South Africa’s welfare debate

SOUTH AFRICA is faced with tough economic choices in an election year as the country languishes with low growth, high unemployment and increasing radicalism. Can the country afford to pay for welfare while bailing out an ailing parastatal sector that presents an ever-increasing drain on the fiscus? Have we finally reached the point where we have to make a choice between a “dirigiste” economy and market capitalism?

Bloomberg the global financial news website criticised South Africa’s “welfare addiction” this week. In an article published Tuesday which, according to T.O. Molefe invoked shades of Ronald Reagan’s “welfare queen” stereotype to argue that South Africa has a welfare addiction, Bloomberg disingenuously pointed out that the number of welfare recipients in the country currently outnumber the number of employed — “Some 16.5 million people receive government benefits, compared with 15.2 million working as of the fourth quarter of 2013 and those on assistance make up 30 percent of the total population.”

Bloomberg managed this slight of hand by conveniently avoiding the demographic reality of South Africa’s welfare system — currently only the youth, the old aged and disabled receive welfare — ignoring the problem of the 24% unemployed who do not receive any form of social security while big businesses remain on the receiving end of state welfare.

South Africa’s massive parastatal sector is a case in point. It lost in the region of R25bn last year and the figure is climbing. A report tabled in parliament shows that SAA has a R1.2bn operating loss bringing its losses to a total of R16bn since 1994. The problem of a welfare state supported by welfare businesses caught in a welfare spiral as the country shifts towards the left is deeply troubling. The solution appears to be dumping elements of the state-guided dirigiste economy while maintaining welfare and social security support for the least privileged.

This would mean letting go of unprofitable state enterprises such as SAA, Telkom, Post Office and Eskom and retaining only those enterprises which are capable of generating a profit. Currently Transnet is the only major state enterprise to show a profit, increasing revenue by 14.3% in the six months to September 2013 to R28.5bn. In effect the profit from Transnet is cancelled out by the losses in other state enterprises, creating the awkward situation where social welfare is entirely supported by tax revenue which is likely to diminish if plans unveiled by radical opposition parties for nationalisation of banks and other businesses proceed.

South Africa could quickly find itself in a double-bind in which all social services such as health, education and welfare payments are solely supported by loss-making state enterprises that have absolutely no hope of ever making a profit. The state would in effect be bankrupted by too much welfare and be forced to either borrow money or increase the circulation of money, in other words inflating the money supply, the banknotes which are created by the printing of money by the central bank. A proposal by the radical EFF to nationalise banks would in effect create one central bank with 220 branches as in North Korea.

Despite these concerns, welfare payments are set to increase as demands for welfare including medialternatives’ own demand for an unconditional basic income grant for each and every citizen, show no sign of abating. The country is in a unique situation. Duma Gqubule an expert for the South African Civil Society Information Service believes the value of untapped mineral resources in South Africa’s is in the region of US$4.7 trillion. “Put differently, the value of these mineral resources is worth one million Rand per South African citizen.” All good and fine, but the question of beneficiation and which economic system is more productive and efficient in terms of adding value and increasing tax revenue is not furthered by arguments which neutralise revenue from the market economy while creating yet another rung of welfare recipients in the process of nationalisation.

The state should not be bailing out businesses and banks which are to use a hackneyed term, “too big to fail’, rather the state should be redistributing the proceeds from productive capital to all citizens who are treated as if they were shareholders.

A state which distributes revenue in the form of an unconditional basic income grant, on a monthly or biannual basis would do a lot more to alleviate problems with poverty and inequality than a state which was tasked with performing a business and venture capital role instead of being an equity partner. Our poor performing parastatals have provided ample reasons why state enterprises are simply massive, under-achieving bureaucracies that do nothing in terms of providing value to citizens as well as consumers. South Africa must find a way to save social welfare while growing its economy. Dumping failing state enterprises and increasing the productive economy is the only solution that stands a chance of succeeding and winning votes.