Paper by Johan van Zyl for an Africa Institute Colloquium in May 2001

A statement like "South Africa is currently in a real mess" is bound to elicit howls of protest from many quarters. In the prevailing over-sensitive politically correct climate shouts of "racism" might well be loudest of all ! Yet perhaps all of this makes the very point that there is quite likely to be much uncomfortable truth in this challenging verdict, regrettable as it is.

However, negative criticism alone will achieve nothing. What needs to be done in more positive terms is threefold viz.


1. The central issue of globalisation

On the face of it the wide range of problems plaguing South Africa at the present time seems to fall into two categories viz. (a) internal social and economic problems and (b) external problems arising from its relations with the rest of the world economy. However, such a categorisation is badly flawed. In hard if uncomfortable fact many if not most of the country's internal problems are closely related to some very major economic issues raised by today's intensive world-wide thrust towards a global economy i.e. globalisation [Rowbotham, 2000].

In its present substantially unfettered form globalisation has put considerable pressure on national governments to pursue economic policies that conform with the new exalted drive towards complete freedom in all international transactions including technology and especially capital. Its purpose and rationale is quite clearly an ideological one viz. to apply some key politically selected features of the theoretical model of the "free market economy" [which has never actually existed anywhere] to the whole world i.e. it is being pursued largely because in much historical experience such an approach has usually favoured the more powerful nations and economic interests over all others.

There is indeed much well-documented evidence today that globalisation has turned out to be a double-edged sword - and a viciously sharp one at that. The rich and more powerful participants eg. the multinational companies are certainly reaping considerable financial rewards but the poor and less powerful eg. many groups in developing countries are suffering serious setbacks in attempting to achieve a decent standard of living. Has the "ugly face of capitalism" surfaced once again ? This time driven by international corporations quite outside the control of national governments which in the past have often been able to give capitalism a more human face?

This is perhaps the biggest current concern viz. the straightjacketing of national governments that prevents them from putting the economic welfare of their own citizens first and foremost. Instead the interests of the vague and undefined "international community" now has to take priority.

It is quite understandable that the current globalisation process and its highly problematic consequences has raised some fundamental questions viz. "to achieve what and for whom" ? And as a result the key issue of "are there sensible alternatives" ? It is indeed interesting to note that the UNDP has itself recently published a collection of essays and articles entitled "The Case against the Global Economy" [UNDP, 1997].

2. South Africa and the global economy

The starting point for any successful new initiative to put South Africa on the road towards a genuinely hopeful economic future must lie in readjusting substantially its relationship with the broad world economy. This would certainly be a brave step requiring much political courage. Hence its basis has to be stated unequivocally viz. that "unbridled globalisation i.e. 'globalisation without a human face' is currently the greatest threat to improving significantly the future quality of life of all South Africans - but especially of the unemployed and the poor".

The sections below focus on some of the core reasons for making such a currently unpopular and controversial statement.

(a) The strongly dualistic nature of the South African socio-economic system

A well-known but often seriously overlooked feature of the South African economy is its highly dualistic nature viz. (i) an industrially advanced modern, core or global sector traditionally closely linked to the international economy and (ii) a very large peripheral or marginalised sector - mainly the townships and rural areas - which surround the core socially and politically but has always had weak economic links to the centre. It has a working age population many times larger than the modern sector yet most of the very high unemployment and poverty in the country occurs in this sector [Lombard, 2000].

Hence in the South African context any beneficial impacts of the current globalision of world markets will very likely be confined largely to the core or modern sector. South African industry is not labour intensive by international standards and current trends are moving sharply towards even greater capital intensity in production processes. To this weak direct impact must be added the generally weak economic links between the two sectors mentioned above. The prospects are clear: there is very little chance that any growing prosperity in the modern sector will in actual practice "trickle down" or "spill over" to the marginalised periphery.

It follows that globalisation itself will do little to resolve South Africa's serious problems of structural unemployment and poverty. Indeed without a deliberate and comprehensive domestic policy programme focused directly on these issues, the current substantially unregulated globalisation process may well further deepen the already wide income and economic welfare differentials between the core and the periphery - quite regardless of the skin colour of the participants involved in either sector.

These considerations lend strong support to the broad necessity of effectively counter-balancing globalisation with greater localisation initiatives and in the process pursuing a dual-track or even a multi-track domestic economy instead of a single universal global economic system.
(b) The recent progressive undervaluation of the rand
During the decade of the 'nineties the Rand fell against the British Pound from roughly about 1:2 to 1:10. A very similar situation occurred in respect of all the other strong currencies in the world. For example, between 1984 and 1994 the Rand depreciated gradually against the U.S. dollar from about R2,50 to R3,50. But from 1994 to 2000 it fell rapidly to approximately R7,00 which implies a doubling of the rate of depreciation. At the present time the annual rate of depreciation seems to be around 15% per year.

Further more "popular" but still significant evidence is provided by the Economist's Big Mac Index [started in 1986 and based on the well-known idea of purchasing power parity]. This index has also been indicating clearly that the Rand has become progressively undervalued. Indeed by this admittedly rough yardstick by early 2001 the rand was undervalued by more than 50% against the U.S. dollar. Hence at that time it should have been trading at about R3.50 to the dollar instead of over R7.

It is really rather astonishing that this continuous and serious depreciation of South Africa's currency has been so blithely accepted by the government and by responsible economic commentators. It surely implies a huge and uncritical faith in the ability of "free foreign exchange markets" to determine the "correct" exchange rate of the Rand. The now widely acknowledged fact that in recent times these markets have drastically changed their traditional structure and functions is apparently simply ignored.

It is often said that up to the early 'seventies about 80% of international finance was geared directly to financing trade i.e. the flow of real goods and services. However, in recent years this ratio has been more than turned on its head with footloose speculative capital flows currently dominating almost entirely. Such capital movements are based largely on the perceptions and the financial power of speculative investors and but little on real trade flows.
It is now some five years since the well-known financier George Soros [after having made billions on international currency speculation !] pointed out that the global capital market is inherently unstable. More broadly, he suggested that "the untrammelled intensification of laisser faire capitalism and the extension of market values into all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the communist but the capitalist threat" [Soros, 1997]. Small wonder that the world financial markets are today often referred to as "the global casino".
Yet many South Africans continue to persist with the curious idea that subjecting our entire economy to their volatile eccentricities is, rather like hurricanes, a regrettable but inevitable fact of nature. This includes the so-called "Afro-discount" which results from the firmly ingrained highly negative perceptions about African countries that currently prevail widely among foreign investment analysts and traders.
The negative impact of the progressive undervaluation of the rand on all South Africans has been very severe. If the 5 times depreciation against the British pound during the decade of the 'nineties should be taken for purposes of illustration the implication is that South African goods and services now sell for one fifth of their earlier price in terms of other currencies. In turn, goods and services on the world market cost South Africa five times as much.

The distressing implication of such a scenario is that the country has been almost literally pouring its material wealth overseas and in return has received a mere pittance by having to pay through the nose for all the imports it buys. South African citizens have simply been progressively impoverished on a considerable scale.

Perhaps the most remarkable aspect of this progressive under-valuation of the rand is that South Africa is still a net exporter ! This emphasises again the high degree to which the country has been losing its material wealth. Yet to be able to remain a net exporter under such adverse relative pricing circumstances does indicate a high degree of [material] productivity in the economy.

But currency values do not affect only the price of goods and services. The low rand also means that South African assets in industry, commerce and agriculture have been available to foreign investors at much below their true worth. In consequence, the returns on inward corporate investment - which is so anxiously sought by government - are for South Africans actually quite minimal. Thus to the continous drain of goods and services must be added the haemorrhaging of private and public assets to overseas ownership at a discount in their terms.

The entire South African economy struggles under this tremendous burden. It can only be rectified by a quite different dispensation to determine a more realistic foreign exchange rate for the rand. Hence the policy proposal later to return to a dual exchange rate system such as South Africa had not so long ago and to reintroduce the Financial and the Commercial rand.

3. The failure of the neo-liberal economic paradigm

In the above overall regard South Africa is not in a unique position. In fact, the majority of African economies and many other developing countries find themselves in similar straits.
The main reason why this rather curious situation is accepted by so many governments including South Africa is that the underlying neo-liberal free market orthodoxy - with its integrated battery of policies including free trade and capital movements, floating exchange rates, deregulation, privatisation, budgetary austerity, encouragement of foreign private investment, amalgamation, etc. - remains today virtually unchallenged by much of the media and by government economists.

Yet it is an orthodoxy that is coming under ever greater scrutiny all over the world. In its stead an alternative vision of economic progress based on sustainability, people-centredness and greater self-reliance/less dependency has made great strides ahead. It is variously called sustainable human or people-centred development, ecological economics or simply new economics [Robertson, 1997].

The orthodox argument is that free market economic policies will create greatly increased wealth and that inevitably some of this will "trickle down" to the less wealthy. However, on the contrary, there is today a large body of analysis as well as evidence which indicates strongly that in practical affairs this approach will often result in the progressive impoverishment of economically weaker countries by the more powerful ones. The plain fact is that free international commerce is simply not a level playing field.

The neo-liberal economic ideology [often referred to as the "Washington Consensus"] emanated from America. Perhaps needless to say America and to a lesser extent the stronger European economies are benefiting substantially from its wide implementation. The basic argument employed is that these countries are doing well because they are practising "sound economics". Thus the rest of the world should simply follow their example, end of story.

There is neither recognition nor acceptance of the strong and well-documented case mentioned above viz. that the free market ideology usually favours the more powerful nations and groups and disadvantages those that are less so. The image of elephants negotiating with ants is an appropriate one. Yet the Washington Consensus continues to stand in defiance of reason and fact. It is the symbol of "respectable" economics and the touchstone of political responsibility. Furthermore, it is a firm policy condition for the approval of World Bank and IMF loans to member countries.

Nevertheless, it is a consensus than can and has been successfully challenged. Malaysia is the prime example having shown during the recent Asian financial crisis that it is quite possible for a country to determine its own relations with the global economy and still survive - indeed to do much better than had it followed the conventional prescriptions of the IMF and the World Bank. It is an example that South Africa will do well to study carefully including taking due note of Prime Minister Mahathir Mohammed's subsequent address to the IMF.


In his pathbreaking work on scientific revolutions, Thomas Kuhn suggested in the early 'sixties that a genuine and deep-going paradigm shift in the evolution of science will occur whenever the "dominant" paradigm can no longer resolve adequately the major social or other serious problems of the day. Then the "emerging" paradigm gradually assumes the dominant role [Kuhn, 1970].

There are strong indications that the global economy and its orthodox economic foundations are currently involved in exactly such a deep-going paradigm shift especially around the closely related issues of development, economic progress and quality of life. Since World War II "development" has been seen very largely in materialistic terms which led to the considerable emphasis on quantitative economic (GDP) growth as the key to progress [W. Sachs, 1989]. In consequence, any role for significant non-economic factors such as "fundamental human needs" or "societal wisdom" was ignored - mainly because such things are not traded in markets and thus no money flows are involved. In the nature of the case modern "positive economics" cannot handle such unmeasurable variables [Ekins et al, 1992].

Key features of the "emerging" more self-reliant development vision

Breaking with the "Washington consensus" will certainly require much political courage. But it also requires something substantial to put in its place i.e. a solid alternative paradigm or vision of economic progress. As indicated earlier such a vision has not only already emerged but is making rapid progress all over the world. It is often referred to as "sustainable people-centred development" or simply "new economics". Moreover, there can be little doubt that the new vision will continue to evolve significantly and also to gain increasing support in the years to come. Nevertheless, even at the present time its basic or key elements are already quite clear. These can be outlined briefly as follows:

1. The first responsibility of any government is towards its own citizens

This might seem to be an obvious yardstick of democracy but still needs clear restatement today. The main reason is that the pursuit of foreign private investment and creating domestic conditions that favour international commerce are both integral parts of today's economic orthodoxy. In effect, these policies clip the wings of national governments to follow the above democratic guideline. It was indicated above that the great expectation of an international "trickle down" process has been largely unfulfilled. In consequence, the encouragement of and advantages granted to international commerce will remain just that - gratuitous benefits simply given away to foreign interests.

Instead of relying on a dubious "trickle down" process the new development approach emphasises more self-reliant "bubble up" activities initiated at more localised levels of economic activity [Trowbridge, 1999]

2. Domestic/local economic renewal is crucially needed as a strong counter-balance to the increasing dominance of giant-scale international commerce

One of the most damaging consequences of indiscriminately pursuing all kinds of inward private corporate investment is the resultant sharp trend towards highly capital intensive production processes and thus the shedding of labour. Today's international industrial world is dominated by modern high-tech information technology. Striving to become competitive in that world is fine for the first world modern industrial sector in a country. However, to suggest that all industries and activities should be subjected to the same forces is at best unrealistic and at worst simply madness.

At its launch our own GEAR strategy - which clearly embraces the key tenets of the neo-liberal economic orthodoxy - the intention was inter alia to increase employment very substantially. The actual outcome has been the opposite: some 800,000 jobs have been lost during the past few years alone. This alone should clearly demonstrate the need to counterbalance the current labour-shedding tendency of globalisation and large-scale [multi-national] business with domestic/local regeneration programmes to promote employment and to combat poverty more effectively.

As indicated earlier, what is fundamentally required is not to be forced to participate in a single universal global economic system but the freedom to design a dual-track or even a multi-track domestic economy tailored to the particular conditions that prevail in any individual country. However, such freedom should not be used to pursue conventional protectionism but to introduce a new approach to countering marginalisation by fostering more self-reliant economic development i.e. to promote "working local communities".

3. GDP growth statistics do not always reflect genuine economic progress

GDP growth is actually a crude and often misleading indicator of economic progress. It simply does not reflect either sustainability or economic welfare. Indeed the new development vision points out a crucial need to distinguish between "good" and "bad" growth rather than uncritically assuming that all economic growth is beneficial. Just as the wrong form of human growth, cancer, can be damaging and even fatal so can the wrong form of economic growth. Some economic activities that boost the GDP are actually negatives that indicate socio-economic waste and even a decline in people's overall economic welfare [Douthwaite, 1998]
Pertinent examples are (a) activities that use up natural resources on an unsustainable basis eg. felling trees faster than they grow, and producing energy mainly from non-renewable resources (b) combating pollution eg. cleaning up oil slicks and dealing with asthma and similar health problems brought about by unclean air (c) an over-rapidly growing category of "regrettable necessities" required essentially to keep the economic system going but contributing little to quality of life in and by themselves eg. crime prevention, debt collectors, TV commercials and expenditure on marketing generally, ever greater demands for transport and for packaging materials, etc.

4. Nowadays growing international trade does not necessarily reflect even greater material prosperity

The new emerging development vision also points out that rising international trade is becoming an increasingly false indicator of economic progress. This is so essentially because nowadays such trade often mainly reflects not the production of new wealth but the much expanded exchange of largely existing wealth.
Some pertinent examples are (a) goods and services produced in one country being traded for near-identical commodities produced in other countries, with little net increase in new production and (b) mass-producing many relatively low quality goods for sale all over the world thus displacing often better quality production that formerly occurred in more dispersed localities, again with little net gain in overall production.

While it might perhaps be argued that [slightly] lower prices for the consumer are also at stake any such potential benefit has to be weighed up eg. against the much greater demand for [subsidised] transport as well as the increased damage to the natural environment likely to be inflicted by concentrated large-scale mass production.
This kind of criticism implies that some negative "external social costs" of the private production process are crucially involved here. It is interesting to note that this important concept was first introduced into orthodox neo-classical economics in the 'twenties by a highly respected fellow neo-classicist A.C. Pigou [Pigou, 1932]. The idea is that any private entrepreneur's raw material, labour and capital costs directly incurred to produce his own output are often not the only costs involved. Very likely there will also be additional indirect "knock-on" costs in terms of induced negative side-effects on the broader community or society. Pollution has become a classic example in this context.

In today's times this key analytical contribution has been largely [and conveniently ?] ignored - and that despite the clearly visible and utterly enormous extent of negative external social costs currently being generated by the giant-scale modern industrial world economy. Well-documented and widely discussed examples here are the non-sustainable exploitation of the world's natural resources, widespread unemployment, national/local economic and social decay, and "a race to the bottom" in respect of labour standards, product quality, corporate taxation, and so on. Perhaps amazing to contemplate but regrettably only too true !

To add to the confusion, the time-honoured and hallowed economic principle of comparative advantage - which is widely regarded as the foundation stone in support of unregulated free trade - has recently been demonstrated to apply only in very special and quite hypothetical conditions which certainly do not exist today, if indeed they ever did [Daly and Cobb, 1989 and Ekins, 1995]. These conditions include (a) that the full costs of production and distribution including all external environmental and social costs are internalised/included in commodity prices and (b) that all the factors of production are immobile i.e. neither capital or labour should be able to move across national boundaries. So much for the "compelling general argument for unfettered free international trade" !

Yet to avoid any misunderstanding it is necessary to state clearly that the emerging development vision does not reject international trade and globalisation out of hand. Instead it seeks much greater balance viz. to stimulate a simultaneous move towards both globalisation and the more pertinent localisation of economic activity. On the one hand, it does wish to regulate and control the ubiquitous and often unhealthy economic and political power-play involved today. On the other, it wishes to foster effectively the regeneration of national and local economies that are either already so [eg. South Africa] or otherwise in danger of being marginalised and their inhabitants progressively excluded as workers, consumers and citizens.

Indeed the regeneration of greater local self-reliance and less dependency in economic decision-making throughout the world is seen as a crucial initiative to counter-balance and to limit/refine the currently excessive dominance of global corporate power. Yet as indicated above a strong move in this direction is not regarded as an agenda to restore the conventional protectionism of earlier years which on its own eventually exhibited many negative features. Instead, it is aimed more pragmatically at promoting a number of inter-related initiatives that are regarded as valuable in their own right viz. (a) rapidly expanding more locally-focused economic activities to create employment and to combat poverty and thus provide a stronger base to the national economy (b) the more effective democratic involvement of all citizens [through the principle of subsidiarity] and (c) a more efficient locally-based approach to using and conserving scarce natural resources.

5. Proactive goverment policies are needed for domestic/local economic renewal

It was emphasised earlier that the well-known battery of free market, deregulation-orientated economic policies which nowadays typically constitute "sound economic management" actually creates an environment in which any national economy can easily become a plaything of overseas investors. Indeed over many years entire [developing] economies have suffered great material loss and even decay because the golden rules of the neo-liberal economic orthodoxy inherently and automatically favour giant-scale multi-national corporate commerce over smaller and less powerful interests.

It is clear that if policies of domestic/local regeneration should become a strong new focus governments will have to play a key role. Such a policy thrust will have to create a new set of economic and financial conditions that are especially appropriate for fostering greater self-reliance in a diversity of domestic localities. In effect, the goal would be to promote a dual-track or a multi-track domestic economy rather than a single universal global economy. In South Africa the strongly dualistic nature of its socio-economic system represents a key illustration of the need for such an initiative.


The main conclusion drawn from the above analysis and discussion takes the bull by the horns and states quite clearly that if the South African government should continue to pursue orthodox neo-liberal economic policies as in the past the serious socio-economic problems now facing the country will not be resolved. On the contrary, they will get steadily worse. Thus the most promising option in attempting to create a more hopeful economic future for South Africa does not lie in "more of the same" but in a "substantial change in course". We will have to design a new set of policies that fit our own situation.

During the recent IMF/World Bank visit to African countries they suggested that the time had come for Africa to "take its future in its own hands". However, as argued above if any genuine success is to be achieved in such a venture it will have to be approached very differently from what these institutions have conventionally proposed. A new and fresh mindset has become a key pre-condition.

It is with this broad conclusion in mind together with the emerging development vision briefly outlined above that some policy proposals are suggested below. It must be clearly stated again that the intention is not to return to the protective nationalism of earlier years with its exclusion-oriented economic policies. The goal is much rather to promote at the same time the currently ongoing move towards globalisation but also much greater localisation of economic decision-making.

Thus the key issues again become what ? and how to ? What is proposed below for South Africa is a rather pragmatic range of mutually-supporting policies all aimed at stimulating more local economic renewal through greater self-reliance [eg. Rowbotham, 2000 and Douthwaite, 2001]. Many of these would also help to control the current excesses of multi-national corporate commerce.

1. Re-introduce a dual exchange rate system for South Africa

This is a first and vital step. It was indicated above that the capital and foreign exchange markets of the world have changed very considerably during the past decade or two and are currently dominated by speculative capital flows often driven by volatile expectations and by the sheer financial clout of the major players. Thus a system of freely floating exchange rates can no longer be relied upon to reflect consistently the "real" [goods and services] value of a currency.

Under such very different basic operating conditions the exchange rate of a small country like South Africa will inevitably become particularly vulnerable - as our recent history in this regard has clearly shown.

One option would be to introduce a fixed exchange rate for the rand eg. against the U.S. dollar and to adjust this rate administratively from time to time [at present generally upwards]. However, this would not resolve the core problem outlined above viz. the seriously distorting influence of huge speculative capital flows. Better then to split exchange transactions between the two major markets involved and opt for a dual exchange rate system i.e. a separate commercial and a financial rand as South Africa has done before.

Such an arrangement would provide much greater freedom for the government to pursue its economic policy responsibilities towards local citizens. It would also carry the important message to South African investors that they have a distinct responsibility towards the local economy from which their wealth originates.

2. Reduce interest rates

In practical business circles it is widely understood that interest rates of 12% and higher exert a simply crippling burden on all businesses whether large or small. Official bankcruptcy statistics show this impact quite clearly. Why then are such policies consistently pursued ?

A significant part of the rationale behind high interest rates is to make a country attractive to foreign investors. However, in recent years despite consistently high local rates of interest foreign direct investment in the South African economy has declined significantly. This at least calls into question the practical usefulness of such a rationale.

Key questions that need to be answered in this context are the following:

Yet the main reason for high interest rates is often the claim that this will curb inflation. Orthodox macroeconomic theory has made it clear that the prime situation for effectively using higher interest rates [along with reduced government spending] to combat inflation is when excessive aggregate demand prevails in an economy [eg. Samuelson, many editions]. Such a condition has quite patently not been a feature of the South African economy in recent times. [Rather the economy lacks "effective demand" especially for investment in and the production of quite basic goods and services that are very locally consumed and which could expand with a low foreign exchange component].
In fact, inflation in South African is of a much more complex and awkward kind viz. "structural inflation". Under such circumstances orthodox policy measures aimed at curbing "excess demand" such as raising interest rates do not work well and might even cause much damage. In practical business high interest rates contribute directly to higher commercial operating costs and thus to increased prices. In turn, rising prices could lead to higher wage demands thus stimulating a cost-push inflation process. Hence in overall effect high interest rates serve largely to disadvantage domestic commerce relative to foreign competitors with access to cheap borrowing. It is simply a very blunt instrument indeed to combat structural inflation.

Domestic commerce is the lifeblood of South Africa and a reduction in interest rates is desperately needed. This is clearly relevant for business viability and employment and hence for both poverty alleviation and civil stability.

3. More lenient government budgeting - at least in the shorter term

An important corollary to a policy of strenghtening the [commercial] rand is to ensure sufficient aggregate domestic demand to support local industry and commerce and to decrease their reliance on exports. In view of the basic deficiency of aggregate domestic demand in recent years together with the serious need for reconstruction and development programmes throughout the economy there is a strong case for suggesting that a larger budget deficit - if only for a limited number of years - is justified. After all South Africa's national debt is still well below the international average. This budgeting approach should be combined with the policy of lower interest rates suggested above.

The contribution that larger budget deficits will make towards expanding the tax base of the economy will generally increase tax revenues for the government. Yet there is an important alternative option for obtaining additional government revenue from sources other than increasing the national debt. This is discussed later under point 8.

4. Promote domestic regeneration programmes using new instruments/initiatives

In broad terms there is wide agreement among most South Africans that there is an urgent need for regeneration programmes to cover eg. rural development, township upliftment, education and training, and [preventative] health care.

Halting the often problematic drift to urban areas requires the positive creation of viable alternative economic opportunities in rural areas. While this policy objective has been stated for some time, practical results have been disappointing. Again the major issues are what ? and how to ?

Missing so far has been a pertinent emphasis on what local rural communities can actually do for themselves i.e. on greater local economic self-reliance. A significant factor here is perhaps simply inadequate knowledge and understanding of the newer "alternative" approaches to rural economic development such as (a) introducing local currencies eg. LETS systems (b) fostering local banking systems such as credit unions and community development banks (c) the local [organic] production of agricultural products for local consumption and especially the significance of establishing new eco-villages for struggling rural communities and (d) the supply of energy [electricity] from local renewable resources [Douthwaite, 1997]. Such initiatives have a notable success record in many parts of the world.

Furthermore, the implementation of a land reform programme in South Africa might well also prove to be more broadly acceptable and viable if the above so-called "alternative" economic approaches should become part and parcel of such a vitally important national initiative.

Similar observations can be made in respect of urban township development. This major issue is discussed below under a separate heading.

5. Expand the informal economy even further

Recognising and effectively promoting the informal economy is a valuable approach which actually involves relatively modest efforts from all sides. South Africa has already gone some distance along this road but more can be done. Generally, much development
experience indicates that the emphasis should be on facilitation, permission, endorsement and funding rather than on regulation, control and tax collection. The informal economy cannot sustain and will indeed naturally avoid charges of any kind. Rather the whole approach should perhaps best be seen as a social service to promote the general economic welfare of all citizens in general.

6. Link the townships more effectively with the broader economy

The basic approach of new economics in respect of township development would be to attempt to connect effectively (a) the requirements of township residents for employment and infrastructure with (b) the inadequate levels of aggregate demand which indicate some potential surplus of commodities available in the economy. Indeed one of South Africa's most useful resources viz. its citizens is being seriously neglected. A pertinent example is that the townships currently house - essentially as economic prisoners - a major proportion of the unemployed. This can easily breed violence and crime. In fact, the overall crime situation has already become a major threat to broad social stability.

The basic economic problem is that there is insufficient purchasing power within the townships for residents to translate their [often desperate] need for goods and services into effective monetary demand. In essence the townships need to be transformed into "working local economies". One significant way to do this is to "monetise" these areas.

There are two approaches towards achieving this viz. (a) to involve government funding and (b) to generate community initiatives to create their own money such as LETS schemes or some other alternative currencies. In practice, both these approaches will very likely be required. Government funding could, for example, take some new forms of establishing co-operative local development trusts, community budgets and local works programmes based on "work rights", all aimed at stimulating more self-reliant local economic activity. It might also involve more conventional welfare payments and subsidies/grants for establishing small-scale business ventures in designated areas.

In addition, LETS schemes or similar actions to create an alternative local currency could be introduced. Such schemes have the strictly limited purpose of generating local-level purchasing power to be exchanged within the local community only. There is certainly no intention of challenging the rand as the national currency in South Africa. These initiatives could be most usefully augmented by establishing local-level banking services [as opposed to relying on the national commercial/savings institutions] with the specific aim of not only stimulating local savings but to ensure the savers that their contributions will be consistently re-invested in the local community economy rather than externally in the country at large.
A significant advantage here is that local currency schemes can generally be introduced quite freely i.e. without going through the usual process of bureaucratic approval. Local people can simply get on with such initiatives. In turn, successes could well stimulate many others to follow suit. Information about the essential what ? and how to ? involved can be obtained eg. from SANE [the South African New Economics Foundation].

In this context an interesting example is a recent proposal incorporating many of these features in a Consultants' Report to the Gauteng Metropolitan Council. It contains many new suggestions for effectively including the townships in that area [including Soweto] into the greater Gauteng economy. The outcome is being awaited with interest.

7. Introduce large-scale tax reform - perhaps in due course

A shift in the burden of taxation can be a potent source of redirecting economic activities into potentially more appropriate channels as well as protecting the natural environment. New economics has been strong in this area with a number of significant new ideas being widely discussed. A major if rather radical objective is to move away from taxing labour/income towards taxing the use of natural resources. The basic rationale is that it does not make sound economic sense to tax the labour factor of production which is in relatively plentiful supply - yet in doing so making its use more expensive - while at the same time having low or no taxes on the use of the absolutely scarce factor of production viz. natural resources [eg. fossil fuel] - which simply stimulates their over-use.

An interesting illustration of this kind of thinking comes from the well-known British new economist Richard Douthwaite following a recent visit to South Africa [upon an invitation from the SANE foundation]. He suggests an extensive programme of domestic tax reform as outlined below.

Three main elements are involved - all of which will indeed have to be carefully co-ordinated:

  1. introducing quotas on the private use of scarce natural resources that belong in
    principle to everyone [i.e. the resurging idea of "the commons"] and obtaining revenue by auctioning these to interested buyers. Pertinent examples would be the use of fossil energy, land, fisheries and the road network.
  2. abolishing all taxes on labour, including income tax and VAT
  3. establishing a citizens' income funded from the revenue raised from the sale of the quotas introduced under (a) above.

The practicalities of actually implementing such a programme will undoubtedly require much further investigation and research. However, for present purposes the focus is rather on what such a system aims to achieve. Four new significant impacts are envisaged.

In more fundamental terms what is envisaged is, on the one hand, to continue to rely basically on a market system to organise production activities in the economy [i.e. no suggestion here of socialistic state ownership and/or organisation of production] but, on the other, to change substantially the framework within which conventional private profit-seeking decisions are made - in this case via creating a different structure of prices by means of the tax system.

Such deep-going tax reform certainly has much to offer. Yet in tough practice it also holds a potentially considerable threat to existing industry and commerce established under the traditional tax regime. As indicated earlier, much more investigation and research will be required especially about the many crucial transitional problems involved before any such wide-ranging tax reform programme can be expected to become practical politics. Nevertheless, such proposals are already being widely discussed in many other countries.

In the meantime a useful and practical alternative would be to investigate any shift towards the taxation of resource use on a case-by-case basis. Such initiatives would gain much by a thorough audit of the particular resources involved. Yet to illustrate and clarify the usefulness of possibly taxing the use of the whole natural resource base in a country, a thorough audit of South Africa's situation in respect of its overall natural resources would be most useful.

8. The central bank/government should create money - instead of the private banks

A key aspect of new economics thinking involves the need for monetary reform. At the heart of th is policy thrust is the clear recognition that any government has the basic right to create money as a public service to the economy - as opposed to delegating it to the private banking sector to do so at a substantial charge to the government and to the economy as a whole. Should the government not, on behalf of its citizens, take back the ancient right of seigniorage and in turn limit the banks to lending only money that had already been deposited with them ?

Like other industrialised countries South Africa allows its commercial banks to create about 95% of all the money in circulation in the country. The banks do this by granting their customers new loans [eg. overdrafts] which they can use immediately as a means of paying quite legally for whatever they feel like. Such new money creation would not have occurred if the banks deducted at the same time the amount of their new loans from somebody else's account thus cancelling things out. But they do not operate in this way. Since the banks charge interest on the money that they create in the above manner allowing them this privilege boils down to giving these private financial institutions a peculiar advantage and a very substantial subsidy.

In addition, and perhaps more seriously such an arrangement makes the economy as a whole very unstable. This is so because unless the total volume of bank lending continues to increase year after year the supply of money in circulation will not rise and might even fall. In turn, this would mean that less buying and selling than expected can be carried out, jobs will be lost, investment will decline and the economy will very likely move into recession - all because of a decline in overall borrowing initiated by the banks.

To avoid such an obviously damaging situation the government simply has to adjust its economic policies all the time to ensure that most citizens are always sufficiently confident about their own futures as well as that of the economy as a whole. Otherwise they would not continue to wish to borrow ever more and more. It follows that such a "dependent" role for the government puts a serious constraint on its freedom of action. In fact, it has to put the interests of potential borrowers [who are usually the better-off citizens] quite firmly before those of any other groups especially the more needy.

On the other hand, if the Central Bank should create new money with the government spending it into circulation, the money supply would not contract if investor confidence fell. It would stay in circulation permanently unless the government itself decided to tax some of it away eg. perhaps to prevent the economy from overheating. Such an arrangement would make the economic system much more stable mainly because if one industrial sector should decline, the same level of potential spending power will continue to exist and thus leave room for other sectors to expand and to absorb the slack.

Moreover, when in effect the government can create its own credit interest-free, the annual interest burden on the national debt which arises from conventional government borrowing would fall away. In most industrialised countries this burden accounts for about 10 - 15% of national government expenditure. Such a policy would progressively reduce this heavy burden thus freeing up increasing sums for public services.

Putting such a policy thrust in place would require the South African government to restrict all the banks to act as financial intermediaries only i.e. simply to lend the savings of one person or company to another. This is not likely to be a popular step with the many private banks who might well object strenously !

Over a period of say five to ten years the Central Bank would gradually replace all the debt-based money in circulation with money that it creates itself. Because the government has to spend all the new money [i.e. replacement money as well as genuinely new money] to get it into circulation this process would inevitably generate a huge sum of windfall revenue for the government to appropriate to a wide range of activities. These could include clearing the country's internal debts, funding large public works programmes such as providing housing and other key facilities in the townships, funding rural development projects and introducing a citizens' income. Clearly a great deal of local investment, employment and poverty alleviation could be generated during such a process.

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 so that more money was required to facilitate trade. Otherwise increasing the supply of money would be inflationary.

This introduces a crucial issue viz. that the government's new power in effect to create money itself would - for well-known political reasons - need to be subjected to firm and effective external control eg. by the Central Bank such as in the present system. How [and perhaps if at all] such a control dispensation could be made genuinely effective in the tough world of practical politics will require careful investigation.

To summarise, the above proposal would make the economy much more stable by reducing the government's current obligation to maintain investor confidence. It would also gradually eliminate the interest burden on the national debt. Finally, it would generate a generous capital windfall that could be used eg. to introduce a citizens' income scheme and to transform basic conditions for the disadvantaged section of the population within a relatively short period of time.

9. Move away from the sharp focus on inward private corporate investment

Surely one of the great falacies of modern-day orthodox economics [and the Washington Consensus] is the assumption that inward private [corporate] investment is a crucial pre-condition for domestic/local economic activity and growth. It is ironical to note that if this assumption were actually true Planet Earth would have had to rely very seriously on investment inputs from another planet otherwise it could not prosper at all ! However, just as our planet is self-reliant in terms of capital and generates its own so too can a nation.

Furthermore, in the context of the dualistic model of the South African economy discussed earlier any fruits of inward investment, just like the benefits of foreign trade, will very likely be confined to the modern or core sector of the economy with little meaningful spillovers or trickle-down effects on the marginalised peripheral economy.

On the face of it capital formation is the result of saving but nowadays it is largely the end-product of bank lending aimed at continuously creating additional credit. South Africa and indeed any nation is quite capable of undertaking its own capital creation. If resources should be lying idle in the midst of wide-spread unemployment and if there is a proven demand for any particular product there is much justification for capital grants funded either via conventional government borrowing or alternatively through direct government credit creation [see point 8 above].

10. Move towards more genuinely merit-based appointments in all government initiatives i.e. away from the so-called "affirmative action" policy which in hard practice has too often become "affirmative discrimination"

Much like the recent experience of Namibia [where during the 'seventies, 'eighties and early 'nineties race relations were generally much more relaxed than in South Africa] "affirmative action" is also causing much friction in South Africa. This is so mainly because a substantial proportion of the public perceives/recognises that this laudable policy [in principle] has often degenerated [in practice] into "affirmative discrimination" i.e. based far too much on skin colour only. Hence the suspicion that "apartheid in reverse" has actually become hidden official policy - despite vehement protestations to the contrary. In the absence of any kind of full investigation the very large number of practical examples often quoted in this context and indeed from many quarters would seem to provide substantial and significant "anecdotal evidence" of the accusations involved.


The thoughts and suggestions expressed above are the result of a sincere attempt to rely on professional economic analysis rather than on the useful but often rather emotionally-driven approach of the concerned activist. Thus the focus is on [hopefully] sane and sensible analyses of South Africa's currently serious economic problems based substantially on the standard toolkit that any well-trained economist should have. Any errors and omissions are, of course, for my own account.

A broader objective is to stimulate much wider discussion and debate than is occurring at present on the many new and crucial economic issues involved. The whole world has been changing substantially and quite irreversibly. In South Africa this hard fact and especially its consequences in the economic sphere should perhaps be taken more seriously than seems to be the case at present. If so, this would open up many valuable correctives to our awkward apartheid legacy as well as to the country's serious current economic under-performance - in terms that would meet more effectively the needs of all South Africans especially the majority of the population living in the marginalised sector.

In turn, all these considerations should indicate strongly the urgent current need for pro-active economic planning. However, such a major exercise can only be effective if it is based on much new and focused research as well as on further public discussion. There is clearly a challenging role here for the Africa Institute.

In summary, the three main issues discussed in this paper are

(a) A critical analysis of some root causes of the current problematical economic situation in South Africa. Specific attention is given to

(b) Some key elements of the new "emerging" paradigm/vision of sustainable people-centred development. These elements are

(c) Localisation alternatives to current globalisation demands: Ten policy proposals.

List of references

  1. M. Rowbotham, The Importance of New Economics for South Africa, Feedback to the SANE Foundation after a personal invitation to visit the country in 2000.
  2. UNDP, The Case against the Global Economy, United Nations, 1997.
  3. J.A. Lombard, Globalisation, Structural Unemployment and Inward Industrialisation in South Africa, unpublished note, 2000.
  4. George Soros, Capital Crimes, Atlantic Monthly, January 1997.
  5. James Robertson, The New Economics of Sustainable Development, A Report for the European Commission, 1997.
  6. Thomas Kuhn, The Structure of Scientific Revolutions, Chicago: University of Chicago Press, 1970.
  7. W. Sachs, On the Archeology of the Development Idea, Mimeo, Pennsylvania State University, 1989.
  8. P. Ekins, M. Hillman and R. Hutchison, Wealth Beyond Measure, Gaia Books Ltd., 1992.
  9. A. Trowbridge, unpublished writings, late 'nineties.
  10. R. Douthwaite, Good and Bad Growth, unpublished article, 1998.
  11. A. C. Pigou, The Economics of Welfare, 4th edition, London: Macmillan, 1932.
  12. Daly, Herman E. and John B. Cobb, Jr., For the Common Good, 2nd edition, Boston:
           Beacon Press, 1994; and P. Ekins, Harnessing Trade to Sustainable Development,
           Green College Centre for Environmental Policy and Understanding, Oxford, 1995.
  13. R. Douthwaite, Feedback to the SANE Foundation [and others], after a personal visit to South Africa following a SANE invitation, 2001.
  14. R. Douthwaite, Short Circuit: Strengthening Local Economies for Security in an
     Unstable World
    , Green Books, Devon, 1996.

The SANE Foundation can be contacted by e-mail at [email protected].

Johan van Zyl,
School for Public Administration and Management,
University of Pretoria.
May 2001.