level of spending power would still exist and other sectors would expand to absorb it.

Putting this proposal into effect would require the South African government to restrict the banks to acting as financial intermediaries that simply lend one person's (or one company's) savings to another. Over a period of, say, ten years, the government would gradually replace all the debt-based money in circulation in the country with money it had created itself. This would give it a great deal of money to spend over the conversion period. Part of this money could be used to clear all the country's internal debts, part to fund vast public works projects such as providing decent housing and other facilities in the townships. A great deal of work could be created.

When the conversion period was over, the government would only be able to spend more money into circulation than it took out in taxes if the economy was growing and more money was therefore required to facilitate trade. Otherwise, increasing the amount of money in circulation would be inflationary.

In short, this proposal would make the economy much more stable and reduce the government's dependence of maintaining investor-confidence. It would also provide a massive capital windfall that could be used to transform conditions for the underprivileged section of the population in the space of a very few years.

STEP 3. Having freed itself from external and internal constraints by steps 1 and 2, the government should then initiate a massive tax reform.

The three main elements of this would have to be carefully co-ordinated. They are:

1. Introduce quotas on the use of scarce resources that belong to everyone. Sell the quotas by auction.
2. Abolish all taxes on labour, including income tax and VAT.
3. Introduce a citizen's income funded from the revenue raised from the sale of quotas introduced under element (i).

Comment: Element (i) involves the imposition of quotas on, as a minimum, the use of fossil energy, land, fisheries and the road network. For example, the use of fossil energy could be restricted, with the amount the country permitted itself to use declining annually at a pre-set rate. In such a scheme, each year's fossil energy quota would be sold by competitive tender to producers and importers of fossil fuels. The quota would probably be expressed in terms of the weight of carbon dioxide each fuel's use would release so that South Africa is already compliant with the Contraction and Convergence method of limiting global warming if that is adopted internationally. To avoid unbalancing South Africa's overseas trade, exporters of fossil fuels, or goods produced using fossil fuels, would receive a rebate to cover the cost of purchasing the CO2 quota required to make or mine them, while a tax would be placed on imports sufficient to buy enough quota to cover their production.

This system would

• create jobs by encouraging South African producers to switch to technologies with lower levels of fossil energy use. These replacement technologies would be more labour intensive, thus helping to cut unemployment. At present, firms are constantly introducing labour-saving technologies which generally require the use of more fossil energy, with the result that, if the economy does not grow at 3% a year, the total number of people employed falls. Higher energy prices would reverse this trend. It is likely that the agricultural sector, in particular, would take on much more labour, thus providing work in the rural areas where there are very few jobs at present.
• give South Africa a head-start with the changes that it is going to have to make not only as part of the global response to climate change but also because world oil production is going to peak within the next decade. In particular, the certainty that steady cuts in energy use are going to be made, and the likelihood that energy prices will rise in real terms, will enable government bodies and businesses to plan properly. The country will thus avoid the waste that would result if everybody continued to pretend that world oil and gas supplies are likely to be cheap and abundant for at least the next 25 years.
• enable much more local production to take place for local use by putting up transport costs. Smaller-scale producers selling in their own areas would get a competitive advantage over bigger ones in other areas, a change that ought to give the opportunity for many more African entrepreneurs to emerge.

The government would also sell a limited number of permits for the use of other public resources. With fish stocks, for example, scientists would calculate the maximum weight of fish that could be caught without reducing the stock, and each year boat-owners would be required to bid for the right to catch part of this limited quantity.

Similarly, traffic engineers would calculate the optimum number of vehicles on a particular stretch of road, and tolls would be set at rates which varied according to the time and the day of the week to ensure that this level was never exceeded. Roads on which traffic rarely exceeded the optimal level would be unaffected.

Land is already subject to quota. As Mark Twain said: "They're not making any more of it." South Africa should adopt a system which would require landowners to have the site value and the improvements to their properties assessed during the first year of its operation, Year One. When the property was subsequently sold, the improvements would be re-valued according to their worth at the time and the vendor would be allowed to keep their full current value, plus the value the site as assessed in Year One. Any increase in the site value would go to local or national government. (Equally, the government would pay compensation for any fall in site value). Similar arrangements would apply if the title of a property was transferred to a relative. Thus, if agriculture became more prosperous as a result of, say, the public paying higher prices for produce, only the increased incomes would benefit the farmer. The capital gains from the increase in land value would be captured by the community. The same would apply if the site of a commercial or other property became more valuable in an urban area.

As revenue from the sale of these tolls and quotas slowly built up, the government would be able to reduce taxes on labour. It should probably reduce VAT rates first and then switch to raising the income-tax threshold, so that fewer and fewer people became liable to pay it. The reason for wanting to eliminate all taxes on labour is that it is silly to tax a factor of production which is in excess, thus making its use more expensive, while at the same time having low, or no, taxes on the use of scarce natural resources like fossil energy.

It is frequently argued that income taxes need to be maintained to avoid the gap between rich and poor becoming even more extreme. However, if people were prevented from becoming wealthy except through their work because:

• taxes on unearned income were maintained or even increased,
• all gains from increases in land values were collected by the community, and,
• death duties and a capital transfer tax made it impossible to transfer significant wealth from one generation to the next

It ought to be possible to eliminate taxes on earned income altogether while at the same time narrowing the gap between rich and poor. Moreover, the introduction of a citizen's income system would also reduce that gap considerably.

A citizen's income is an essential component of any tax reforms involving energy because as the poor spend a higher proportion of their income on energy and products made with large amounts of energy than do the rich, they would suffer great hardship without one as energy prices rose. Moreover, everyone is entitled to expect a share of the income received from payments that are essentially rentals on the use of common property.

STEP 4: Adjust the balance between urban and rural

Comment: The rural areas of South Africa are very depressed. Unemployment is high, incomes are low and the net flow of money from urban areas is very weak, largely because the price of agricultural commodities is low in relation to other goods and services and a very high proportion of the earnings from the sale of produce leaves the country immediately in payment for industrial inputs to the agricultural system, such as fertilisers, pesticides, machinery, fuel and packaging materials. In many country districts, pensions are almost the only source of cash.

Rural poverty creates acute problems not just in the country but in urban areas too. Among these are:

• There is a very poor market for domestically-produced consumer goods in the countryside, even though rural people would like to buy them. This reduces the level of employment in urban centres.
• The constant flow of employment-seekers and their families from the rural areas overtaxes the resources of the places to which they move and leads to congestion, shortages, pollution and crime. Moreover, this flow sets up a positive feedback. If the government devotes resources to housing the new arrivals and building schools and other facilities for them, this creates work and incomes in the urban areas which, in turn, encourages more migrants to come.

The government's strategy should therefore to reverse the population flow and get people moving back to the rural areas. A Citizens' Income system would make this very much easier to bring about because it de-links the possibility of getting an income from the place in which one lives. To promote the change, a higher rate of Citizens' Income could be paid to those collecting it in rural areas than in urban ones.

The higher costs of agricultural inputs as a result of the quota on energy use, plus the higher transport costs, are going to create opportunities for more food production for local use in rural areas. This should be encouraged by promoting organic and other forms of low-external-input agriculture. These have the advantage of requiring more labour per unit of output. Another plus is that in order to prevent the build-up of pests and diseases, farms need to grow a wide range of crops in small areas. Because of the management problems this entails, it encourages a movement to a much smaller farm size. This, in turn, allows more people to be farmers rather than farm workers.

My recommendation is that South Africa should attempt to become a world leader in the production of organic meat, fruit, vegetables and grain. The provision under Step 3(i) for an export rebate to cover the additional costs incurred by the operation of the fossil-energy quota would mean that there would be no obstacle to the emergence of a good export market for these. However, the health of the population, the creation of employment, and the sustainability of the country's economic, social and environmental systems, should be the main motives for going organic rather than any possible export gains.

There are many more tactics that could contribute to bringing about a rural revival such as the creation of rural banks and money systems. These need to be developed in a wider report. Overall, however, a rebalancing between urban and rural would:

• Remove the need for expensive and basically unsustainable infrastructural project is the urban areas.
• Reduce crime, pollution and congestion.
• Provide a wider range of employment and self-employment opportunities.
• Enable people to fulfil themselves by becoming more self-reliant, because in the rural areas they would have access to the resources to do more to provide for themselves.

Summary

The first three steps I propose would free the South African government from having to constantly concern itself with keeping the business community and internal and external investors happy. They would provide it with a lump sum to invest over the next few years and enable it to achieve a more even distribution of employment, incomes and wealth within a decade. The fourth step would take a lot of pressure off the urban areas and allow lower energy-using, more self-reliant communities to develop throughout the country.

Obviously, a great deal of elaboration is required to make these four steps into fully developed policy options. I would be happy to work with others to develop them further if asked to do so.

Richard Douthwaite, Cloona, Westport, Ireland.
Tel/fax (353) 98 25313.
e-mail [email protected]

© South African New Economics Network 2006. Page generated at 17:23; 24 September 2006