Tuesday, October 29, 2013

Actually, we need the other thing administered by someone else

During recent times I have been highly critical of all the economic policies put forward by Julius Malema’s Economic Freedom Fighters, even if I do agree with all the economic concerns they put forward. What I am yet to do, however, is to put forward my own suggestions on how we can alleviate these problems in the short term, while completely solving them in the long run and this, incidentally, is exactly the problem when it comes to my (true) neo-liberal economics; these solutions take time to bear any meaningful fruit, decades in fact, and thus they are almost impossible to sell to an electorate where the majority of people live in abject poverty and feel excluded from mainstream economic activity. Before I continue though, I feel that it is necessary to include a few side notes to ensure that we are all in the same ballpark.

Side note 1: Money is no object

We’re not working from a perspective where we have enough money to do whatever we like, but the perspective that the only function of currency in economics is a) to serve as a meter of value and b) increase economic efficiency. There is nothing to prevent you, for example, from buying your next car with 10 tons of frozen chicken or a couple of tons of grain, but the economic problem arises when you have to pair that which you have (grain or chicken) with that which the car dealer wants or needs. He might prefer to be paid in beef, so then you have to go find a beef farmer who wants chicken or grain and ultimately you could search for months until you find the person who is selling what you want while being willing to accept what you intend to pay with. Now you just pay the man in currency and he can buy his own grain, chicken, beef or whatever else he wants to buy. Your employer could also pay you in product if he so wished, assuming that he pays in a product you need, and this therefore means that the notion that poverty is related to income levels is actually invalid and that poverty is actually linked to the relative cost of living.

Side note 2: The role of private banks

People seem to subscribe to the fallacious notion that private banks are somehow responsible for direct economic investment when in actual fact they perform but a few economic functions. The three chief functions of the private banking system is to a) serve as collection points of the public’s currency (read economic value), b) increase economic efficiency through the pooling of resources and c) to “create money.” What actually happens in the banking system is the following: Let’s say that Mrs. X and one thousand other people have R1000.00 in their bank accounts with ABSA (collection point of currency) and that MR. Y now wants finance for his business to the value of R900 000. Instead of Mr. Y now having to go negotiate terms of loan with Mrs. X and 1000 other people, he merely visits ABSA bank to fill out a loan application (increased economic efficiency), but because the money being lent does not belong to the bank, they have to ensure that Mr. Y is credit worthy and that the clients’ money will not be lost. Mr. Y then pays his suppliers who bank at FNB and the cycle can start over again. Theoretically, the South African banking system can create R40 of credit for every Rand (value divided by the Reserve Requirement) that is banked with them and that is how “money is created,” but financiers have to be remunerated for the credit risk they undertake and that is why banks pay and charge interest to their clients; the reason for the disparity in interest paid/charged is that the bank should receive recompense for its role as financial intermediary. There are of course other safety requirements placed on the banks by the South African Reserve Bank, so the number is actually less but we are not discussing Bank Economics at the moment.

Side note 3: The non-linear value of money

Believe it or not, this is actually a mathematical poker theory that I am applying to matters of economy and it states that R50 is not equal to R50 is not equal to R50. The simple fact of the matter is that the relative value of money is entirely dependent on the overall income of the person it belongs to, i.e. R50 is worth much more to someone who earns R3500 per month than to someone who earns R15 000 per month. Since many of the suggestions that I am going to make will benefit the wealthy and the poor alike, the fact is that even a smaller saving for a poor person would be worth more than a bigger saving for a wealthy person.

With all that being cleared up, what would I do if I had it all my own little way? Well, the only way in which we can make any meaningful impact on the lives of the poor is through the rapid development of our industry, society and even the Government

Phase One: Rapid Industrial Development and Decentralisation

Disband the Industrial Development Corporation and replace it with a Government Business Unit, the board of which will be comprised of the Minister of Trade and Industry, the Minister of Mineral Resources, the Minister of Economic Development and the Minister of Finance as well as several business people nominated by the business community. Its first order of business would be the immediate systematic privatisation of 50.1% of the South African Post Office, South African Airways, the South African Broadcasting Corporation, the entire railway fleet of TRANSNET and ESKOM’s power generating capacity. At no point will international investors own more than 20% of these companies, while the State will retain control the power grid and railway infrastructure in order to exert maximum pressure on the final costs to consumers if the need should arise. The moratorium on private railway companies and power generation will be lifted while the Parastatals will charge rent on the usage of the infrastructure.

Half of the proceeds of these sales will be used for the repairing and expanding the country’s ageing rail and power infrastructure while the remaining funds will be earmarked for the sole purpose of expanding Government’s footprint in certain industries of national or strategic importance. The GBU would, for example, be responsible for creating a large scale steel smelter and mill through public-private partnerships that would be aimed at creating steel products for the local and African markets. In order to facilitate its operation, mining licenses would be changed to give GBU related companies first option on the purchase of a certain amount of resources, 15% for example, produced by private mining firms. The shares in and profits from the new companies and former parastatals will be retained by the GBU for a minimum period of ten years or until the business generates a set return on investment after which the shared held by the GBU will be systematically redistributed to all the people of South Africa who obtain a matric certificate, with an additional number for all levels of tertiary qualification, under the proviso that they do not “come from wealth.”

Due to the time delays, poor quality and corruption brought about by the current tender system, I also envisage the creation of a State Engineering Company to undertake all future public works programs and projects. Since such a company will have to be massive and have a vast impact on private engineering firms, the new Company will initially operate as a conglomerate controlled by a board comprising of the Minister of Public Works and executives from private engineering firms. To ensure that the wealth generated by the Public Works Program is not only shared by these companies, a certain percentage of all projects will be outsourced to small, local construction companies and these companies will then have the option of functioning under a Company Affiliation Program in order to facilitate their future growth and success through the transfer skills, economy of scale and bargaining power brought to the table by bigger firms.

On the subject of land reform, the State will not sell any of the 16.8 million hectares of farmland under its ownership to private individuals. Instead, parts of the land will be converted into training centres for aspirant farmers and once they have proved their ability to run commercial farms, they will be awarded with pieces of land currently under Government ownership. In order to protect food security and the prices of foodstuffs, all outstanding land claims against privately owned agricultural land will be suspended until such time as the State has no further land, apart from the training centres, available for redistribution. Only then will the land restitution process continue under the willing buyer-willing seller principle.

Benefits of Phase One

-          The most obvious benefit from the proposed measures is that we solve our electricity supply problems almost immediately while adding absolutely no pressure or additional burden to the taxpayer and as the private companies innovate, the cost of electricity for end users will decline.

-          We also solve our railway capacity problems. Currently, 90% of our national freight transportation is done at high costs via the road network and the costs are always passed on to the consumer. Not only is rail transport cheaper to the tune of an estimated R2 per ton of freight per kilometre, but we will also experience massive savings via the reduced maintenance bill with regards to road infrastructure that could then be used to fund other social projects.

-          Thousands of job opportunities will be created virtually overnight due to the construction of new power plants, administrative centres and other infrastructure.

-          No more costly bailouts for failing parastatals like SAA and the SABC.

-          By following a program of industrial decentralisation we create the space and opportunity to bring economic opportunity to people living in poorer rural areas, with the added bonus of creating spin off job and business opportunities for local residents and a further reduction in transportation costs.

-          The eventual redistribution of shares will reduce poverty while serving as an incentive for young people to complete their primary education and obtain the maximum qualification that they can.

-          An opportunity to beneficiate our own resources is created that will reduce our reliance on importing finished products from abroad, ease the burden on our foreign reserves and with possible future expansions into Southern and the rest of Africa, these products hold great potential.

-          The abolishment of the tender system will virtually wipe out Government corruption where public works projects are concerned and ensure that quality infrastructure reach more people in a shorter amount of time.

-          It will also go a long way in preventing instances where a project has to be re-launched due to poor quality, like when the bridges in Limpopo washed away because they were poorly built by some “Comrade in Thief’s” On Point Engineering company.

-          The protection/expansion of our food security and production would take great strides in containing food price inflation that averaged 14% for the first half of 2013 alone, while the salary increase for the average South African worker was around 5.5% for the same period.

Of course, these are just a few suggestions on what we might do to solve our structural economic problems and I am sure that there are many more suggestions out there, so please don’t be shy to contribute your thoughts because I certainly do not presume to have all the answers. It should also be said that what has been posted here is but a part of the overall solution, but this is a long enough piece already.

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