This article was first published by BizNews.com on 5 December 2022
The SA public sector needs economic restructuring
Expenditures of governments world-wide have been consuming an increasing proportion of wealth produced. The result has not been, as some commentators led us to expect a means of improving the quality of life of the general populace. The opposite has been true. As taxes have increased to pay the growing costs of government, the rate of improvement in living standards has declined.
Countries in which governments, including their enterprises and agencies, have the lowest expenditures as a percentage of GDP, have the most rapid increases in per capita incomes. They are most capable of ensuring the lowest unemployment rates, the most effective health and education services, and the best infrastructure. In addition, and most importantly, their public servants show a greater responsiveness to the needs and wishes of the users of public services.
The inescapable conclusion is that a bloated public sector not only manages resources inefficiently, but also becomes impervious to the demands of the public. Reducing government expenditure as a percentage of GDP and ensuring efficient use of the resources that remain under government control, must therefore be a cardinal objective of any economic restructuring. The public sector must become more efficient and more accountable to the taxpayers, and mechanisms are needed to ensure that this occurs.
The role that economic freedom can play in improving economic outcomes
The population of countries that experience greater economic freedom are rewarded with higher incomes as revealed by the measures of economic freedom produced by the Economic Freedom of the World annual reports and the changes in GDP per capita as calculated and published by the World Bank, measured in this instance in constant 2015 US Dollars.
Between 1990 and 2020 South Africa’s economic freedom ranking declined from 46th to 99th of the 160-plus countries included in the studies. During the same period Peru improved from 102nd to 37th, Malta improved from 52nd to 21st, and Romania improved from 99th to 19th. The purpose of listing these countries is to show what the effect has been of increases and decreases in economic freedom on the GDP per capita of these countries.
South Africa’s GDP per capita (constant 2015 US Dollars) increased from $5,031.5 to $5,659.2, an increase of 12.4% in 30 years. During the same period Peru’s GDP per capita increased from ,700,0 to $5,807.1, an increase of 115.08%. Romania’s GDP per capita increased from $4,996.7 to 0,865.1 an increase of 117.45% and Malta’s GDP per capita increased from 0,074.3 to 5,427.1 an increase of 153.58%.
Competition keeps private business efficient and "honest"
It is common cause that effective competition is the only real consumer protection for consumers, as well as the only real discipline that can be imposed on suppliers of goods and services. Even opponents of the free market appear to agree with this view, in that they are harshly critical of any business arrangements that appear to them to be uncompetitive. Monopolies, large businesses, conglomerates, single sellers and overlapping directorships are all roundly condemned. Practices such as retail price maintenance, price fixing, charging excessively high prices or excessively low prices, and collusive tendering, are all frowned upon.
The only way government can ensure effective competition is to stop interfering with the competitive process
Unfortunately, it took about one hundred years of intervention in the USA to show that anti-trust legislation reduces competition rather than increasing it. Instead of heaping regulation upon regulation, it has been discovered that the best way to ensure that effective competition will occur, is to remove all legislative barriers to entry into business. This means removing all laws and regulations that protect some suppliers at the expense of potential alternative suppliers. Letting the cold winds of global competition blow across South Africa is going to be the only way to ensure long term prosperity. Rolling back the web of interventions such as tariffs, exchange control, banking regulation, agricultural control boards, laws intended to "promote" competition, export incentive schemes, laws that drive up the cost of labour, and much more, would be necessary to make the South African economy truly competitive.
Unfortunately, it took one hundred years of intervention in the USA to show that anti-trust legislation reduces competition rather than increasing it. Instead of heaping regulation upon regulation, it has been found that the best way to ensure that there will be effective competition is to remove legislative barriers to entry into business. This means removing all laws and regulations that protect some suppliers at the expense of potential alternative suppliers. It also means applying the same rules to potential foreign suppliers as those applied to domestic firms. Letting the cold winds of global competition blow across South Africa is going to be the only way to ensure long term prosperity. Rolling back the web of interventions such as tariffs, exchange rate, exchange control, banking regulation, agricultural control boards, laws intended to "promote" competition, export incentive schemes, laws that drive up the cost of labour, and much more, would be necessary to make the South African economy truly competitive.
Accepting that self-interest motivates all people is the first step towards achieving accountable and efficient government
The same principles that apply to private business must also be applicable to government activities. Incentives and disincentives must have the same effect on people, whether they work in the private or government sectors, as all are inclined to pursue their own self-interest. The myth of the selfless civil servant labouring away in the public interest, with no thought for his or her own fortunes, is well and truly shattered. The Public Choice school of economics played an important part in compelling serious scholars to face reality on this issue.
Public sector reform
Public sector reform must form an integral part of economic restructuring. Economic recovery and prosperity will be seriously retarded if it does not occur. The most important forms it can take are:
Privatisation
The existing ideological opposition to the transfer of monopoly government industries and services to private ownership is most unfortunate. If the process does not occur, or is delayed, South African consumers will be the poorer. They will lose because services will not be as good as they could have been. Services
will continue to cost more. There will be less choice. Taxes will be higher. And archaic methods and practices will be allowed to continue to exist - instead of being eliminated as they would be if they were used by private businesses.
Privatisation has formed an integral part of public sector reform in many countries. In some cases, it has rescued economies from disastrous decline. According to Dr Madsen Pirie of the Adam Smith Institute in London, the former UK state companies operated more efficiently, gave better service, and were more responsive to customers: "It was a major change in culture, and one which placed them into the marketplace, exposed to the pressure which consumers and competitors bring to bear. Instead of being directed from the top by the state, and administered through layers of bureaucracy, they had to attend to the signals which the market carried from below, and to respond accordingly."
There have been claims that some South African state companies were efficient but until they have competition - whilst they continue to have monopolies protected by legislation - neither they nor the public can be sure. If they are sure, there is a simple challenge they need to answer: Are you prepared to ask government to remove the laws that protect you from competition? Are you prepared to face competition from all comers, including foreign competitors? How many state entities would pass such a test.
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