Jean Monnet, the French political economist and diplomat, demonstrated that “deep thought” and concentration are required in order to come up with lasting solutions.

Faced with the rivalry between the economic powerhouses in Europe at the time (France and Germany) and the potential for the implosion of Europe, he undertook a long walk (over two weeks) in the Alps in order to think.

Monnet reflected deeply on the challenge being faced by European nations and how out-of-the-box thinking could assist in finding lasting peace. He is credited as the “Father of Europe” since his pioneering efforts was key to the establishment of the European Coal and Steel Community, the predecessor of today’s European Union.

As South Africans, a similar undertaking is needed – to think and think hard and out of the box to find lasting solutions here too.

Ideologically, where do we find ourselves when wanting to respond to this challenge? I know that some of you are already asking the question: what has ideology to do with it? The answer I’m afraid is everything. Theory without practice is blind and practice without theory is suicide. Trying to find answers without a framework within which you operate will simply result in futile exercises.

Marxist Leninism tells us that the modes of production, which reside in the hands of the owners of production (the bourgeois/ruling class) – in South Africa they are primarily white citizens – must be redistributed into the hands of the working class (proletariats). The South African race component is not necessarily the case in other parts of the world. This particular ideology has a bad rap globally since it has not succeeded as an economic system anywhere in the world.

One can perhaps refer to Communist China and their successful socialist economic project; however, what is being practised and tested there are referred to by the Chinese as socialism with Chinese characteristics, whatever that means.

At some point in the history of Chinese development, the then leader, Deng Xiaoping, remarked that surely socialism cannot mean an equitable distribution of poverty. He then embarked on an experiment in which he decided that certain coastal areas should be declared economic free trade zones, in essence adopting a capitalist economic system in those areas.

The argument at the time was that a period of 100 years would be required to build China towards a socialist epoch; in other words, China at this point is not as yet practising socialism. One could therefore argue that this is why the socialist project with Chinese characteristics is seen as successful in that country. South Africa, safe to say, is not practising this economic system.

The diametric opposite to this is the capitalist economic system which is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labour, voluntary exchange, a price system and competitive markets. For the past 20-plus years since democracy it is safe to say South Africa has been following this model religiously.

Fiscal constraints and tight fiscal controls by the Reserve Bank and our National Treasury have been the order of the day, hence the neoliberalist policy choices such as GEAR/AsgiSA/etc, since the advent of democracy. This system has largely been protecting White Monopoly Capital (owners of the means of production), private property land owners and our large banks.

It seems to me, though no one wants to admit it, but the governing party’s ideological premise seems to be social democratic in nature. In other words, promoting in the main a capitalist economic system but with a conscience. A conscience that says that the poor in our country must benefit from the wealth created and therefore must find expression through a social grant (welfare) system.

Emphasis is placed on SA being a developmental state where the state plays an active role in the economic development of the country. This is largely why our government holds on to State-owned Enterprises because the argument is that through these organisations the government can ensure the provision of basic services such as water, electricity and sanitation, at affordable prices, especially for the most indigent of our people. Examples of successful social democracies are regions such as the Scandinavian group of countries. Whether this is working in SA is a debate for another time perhaps.

South Africa must decide which side of the divide we are on since this will give us all clarity of purpose, just like Jean Monnet found while traversing the Alps.

Previously I advocated for a stimulus package that must come about through the financial commitments made by labour, government and the private sector. I have argued that government and its public servants must commit to put about R250-billion on the table, made up of a percentage taken from the PIC funds and a Public Wage Bill freeze. Thereafter, the private sector must commit to meet every rand of the government commitment, meaning an additional R250-billion.

This R500-billion must then be utilised to inject into the economy to kick-start it towards opportunities of job creation, massive infrastructure investment and curbing part of our public debt.

I propose this because today I want to make a bold statement that austerity and expenditure cuts do not curb debt levels as espoused by Ann Pettifor, a UK-based economist. Pettifor demonstrates that growth takes place in economies when governments have spent, in other words enlarged their expenditure levels instead of expenditure cuts.

Cuts are what our government consistently advocates and practises because foreign investors and rating agencies expect precisely that. They would rather increase certain taxes and think that this will stimulate the economy to a point of confidence and investments which in turn give you much needed growth. This unfortunately is not the case as proven by the longitudinal studies and data sets produced by Pettifor and her team. Spend, spend and spend is what will unlock opportunities and this strategy together with a stimulus package will certainly go a long way in taking Mzansi forward.

A new big idea I want to place on the table as we think out of the box, is tackling our “real interest rate”. Why have our Reserve Bank and Treasury not yet entertained this as an option?

In Brazil we observe that:

• In 2015-2016, the country was in the midst of a recession, with confidence falling, investment waning, and in the midst of political turmoil;
• The country was able to use the rapid fall in inflation to reduce interest rates dramatically (in both real and nominal terms) – overnight, interest rates fell from 14.25% in early 2016 to 6.5% currently;
• The primary consequence has been an economic recovery, with the unemployment rate on a downward trajectory, and retail sales that are picking up from -10% to *5%;
• Lower real rates have helped more optimistic general elections outcomes as well;
• It’s become much cheaper for Brazil to finance its deficit and continue with looser fiscal policy;
• Banking system aggregates are starting to show signs of life;
• Lower real interest rates have kept the currency from strengthening overly, keeping exports competitive; and
• This dynamic has given the country the leeway to address some of its underlying imbalances.

Lessons learned tells us that if we can do this then we too can benefit in much the same way as outlined above, why not?

After all, real interest rates provide a more economically sound way of quantifying the cost that the government (or any borrower) incurs to finance its debt (ignoring inflation and looking only at nominal yields overstates the cost of financing debt) – higher inflation and growth rates, all else equal, erode the value of debt.

Recently in SA, real interest rates, due to the fall in inflation that has taken place since CPI hit its peak in early 2016 (it has fallen from 7% to 4% as reported by the last data release-assisted in no small part by the rally in the rand) are near 10-year highs, even though nominal interest rates have fallen considerably. This acts as a headwind to the borrowing and credit creation that is necessary to stimulate growth. Lower real interest rates can generate the growth and investment that SA needs.

Markets have endorsed President Cyril Ramaphosa’s leadership with a complete repricing of SA assets  (look at ZAR, SA bonds – even as the world fears higher rates in other countries, SA has been exempt). But growth has and will likely not improve until the country is able to leverage this newfound stability into the right conditions for investment.

Real interest rates are the key. In some way, recent strengthening of the currency puts downward pressure on inflation, has boosted real interest rates, and ironically tightened the monetary conditions for borrowing and investment.

As countries in similar situations have done (see Brazil in 2016-2018: interest rates have fallen from 14%+ to 6.5%; growth has gone from deeply negative back to its long run average. The US and the Euro zone have successfully implemented similar policies following their respective financial crises, deep reductions in real interest rates can spur an otherwise dormant banking sector, prevent overt strengthening of a country’s currency to keep exports competitive, and improve a country’s debt trajectory.

So when we all clamour for a social compact or an economic Codesa, these are some of the difficult decisions that will have to be entertained if we are to make real progress in taking Mzansi forward and place it squarely on a much needed growth trajectory.

Think out of the box and take the difficult decisions needed in order for us all to get a handle on the triple challenges of poverty, inequality and unemployment. Expenditure cuts won’t work, full stop! DM