A tale of two loaves

The scary prospect of having fewer choices

It was by chance recently that I came across the President’s parable. Many of you may know it, and many will most likely not want to know it. But it is an analogy that President Jacob Zuma seems to favour and has repeated a few times since offering it at the launch of his call centre in 2009. (Is it still functional?). That’s when he asked: “When you are given two loaves of bread and someone says to you one is from government and the other from the private sector, which one would you take?”

It is, of course, a no brainer, given the latest power cuts and research last year that showed South Africa as having the biggest gap between trust in government and trust in business. Only 17% of informed South Africans taking part in the Edelman poll said they trusted government to do the right thing, compared with 63% who said they trusted business to do so. But leaving the obvious and ironic aside, it could be one of the most insightful questions to ask in these times – albeit unwittingly.

This could be the era when conventional theories will be rewritten about government involvement in economies, free enterprise, private initiative, mixed economies, and developmental states; as well as the role of money and debt. We appear to be well into an extended period of deflation, adjustment and low economic growth; a time during which, in true Keynesian tradition, governments expand while private enterprise contracts. The behaviour of large corporate business especially in the financial sector, profit obsession and shareholder-value frenzy, as well as widening income disparities have encouraged popular clamour for government intervention.

It is to be hoped at least that the world will emerge with a renewed commitment to the two primary roles of government:

· to establish optimum conditions for private initiative to create wealth and

· to help those in genuine need of societal care.

The former is far more important than the latter because the latter is totally dependent upon the former. This was a hard fought lesson over centuries of policy experimentation.

Governments can and sometimes do run efficient commercial enterprises. If one added say a German or Swiss government baker into Zuma’s mix, it would be a moot point whether it would not be the preferred supplier.

Wealth is created when two things happen: doing or making something useful to others, and following the rules of free and legitimate transaction of supply, demand and price. This stands independent of and aloof to motive. So to argue that an absence of the profit motive is what makes government fail where private initiative succeeds with it, is shallow and disingenuous. Government commercial ventures fail mostly because of an absence of competition and failure to recognise the cost of capital. It is easy to cover inefficiencies simply by raising taxes. It is not so easy when you are using investors’ funds.

Before South Africa finds even the remotest consolation in the global trend towards bigger government it needs to seriously correct its government performance and accountability. It’s one thing having a big government; it’s another having a highly inefficient and ineffective one. A government that cannot deliver is a huge drag on society, and the bigger it is the bigger this drag. I remember many years ago, coming across a study that compared country fiscal efficiencies. In that study it was mooted that for every tax dollar a country like Denmark gathered, it returned some $0.90 to the populace in tangible value. In South Africa at that time it was only about $0.25.

I would give no credence to such a study today. The variables are just too large and the research too complicated to make a finding valid. But it does pose the intriguing, albeit complex question of what kind of value we are effectively getting for our tax rand. Put differently: what could government cut from its current activities and how effective could it be in doing the rest?

To get some help I approached economist Mike Schussler who is an outspoken thought leader on fiscal affairs. The first point he brought home through a number of charts is the extent of government encroachment. The most telling is one that shows our relatively high tax to GDP rate of 27% -- higher than Sweden at 22%; and nearly treble that of Japan (9.8%) and United States, China, Switzerland and India all at about 10%.

An important consideration is that for their tax dollars, citizens of many countries receive important benefits such as pensions and health care which a large part of South African taxpayers don’t. According to Schussler, South African government salaries as a percentage of GDP were the 6^th highest in the world in 2010 and probably higher today. They make up more than 30% of formal sector pay. So his conclusion to the overall question is that the South African taxpayer in the private sector particularly is getting a relatively minor proportion back in tangible value.

From my perspective it means simply that the South African government is overwhelmingly redistributive. This may be understandable and ideologically justifiable. But it is very counterproductive when the redistribution agency soaks up a large chunk of what there is and ultimately threatens what can be redistributed.

So what would Schussler do? Get out of involvement in electricity, air travel, airports, rail, telecommunications, road construction, prisons, and national parks; and streamline government financing institutions such as the Landbank, Development bank and IDC. He also suggests that education itself can reside more in private hands with government vouchers for needy learners – the principle of subsidising a person rather than an institution.

Schussler also has a beef with that other major government impediment to economic activity – rules and regulations. He would like to see far deeper and enlightened oversight on the extent to which they harm or impede private initiative.

Cutting the government is one thing. The real challenge is to ensure maximum efficiency in whatever it does. The government itself has conceded that much work has to be done. But it seems to be losing the battle when the Auditor General’s latest report reflects a more than two fold increase in irregular spending at R62bn. Schussler points out that by far the largest part of government inefficiency is incalculable. It is where the rubber hits the road, where teachers have to teach, police protect, nurses nurse, and municipalities deliver services.

The supreme example of an utterly cavalier view of taxpayer’s money is of course, the State President himself. This is not only in Nkandla. He has surrounded himself with a cabinet of 35 – one of the largest in the world – bigger by far than the United States (16) and China (25), and each costing about R4m a year. Cut that by half (both the number and their pay) and by sheer example alone you will suppress waste substantially.

The economic effects of a big government are obvious: it shifts resources, including capital and skills, from where they are adding value and creating wealth to where they are merely redistributing that wealth. Add inefficiency into that mix and you compound the problem severely.

But the argument against big government is more profound: ultimately you restrict choice. Ultimately you erode freedom. Ultimately you end up with one loaf.

To end on a philosophical note at this time of reflection: I have been writing a lot recently about empathy and survival and a frequent response has been that empathy is simply enlightened self-interest.

Enlightenment is not about practising empathy for survival; it is about not seeing the difference.