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On 22 February 2022, H.E. Mr. Han Peters, Ambassador of The Netherlands to South Africa, hosted Mr. Daryl Swanepoel, Chief Executive Officer of Inclusive Society Institute of South Africa. During the meeting, the CEO acquainted Ambassador Peters with the work and experience of the Institute; and the current projects they are working on with the objective of working towards greater inclusivity within South African society. They also exchanged views about the opportunities of developing bilateral partnerships between The Netherlands and South Africa in various spheres, including Think Tanks, research and educational institutions.

On 22 February 2022, H.E. Mr Tobias Elling Rehfeld, Ambassador of Denmark to South Africa, hosted Mr. Daryl Swanepoel, Chief Executive Officer of Inclusive Society Institute of South Africa. During the meeting, the CEO acquainted Ambassador Rehfeld with the work and experience of the Institute; and the current projects they are working on with the objective of working towards greater inclusivity within South African society. They also exchanged views about the opportunities of developing bilateral partnerships between Denmark and South Africa in various spheres, including Think Tanks, research and educational institutions.

The Inclusive Society Institute (ISI) hosted a High-level Dialogue on the Establishment of a National Anti-Corruption Agency for South Africa on 19 October 2021. The dialogue was a response to the proposal by President Cyril Ramaphosa to establish a National Anti-Corruption Advisory Council (NACAC). The ISI and the Anti-Corruption Centre for Education and Research (ACCERUS) of Stellenbosch University, through its School of Public Leadership, has entered a partnership to research the realities of international and African Advisory Councils against corruption and to produce a report which will be handed to the public policymakers as a contribution to policy development in this regard. This dialogue aimed to give direction to the research to be undertaken by the ISI and the School for Public Leadership. The dialogue noted that corruption is antithetical to sustainable development, aggravating income inequality, reducing domestic and foreign investment and significantly lowering the quality of public sector services. Addressing corruption will support a more inclusive recovery from the Covid19 pandemic. The research is now proceeding towards finalisation. An academic panel discussion was held on Thursday, 17 February 2022 to consider the proposals made in the report, and to robustly engage the proposals made in the preliminary findings. The emphasis of the deliberations was on effective mechanisms to protect whistle-blowers and the final proposed organisational structure of the NACAC).

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in October 2021 Author: Mariaan Webb Editor: Daryl Swanepoel Content Abbreviations & acronyms Introduction Identifying weaknesses Construction mafia Cumbersome licensing and permitting Infrastructure constraints Competency shortcomings Long project lead times Poor planning and budgeting Skills deficit Subcontracting requirements Tenders and procurement Weak partnerships Interventions for fostering growth Conclusion References Abbreviations & acronyms BER Bureau for Economic Research DPWI Department of Public Works and Infrastructure DWS Department of Water and Sanitation IDP integrated development plans GCI Global Competitiveness Index ISI Inclusive Society Institute PPP public–private partnership Safcec South African Civil Engineering Contractors Stats SA Statistics South Africa Introduction The construction industry is diverse and is involved in projects ranging from the development of civil infrastructure, such as roads, bridges and ports, to residential and nonresidential buildings, as well as small private projects. The last decade, and 2020 in particular, has been tough for the industry. Already in deep trouble before the Covid-19 pandemic, the construction industry contracted by 20.30% in 2020, marking the sector’s fourth consecutive year of economic decline (Stats SA, 2021a). Despite some improvement in 2021, construction remains severely affected by the Covid-19 pandemic and weak investor sentiment (Reserve Bank, 2021). The industry is a key employer, especially for low- and medium-skilled workers, providing jobs to about 1.22-million people. Between March 2020 and March 2021, the industry shed 264 000 jobs (Stats SA, 2021b). Due in the main to a post-Covidlockdown rebound the sector increased employment in the second quarter of 2021, with gain of 143 000 jobs (Stats SA, 2021c). Government spending has a material impact on the health of the construction industry as it accounts for more than two-thirds of civil revenue and about 40% of nonresidential construction revenue. As a result of weakening project flow and spending by the public sector in recent years, many civil construction companies have turned to foreign contracts to survive, and an unprecedented number of big contractors have gone into business rescue or liquidation. This is largely attributed to a lack of big government contracts, late payment and the shouldering of lossmaking contracts (DPWI, 2021). The National Infrastructure Plan 2050, a draft of which was released, for comment in August 2021, can act as an economic stimulus for the industry, provided that a credible pipeline of projects is put forward. It is estimated that the cost of delivering infrastructure to meet the country’s infrastructure development needs will be more than R6-trillion between 2016 and 2040. It is estimated that the finance gap that needs to be closed is about R2.15-trillion (DPWI, 2021). The private infrastructure investment sector will be called upon to help fund infrastructure, with public–private partnerships (PPPs) expected fill a finance gap of about one-third of the amount that needs to be invested by 2050. Amendments to Regulation 28 of the Pension Funds Act will assist to mobilise resources for infrastructure. The changes will seek to mobilise a higher proportion of retirement savings for infrastructure investment, as South Africa is currently behind other countries on this indicator (Business Times, 2021). This Inclusive Society Institute (ISI) report is a summary of themes that emerged from virtual discussions, held on October 19 and November 7, 2021, with construction industry participants to gather their views on what the country must do to place it on a path of higher, sustainable, and inclusive growth. The report identifies constraints to economic growth and development, from the construction industry’s perspective, and puts forward suggestions to improve the status quo. The report is one in a series of dialogues that the ISI has held with different sectors of the economy and forms part of the institute’s economic research project to develop a blueprint for rejuvenating the South African economy. Identifying weaknesses Construction mafia The violent disruption of construction sites is one of the biggest threats to economic activity. A so-called ‘construction mafia’ has been plaguing the industry for some years, with syndicates disrupting projects and causing damage worth billions of rand. These armed groups visit construction sites and demand a share of work. In January 2020, estimated losses owing to the disruption of construction projects amounted to R40.70-billion (IOL, 2021). Criminality is affecting not only the construction industry, but is also weighing on the electricity sector with serious allegations of sabotage of power group Eskom’s infrastructure, as well as in the rail industry with unprecedented theft of cables. Eskom believes the recent collapse of a distribution-line tower at its Lethabo power station, in the Free State, is a “deliberate act of sabotage” (Engineering News, 2021a). The theft of overhead cables and vandalism of freight utility Transnet’s property continues to be on a steep increase. From January to October 2021, Transnet Freight Rail lost more than 1 000 km of copper cable, while an average of 600 theft and vandalism incidents a month were recorded (Engineering News, 2021b). The criminal activity is a serious constraint on the economy and left unaddressed, will curtail South Africa’s growth prospects (BER, 2021). Construction projects are also disrupted when there is limited community involvement and support. The Mtentu bridge project, in the Eastern Cape, is but one example of a megaproject that has suffered severe delays owing to community protest. The former contractors, a joint venture of Strabag and Aveng, terminated their contract with the South African National Roads Agency Limited in early 2019, stalling the Mtentu project. At the time of writing, a new contractor was yet to be appointed (Engineering News, 2021c). A concerted effort is needed to ensure proper community engagement and redress to prevent the project disruptions. Investment in local skills transfer and training of local emerging contractors will enable communities to benefit more from infrastructure projects. The South African Forum of Civil Engineering Contractors (Safcec) believes “throwing the book of law at disruptors is not enough, so too must a book of opportunities be handed to them” (Webster, 2021). Safcec argues that thugs must be isolated from genuine grievances of communities and community-based entities that feel excluded from participation in local economic activities. Some business forums in the construction sector, whose members were in the past accused of violent disruptions, have transformed themselves and have started to undertake legitimate business activity. Cumbersome licensing and permitting The construction sector is highly regulated and requires permits in advance of construction. These processes can be slow and cumbersome, leaving many private projects trapped in an ineffective licensing and permitting system. The World Bank’s 2020 Ease of Doing Business Ranking places South Africa 98 out of 190 countries on regulations pertaining to construction permits and 108 regarding the registering of property. To build a R4-million warehouse in Johannesburg, Gauteng, it will take 20 procedures and 155 days to obtain licences and permits, to complete required notifications and inspections and to obtain utility connections. By comparison, sub-Saharan Africa’s average is 15.10 procedures and 145.40 days to do the same (World Bank, 2020). Infrastructure constraints South Africa faces serious limitations when it comes to basic infrastructure and services that are required for the successful execution of projects. The electricity supply issues are well documented, with the country having experienced intense periods of loadshedding in recent years. South Africa is also facing a water crisis, in part owing to a lack of skilled water engineers and insufficient infrastructure maintenance and investment. About 56% of the more than 1 150 municipal wastewater treatment works and about 44% of the 962 water treatment works are in a ‘poor’ or ‘critical condition’ and in need of urgent rehabilitation and skilled operators. About 11% of this infrastructure is completely dysfunctional (DWS, 2019). Road infrastructure is also deteriorating. More than half of the country’s unpaved road network is in ‘poor’ to ‘very poor’ condition, while about one-third of the paved network is in similar condition. The Eastern Cape, Free State, Limpopo, Mpumalanga and the North West, in particular, are struggling with the maintenance of their respective road networks (Frost & Sullivan, 2021). Competency shortcomings The lack of appropriate skills in strategic positions in government is a concern. Local government, in particular, grapples with low competency levels as municipalities battle to attract, retain and train and employees with the requisite skills leading to a deficit of experienced staff. There is a disparity between metropolitan and rural municipalities and their ability to attract talent. Each year, billions of rands are spent on wasteful expenditure, highlighting the lack of accountability, weak project management and the high level of vacancies in key positions across municipalities across the country. The Auditor-General’s report for 2020/21, however, paints a bleak picture of the state of local government, with only 27 (11%) of the 257 municipalities receiving clean audits. It also shows that the resourcing of 122 finance units (32%) was either ‘concerning’ or ‘requiring intervention’, owing to staff vacancies, inadequate skills or a combination thereof (Maluleke, 2021). Shortcomings in municipalities have a direct impact on project planning, execution and management. Concerns have been raised about whether municipal employees understand contracting or what contracting methods are used. The private sector should be called upon to assist municipalities in project management and project spend. Long project lead times The government infrastructure programme lacks urgency and adequate scale. Industry players participating in the ISI discussion argue that, despite pronouncements by government, actual projects are slow to materialise. Poor planning and budgeting Weak integrated and spatial development planning, misaligned government budgets and weak leadership and management are to blame for project failures. Government often operates in silos, which hampers the effective delivery of infrastructure. For example, an affordable housing development will be delivered on time, but a lack of coordination among government departments means that bulk services upgrades or social infrastructure, such as a school or a clinic, are not delivered at the same time. A development that should have been conducive to growth is relegated to a dormitory suburb. Municipalities also fall short in project management, despite being required to draft and present annual integrated development plans (IDPs), in which all projects that are planned and ongoing are listed. The failure to properly plan, present and implement IDPs results in failing infrastructure. For example, raw sewerage flowing into freshwater catchment areas or erratic water supply. It is argued that IDPs and other strategic plans fail when the task at hand is not appropriately quantified, resulting in faulty budgeting and a failure to measure and track progress. There is also a mismatch between policy and affordability. In housing for instance, the focus is on densification, but that is not necessarily affordable. Town planning failures exacerbate problems at municipal level, with buildings being erected on vacant land without consideration of complementary infrastructure. Political interference in planning and execution of projects, a lack of accountability, as well as corruption further stifle development. Municipalities are hamstrung by a short-term view, and they seldom look past the medium-term expenditure framework. The focus on this three- to five-year horizon is not conducive for multiyear projects or developments. Budget and funding decisions often focus on the capital expenditure for the creation of infrastructure and do not take into account the full life-cycle cost of infrastructure, resulting in poor maintenance planning later on. Skills deficit South Africa’s skills deficit is a widely reported concern. The country is not only losing engineers and other highly skilled technical people through emigration, but skills transfer and training are not keeping up with requirements. Training of skilled and semiskilled personnel in the construction industry is important to ensure that infrastructure work is of high quality. Subcontracting requirements Government has introduced a requirement that 30% of public procurement contracts be subcontracted to designated groups to advance transformation in the economy. Where feasible, subcontracting is compulsory for tenders above R30-million (National Treasury, 2017). While the industry considers transformation as imperative, the 30% subcontracting requirement is a contentious issue. There is concern that in a competitive market, adverse cost effects are mainly being borne by main contractors, which is not sustainable in the medium to long term. The requirements increase the risk for the main contractor and reduce its span of control over the delivery timeframe, budget and quality of work (Massey, 2021). The payment of subcontractors is also an area of concern. Smaller subcontractors must be paid within 30 days, but often the main contractor is under pressure as payment from the client is delayed. It is important that there be improved synchronisation of such payment cycles. Tenders and procurement Several issues were raised regarding tenders and a lack of trust between government and the private sector in the tendering process. Government’s inability to correctly determine the cost of infrastructure results in inflated tenders being awarded, or tenders that underestimate the true cost of delivering the infrastructure. There is frustration regarding the disqualification of bidders, which appears arbitrary and vague amid a lack of transparency in the tender adjudication process. To address these concerns, professionals who specify the bid should be involved in the adjudication process. The Gauteng Department of Roads and Transport’s open tender system is a model to emulate to restore confidence in public procurement. The open tender process includes public scrutiny of the opening of the tender boxes and imprinting of all documents, appointing external, independent probity auditors to scrutinise every phase of the tender evaluation process, and importantly, the public adjudication of the decision on the recommended service provider where bidders, the media and interested members of the public can watch the proceedings. It also takes too long to award tenders and the ratio of tenders that are awarded is low. Safcec has called out the City of Cape Town for its slow pace in awarding tenders. According to the forum, the City advertised a road rehabilitation project in May 2019 and gave contractors only one month to tender, while it took the city 16 months to assess the applications and appoint six contractors for the work in October 2020 (IOL, 2020). Further, a lack of trust between the public and private sectors in the tendering process results in more demands for performance bonds. A performance bond protects the client from a contractor’s failure to perform according to contractual terms. In the current circumstances, the low level of trust means that even smaller projects with contract values of under R5-million require performance bonds. Concern has been raised about the abuse of tender panels, comprising a selection of prequalified providers, who are considered preferred suppliers. Although a tender panel simplifies the procurement process, it may reduce competition and open the process to corruption. Weak partnerships Industry participants raised concern about partnerships between government and the private sector. There is a view that government does not consult the construction industry and contractors in early infrastructure planning and design. Early contractor involvement will mitigate many risks during the implementation phase of projects and will save government money. PPPs also need to be streamlined. Interventions for fostering growth Suggestions to enhance investor confidence Build leadership and management skills Leadership and management failures are arguably the greatest single stumbling block to effective service delivery and development. It is stated that it is often not the lack of capital that stops service delivery, but the inability by senior officials to activate and manage the process. Enhance private-sector involvement Move away from a public-sector driven economy to a PPP-driven economy, in which the private sector is more involved in driving infrastructure investments. The private sector will fund infrastructure if there is a return on investment and if corruption can be rooted out. The private sector must be treated as an equal partner to the public sector to foster real partnerships. Consult contractors and the construction industry early on in a project to save government money by mitigating risks during the implementation phase. Embrace PPPs where they deliver better value for money. PPPs will reduce demands on the fiscus and can be used to fill finance gaps for infrastructure development. Streamline PPPs to reduce complexity. Fix municipalities A new way of thinking is required regarding municipalities, particularly district and rural municipalities, where competency is lacking. Some of the suggestions to get municipalities working again are: Establish a model to allow for the private sector to partner with local government. This will speed up development. The private sector must be involved throughout the entire cycle, from budgeting, financial management, maintenance and supplementing professional skills. Professionalise local government to maximise its development impact. Municipalities need to conduct proper planning and improve the management of budgets and cash flow. Enforce accountability for qualified audits and take people to task for failures. Equally, promote clean audits and prioritise the eradication of corruption. Consider bonus-driven targets that incentivise better performance. Simplify management systems. Officials set themselves up for failure because of unwieldy procedures. Local participation and skills transfer Ensure skills are transferred to local communities surrounding big infrastructure projects. Increased local participation could assist, to some extent, with the problems that the industry faces regarding the so-called construction mafia and the disruption of project sites. Maintain infrastructure Abandon the ‘run-to-failure’ approach where maintenance is conducted only when infrastructure fails. Budget for the full life cycle of a project, including operations and maintenance, rather than considering only the cost of planning and construction. A focus on proactive, as opposed to reactive or emergency, maintenance will save costs and prolong the infrastructure’s life span. Remove bottlenecks to development Red tape and bureaucracy are slowing down development. Regulatory timeframes for approvals must be expedited. A suggestion is to establish a council overseeing the approval processes and to deal with any appeals. For example, should an application fail to be processed in the specified timeframe, the overarching body should determine the reasons for it – whether it be an apathetic official or an issue with bulk services. More land must be made available for development. A rapid land release for housing is needed and government has tracts of land that can be used for this purpose. Accelerate the planning for bulk services and invest in the provision and maintenance of services, such as electrical installations, water reservoirs and distribution networks, sewerage treatment works and roads. Dedicated spending is needed to get maximum delivery traction. Rework the tender process The tender process is cumbersome, expensive and an inhibitor for development. While the tender system should not be done away with, there is a need for government tenders to be more specific, streamlined and simplified. Tender submissions tend to contain a lot of duplicated information, which adds time and costs to the process. Bids out for tender must be awarded timeously. Industry participants are concerned that too many government tenders are issued for purely speculative or budgeting reasons with no intention or ability to follow through. Sharpen focus on sustainable developments A greater emphasis must be placed on planning and building sustainable developments – cities that are planned with job opportunities in mind, with fit-for-purpose infrastructure and that are built with materials that have sustainability in mind. Conclusion The discussions with the construction industry have highlighted that South Africa must move away from a public-sector driven economy to one in which PPPs play a more predominant role. Government must acknowledge that it alone cannot create the jobs that are required to place the economy on a path of faster economic growth. Instead, a conducive environment must be created for the private sector to flourish and to attract the investment that is required. There is also a unanimous view that failing municipalities, often run by staff and managers who do not have the required skills set or who lack ethical leadership, must be fixed urgently to unleash a new wave of development. To achieve this vision, the private sector should be roped-in to partner with municipalities to better leverage private-sector expertise, capacity and experience. The restoration of working municipalities is key to a working and growing economy. Overall, process must be kept simple and transparent. This must include keeping tender and approval procedures simple, and streamlining PPPs to maximise efficiency and remove bottlenecks to development. References Bekker, G. 2021. Municipalities’ project management falling short, July 23, 2021. [Online]. Available at: https://www.engineeringnews.co.za/print-version/municipalities-projectmanagement-falling-short-2021-07-23 [accessed November 27, 2021]. Bureau for Economic Research. 2021. Weekly Review, Number 45, November 22, 2021. [Online]. Available at: https://www.ber.ac.za/knowledge/pkviewdocument.aspx?docid=15053 [accessed November 27, 2021]. Business Times. 2021. Infrastructure investment set to get a leg up from new forum, November 28, 2021. [Online]. Available at: https://www.businesslive.co.za/bt/businessand-economy/2021-11-28-infrastructure-investment-set-to-get-a-leg-up-from-new-forum/ [accessed November 29, 2021]. Department of Public Works and Infrastructure. 2021. National Infrastructure Plan 2050, August 10, 2021. [Online]. Available at: http://www.publicworks.gov.za/PDFs/44951_10-8_ PublicWorksInfras.pdf [accessed November 27, 2021]. Engineering News. 2021a. Eskom officially declares Lethabo tower collapse an act of sabotage. November 19, 2021. [Online]. Available at: https://www.engineeringnews.co.za/article/eskomofficially-declares-lethabo-tower-collapse-an-act-of-sabotage-2021-11-19 [accessed November 27, 2021]. Engineering News. 2021b. TFR bemoans unprecedented levels of cable theft, vandalism, November 10, 2021. [Online]. Available at: https://www.engineeringnews.co.za/article/tfrbemoans-unprecedented-levels-of-cable-theft-vandalism-2021-11-10 [accessed November 27, 2021]. Engineering News. 2021c. President urges communities to support N2 toll road project, September 23, 2021. [Online]. Available at: https://www.engineeringnews.co.za/article/ president-urges-communities-to-support-n2-toll-road-project-2021-09-23/rep_id:4136 [accessed November 27, 2021]. IOL. 2020. City of Cape Town slammed by civil engineers for slow pace of awarding tenders. November 22, 2020. [Online]. Available at: https://www.iol.co.za/capeargus/news/city-of-capetown-slammed-by-civil-engineers-for-slow-pace-of-awarding-tenders-efab7ea5-4f48-4328-a27c48cf0491697f [accessed November 27, 2021]. IOL. 2021. Call for government to deal decisively with dangerous ‘construction mafia’, September 10, 2021. [Online]. Available at: https://www.iol.co.za/news/politics/call-forgovernment-to-deal-decisively-with-dangerous-construction-mafia-52388153-c811-4058-acde9eb73bad6345 [accessed November 27, 2021]. Maluleke, T. 2021. Consolidated general report on the local government audit outcomes 2019/20, June 30, 2021. [Online]. Available at: https://www.agsa.co.za/Portals/0/Reports/ MFMA/201920/2019%20-%2020%20MFMA%20Consolidated%20GR.pdf [accessed November 27, 2021]. Massey, I. 2021. Opinion: South African construction contract participation requirements appear to be out of touch with reality, October 28, 2021. [Online]. Available at https://www. engineeringnews.co.za/article/opinion-sa-construction-contract-participation-requirementsappear-to-be-out-of-touch-with-reality-2021-10-28/rep_id:4136 [accessed November 27, 2021]. National Treasury. 2017. Preferential Procurement Policy Framework Act, 2000: Preferential Procurement Regulations, January 20, 2017. [Online]. Available at: http://www.thedtic.gov.za/ wp-content/uploads/PPPFA_Regulation.pdf [accessed November 27, 2021]. Reserve Bank, 2021. Quarterly bulletin – no 301, September 28, 2021. [Online]. Available at https://www.resbank.co.za/en/home/publications/publication-detail-pages/quarterly-bulletins/ quarterly-bulletin-publications/2021/FullQuarterlyBulletinNo301September2021 [accessed November 27, 2021]. Statistics South Africa. 2021a.Gross domestic product, Q4 2020, March 9, 2021. [Online]. Available at: http://www.statssa.gov.za/publications/P0441/P04414thQuarter2020.pdf [accessed November 28, 2021]. Statistics South Africa. 2021b. Quarterly Labour Force Survey, Q1, June 1, 2021. [Online]. Available at: https://www.statssa.gov.za/publications/P0211/P02111stQuarter2021.pdf [accessed November 27, 2021]. Statistics South Africa. 2021c. Quarterly Labour Force Survey, Q2, August 24, 2021. [Online]. Available at http://www.statssa.gov.za/publications/P0211/P02112ndQuarter2021.pdf [accessed November 28, 2021]. Webster, M. 2021. SONA infrastructure pronouncements: Safcec suggested points of emphasis for 2021 Budget Vote, February 24, 2021. [Online]. Available at: https://www.safcec.org.za/ news/553366/SONA-Infrastructure-Pronouncements-SAFCEC-Suggested-Points-of-Emphasisfor-2021-Budget-Vote.htm [accessed November 27, 2021]. World Bank. 2021. Doing Business, November 2021. [Online]. Available at: https://www. doingbusiness.org/en/data/exploreeconomies/south-africa#DB_dwcp [accessed November 27, 2021]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

The Inclusive Society Institute is currently engaging various economic sectors as part of its extensive economic research project, which will culminate in a comprehensive ‘Blueprint for rejuvenating South Africa’s economy’. In a series of dialogues, the various sectoral stakeholders and policymakers are engaged in seeking answers to the all-important questions aimed at gaining an understanding, from the particular sector’s perspective, as to what the country needs to correct policy wise, and what new initiatives / policies should be introduced to shift the economy onto a higher growth trajectory. In the constructive dialogue with labour, which was held 15 February 2022, some important issues raised, including, amongst others: An acknowledgement that the economy is in crisis and needed all hands-on deck to place it onto a new growth trajectory. There were problems with the current macro-economics, which, in the view of labour, relied too heavily on neo-liberal values. There needs to be greater focus on positioning South Africa as a developmental state. The state is failing, or at least failing to implement policy. And the continual shifting of ideology is not helpful. Public policymakers need a wake-up call with regard to the state of social cohesion in the country. On corruption, there was a strong feeling that “the crooks must be jailed”, and that those from the political establishment need to be prioritised so as to set the example and create investment confidence. The place of immigrants in the economy needs to be thoroughly considered. Localisation and circulation of the Rand within the country was now more crucial than ever. The tax-system needs to be re-looked. Are the rich sufficiently taxed? Is there space for targeted solidarity taxes? Don’t keep changing policies every five years. Policy certainty is needed. There needs to be balancing between the needs of the financial sector and that of the real economy, for example, credit allocation to emerging manufacturing firms. Urgent policing of infrastructure is needed. Take home message: Dealing with the economic woes as a matter of urgency. Either leadership must do it, or society will do it for them.

Occasional Paper 2/2022 Copyright © 2022 Inclusive Society Institute 50 Long Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute. DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. FEBRUARY 2022 by Prof William Gumede Associate Professor, and former Convener, Political Economy, School of Governance, University of the Witwatersrand; and former Senior Associate and Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; and author of South Africa in BRICS (Tafelberg) Introduction Singapore’s People’s Action Party (PAP) offers valuable lessons for the ANC and other African liberation and independence movements, in how to turn themselves into effective developmental parties. This type of political body has the necessary capacity to govern diverse countries inclusively and manage the complex development strategies that are needed to turn ethnically diverse former colonies into highly industrialised, racially inclusive and peaceful countries. The PAP transformed itself from a party of independence – a typical broad front spanning trade unions, communists and small business – into a developmental party with pragmatic policies, merit-based leaders, and with honest, anti-corrupt and ethical governance. Unlike many other independence and liberation movements, especially those in Africa, once in power, the PAP did not wallow in victimhood, or blame colonialism or imperialism for everything that went wrong or for self-inflicted failures. Instead, it focused its energy firmly on the present, the future and on tackling problems pragmatically[1]. The PAP used its postcolonial hegemony over society better than Africa’s dominant independence and liberation movements. It transformed Singapore within one generation from dirt-poor at independence from Great Britain in 1965, into a highly developed economy. At independence Singapore had no mineral resources, no significant industries and imported its energy, food and water[2]. In 1965, Singapore’s nominal GDP per capita stood at US$500 – the same as Mexico at the time. In 2015, GDP per capita rose to US$56,000 – similar levels to Germany[3]. Singapore had caught up with industrial and former colonial powers. The country managed to make income distribution more equal on the back of concentrated focus on quality education, improving technical skills and fostering entrepreneurship in both the public and private sectors[4]. In contrast, almost all African countries within one generation became significantly poorer, more corrupt, more ethnically divided and more dysfunctional than they were at independence. By delivering industrialisation, widespread prosperity and racial peace, the PAP ensured its continued legitimacy[5]. With few exceptions, African independence and liberation movements have been successful in opposing colonial or apartheid regimes. However, they have failed to use their hegemony over their societies to make the transition as governing parties who can successfully manage the kind of intricate state-building, industrialisation and development so effectively implemented by the PAP. Most importantly, the PAP is the only party after independence that renewed itself while in power. It changed independence-era policies, ideologies and ideas for pragmatic ones, and forcefully retired veteran struggle leaders who were not competent, in spite of their “struggle” credentials. The party brought in new leaders, many of whom were never part of the “struggle” or, in some cases, were not even members of the party. The PAP dealt firmly with corruption within the party and state – jailing senior leaders in the party and government implicated in corruption, even if they were struggle grandees. The party introduced a strict meritocratic system and governed at all times in the widest public interest, not only in the interest of its struggle leadership elite, members or core constituencies. The shock therapy introduced by the PAP to renew itself offers many lessons for the ANC and other African liberation and independence movements, such as Namibia’s Swapo or Algeria’s FLN, who have backslid in government. PAP – an independence party of the Left The PAP was established in 1954 as a party to fight for the independence of Singapore from Great Britain. Lee Kuan Yew, the founding father of post-independence Singapore, was one of the founders of the PAP. The party was similar to many African liberation and independence movements, a party of the Left[6]. However, unlike many African liberation and independence movements who adopted either Marxist-Leninism, African variants of socialism and communalism, democratic centralism, and state-led development, the PAP pursued social democracy, adopted pragmatic market-based policies, and partnered with business, including multinationals. The Singaporean thinker, Chan Heng Chee says that the PAP ideology was that of pragmatism[7], meaning adopting policies based on whether they produce results, and if they do not, rejecting them, and not basing policies on dogma or the belief in an absolute truth. Lee Kuan Yew explained the PAP policy approach as “rational” decision-making[8]. Michael Hill and Lian Kwen Fee said that the PAP adopted ‘‘purposive rational policies’’, which “requires planning and considerable quantitative analysis to complement a very strong strain of empiricism. If the leaders find that a policy is not working or that it is producing unintended results, the PAP will jettison it without any sentimentality”[9]. Many African liberation and independent movements of both the left and the centre, often also pursued left populist social, political and economic policies, whereas the PAP consistently rejected populism. The PAP essentially almost became “non-ideological” in government[10]. The PAP has been exceptionally “responsive” to citizens’ concerns[11], contrary to most African liberation and independence movements, who often take for granted that their supporters will vote for them because they supposedly brought “freedom”. The PAP also focused on the long term, rather than the short term, whereas many African liberation and independence movements focused largely on the short term, undermining long-term sustainability. The PAP focused on making “things work”, delivering quality basic public services on time, making “basic utilities function efficiently”, and ensuring new “infrastructure is intelligently planned with a long-range vision in mind”[12]. PAP’s pragmatic policy turns away from liberation ideology At independence local and international business were alarmed by the rise to power of the PAP, because of its left-wing history. As a result, many local and international companies moved their head offices to other countries[13]. However, the PAP proved the market doubters wrong. The PAP cobbled together an industrialisation strategy, focusing on export manufacturing, unlike many African liberation and independence movements, who rarely focused on industrialisation, but rather concentrated on redistribution of colonial or apartheid-inherited assets, land and businesses as the main strategy. Ravi Menon, Managing Director of the Monetary Authority of Singapore, the country’s central bank, says that in 1965, Singapore made two strategic economic decisions which broke from accepted left-wing developing country independence ideology. Firstly, it moved away from a strategy of import-substitution to one of export-led industrialisation. Secondly, the country went all out to attract foreign multinationals – given the fact that it did not have its own industry players, to drive industrialisation. “The government developed industrial land, put in place infrastructure facilities, reformed labour laws to promote industrial peace, and invested in basic education with emphasis on technical skills relevant to industrialisation. Sound fiscal and monetary policies ensured macroeconomic stability and underpinned investor confidence.”[14] By 1975, the country’s manufacturing share of GDP had expanded to 22% from 14% in 1965 and the economy almost reached full employment[15]. The country’s manufacturing drive focused on making basic products that were needed by the population, such as fishhooks, matches and mosquito coils. When it reached a sizeable new manufacturing base, it changed track to focus on “moving up the value chain towards more capital-intensive and skill-intensive activities”[16]. The new capital- and skill-intensive strategy, by the late 1980s, yielded a large value-added sector in electronics, component and precision engineering and petrochemicals[17]. Such was the expansion of the electronics industry, which started from a zero-base, that in the 1980s Singapore became the world’s leading producer then of hard disk drives, the early method of memory storage used in computers[18]. “The first two decades of Singapore’s economic history could be described as the ‘take-off' phase. It was the period when the economic fundamentals of prudent public finances, sound monetary policies, co-operative industrial relations, outward orientation, and market-based strategies took root. The economy grew by an average of about 10% each year during this period, and Singapore emerged as a newly-industrialised economy at the forefront of developing countries”[19]. Private sector-led growth, rather than state-led growth The PAP encouraged private sector-led growth, rather than state-led growth, unlike many African liberation and independence movements, who discouraged private sector-led growth, prioritizing state-led growth. It focused on export-led manufacturing. It eschewed import substitution, the policy of replacing foreign imports with domestic production, to focus on manufacturing locally for export abroad. The party’s post-independence economic strategist, Goh Keng Swee, strongly pushed industrialisation as a way to foster growth and create jobs, rather than using redistribution of existing or colonially inherited wealth[20]. The state partnered with business – predominantly foreign multinationals. In contrast, African independence and liberation movements nationalised many local and foreign companies, or introduced indigenisation or empowerment programmes, where the state or local political capitalists close to governing parties get slices of local or foreign companies. The PAP used private sector individuals who had previously successfully managed large companies to lead the implementation of critical government policies. For example, the banker, Lim Kim San, was appointed to lead the government’s pillar redistribution and industrialisation strategy, its housing development programme, which he led spectacularly successfully. It is very unlikely that a PAP politician or activist who had never led a complex commercial organisation, as Lim Kim San had, would have been so successful in driving the housing development programme. The party sought out progressive outside expertise for help. They did not take on Marxist-Leninist or neo-liberal advisors. Instead, Singapore took lessons from Japan’s successful post-Second World War industrialisation, the Dutch and German industrialisation following the end of the Second World War, and the United Nations Development Programme, which is more sustainable development-orientated, than say the World Bank or International Monetary Fund. It particularly sought the advice of the Dutch social democratic economist Albert Winsemius, who became economic advisor for the country from 1960 to 1984[21]. The PAP uniquely used multinationals in Singapore to lead industrialisation – because at independence there were no large indigenous companies, international multinationals led the export manufacturing expansion[22]. The PAP government did not nationalise colonial-era local and foreign businesses – as has been the case in many African independence and liberation movement-led countries. The party’s government encouraged local and foreign investment, introducing tax holidays, low taxes, and establishing the Jurong industrial estate[23]. It also involved foreign multinationals in partnering with the government in industrialisation and partnered with local and foreign businesses to stimulate growth, industrialisation and development. The PAP government focused all-out on revamping the colonial education system, making the system fit for purpose for industrialisation. It put pressure on the trade union movement, aligned with the PAP to strike compromises to encourage economic growth, employment and business creation. Redistribution that focuses on industrialisation, infrastructure and education The PAP government-built redistribution strategies on industrialisation, infrastructure and education. It constructed its infrastructure programme around building low-cost housing – forging a manufacturing industry link to the inputs of the housing programme, fostering technical education and forming inclusive ethnic communities around the housing programme[24]. As stated earlier, the banker, Lim Kim San, was put in charge of the rollout of the housing programme – which he did very successfully. The government also used the housing expansion to integrate different ethnic communities, to foster multiracialism and common nationhood. The PAP’s land reform strategy was pragmatic, not ideological or vengeful or emotional. In 1966, the party enacted the Land Acquisition Act, which made it possible for the government to acquire private land for public purposes[25]. The Act provided for compensation to private owners of land acquired by government, which was land that was in “surplus”, vacant or that private owners wanted to willingly sell. Land in productive use remained largely untouched. Between 1959 and 1984, the government acquired around one-third of the total land area of Singapore. An Appeals Board was established, with independent members, to mediate in any disputes over the amount of compensation between private landowners and government. The Act fixed compensation at market value as of 30 November 1973. The PAP did not pursue affirmative action and empowerment programmes for previously disadvantaged communities, such as the Malay communities. They prioritised lifting everyone out of poverty, giving the poorest of all communities a leg up. They focused especially on education as a development, growth and empowerment strategy. In 1981, the Prime Minister established Yayasan Mendaki (Council for the Education of Muslim Children) to boost the educational performance of poor Malays and to promote a cultural change to make education a priority among the community[26]. To finance the Mendaki scheme, the government deducted 50 cents from every Malay-Muslim employee’s pension fund contribution – which the government matched[27]. Prioritising entrepreneurship After the Second World War, Singapore – like other successful East Asian economies such as South Korea, Taiwan and Japan – pushed entrepreneurship. This is the reason why the country is now more advanced than all African countries, which did not follow that route. By the late 2000s, Singapore had become one of the world’s leading countries for start-up ecosystems[28]. High-tech manufacturing is now the country’s main focus in its drive to ever-increasing manufacturing output. The PAP, after coming into power, ditched the rigid ideological view that almost all independence parties of the Left – whether in Asia or Africa – had during their independence struggles, that only the state should lead development (Gumede 2017). Rather, the party’s leadership under Lee Kuan Yew prioritised entrepreneurship[29]. The PAP’s focus was not on what is called “necessary entrepreneurship”, meaning “people who by necessity, the unemployed or the unemployable, resort to creating or starting their own business”[30], but on a whole-of-society entrepreneurship[31]. The PAP government initially focused on attracting foreign multinationals. But by the late 1970s it began to concentrate on transforming the local small business sector into an export manufacturing sector. A 1985 government report, the Sub-Committee Report on Entrepreneurial Development, proposed that the government foster a countrywide entrepreneurial spirit by inculcating entrepreneurship into the education system, into the country’s work culture, and by encouraging local companies to internationalise, to force them to become more entrepreneurial[32]. The Singapore government itself also played the role as an entrepreneur. Tony Fu-Lai You describes the term “state entrepreneurialism” and David E. Osborne and Ted Gaebler (1992)[33] called it “entrepreneurial government” for the way a state itself could function as an entrepreneur[34]. The PAP introduced merit-based appointments to the public service, rather than cadre deployment, which brought large numbers of entrepreneurial minded new public servants into government. Lichauco (1988) called such entrepreneurial minded public servants “entrepreneurial agents of the state”[35]. When the PAP’s left-wing, communists and trade unions opposed the new entrepreneurial direction, Lee Kuan Yew, like other leaders of independence movements did not try to hold the left and moderate factions of the party together for the sake of “unity”, which would invite policy paralysis, but instead encouraged them to leave. The far-left faction’s opposition to the party’s focus on driving the private sector to become prominent in leading industrialisation, combined with its opposition to securing a merger between Singapore and Malaya, caused it to eventually leave the PAP in 1961. The PAP leadership did not try to accommodate them by backing away from private sector-led industrialisation for the sake of unity. Most African governments and leaders have either actively discouraged or were indifferent to entrepreneurs, and rarely fostered supporting institutions, policies and environments for entrepreneurship. Since independence from colonialism, African industrialisation, development and growth have been stunted because most governments have not explicitly encouraged entrepreneurship. And not much has changed since then. Entrepreneurs change society[36]: they create new industries, new jobs and new wealth, which more people can benefit from. They increase the size of economies and fuel economic growth. They inspire a virtual cycle of others trying their hand at starting new businesses, developments and initiatives too[37]. The French economist, Jean-Baptist Say, who in 1800 coined the term entrepreneur, described entrepreneurs as being able to “shift economic resources from an area of lower productivity into an area of higher productivity and greater yield”[38]. The celebrated economist Joseph Schumpeter wrote that an entrepreneur is “an individual who introduces something new in the economy, a method of production not yet tested by experience, a product with which consumers are not yet familiar, a new source of raw material or of new markets”[39]. Researchers Robert Hirsch, Michael Peters and Dean Shepherd in their book, Entrepreneurship, described entrepreneurship’s role in economic development as involving “more than just increasing per capita output and income; it involves initiating and constituting change in the structure of business and society”[40]. There is a widespread wrong belief among many in the ANC – in fact, among many African left-leaning liberation movements – that entrepreneurship is something bad, that it will lead to capitalist “exploitation” and will take power from the state. Such movements minimise the impact of entrepreneurial individuals to bring developmental transformation. In African liberation ideology, the individual often does not matter, and everyone is lumped as part of the “collective” or the “masses”. This is one of the reasons for the misguided phenomenon that anyone can be appointed to run complex organisations, even if they do not have the skills, as long as they are a “cadre”, which has led to the collapse of many African countries, state-owned entities and agencies. For another, in South Africa, tenderpreneurship – getting a tender, or political entrepreneurship, being middle-men or women based on one’s political connections, rather than competence or skill – is often falsely seen as entrepreneurship. It is not. It undermines entrepreneurship. Repositioning the PAP from an opposition independence movement into a pragmatic developmental party that can govern effectively The PAP, like African liberation and independence movements, was also at its inception a broad church, or popular front, bringing together different ideological groups – from the left, centre to the right – trade unions, businesses and conservative religious leaders, under one umbrella to oppose colonialism. Communists and trade unions were aligned with the PAP, a left-wing nationalist party which had “a reasonably broad working-class base”, the “English-educated” middle class, the “Malay blue- and white-collar workers”, and “the Chinese clan associations, trade guilds, and blue-collar workers’’[41]. At the party’s inaugural meeting more than 90% of those present were from the trade union movement. At independence, the PAP was dominated by strands: one the central democratic wing, led by Lee, and the other, the communist grouping, led by Lim Chin Siong. When the PAP repositioned itself into a governing party, with pragmatic policies, rejecting fixed old independence movement-era ideologies, appointing leaders on merit and firing incompetent, corrupt and dishonest leaders, many struggle cadres rebelled. The party’s left-wing groups also objected to repositioning the party as a pragmatic developmental party. Lee pushed to realign the PAP to turn it into an effective governing party. In August 1961, Lee forced out the communists from the PAP broad church because of irreconcilable ideological, policy and leadership differences. The PAP communists then, in 1961, formed the Barisan Socialist Party and took 35 out of 51 branches of the PAP with them. Extraordinary for any independence party, the PAP actively discouraged populism among members and leaders – at the threat of expulsion[42]. The government established a social pact coordinated body, like the Dutch equivalent, to forge a consensus between organised labour, business and the government on growth, industrialisation and multiracialism strategies[43]. Importantly, business had equal power to that of labour, although the PAP started off as a party aligned to trade unions. Trade unions were compelled to compromise short-term interests in favour of the country’s long-term industrialisation[44]. For example, they had to agree to productivity targets, accepting lower wages and increases and not to strike, to foster an investor-friendly labour market. African liberation and independence movements aligned to trade unions often give preference to their labour allies above that of business. This results in these governments alienating business, and therefore losing out on having the support of business, with its resources, ideas and capacity for the industrialisation programme. Many African liberation and independence movements, when in power, still keep together the different and opposing ideological groups which were part of the broad church of the anti-colonial or anti-apartheid struggle. However, keeping such disparate ideological groups within one governing party in power causes continual paralysis in decision- and policy-making and direction. This undermines development, industrialisation and societal peace, which need clarity in decisions, policies and direction. Introducing the rule of law and tackling corruption regardless of leadership seniority The PAP was from the start very firm against corruption, prosecuting its own powerful leaders for such malfeasance, to show that liberation leaders are not above the law, as is the case in many postcolonial societies. No successful country development can take place amidst corruption, incompetence and lawlessness. Most of the postcolonial African development initiatives were carried out under leaders who were corrupt, incompetent and acting above the law – which predictably caused these efforts to fail. Corruption included elected and public representatives living beyond their means or being unable to explain wealth, property or assets. Very early on in power, the PAP came out hard on corruption within its leadership ranks. In 1959, Education Minister Chew Swee Kee was forced to resign after evidence emerged of his involvement in corruption. The PAP prosecuted a key leader, Phey Yew Kok, who was also the powerful leader of the National Trade Union Council (NTUC), sending him to jail for accepting bribes. The party was also more determined to establish the rule of law at independence – and making everyone equal before the law. When Singapore was granted self-government by Great Britain in 1959, not at independence, which came only in 1965, PAP won the 1959 general elections and Lee became Prime Minister. In the first thirty days of gaining power in 1959, the PAP government broke up criminal gangs, mafia networks and illegal activities. The government continued with enforcing the rule of law – bringing to book both party members and leaders and ordinary citizens who were corrupt – which entrenches the rule of law. When they get into power, many African liberation and independence movement governments often exempt party members and leaders from the rule of law, while they police ordinary citizens not connected to the liberation or independence movement leaders. This unequal treatment of citizens depending on their connection to the leaders of the governing party undermines establishing a culture of rule of law – crucial for industrialisation, growth and development. In addition, party members did party organisational work as volunteers – receiving no payment or benefits[45]. Ethnic inclusivity in party and government Singapore is a multi-ethnic and a multilingual state. It consists of 77% Chinese, 14% Malay, 7.7% Indian and 1.3% Eurasians. Within these individual groups, there is extensive diversity. The PAP went out of its way to represent all ethnic groups at ‘‘all levels of the state and in state institutions’’[46]. It adopted multiracialism, a respect for and equality of all ethnic groups, and tolerance of differences, as one of the post-independence country’s “founding myths”[47]. In its policy of meritocracy within the party and the state, the PAP rewarded performance, excellence and efficiency on merit, rather than basing it on ethnicity. It went out of its way to protect minorities. The PAP was scrupulous in electing and appointing leaders who came from diverse ethnic backgrounds in the multiracial country, making multiracialism a guiding ideology. In elections to the central executive committee, to Cabinet, and for candidates for parliament, the party took care to have ethnic diversity and gender equality. Ahead of every election, the PAP vigorously reviewed existing representatives in terms of their performance, and to make place for new talent. Many African independence and liberation movements were often dominated by and prioritised one ethnic group, colour or region, excluding others. And thereby, marginalising the talents, ideas and resources of other groups who could have been marshalled for industrialisation, development and nation-building. Furthermore, in many African countries, one ethnic, colour or regional group, has often been scapegoated for the lack of advancement of another community. Many countries in which this happens have been plunged into ruin, social disorder and economic stagnation. Diversity in government, political parties and private organisations brings different skills, experiences and ideas together, which collectively spark innovation, boost performance and unleash dynamism. Merit-based deployment system to bring talent and marginal ethnic groups into the leadership in government and party In 1958, the PAP introduced one of the most successful cadre deployment policies of any former independence party[48]. The system, where minimum educational standards were set to become a cadre and certain kinds of people were excluded, was initially used to raise the quality of new party members. The Singapore cadre system was only used for the party itself, initially to recruit quality ordinary members, and then later to recruit talented ethnically and gender diverse members from outside the party for leadership within the party. In addition, the party used the cadre policy to headhunt new leaders who were not members of the PAP for leadership positions in the party, parliament and government. The public service of Singapore was ring-fenced from cadre development and had an inclusive merit-based system. The PAP vigorously pursued the strategy of merit within its own party and within the state. Elections to party leadership were largely on merit, but also included all ethnic groups, which lifted the best talent among its support base to the leadership of the party. The PAP was “obsessive about co-opting talent”[49] and they “ ‘constantly’ replaced ‘older MPs’ with the ‘best and brightest’ young talent that can be recruited”[50]. Parliamentary candidates were selected after interviews, competency assessments and lifestyle audits[51]. The PAP headhunted new talent based on their performance record, educational background and values for leadership in the party. During the first years in power, when it faced fierce competition from opposition parties, Lee Kuan Yew made a case for the PAP to recruit the country’s top talent: ‘‘It is a battle of ideals and ideas. And the side that recruits more ability and talent will be the side that wins’’[52]. In 1976, the PAP modified Shell, the oil company’s system of testing new executives to evaluate new recruits for party leadership. The Shell system involves testing candidates’ ability to analyse, imagination and sense of reality[53]. Critics have slammed the rigorous selection process saying it promoted elitism[54]. However, the merit-based system in the party and government was a key reason for the country’s economic growth, racial peace and political stability miracle. The PAP also established a meritocratic public service, setting entry examinations for new entrants, to recruit the nation’s best talent, no matter their ethnic, political or language affiliation. No African liberation or independence movement has created meritocratic public services. Rather, most appoint only cadres of their parties, or in some cases members of the ethnic, language or regional group dominating the party, to public service positions. Bringing the best talents continuously into leadership, getting rid of corrupt and incompetent ones and ensuring ethnic diversity in leadership appointments, made the PAP a much more dynamic political party than most African liberation and independence movements. These entities often elected leaders based on struggle credentials, loyalty to the leader and ethnic, colour or religious affinity to the dominant leadership group. In contrast to the PAP in Singapore, in South Africa, the then general secretary of the ANC said the party will not do away with cadre deployment because the ANC do not want “graduates and businessmen and women who are competent, but who are hostile to the programme of the ANC”[55]. Lessons from the PAP for the ANC The ANC and other African liberation and independence movements would do well to learn from how the PAP, one of post war’s most effective former independence movements, transformed Singapore from a poor backwater into a prosperous, ethnically inclusive and peaceful society. The ANC is in deep crisis. It urgently needs renewal of policies, leaders and ideologies; to introduce merit in the party and state; and to make the party more racially, gender and youth inclusive. It needs to genuinely tackle corruption. African liberation movements like the ANC, in their fight against colonialism or apartheid build broad fronts, ranging from African traditionalists, Marxist-Leninists to free-marketers. But in power, governments need one set of policies, not a multitude of conflicting policies. To be an effective governing party, the ANC must have one set of coherent policies, and shed the groups that have ideologically different outlooks. Genuine renewal of the ANC necessitates realignment of the internal forces, groups and factions within the party. As the PAP got rid of the far-left, so too will the ANC have to rid itself of the populists. The ANC must also shed its ideological opposition to entrepreneurship, its dismissal of business, civil society and professionals, and instead genuinely partner with these social partners, in order to leverage the resources, ideas and capacity of these social partners to improve the capacity of the state. In fact, it needs to build new kinds of social pacts between itself, civil society, business and communities. Like the PAP, the ANC now needs to recruit new talented leaders from outside the party structures. The South African public sector must be fully ring-fenced from cadre deployment, which should be restricted to the ANC as a party deploying talent, ethnic, youth and gender diversity into their party ranks as part of deployment, not into government. South Africa’s public service must be an inclusive merit-based system – seeking out those from previously disadvantaged communities on merit also. The ANC leaders must restore the rule of law, by making everyone equal before the law. Top ANC leaders who have mass support, but who are corrupt, dishonest and criminal should not be shielded from prosecution. They must be expelled from the ANC. But the ANC government must also break untouchable parallel governments such as gangs, violent taxi associations and autocratic traditional leaders. The ANC must also firmly tackle the party’s own militia, such as the MK military veterans. Trying to renew, modernise and clean-up the organisational culture of any organisation, let alone the ANC, where corruption has become so entrenched, will meet with fierce resistance. When organisational cultures are deeply entrenched, leaders who want to change them are often deposed by members of the organisation. Serious reforms by President Cyril Ramaphosa to change the ANC organisational culture will likely cause a similar rebellion against him at the party’s December 2022 national elective conference, as happened against former ANC President Thabo Mbeki at the ANC’s 2007 Polokwane conference, when he tried to introduce overdue modernisation reforms of the ANC[56]. ANC President Cyril Ramaphosa will need to introduce shock therapy to shake up the ANC: be bold and lead, sack all corrupt leaders, and on merit bring in large numbers of new ANC leaders who have not been part of the current corrupt ANC structures. The party needs new ideas, new partnerships with business, civil society and professionals. If the ANC does not change, the party will lose the 2024 national elections. 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[38] Hollander, Samuel (2005), Jean-Baptiste Say and the Classical Canon in Economics: The British Connection in French Classicism. Routledge; School, Evert (2012). Jean-Baptiste Say: Revolutionary, Entrepreneur, Economist. Routledge. Sowell, Thomas (1973) Say’s Law: An Historical Analysis, Princeton University Press; Whatmore, Richard (2001) Republicanism and the French Revolution: An Intellectual History of Jean-Baptiste Say's Political Economy, Oxford University Press. [39] Schumpeter, Joseph A. (1949), "Economic theory and entrepreneurial history", in Wohl, R. R. (ed.), Change and the entrepreneur: postulates and the patterns for entrepreneurial history. Harvard University Press. [40] Robert Hirsch, Michael Peters and Dean Shepherd (2008) Entrepreneurship. McGraw-Hill. [41] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press. P.38. [42] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press, p. 14. [43] United Nations Development Programme (2015) “UNDP and the Making of Singapore's Public Service - Lessons from Albert Winsemius”, UNDP & Global Centre for Public Service Excellence, August. [44] Garry Rodan (1989) The Political Economy of Singapore’s Industrialization, London: Macmillan, pp. 157–60; Edgar H. Schein (1996) Strategic Pragmatism, Cambridge, MA: The MIT Press; Rachel van Elkan (1995) ‘‘Singapore’s Development Strategy’’, in Kenneth Bercuson (ed.), Singapore: A Case Study in Rapid Development, Washington, DC: International Monetary Fund, 1995, p. 17; Ho Khai Leong (2000) The Politics of Policy-Making in Singapore, Singapore: Oxford University Press; C.V. Devan Nair (1976) ‘‘Trade Unionism in Singapore’’, in C.V. Devan Nair (ed.), Socialism That Works, Singapore: Federal Publications. [45] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press, p. 41. [46] Joseph B. Tamney (1996) The Struggle Over Singapore’s Soul, Berlin and New York: Walter de Gruyter, p. 111. [47] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press, P.49; Lee Kuan Yew (1998) The Singapore Story: Memoirs of Lee Kuan Yew, Singapore: Prentice Hall, p. 56. [48] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press; Lee Kuan Yew (1998) The Singapore Story: Memoirs of Lee Kuan Yew, Singapore: Prentice Hall; Chan Heng Chee (1989) ‘‘The PAP and the Structuring of the Political System’’, in K.S. Sandhu and P. Wheatley (eds.), The Management of Success, Singapore: Institute of Southeast Asian Studies, pp. 70–89. [49] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press. P.39. [50] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press. P.39. [51] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press. P.39. [52] Lee Kuan Yew (1998) The Singapore Story: Memoirs of Lee Kuan Yew, Singapore: Prentice Hall. [53] Mauzy, Diane K.; Milne, Robert Stephen (2002). Singapore Politics Under the People's Action Party. Psychology Press, P.49; Lee Kuan Yew (1998) The Singapore Story: Memoirs of Lee Kuan Yew, Singapore: Prentice Hall. [54] Chan Heng Chee (1989) ‘‘The PAP and the Structuring of the Political System’’, in K.S. Sandhu and P. Wheatley (eds.), The Management of Success, Singapore: Institute of Southeast Asian Studies, pp. 70–89. [55] Gwede Mantashe (2014). “Comments following the ANC’s National Executive Committee meeting”. Johannesburg, June 9. [56] William Gumede (2012) Restless Nation: Making Sense of Troubled Times. Tafelberg. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

The Inclusive Society Institute (ISI) is working with the Swedish Embassy on a number of initiatives aimed at strengthening people to people relations. As part of this collaboration a dialogue between the Swedish Embassy, politicians and civil society held a roundtable discussion on social dialogue and the future of work. The ISI partnered wish the embassy in mobilising delegates to the dialogue, which proved to be a highly successful interactive session. The main thrust of the dialogue was to share the experiences of the Swedish companies’ initiatives and programs in South Africa under the auspices of the Swedish Workplace Programme. The ISI was represented by its Advisory Council Chairperson, Ms Buyelwa Sonjica, its CEO, Daryl Swanepoel and Dr Klaus Kotzé, who is coordinating the institute’s social democracy programme.

Copyright © 2022 Inclusive Society Institute 50 Long Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in November 2021 Author: Mariaan Webb Editor: Daryl Swanepoel Content Abbreviations & acronyms Introduction Identifying weaknesses Electricity tariffs and supply Infrastructure shortcomings Labour and community relations Localisation and black empowerment Mining narrative Planning and implementation gap Policy and regulatory uncertainty Slow on innovation Weak government Suggestions for fostering growth Conclusion References Abbreviations & acronyms BEE black economic empowerment GDP gross domestic product ISI Inclusive Society Institute PGM platinum-group metals Introduction South Africa is one of the world’s leading mining and mineral-processing nations. The country has the world’s biggest reserves of platinum-group metals (PGMs) and manganese, and is ranked among the top three countries for chromium, fluorspar, gold, vermiculite and zirconium reserves (Minerals Council, 2021a). For many years, mining has been the mainstay of the South African economy and the industry continues to be a valuable contributor. In 2020, mining added 8.40%, or R371.90-billion in nominal terms, to gross domestic product (GDP). Mining also provides the single greatest part of South Africa’s export revenues and employs directly, and indirectly, more people than any other comparable sector. The industry in 2020 provided direct employment to more than 452 000 people, which is 4.70% of the total formal nonagricultural employment (Minerals Council, 2021a). As a major exporter that competes with international players, South Africa must be competitive if it is to realise the true potential of its rich resource endowment. However, regulatory uncertainty, unreliable power supply, high electricity tariffs and rail and logistical shortcomings continue to negatively affect the sector, holding back investment and limiting its contribution to economic growth and development. This report by the Inclusive Society Institute (ISI) is a summary of themes that emerged from virtual discussions, held in November 2021, with participants from the mining industry to gather their views on what South Africa must do to remove constraints to economic growth and development. The report also puts forward suggestions on what can be done to accelerate GDP growth. The report is one in a series of ISI reports, which forms part of a broader research project to develop a New Economic Blueprint for South Africa. Discussions were also held with other sectors, including finance, manufacturing, construction, information communication and technology, and retail to canvass their opinions as part of the broader research project. Unless South Africa achieves much higher levels of economic growth for a sustained period, the country’s economic and social problems of poverty, inequality and unemployment will not be resolved. Identifying weaknesses Electricity tariffs and supply Electricity tariff increases since the onset of the power crisis in 2008 have been significantly above inflation levels, with a doubling in real prices from 2008 to 2012 and a further increase of 25% above inflation from 2012 to 2016 (Minnaar, 2021). Power utility Eskom argues that the pricing regime does not meet the requirements for cost-effectivity at an efficient operational level, but customers are concerned about affordability in relation to other countries. Above-inflation tariff increases have a substantial impact on the mining industry’s cost structure, jeopardising the viability of marginal and lossmaking mines and threatening to accelerate job losses at energy-intensive mines. In 2021, mining input cost inflation averaged 8.80%, but this will increase to 13.30% should Eskom’s latest requested tariff increases for 2022/23 to 2024/25 be approved (Langenhoven, 2022). The Minerals Council argues that the mining sector is a price taker and cannot influence selling prices. Therefore, cost increases erode profit margins and jeopardise the sustainability of the sector. The mining industry has also called for a more predictable price path for electricity. While Eskom will continue to supply the bulk of the mining sector’s power needs for some time, Minerals Council member companies have announced a pipeline of 3 900 MW of potential renewable-energy projects worth more than R60-billion that would, when implemented, substantially contribute to bridging the large country electricity supply deficit, diversify the country’s supply, reduce the sector’s carbon footprint and stabilise costs (Mining Weekly, 2021). Infrastructure shortcomings The mining industry has singled out logistics as one of its biggest domestic constraints, particularly for those companies producing bulk commodities, like iron-ore, coal, chrome and manganese. These firms have been unable to benefit from higher global commodity prices, in some instances record prices, because of rail and port inefficiencies. State-owned Transnet’s rail system faces major impediments stemming from high levels of theft and vandalism, among other operational challenges. The parastatal loses about 120 km of overhead cables a month, owing to criminality. Security incidents across the freight rail network have increased 177% in the past five years and the cost to Transnet and its customers has increased exponentially (Transnet, 2021). Africa’s top iron-ore producer, Kumba Iron Ore, has said that it cannot transport its premium steelmaking material from the mines in the Northern Cape to the Port of Saldanha on the West Coast, because of rail bottlenecks, costing the company billions of rand in lost revenue. Logistical issues also affect the movement of coal, with major producers Exxaro Resources and Thungela Resources having flagging concerns about rail shortcomings. The Richards Bay Coal Terminal last year exported its lowest volume of coal since 1996, owing to an inability to get coal from the mines to the export terminal, in KwaZulu-Natal. The rate mining companies are charged for rail services is also deemed to be uncompetitive. As mining companies are not the owners or operators of the rail services, it is difficult to influence Transnet to be more productive, innovative or to introduce better technology. In many other countries, private companies own or partially own the infrastructure in the logistics value chain. More private-sector involvement in rail and port logistics is considered a key enabler that can make South Africa more competitive. Plans are afoot for more private participation in logistics. Government is promoting greater private-sector participation in rail, including through granting third-party access to the core rail network and the revitalisation of branch lines. A major ports reform is also under way. Labour and community relations A stable labour workforce and sound community relations are key enablers in making mining companies globally competitive. Without stable relationships, the industry will not produce the tons that are required to compete on a global level. Civil society has a role to play in levelling the playing field between labour and mining companies. However, the mining industry is perceived as being too defensive in its interactions with civil society. Localisation and black empowerment Localisation, procurement and broad-based black economic empowerment (BEE) can be burdensome on the industry, when sufficient capacity does not exist in the value chain of smaller players. The Mining Charter requires that 44% of the total procurement budget be spent on South African manufactured goods by BEE-compliant companies, 21% on South African goods manufactured by black entrepreneurs and 5% on goods manufactured by BEE women entrepreneurs or youth-controlled companies. In respect of services, even higher percentages are set for procurement from majority black-owned suppliers. The Mining Charter provides that 60% of the total services must be procured from BEE entrepreneurs, 10% is to be procured from BEE-compliant companies and 10% from BEE women entrepreneurs or youth-owned companies (Department of Mineral Resources, 2018). Mining narrative The tone from politicians, some senior State officials and communities is one that is not always supportive of the mining industry, with a narrative that mining is the ‘big evil’. These messages sow mistrust and negatively affect investment appetite. Planning and implementation gap South Africa seems to be stuck in a phase of ongoing planning, often without much progress on the implementation front. This could be owing to a lack of political backing for certain plans or owing to a shortage of people with the necessary skill, professionalism and capabilities to implement plans. The private sector feels its assistance, offering specialists skills through secondments, is met with an unwelcoming attitude. Policy and regulatory uncertainty South Africa must address policy and regulatory uncertainty if it is to attract more investment in exploration and mining. South Africa attracted $194-million a year in exploration expenditure between 2000 and 2018, compared with Canada’s $2-billion a year and Australia’s $1.80-billion a year (Baxter, 2021). The Canadian public policy research organisation, the Fraser Institute, in its 2020 Survey of Mining Companies, released in early 2021, shows a regression in perceptions relating to South Africa as a mining investment destination. South Africa ranked sixtieth out of 77 jurisdictions for investment attractiveness and its attractiveness score worsened from 64.79 in 2019, to 56.33 in 2020 (Yunis & Aliakbari, 2021). In comparison, Botswana has been the top-ranking African country in the Fraser Institute survey for more than 20 years. In 2020, Botswana was the eleventh most attractive jurisdiction in the world for mining investment, with an investment attractiveness score of 81.48 (Yunis & Aliakbari, 2021). Minerals Council South Africa CEO Roger Baxter attributes Botswana’s success to the stability of its regulatory system. He notes that Botswana changed its Mines and Minerals Act in 1999 and has left it untouched since then. By comparison, South Africa has sought to implement an ongoing sequence of major changes to its mining laws and policy frameworks over the past 25 years. Botswana’s mining and prospecting rights application processes are also more streamlined than South Africa’s. In Botswana it takes 20 days to get a mining right for a major project and 40 days for a prospecting right. It takes vastly longer in South Africa to obtain the same licences. In South Africa, to secure a mining right takes on average 355 working days and a prospecting right 245 working days (Minerals Council, 2021b). Unresolved licensing applications currently hold back about R30-billion of committed investment by companies that cannot be spent, owing to red tape, including delays in approval of permits and mining right transfers, issuing of water-use licences and environmental permits (Baxter, 2021). Mining companies have difficulty explaining to shareholders, credit agencies and investors what the future of investment in South Africa holds, when the regulatory framework is not stable. At times the mining regulations, and the bodies empowered to implement them, are experienced as punitive and combative, rather than as collaborative. Slow on innovation South African mining urgently needs innovation. Over the past decade, multifactor productivity in South Africa, an indicator of innovation, has fallen by 7.60% (Baxter, 2021). The local industry is lagging its competitors when it comes to innovation. The mining industries of Australia and the Americas are at the forefront of, or leading, the charge in making their mines safer. They are introducing technology to get to deeper ores that using older technologies are not currently accessible at an economic rate. This is particularly important for South Africa, which has some of the world’s deepest mines. South Africa is not implementing policies, or support measures, to allow for productivity-enhancing measures to be introduced into its mines. Government is not clear on what its social strategy is with regard to innovation and technology, and how the country is going to adapt to it. Weak government The weakness of State entities and the failing of local and provincial governments are areas of concern for the industry. When the State fails to provide services, mining companies are forced to take on the role of ‘surrogate State’ as near-mine communities often expect private businesses to pick up the slack and provide housing and related services. This can result in tension between the industry and communities. Suggestions for fostering growth Conclusion South Africa has vast mineral resources – estimated to be worth $2.50-trillion – but unless the country manages to attract investment in exploration and mining, its minerals are going to stay in the ground. Providing certainty of policy and a predictable regulatory environment could speed up investment, which will drive up inclusive economic growth and much-needed employment creation. Improving the global competitiveness of South Africa would change the country’s economic growth trajectory. Modernising the economy, including the mining sector, will be key to achieving this goal and will require a new approach to technology and innovation. Partnering with the private sector will help the country be more competitive, and will unlock greater private-sector investment required in core infrastructure such as railways, harbours and electricity. To encourage private-sector participation, the country must continue to implement long-awaited structural reforms. In an environment often characterised by talk, rather than action, it is time for the country to roll up its sleeves and get things moving to create an investment framework that is conducive for investors to commit to South Africa. At the same time, the mining industry must seek buy-in from all stakeholders and be more vocal about the consequences of a scenario in which South Africa fails to encourage more resources investment. References Baxter, R. 2021. Address to the 2021 Minerals Council Annual General Meeting, May 26, 2021. [Online]. Available at: https://www.mineralscouncil.org.za/industry-news/publications/annual-reports [accessed January 23, 2022]. Bloomberg News. 2021. Coal and iron pile up in South Africa on rail constraints, October 21, 2021. [Online]. Available at: https://www.bloomberg.com/news/articles/2021-10-21/coal-and-iron-pile-up-in-south-africa-on-rail-constraints [accessed January 23, 2022]. Department of Mineral Resources. 2018. Draft broad-based socioeconomic empowerment charter for the mining and minerals industry, June 15, 2018. [Online]. Available at: https://www.gov.za/documents/mining-charter-broad-based-socio-economic-empowerment-charter-mining-and-minerals-industry [accessed January 23, 2022]. Langenhoven, H. 2022. MYPD5 – Nersa public hearings, January 21, 2022. [Online]. Available at: https://www.mineralscouncil.org.za/industry-news/media-releases/2022 [accessed January 23, 2022]. Minerals Council South Africa. 2021a. Facts and Figures 2020, October 14, 2021. [Online]. Available at: https://www.mineralscouncil.org.za/industry-news/publications/facts-and-figures [accessed January 23, 2022]. Minerals Council South Africa. 2021b. Integrated Annual Report 2020, May 26, 2021. [Online]. Available at: https://www.mineralscouncil.org.za/industry-news/publications/annual-reports [accessed January 23, 2022]. Mining Weekly. 2021. Minerals Council members could deliver up to 3 900 MW of supplementary electricity supply, November 23, 2021. [Online]. Available at: https://www.miningweekly.com/login.php?url=/article/minerals-council-members-could-deliver-up-to-3-900-mw-of-supplementary-electricity-supply-2021-12-10/searchString:minerals+council+members [accessed January 24, 2022]. Mining Weekly. 2021. South Africa’s RBCT exports lowest coal tonnages since 1996, January 25, 2022. [Online]. Available at: https://www.miningweekly.com/article/south-africas-rbct-exports-lowest-coal-tonnage-since-1996-2022-01-25/rep_id:3650 [accessed January 25, 2022]. Minnaar, U. 2021. Energize: A brief perspective on Eskom’s electricity tariffs, September 27, 2021. [Online]. Available at: https://www.energize.co.za/article/brief-perspective-eskoms-electricity-tariffs [accessed January 23, 2022]. Transnet. 2021. Media statement: Transnet continues to implement interventions to curb cable theft, June 10, 2021. [Online]. Available at: https://www.transnet.net/Media/Press%20Release%20Office/TRANSNET%20CONTINUES%20TO%20IMPLEMENT%20INTERVENTIONS%20TO%20CURB%20CABLE%20THEFT.pdf [accessed January 23, 2023]. Yunis, J. & Aliakbari, E. 2021. Fraser Institute Annual Survey of Mining Companies, 2020. [Online]. Available at: https://www.fraserinstitute.org/studies/annual-survey-of-mining-companies-2020 [accessed January 23, 2022]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 2/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. by Daryl Swanepoel MPA, BPAHons, ND: C.Admin Abstract The COVID-19 pandemic has resulted in strained relations between the two largest global economies, the United States of America (US) and China. This discord requires countries who have longstanding and strategic relations with both these nations to carefully navigate their affairs, adopting foreign policy positions that would maintain and strengthen their interactions with both. This paper examines the effect that COVID-19 and these strained relations has had – and may still have – on South Africa’s and Africa’s foreign policy towards China. In reflecting on the tricky position in which the US-China discord is placing South Africa and many other countries on the continent, the paper comes to a few key conclusions. Firstly, the US’s withdrawal from the WHO is ill-considered, especially at a time when the global COV ID-19 pandemic requires all nations to work together in solidarity to combat this disease. Secondly, based on the multitude of new cooperation commitments and aid packages extended from China to Africa during the pandemic, relations between the two are unlikely to be affected by the COVID-19-charged feud between China and the US. Thirdly, however, as the US too remains an integral partner to South Africa and Africa, this might see the African continent performing a difficult balancing act between the two feuding parties and their respective allies in the months and years to come. Upon writing this paper in early July 2020, more than 11 million people worldwide had contracted the COVID-19 virus, and more than 550 000 deaths had been linked to the disease (Deutsche Welle, 2020). The virus was first detected in the Chinese city of Wuhan, where officials started reporting cases in December 2019 (WHO, 2020). Its genetic sequence was shared publicly between 11 and 12 January 2020. All indications are that it has a natural animal origin and is not a manipulated or constructed virus (WHO, 2020). Nevertheless, accusations that the COVID-19 virus was created in a laboratory seem to persist. A study in Canada, for example, revealed that one in four Canadians believed there was at least some truth in the claim that the virus had emerged from a laboratory in Wuhan (Stecula, Pickup & Van der Linden, 2020). However, this notion appears to have been dispelled now that many researchers have studied the genomic features of the virus and have found no evidence of it being a laboratory construct. If it were, the genome sequence would have shown a mix of known and unknown features, which it does not (WHO, 2020). Yet the United States of America (US) continues to insinuate that “COVID-19 originated in a Chinese biolab” (Ecarma, 2020). They also blame China for not being transparent when COVID-19 was first detected, and for having tried to suppress the outbreak. At a news briefing in April 2020, the US secretary of state told reporters that his country believed that Beijing had failed to report the outbreak in a timely manner, in breach of World Health Organisation rules (Brunnstrom & Pamuk, 2020). The notion of China having behaved inappropriately in respect of COVID-19, and of the World Health Organisation (WHO) somehow being an aider and abettor, continues to gain momentum in US rhetoric. By 8 July 2020, it had escalated to the point where the US officially started the process of withdrawing from the WHO (Cohen, Hansler, Atwood, et al., 2020). How this growing discord between the US and China will affect other nations’ relations with China remains to be seen. Whether these tensions will sway or at least dampen enthusiasm to further strengthen ties with China is yet to be determined. That it could still have an impact cannot be ruled out, especially given the current US administration’s inclination to pressurise other nations to follow its lead. In 2018, for instance, the US threatened to cut funding to South Africa through its USAID programme when it emerged that South Africa had voted against their motion in the United Nations (UN) to declare Jerusalem the capital of Israel (Pather, 2018). USAID, through the United States President’s Emergency Plan for Aids Relief (PEPFAR), supports South Africa’s efforts to prevent and treat HIV/Aids and tuberculosis (USAID, n.d.). Granted, the aid was eventually not cut; in fact, South Africa received even more assistance in the form of a US grant of at least R410 million to combat the COVID-19 pandemic in the first half of 2020 (Home, 2020). For now, therefore, South African relations with the US appear to be sound (US Department of State, 2020). But how could the discord being sown by the US in relation to China and the COVID-19 pandemic affect Sino-South African and Sino-African relations, if at all? Placing South Africa in a tricky position The US is a key strategic partner to both South Africa and other African countries who share its values of democracy, the rule of law and good governance (DIRCO, 2020). It is also South Africa’s third-largest trading partner (South African Market Insights, n.d.). At the same time, South Africa’s strategic collaboration with China extends beyond bilateral interests, as the two nations have similar views on many global issues (DIRCO, 2020). In addition, China is South Africa’s largest trading partner (South African Market Insights, n.d.). The South African position to date has been that, given the global gravity of the COVID-19 pandemic, the US and China should engage in dialogue to address their concerns and resolve their issues in a peaceful and constructive manner. Convinced that the pandemic calls for a global inclusive solution, South Africa believes that the two global giants’ focus should be on providing support and assistance to vulnerable countries (DIRCO, 2020). As the world’s two largest economies, the US and China both have a responsibility to help restore the well-being of people across the globe by reviving the world economy, which has been devastated as a result of the COVID-19 outbreak (DIRCO, 2020). Already, the US-China trade war poses threats to the South African and African economies. Whilst Africa is not a direct target of the conflict, the impact of the quarrel is affecting the continent. The imposition of US tariffs on Chinese products has caused commodity prices and local currencies to fall. Major stock exchanges across Africa have been badly hit, which has shaken investor confidence in the continent. Indeed, it is predicted that the resulting slowdown of the Chinese economy could hinder the exports and government revenues of many economies across the African continent (Cazares, n.d.). The COVID-19/WHO spat adds another dimension to the threat that the uneasy US-China relationships hold for the African continent. Keep in mind that Africa is heavily dependent on WHO funding. The continent receives “more than double the budget allocation of any of the five other regions the WHO administers globally,” of which approximately 60% goes towards reducing infectious diseases (Baker & Hincks, 2020). Against this backdrop, the US’s decision [to cut funding to the WHO] could have its greatest impact on Africa’s ability to fight the pandemic since it is probably the region least equipped to fight it on its own (Fabricius, 2020). So, whilst South Africa has been measured in its response, this should not be mistaken for a lack of concern over the tensions between the US and China, especially during this period of global turmoil. Resolving US-China tensions is clearly in the global interest, particularly in so far as it affects Africa. In South Africa’s engagements in the multilateral arena, the country has emphasised the importance of the US and China bridging their differences. This it has done independently, and as chair of the African Union, as well as in the capacity of non-permanent member of the UN Security Council (DIRCO, 2020). Pointing to the US’s key role in the sustainability of the WHO and, therefore, in the prevention of future pandemics, South Africa has urged the US to reconsider its withdrawal from the WHO. Ultimately, the capacity of all global nations is required to help combat the deadly COVID-19 pandemic and similar future outbreaks (Lindeque, 2020). Impact of COVID-19 US-China discord on South Africa's and Africa's willingness to deepen Sino-African relations South Africa’s foreign policy is driven by five priorities. These are (i) strengthening cooperation within the Southern African Development Community (SADC), (ii) promoting the African Agenda, (iii) strengthening South-South cooperation, (iv) strengthening multilateralism, and (v) cooperating with strategic formations from the North. Its underpinning values are the promotion of global peace, development, and economic prosperity (DIRCO, 2020). This is the policy and values system within which the country’s strategic partnership with China is positioned. The South Africa–China partnership goes beyond narrow bilateral considerations, extending into the multilateral arena. The two nations have similar views on several global issues. The strategic partnership is guided by the respective partners’ shared aspiration to promote economic growth, development, and mutually beneficial cooperation to help eradicate inequality, poverty, and unemployment (DIRCO, 2020). At a national level, South Africa considers its relationship with China an important vehicle to achieve the development goals articulated in its National Development Plan (NDP) (DIRCO, 2020), which was developed by the National Planning Commission in collaboration and consultation with South Africans from all walks of life (National Planning Commission, n.d.). To this end, South Africa pursues several agreed cooperation mechanisms with China that provide opportunities to exchange views, adopt best practice and deepen cooperation so as to create a better future for both countries’ peoples. These mechanisms include: a bi-national commission, which serves as a strategic platform to address issues of common interest between the two countries, such as trade promotions and economic exchanges (RSA, 2019); a joint working group, comprising cabinet ministers from both nations, who monitors the implementation of cooperative pro jects, and manages and solves challenges that arise during the implementation of those projects (Fahamu, 2014); and a strategic dialogue, which provides a platform for the regular review of the bilateral political and economic relations between the two countries (DIRCO, 2019). As current chair of the African Union (RSA, 2020), South Africa understands the complexities and importance of China’s engagement with and on the African continent. China’s focus has been on economic development and the provision of crucial socio-economic infra structure. It has also been willing to invest in geographic areas that other international financial institutions, Western governments, and companies have steered clear of to date (DIRCO, 2020). As the largest trading partner of South Africa and the rest of the African continent, China plays a critical role in supporting economic diversification, beneficiation, human resource development and employment, as well as the expansion of the continent’s manufacturing base. Its position as the global engine of economic growth has presented both the South African and African economies with significant growth opportunities (DIRCO, 2020). In the context of COVID-19, this close cooperation was again demonstrated when South Africa and China cooperated closely on research and the exchange of medical supplies and expertise during China’s initial outbreak of the coronavirus. During this period, South Africa made several donations of medical equipment to help China combat the virus (news24.com, 2020 & DIRCO, 2020). Similarly, China is now supporting South Africa and Africa by supplying them with much-needed medical equipment, training, and information, and deploying medical research teams (Mekuto, 2020). As to whether the COVID-19-charged discord between the US and China has had an adverse impact on Sino-South Africa and/or Sino-African relations, the answer seems to be in the negative. If anything, the sustained level of Chinese involvement on the African continent, whether COVID-19-related or not, has served to strengthen relationships. Attempts to weaken trust in China and its intentions do not measure up to the reality experienced by Africa’s leaders. Through the Forum on China-Africa Cooperation (FOCAC), a dialogue platform that formalises Sino-African exchanges on various topics (King, 2019), China has pledged to continue supporting African countries in their fight against COVID-19. More so, it has pledged financial support, partly through the suspension of debt servicing and repayment. China has also undertaken to construct the African Centre for Disease Control. And through the Belt and Road Initiative, in which a number of African countries such as Egypt, Ethiopia and South Africa are taking part (Chatzky & McBride, 2020), greater cooperation with international organisations such as the UN and WHO is also on the agenda (Temba, 2020). Beyond COVID-19, China’s President Xi Jinping has committed to support the development of the African Continental Free-Trade Area (ACFTA), which will aim to create a single continental market for goods and services, with free movement of businesspeople and investments (AU, n.d.). China will help enhance connectivity, strengthen industrial capacity, and develop supply chains. In addition, it will explore broader cooperation with Africa in new areas, such as the digital economy, smart cities, clean energy and 5G mobile technology to boost the continent’s development and revitalisation (Xi, 2020). China also announced measures to support WHO efforts to establish a global humanitarian response depot, which will facilitate anti-epidemic supply chains and foster “green corridors” to fast-track transportation and customs clearance. It has undertaken to make available $2 billion over the next two years to respond to the COVID-19 pandemic, especially in developing countries, many of which are in Africa. Through FOCAC, the construction of the China-Africa Friendship Hospitals and the pairing of Chinese and African hospitals were announced. China has also pledged to prioritise African countries once it has succeeded in developing a COVID-19 vaccine (Abumaria, 2020). Clearly, therefore, many of the new economic developments, cooperation commitments and aid packages from China to Africa were announced, and indeed commenced, during the period of combatting the COVID-19 pandemic. Moreover, this has taken place notwithstanding the US-China discord. Thus, it is safe to conclude that despite the dissonance between the US and China, FOCAC will remain an important platform for Africa and China to jointly implement their cooperation initiatives (Xinhuanet, 2020). There is little evidence to suggest that this particular dispute between the world’s two greatest economies is affecting Sino-African affairs. Instead, the scenario sketched above not only suggests South Africa and Africa’s willingness to deepen China-Africa relations in the current international environment and under present conditions; it also confirms a deep commitment on Africa’s part to honour its partnership with China and work towards taking this relationship to even greater heights. Conclusion To ensure economic growth and development in the wake of the COVID-19 pandemic, and effectively combat the disease at a global level, South Africa believes that the international community needs to sustain and strengthen cooperation at both bilateral and multilateral levels. Within this context, it considers China to be a proven and reliable partner to both itself and the African continent (Lotz, 2020). This in itself is bound to drive a deepening of relations between South Africa and Africa on the one hand, and China on the other. This is particularly so given that South Africa’s foreign policy towards China is rooted in decades of solidarity and friendship. Going forward, this will mean walking the tightrope between maintaining good relations with China and with the US. That tightrope might even become more treacherous if other countries follow the US’s lead in ostracising China because of its handling of the coronavirus, which the United Kingdom lately seems inclined to do (Langfitt, 2020). References Abumaria, D. 2020. Beijing offers Egypt, other African nations first use of future vaccine. [Online] Available at: https://www.jpost.com/international/beijing-offers-egypt-other-african-nations-first-use-of-future-vaccine-634575 [accessed: 14 July 2020]. African Union (AU). N.d. CFTA Continental Free Trade Area. [Online] Available at: https://au.int/en/ti/cfta/about [accessed: 11 Jul 2020]. Baker, A. & Hincks, J. 2020. What Trump’s WHO Funding Freeze Means for the Most Vulnerable Countries. [Online] Available at: https://time.com/5823297/trump-who-funding-freeze-africa-coronavirus/ [accessed: 15 July 2020]. Brunnstrom, D. & Pamuk, H. 2020. US ups criticism of China over COVID-19 transparency and data. 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[Online] Available at: https://issafrica.org/iss-today/africa-feels-the-repercussions-of-the-us-china-global-spat [accessed: 14 July 2020]. Fahamu. 2014. South Africa committed to enhancing bilateral relations with China [Online] Available at: http://www.fahamu.org/ep_articles/south-africa-committed-to-enhancing-bilateral-relations-with-china/ [accessed: 11 July 2020]. Home, W. 2020. VSA gee nog geld aan SA vir virusstryd. Cape Town: Netwerk24. King, K. 2019. [Online] China–Africa Education Cooperation: From FOCAC to Belt and Road. Available at: https://www.researchgate.net/publication/292528132_The_forum_on_China-_Africa_cooperation_FOCAC [accessed: 11 July 2020]. Langfitt, F. 2020. How The Coronavirus Has Strained U.K.-China Ties. [Online] Available at: https://www.npr.org/2020/05/22/857767920/how-the-coronavirus-has-strained-u-k-china-ties [accessed: 24 July 2020]. Lindeque, M. 2020. Coronavirus: SA calls on Trump to reconsider decision to cut funding to WHO. 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[Online] Available at: https://www.gov.za/speeches/acceptance-statement-south-african-president-he-cyril-ramaphosa-10-feb-2020-0000?gclid=CjwKCAjwxqX4BRBhEiwAYtJX7V_cH1QS0ocSDgSDuj2TWdTsKyt7klr4eomTHI69fNUbr0sY6u49rRoCQCYQAvD_BwE [accessed: 11 July 2020]. South African Market Insights. N.d. South Africa’s Trade Data Page. Last updated: 4 April 2020 Category: International trade and eco nomics. [Online] Available at: https://www.southafricanmi.com/south-africas-trade-data-page.html [accessed: 11 July 2020]. Stecula, D., Pickup, M. & Van der Linden, C. 2020. Who believes in COVID-19 conspiracies and why it matters [Online] Available at: https://policyoptions.irpp.org/magazines/july-2020/who-believes-in-covid-19-conspiracies-and-why-it-matters/ [accessed: 10 July 2020]. Tembe, P. 2020. China’s leadership during the Covid-19 crisis has been exemplary. [Online] Available at: https://www.iol.co.za/busi ness-report/belt-and-road/chinas-leadership-during-the-covid-19-crisis-has-been-exemplary-49605815 [accessed: 14 July 2020]. USAID. N.d. Our Work. Health. [Online] Available at: https://www.usaid.gov/south-africa/our-work [accessed: 12 July 2020]. US Department of State. 2020. U.S. Relations with South Africa. [Online] Available at: https://www.state.gov/u-s-relations-with-south-africa/#:~:text=U.S.%2DSOUTH%20AFRICA%20RELATIONS,%2C%20environment%2C%20and%20digital%20economy [accessed: 12 July 2020] World Health Organisation (WHO). 2020. SUBJECT IN FOCUS: Origin of the severe acute respiratory syndrome coronavirus-2 (SARS CoV-2), the virus causing COVID-19. Coronavirus disease 2019 (COVID 2019) Situation Report - 94. Geneva: WHO. Xi, J. 2020. Enhanced China-Africa cooperation vital to soften impact of Covid-19 - Xi Jinping. [Online] Available at: https://www.iol.co.za/news/africa/enhanced-china-africa-cooperation-vital-to-soften-impact-of-covid-19-xi-jinping-49508208 [accessed: 14 July 2020]. Xinhuanet. 2020. FOCAC leads int’l cooperation with Africa: Chinese FM [Online] Available at: http://www.xinhuanet.com/eng lish/2020-01/13/c_138699366.htm [accessed: 14 July 2020]. Opinion: COVID-19 and China - No stopping the giant by Ambassador Gert Grobler, BA (Hons) Institute of African Studies, Zhejiang Normal University in Jinhua, China The outbreak of Covid-19 has changed the world in many respects. It has also led to a new era at international relations level, with far-reaching implications for the global geopolitical, economic and security situation. China, especially, has come into sharp focus given the significant and growing role that the country played on the international political and economic scene, prior to the outbreak of Covid-19. There is currently worldwide speculation on what the implications of Covid-19 will be for China. This raises the question of what the impact of Covid-19 will be on China's domestic political and economic situation as well as on the country's future role internationally, including its relations with Africa. China's political agenda On the domestic front, one senses a deep-seated unity, pride, and unashamed patriotism among the Chinese people. Their overwhelming support for President Xi Jinping and the government is therefore unsurprising, as is their belief that he should be credited for the effective and resolute manner in which Covid-19 was contained in China. All of which has further consolidated President Xi Jinping's strong position as the leader of the Communist Party of China. But there is an urgent need in China for wide-ranging discussion on political, economic, and social matters as well as international relations. These issues were addressed at the most important event in the Chinese political calendar, the "Two Sessions", which entails the twin plenum of the National People's Congress and the China People’s Political Consultative Conference, the topmost political advisory body to the government. This critical event took place in Beijing, from 22 May 2020, against the backdrop of Covid-19, and will significantly change domestic and international realities. Economic affairs On the economic front, Covid-19 has had a serious negative impact on the economy, which already showed signs of slowing down, prior to the onset of the virus, due to external factors. While there are observers who are predicting that China's growth rate of 6,1 percent in 2019 could drop to anything between 1 and 3 percent in 2020 – due to the significant drop in consumer spending and industrial production as well as declining demand from overseas countries, particularly in the West – the Chinese government remains optimistic that, by and large, China will still make progress towards the achievement of its broad political, economic and social goals for 2020. On China's economic performance, there are many observers who point out that, based on China's phenomenal economic growth over the last few decades (the size of the economy doubled over the last decade), the inherent robustness of the economy, the introduction of sensible fiscal and monetary policies and the dynamic technology/digital sector, combined with the expected gradual recovery of the global economy, the speed of the recovery of China's economy will come as a surprise to many. This is an opinion I entirely share. This being said, an important factor in future global economic growth is the ongoing trade/tariff "war" between China and the USA, which is accompanied by the current deterioration of bilateral relations between the two countries. The current attempts by President Trump and others to initiate a major shift of the economic supply chain away from China is unlikely to make any substantial progress though, given the strength and the existing integral role of China's economy in the global economic arena. In fact, this would serve as a disincentive to many countries from following Trump's counterproductive approach. There is a growing frustration and despair on the Chinese side as regards the uncertainty as to whether Trump has the real intention to pursue the implementation of Phase 1 of the trade/tariffs agreement, agreed upon earlier, which holds significant benefits for both sides and which should have kicked in, early in January 2020. The question remains whether Trump has the "political will" to proceed with the implementation of the agreement as well as continued discussions on trade matters, due to a recent Pew poll in the USA which reflected that 66 percent of all Americans hold "negative views" of China. This must unfortunately be ascribed to the ongoing unfounded attacks against China made by Trump and the USA Congress. This is a short-sighted approach by Trump, as it is generally stated by observers that lack of progress on the trade talks would cause considerably more economic headaches for the USA than for China. International relations With the situation regarding Covid-19 now rapidly normalising in the country, China is highly active and admirably supporting approximately 130 countries around the world with medical equipment and advice in their battle against Covid-19. The Chinese government and private enterprises are currently also busy supporting Africa – where Covid-19 is now increasingly spreading – on a big scale with comprehensive aid packages and advice. But despite this, and the fact that the international community overwhelmingly gave credit to the Chinese government for its efforts to contain Covid-19 in China, President Trump and his cohorts continue to launch unjustified attacks on China as regards "China's handling of Covid-19", with the unfortunate result that China has now become a "political football" in the domestic affairs of the USA. It is generally said in the international community that the reason for Trump's unfair attacks on China, is to conceal his own glaring mistakes which failed to protect the USA citizens from Covid-19 and also, of course, to try and boost his chances in the upcoming presidential elections. The USA and others have even gone so far as to propose an "investigation into the origin of Covid-19 and related issues". It can be expected that the Chinese government may agree to this, but subject to the condition that the investigation is conducted in an "independent manner" under the auspices of the World Health Organisation and without any notion of "presumption of guilt" on China’s part, and also once the battle against Covid-19 has further progressed, which should be the main priority now. Covid-19 emerged at a time when China was making increasing progress with its political and diplomatic acceptance in the international community as a "responsible world leader ". It is against this background, that it is doubtful whether the attempts by the USA and others "to sue China for compensation as a result of Covid-19" will succeed. Apart from a number of international law obstacles, it is a fact that there is no great appetite on the part of many leading countries in Europe, Asia and among international organisations for this counterproductive and unjust initiative. It is also highly unlikely that SA and the African Union would support it. I agree with observers who argue that “Covid-19 will help China to enhance its role as a responsible world leader". In fact, China through its responsible actions, have already, even prior to Covid-19, moved into the global leadership "vacuum," left behind by leaders like Presidents Trump and Bolsanaro. It is a fact that China's constructive approach on burning international issues such as global peace and stability, development, climate change and support for multilateralism, is much more closely aligned to that of Europe, Asia, and Africa, than to the erratic and unpredictable policies of Trump on these key issues. Given the significant role that China is playing in the global economy as well as the ongoing constructive role that China is adopting in the multilateral arena and global affairs, it can be expected, once the worst of Covid-19 has passed, that the international community will increasingly reach out to China, to further consolidate and promote bilateral and multilateral cooperation. The China-Africa cooperation Despite the recent incidents about "alleged racism against Africans in China" which the western media tried to exploit to China's detriment, but which was subsequently resolved between China and the AU through constructive dialogue, it can be expected that the excellent cooperation between China and Africa will continue to gain momentum, particularly at this juncture, where Covid-19 is bound to have a serious negative impact on the economy of the continent. The growing China-Africa friendship and cooperation was, as predict ed, an agenda point at the "Two Sessions" plenum in Beijing, where a strong endorsement and affirmation was given to the continued China-Africa cooperation and friendship in the context of the Forum on China/ Africa Cooperation (FOCAC) in the foreseeable future. China is already Africa's most important economic partner and largest trade partner, with total trade increasing from USD10-billion in 2000 to USD204-billion in 2018. The economic as well as people to people cooperation between China and Africa will also be significantly enhanced in the context of the exciting and commendable Belt and Road Initiative. In closing, despite many prophets of doom, particularly in the West, it is predicted that China will overcome all the challenges flowing from Covid-19, through its typical determined, focused and industrious hard work approach, and that China will not only resume its key role in global political and economic affairs but will further strengthen it in the years to come, towards a shared destiny of mankind. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 3/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. by Daryl Swanepoel MPA, BPAHons, ND: C.Admin Abstract Some accuse the United Nations (UN) of having turned into an irrelevant, toothless organisation. According to these critics, the disconnect between the UN General Assembly and the UN Security Council undermines the legitimacy of UN resolutions that are meant to advance human rights, socioeconomic development, and peace and security. The exclusive nature of the Security Council, member state inequality, uneven regional representation and the unfairness of the permanent five members’ veto power are issues said to diminish the credibility of the UN’s work. As a result, the body is confronted by two sets of critics: those who believe that it is no longer fit for purpose, and those who say that the need for a reinvigorated and reformed UN is now greater than ever before. UN proponents, on the other hand, maintain that the body remains best positioned to coordinate global responses to the growing number of transnational challenges confronting our interconnected world. This paper examines South Africa’s position in the debate. It finds that while South Africa has not lost faith in the UN’s role in global affairs, the country does seem to side with those pushing for comprehensive UN reform. The United Nations (UN) was founded in 1945 following World War II, primarily for the purpose of preserving global peace and security, fostering sound international relations between nations, and promoting human development and human rights (UN, N.d.(a)). A snapshot of the UN The UN is neither a government, nor does it have an army or levy taxes. Instead, it is an organisation of member states, on whom the organisation relies on to carry out its decisions (UN, N.d.(b)). It is funded by means of mandatory payments and voluntary contributions by its member states, and also receives significant donations from philanthropists and charitable organisations (Shendruk, 2018). At present, the UN has 193 member states (UN. N.d.(c)) and comprises six organs: The General Assembly comprises representatives from every member state, affording each state a single vote (UN, N.d.(b)). It takes decisions relating to key issues such as international peace and security, membership and the organisation’s budget, for which a two-thirds majority is required. Other General Assembly matters – for instance the promotion of international cooperation, development of international law, and human rights – are decided by a simple majority. Although generally regarded as an articulation of the global opinion on pertinent issues, General Assembly recommendations are not compulsory to execute (UN, N.d.(d)). The Security Council (UNSC) has 15 members, each with a single vote. Five of these members – the United States, United Kingdom, France, China and Russia – are permanent. The remaining ten are elected by the General Assembly for two-year terms. Unlike General Assembly recommendations, however, UNSC decisions are binding on all 193 member states. Nine affirmative votes are required for a decision to carry. However, substantive decisions of a non-procedural nature cannot be made if not supported, or if vetoed, by a permanent member (UN, N.d.(e)). The Economic and Social Council (ECOSOC) makes policy recommendations regarding global economic, social and environmental challenges (UN, N.d.(b)). The Trusteeship Council was established to provide international supervision for eleven trust territories. Its purpose was to take steps to prepare these territories for self-government or independence (UN, N.d.(b)). All these territories have since attain independence, but the Council is yet to be formally disbanded (UN, N.d.(f)). The International Court of Justice is charged with settling legal disputes between states and issuing advisory opinions to the UN and its agencies (UN, N.d.(b)). The Secretariat sees to the day-to-day functioning of the UN. It serves the principal organs of the UN and its programmes, and implements their policies (UN, N.d.(b)). Why is the UN important, and is it stile relevant? In short, as the global architecture designed to prevent war and restore security in areas of conflict, the UN’s significance lies in its founding purpose to protect people, advance human development and social progress, and achieve global cooperation aimed at resolving economic, social, cultural and humanitarian challenges. This is premised on the vision of an ideal world, where everyone feels protected, is able to live their lives in freedom and peace, feels loved and wanted, and has their basic housing, food and work needs fulfilled. In pursuit of this vision, the UN harnesses teamwork and mutual trust, compassion and understanding between nations, peoples and cultures. (Paradiso, 2015) However, these noble ideals are of little consequence if the mechanism to achieve them is broken, insufficient or lacking. While the mainstream opinion still is that the UN’s objectives are as relevant today as they were 75 years ago, many in society have started questioning whether the UN is still fit for purpose, with United States president Donald Trump on record for having described the body as “just a club for people to get together, talk and have a good time”. Other world leaders who have expressed an urgent (yet perhaps more eloquently phrased) need for UN reform include German chancellor Angela Merkel, Chinese president Xi Jinping and Canadian prime minister Justin Trudeau (Merelli, 2018). The question of the UN’s relevance hinges on the two issues of inconsequence for member states’ non-adherence to UN resolutions, and the UNSC’s decision-making regime. The difficulty regarding inconsequence for non-adherence to UN resolutions was illustrated when the United States chastised the UN for its inability to hold Iraq accountable for its violation of 16 UNSC resolutions. Moreover, back in 2002 already, it was reported that, in reviewing five decades of UN resolutions, Prof Stephen Zunes of the University of San Francisco had identified at least 91 resolutions – in addition to the 16 Iraq violations – that were clearly being violated. In many instances, enforcement was blocked by powerful countries. The degree of compliance, Prof Zunes suggested, “depends on the influence of each state and its backers” (Farley, 2002). These consistent breaches underscore the conundrum of the UN: While the has the power to pass resolutions, it often lacks the authority to enforce them, which erodes its overall credibility (Farley, 2002). And as stated earlier, adding to this problem is the fact that many General Assembly decisions are non-binding on members. In terms of the UNSC’s decision-making regime, several concerns have been raised. The most significant of these relates to the distinction between the UNSC’s five permanent and other, non-permanent members. No substantive decision can be adopted without the permanent five’s concurring votes, and a single permanent member can veto a UNSC decision, rendering it invalid (Security Council Report, 2020). In essence, therefore, although fourteen of the fifteen member states serving on the UNSC, as well as the vast majority of member states in the General Assembly, may support a particular position, all would come to naught should a single permanent UNSC member veto it. And there’s the rub: Permanent members are known to use the veto to defend their own national interests or the prescripts of their foreign policy, or even to advance a single issue that is important to them (Security Council Report, 2020). Another matter raised with regard to the UNSC’s decision-making is the need for better representation, both in terms of size and geographic spread. Seventy-five years ago, the UN was formed by 51 states, with the UNSC comprising five permanent and six non-permanent members. By 1960, the UN had grown to 99 members, and the non-permanent members of the UNSC were increased from six to the current ten. With a current UN membership of 193, the size of the UNSC seems out of touch with reality: In 1945, the five permanent members accounted for 50% of the world’s population; today, they account for only 26% (of whom two-thirds are in China alone) (Thibault, 2020). Geographic representation on the UNSC is equally skewed. Altogether 47% of the seats are occupied by Western and Eastern Europe, Australia, Canada, Israel, New Zealand, Turkey and the United States, who account for only 17,1% of the global population. On the other hand, the Asia-Pacific group of countries, who account for 58,6% of the global population, and the African group of countries, who account for 15,8% of the global population, are each allocated 20% of the seats. Latin American and Caribbean countries, who represent 8,5% of the global population, occupy 13% of the seats (Thibault, 2020). Yet the UN remains a relevant force. It has helped ward off hunger, poverty and violence for hundreds of millions of people. It leads the fight against climate change. Its agencies take care of approximately 60 million refugees and other vulnerable people across the world. UN observers help ensure free and fair elections worldwide. Its peacekeepers have intervened in conflicts where few countries would consider doing so alone. The Non-Proliferation Treaty has ensured the limitation of nuclear weapons (Santamaria, 2020). It also remains relevant in terms of providing an enormous range of basic services that people take for granted. And while there are a growing number of alternative platforms where world leaders can engage in multilateral cooperation, “there is no entity matching the standing capacity of the UN’s agencies across the board” (Gwertzman, 2010). The solution to the stated concerns relating to the process and structures of the UN, therefore, does not necessarily lie in withdrawal of funding or participation. The UN still has a key role to play. Instead, it might be time for a comprehensive overhaul of the organisation’s structure, systems and, most importantly, its decision-making processes and mechanisms to ensure adherence to its resolutions. Call for UN reform Despite numerous successful interventions over the lifespan of the UN, calls for reform of the organisation are growing louder. There appears to be a growing sense of discomfort that failure to reform will erode the organisation’s relevance even further. Germany, for instance, has increasingly insisted on the reform of the UNSC, and has been openly supported by France in calling for the expansion of the number of permanent seats. Turkey, in turn, wants a rotational format in the UNSC, without increasing the number of permanent members. Other countries calling for reform include Japan, Canada, Brazil, Italy, Spain and Argentina. Some have called for a greater number of permanent seats on the UNSC, while the “Uniting for Consensus” movement opposes the expansion call, instead suggesting the principle of rotation and the rejection of certain states’ veto privilege. (Erkut Eyvaz, 2019) It would seem, therefore, that failure by the UN to reform would feed into the narrative of an increasingly irrelevant organisation clinging on to old-world structures and processes, with a growing sense of disenfranchisement among many of its members. This could very well drive the global dialogue towards alternative emerging cooperation platforms. Against this backdrop, where does South Africa stand in the UN reform debate? South Africa's position on UN reform In terms of UN management reform, South Africa continues to support the UN secretary-general’s comprehensive Management United to Reform, which sets out a new management paradigm for the Secretariat. This paradigm envisages a UN with, among others, simplified processes, a better operational set-up and improved strategies and structures. South Africa also believes that there should be greater transparency, predictability and oversight in UN funding, and in the implementation of its peace mandates, especially as they relate to the African continent. Furthermore, due consideration should be given to, among others, the UN’s human resource and procurement policies, gender parity and equitable geographic representation. (DIRCO, 2020) South Africa believes that revitalisation of the UN General Assembly is a critical aspect of overall UN reform. Key to this is the recognition of the General Assembly as the most representative and democratic political organ of the UN, and so its role and authority need to be strengthened accordingly. The objective with structural reforms should be for the organisational design to support the implementation of the 2030 Agenda for Sustainable Development effectively and efficiently. (DIRCO, 2020) The 2030 Agenda enshrines the seventeen sustainable development goals (SDGs) and 169 targets that the UN aims to achieve over the next fifteen years, and with which national governments are expected to align their political agendas (EDF, N.d). In terms of the UNSC also, South Africa is concerned about the slow pace of reform, believing that reform efforts need to be urgently reinvigorated. Although global consensus on the need for the early reform of the UNSC was reached in 2005 already, no significant reform has been achieved to date. (DIRCO, 2020) The Ezulweni Consensus as a basis for South Africa's stance South Africa’s position on both UNSC and General Assembly reform is guided by the African Common Position as enunciated in the Ezulweni Consensus (DIRCO, 2020). The African Union (AU) adopted the Ezulweni Consensus in Addis Ababa, Ethiopia, in March 2005. It contains the combined African thinking on the reform needed in the various organs of the UN. In that document, the AU expressed the need for the UN General Assembly to be strengthened. While it should retain its intergovernmental character and remain essentially as a forum for intergovernmental dialogue, measures should be taken to improve its effectiveness, including its ability to ensure that its decisions are implemented. Furthermore, the relationship between the General Assembly and UNSC needs to reflect a more balanced distribution of competence (AU, 2005). Keep in mind that in 1945, when the UN was formed, most of Africa lacked representation. And in 1963, when the first UNSC reform took place, the continent was still not properly represented. Now that Africa is fully represented in the UN, however, it is better placed to influence reforms. The AU’s goal, therefore, is for Africa to be fully represented in all the decision-making organs of the UN, particularly in the UNSC, which is considered the principal decision-making organ in matters relating to peace and security (AU, 2005). In the AU’s opinion, Africa should be allocated at least two permanent seats on the UNSC. These appointments should be accompanied with all the prerogatives and privileges of permanent members, including the right of veto, should the principle of veto rights be maintained. Although opposed to the principle of a veto, the continent’s leadership argues that, as long as it exists, it should be made available to all permanent members of the UNSC as a matter of common justice. Furthermore, Africa should be allocated a further five non-permanent seats on an expanded UNSC (AU, 2005). The selection of Africa’s representatives on the UNSC should be the AU’s responsibility. Criteria should include continent-wide representation, and the chosen member states’ capacity to represent the continent and to effectively execute its responsibilities within the UNSC (AU, 2005). Although the Ezulweni Consensus stipulates that the AU reserves the right to elect the two permanent members to the UNSC, a number of African states have already pronounced themselves ready to assume such a seat (Anon., 2020). UNSC reform from a South African perspective South Africa agrees with the Ezulweni Consensus that, since Africa’s member states make up 54 of the 193 UN members, the continent should be given two permanent seats on the UNSC. Such a step also seems fair given that most of the issues affecting Africa are dealt with by UNSC, and Africa has contributed immensely to conflict resolution, peacekeeping and peacebuilding. Currently, Africa does have three non-permanent seats, but they are rotational, which poses challenges in terms of creating institutional memory – an issue not faced by the permanent five. (Anon., 2020). Reform does not relate to composition alone, however. Going hand in hand with composition is the decision-making process. Simply adding additional permanent members without either abolishing the veto right, or at least extending it to all permanent members, may only serve to complicate decision-making. With more players at the table, retaining the veto in the hands of only the initial permanent five could very well lead to increased tension and frustration. Therefore, South Africa believes that all permanent members, including the proposed two African-held permanent seats, should be afforded the veto right as long as such right exists (Anon., 2020). Yet it is also South Africa’s belief that the veto right is often misused, thereby stifling important UNSC business: For instance, the UNSC could not even pass a resolution on the all-important topic of COVID-19 because of the United States’ insistence that there be no reference to the World Health Organisation. Similarly, when discussing the political and humanitarian crisis in Venezuela, no substantive discussion was possible given the introduction of two completely opposing resolutions by two members holding veto rights, namely Russia and the United States. Referring to these two resolutions as “equally hopeless”, one commentator eloquently captured the folly of having any expectation of a sincere consensus-seeking discussions while the “world’s most powerful nations displayed their bitter differences” within the confines of the UNSC machinery (Roth, 2019). Thus, the veto right has rendered the UNSC increasingly divided and less credible, which is not conducive to its work or the execution of its UN Charter mandate to ensure the maintenance of international peace and security (Anon., 2020). South Africa will continue advocating for genuine negotiations to commence in the UN General Assembly, as this is the only way to achieve Africa and like-minded countries’ common goal of a more representative UNSC (Anon., 2020). The Intergovernmental Negotiations (IGN) on UNSC reform that the UN General Assembly established in 2008 has been mandated to deliberate on five substantive areas of UNSC reform. These are (i) categories of membership (permanent and non-permanent); (ii) the question of the veto right; (iii) regional representation; (iv) the size and working methods of an enlarged UNSC; and (v) the relationship between the UN General Assembly and the UNSC. To date, there has not been any progress (Anon., 2020). To move the reform process forward procedurally, negotiations should, in South Africa’s view, be text-based, as “that is how negotiations are conducted in the UN” (Anon., 2020). While the UN resolved in 2015 already to follow such a text-based approach to reform negotiations, at least as it relates to the UNSC (Singh, 2015), there has been no concrete steps to advance the discussions. It appears there is currently no consensus among the permanent five for text to be put on the table. In addition, it seems that some powerful countries opposed to reform are blocking the process by arguing that there are still divergent views on the matter, and that text-based negotiations are premature and will be counterproductive (Anon., 2020). The United States and other advanced democracies, for example, reject the notion that the UNSC’s legitimacy should rely on its composition, believing that its “primary mission is to be effective, not representative” (Patrick, 2019). Although Africa is united in terms of the need for UNSC reform as expressed in the Ezulwini Consensus, South Africa’s view on the procedure to be used to negotiate such reform is not necessarily shared by other African states. Some African countries feel that the environment is not yet ready for text-based negotiations, as views within the UN are still too divergent. They believe that since the impasse is still too great, negotiations have no chance of succeeding (Anon., 2020). Another tricky area is that some African members, including South Africa, also belong to the L.69 Group, a cross-regional grouping of developing countries from Africa, Latin America and the Caribbean, Asia and the Pacific pushing for lasting and comprehensive reform of the UNSC. The L.69 Group is bound by the firm conviction that expansion in both the permanent and non-permanent categories of UNSC membership is imperative to better reflect contemporary world realities and achieve a more accountable, representative, transparent and relevant UNSC. They derive their name from the draft resolution number “L.69” they tabled in 2007, calling for intergovernmental negotiations on UNSC reform, which ultimately saw the creation of the IGN mechanism in the UN General Assembly. In the current IGN, Africa is represented by the Committee of Ten (C-10), which was established through a decision of the special AU summit in Addis Ababa in August 2005 to coordinate engagement on UNSC reform. Chaired by Sierra Leone, the other nine members are Algeria, the Republic of the Congo, Equatorial Guinea, Kenya, Libya, Namibia, Senegal, Uganda and Zambia (APAUNR, N.d.). Whilst not explicit in their criticism of the L.69 Group, the C-10 has requested African countries not to be part of other negotiating groups in the IGN to ensure that Africa remains united in the negotiations. (Anon., 2020). Yet the L.69 Group supports the Ezulweni Consensus and has indeed helped strengthen the C-10’s position in the IGN. The L.69 Group and the C-10 have a similar stance on most issues, including that the veto should either be abolished or extended to all permanent members (Lättilä, 2019). As such, South Africa believes that the L.69 Group remains one of the progressive groups and plays a supportive role in the IGN (Anon., 2020). UN General Assembly revitalisation from a South African perspective In South Africa’s view, unlike UNSC reform, reforms pertaining to the revitalisation of the General Assembly have been making some progress. The negotiations on the relationship between the General Assembly and the other principal organs of the UN have been ongoing. South Africa has underlined the need for the General Assembly to work in close collaboration with all principal organs, in particular ECOSOC and the UNSC. South Africa further believes that the General Assembly should be given a more prominent mandate in overseeing the implementation of the UN’s priorities of human rights, peace and security, and socioeconomic development. At present, even though all member states have an equal vote in the General Assembly, decisions are mere recommendations and are of no binding force on member states. South Africa’s position is that, as the most representative organ in the UN, the General Assembly should be given more teeth to hold countries accountable to the decisions it takes. Thus, South Africa will continue to work with fellow UN members to strengthen the role and authority of the General Assembly in executing its responsibilities, including those relating to the maintenance of international peace and security, and the implementation of the 2030 Agenda (Anon., 2020). Moreover, South Africa reaffirms the important role played by the United Nations secretary-general amidst the global challenges facing the world today, and in implementing the UN pillars of peace and security, human rights and sustainable development. In this regard, South Africa holds the view that the selection and appointment of the secretary-general should be more transparent and democratic. More specifically, the country believes that the secretary-general should ideally be appointed by the General Assembly, at the recommendation of the UNSC. While not an official South African position, mention has been made of the option for the secretary-general rather to be elected for one longer, non-renewable period, as opposed to the current five-year term with the option of extending the appointment by another five years (Anon., 2020). In terms of driving the South African UN reform agenda, the country uses all available platforms to do so, both within and outside the UN structure. These include high-level general debates in the UN and at other multilateral fora such as the AU, which it currently chairs, as well as the Non-Aligned Movement and IBSA (India, Brazil, South Africa) (Anon., 2020). South Africa also often raises the issue of UN reform in its bilateral discussions with other likeminded countries (Anon., 2020). How South Africa views the way forward Moving the UNSC reform process forward will be an uphill battle. With no consensus on the substantive issues between the permanent five, no reform will happen. Furthermore, the permanent five consider their veto a fundamental right articulated in the UN Charter and so not seem willing to relinquish that right any time soon (GüIler, 2019). Therefore, one could understand why many have concluded that the annual and ongoing deliberations relating to UN reform largely ring hollow. To give impetus to the negotiations, those seeking reform will need to reach out more directly to the permanent five, either as a group or individually, to find a negotiating path that will satisfy the five’s insistence on knowing upfront what the negotiated outcomes will deliver. For example, the permanent five will not agree to any expansion of the UNSC, nor to the relinquishment of their veto, without them knowing in advance who the aspirant candidates for seats on the UNSC will be. Historical conflicts and conventions will affect the likelihood of the permanent five agreeing to the candidature of countries to whom they have traditionally been opposed (Anon., 2020). China, for instance, believes that Japan’s past occupation of China disqualifies it from a permanent seat (GPF, 2006). France, in turn, while amenable to Germany’s call for extending the permanent membership of the UNSC, was not open to Germany’s proposal to convert the French seat into a European seat (DW, 2018). Of course, the idea of the permanent five vetting aspirant candidates is in direct contrast to the AU’s position, which insists on Africa determining for themselves which countries should represent the continent on an extended UNSC (AU, 2005). The AU approach may be counterproductive, however, as a group, they believe that the election of African candidates can be resolved at a later stage; to them, it is more important first to establish the principle of Africa being allocated at least two permanent seats on the UNSC. Knowing that the permanent five have indicated that they want to know upfront who the candidates will be, a rigid African approach could very well lead to a stalemate in the negotiations. This is an issue that South Africa will have to start breaching on the continent, especially since it has been asked to indicate its availability to take up a UNSC seat. Other African countries interested in the seats include Egypt, Kenya, Nigeria and Senegal (Okumu, 2005). South Africa also has other work to do among its fellow African states. As mentioned earlier, there is no consensus on the continent on a text-based approach to UN reform negotiations. Anxious not only to see the negotiations move forward, but also to strengthen Africa’s negotiation effort, South Africa will have to be more proactive by starting to approach progressive countries across the continent to advance the reform process (Anon., 2020). The South African government is pleased that it was able to have a call for the reinvigoration of the UNSC reform negotiations included in the heads of state declaration that will be adopted at the special high-level commemorative event to mark the UN’s 75th anniversary, scheduled for 21 September 2020. The country hopes that the president of the 75th session of the General Assembly will appoint, as a matter of priority, co-facilitators to take the IGN’s work forward (Anon., 2020). Conclusion For those who deride the UN as a toothless instrument (Dejevsky, 2016), South Africa has a clear message: For all its faults, the UN still has an important role to play, now more than ever before. The COVID-19 pandemic has proven this. The UN and its agencies remain the only intergovernmental body able to bring all nations together to find a coordinated approach to resolving global problems. Withdrawal from the UN or from multilateral agreements, or the cutting of funding to multilateral institutions, will not only be detrimental to the country doing so, but will have global implications for noble humanitarian and development programmes, as well as for the pursuit of the SDGs. To say that the UN is a toothless body is to say that countries can go it alone. They cannot. There are too many transnational challenges facing the globe – no country can go it alone. Thus, current global challenges such as COVID-19 warrant a renewed commitment by the international community to uphold and defend the purposes and principles of multilateralism, with a view to establishing a world that is peaceful and prosperous, along with a just and equitable system of global governance (Anon., 2020). Nevertheless, no sober assessment of the workings of the UN can ignore that the organisation is facing serious issues relating to its credibility, legitimacy and relevancy. The choice is this: either business as usual, which will undoubtedly further erode the UN’s standing, or reform, which will gear it for the future and enable it to build on the critical humanitarian, socioeconomic development and peacekeeping work it has carried out since 1945. In recognising the relevance of the UN as a global instrument to promote human rights, socioeconomic development and peace, South Africa has chosen to promote reform. Some major flaws have been identified in the UN’s design. These include inequality resulting from the veto right and UNSC permanent versus non-permanent seats, and exclusivity resulting from limiting the UNSC’s membership to a small portion of the total UN membership (Lättilä, 2019). South Africa’s approach to UN reform acknowledges the inherent complexities encapsulated in these flaws. It attempts to weigh the question of exclusivity in the UNSC against inclusivity in the General Assembly. It does so by acknowledging the need for decision-making efficiency in the UNSC, and the strengthening of accountability mechanisms in the Assembly (Damianou, 2015). In its quest for UN reform, South Africa seems to be singing from the same hymn sheet as UN secretary-general António Gutteres, who called for a “new social contract” and a “new global deal” in delivering the annual Nelson Mandela lecture on 18 July 2020. He said: “For this new social contract to be possible, it must go hand in hand with a new global deal. The global political and economic systems are not delivering on critical global public goods: public health, climate action, sustainable development, peace. A new model for global governance must be based on full, inclusive and equal participation in global institutions. Without that, we face even wider inequalities and gaps in solidarity. A new global deal, based on a fair globalisation, on the rights and dignity of every human being, on living in balance with nature, on taking account of the rights of future generations, and on success measured in human rather than economic terms, is the best way to change this. People want a global governance system that delivers for them. The developing world must have a far stronger voice in global decision-making.” References African Parliamentary Alliance for UN Reform (APAUNR). N.d. Committee of Ten. [Online] Available at: http://apaunr.org/c10.php [accessed: 26 July 2020]. African Union (AU). 2005. The common African position on the proposed reform of the United Nations: The Ezulweni Consensus. Addis Ababa: African Union. Anonymous. 2020. 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[Online] Available at: https://www.un.org/en/model-united-nations/trusteeship-council [accessed: 25 July 2020]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 4/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. by Joanmariae Fubbs MSc in Public Policy and Management, 2012 (University of London), Postgraduate Diploma in Economic Principles, 2000 (University of London), MSc Development and Planning, 1993 (University of the Witwatersrand), BA Hons degree in Clinical Psychology, 1990 (UNISA), BA Political Science and Psychology 1980 (UNISA) Abstract In the midst of growing inequality, poverty, and unemployment South Africans were hit by the Covid-19 pandemic which exacerbated the socio-economic decline. To make matters even worse, corrupt officials played havoc with the Covid-19 funding, with no thought for the impact it would have on the vulnerable and the economy broadly. So, what can be done to arrest this erosion of the objectives of a better life for all, and a prosperous society with an inclusive economy? What measures can we employ to significantly reduce and then eliminate poverty? Surely, there is a need to adopt realistic targets and implementable policies that can be monitored and measured to track outputs and outcomes. Statistics South Africa (Stats SA) enjoys an enviable reputation. The statistical tables, graphs and figures it produces are backed by current research and are readily available. One of the issues that Stats SA has identified as highly relevant to the current stagnant economy is the deficit in trust. No amount of money can establish trust. However, this paper attempts to show that through the establishment and pursuit of social cohesion by all spheres of government, departments and entities, business and corporates, trust can be re-established. Poverty and inequality can then be confronted with a multi-dimensional approach but from a strong social cohesion base backed by a social compact. The struggle for economic, social, and political freedom has reached a defining moment in South Africa. Many South Africans fought for this and established a constitutional people’s democracy which encompassed the conception of democratic socialism within a mixed economy. Today, we live not only in a Covid-19 environment, but worse, in a contaminated moral environment. Nevertheless, the struggle for socio-economic and political freedom pursued by the African National Congress (ANC) is enshrined in the Constitution and should continue to drive transformation. The 2008-2009 financial crisis emphasised that unregulated markets are unsustainable, and that the intervention of the State is essential for the well-being of the population and the long-term eradication of poverty, according to Edigheji (2010:1). This view is echoed by Ben Fine (2010:171) who in contrasting the “political school” with “economic school” raises the danger of the latter’s pre-occupation with exclusively correct economic policies. Income inequality has been rising as evidenced by 2011 and 2014 statistics (Statistics South Africa, 2011; 2014). Unfortunately, the growing tendency and subsequent trend to resolve unemployment, service delivery, strategic skills development, poverty, poor educational outcomes, and deteriorating health of people in low-income groups focused largely on using purely economic measures. Former Statistician General Dr Pali Lehohla, in the Indlulamithi 2020 Scenarios this year, responding to this approach re-emphasised those issues related to unemployment, poverty and inequality, and low growth are complex and best resolved socio-politically, not purely economically. To “build back better” we need to examine the superiority of the “multi-dimensional poverty lens”, after which we should be more specific with our solutions, by developing “believable employment” figures and lower poverty and inequality rates (Lehohla, 2020). The ANC ideological programme The ANC deems itself a force of national liberation in the post-apartheid era; it officially defines its agenda as the National Democratic Revolution. The ANC is a member of Socialist International. In 2004, the ANC declared itself to be a social and national democratic party. Socialism theory had its genesis in Europe in the revolutionary theories of Karl Marx (1818-1883), the evolutionary theories of Eduard Bernstein (1850-1932), and in Africa, socialism was interpreted by the philosophical theories of Kwame Nkrumah (1909-1972). Nkrumah’s (1970) theory of consciencism draws together strands from the three main traditions that make up the African conscience: Euro-Christian, Islamic, and African. Nkrumah characterises traditional African society as essentially egalitarian, arguing that a new African philosophy must draw its nourishment chiefly from African roots. Supporters of the idea of a more just society were given the umbrella term socialists and included social democrats and democratic socialists. Peter Lamb, in his book Socialism: Key Concepts in Political Theory (2019), identifies the key ideas and principles of socialism and explores different (often conflicting) interpretations that have appeared in Europe, Asia, Africa and the Americas, from the early nineteenth century until today. Social democracy is a political, social, and economic philosophy within socialism that supports social, political, and economic democracy. Many countries, from Sweden to Ghana and New Zealand, consider themselves as enjoying a social democratic form of governance, and consequently there are just as many definitions. The instruments used in a social democratic government include ensuring strong workers representation, support for trade unions and parliamentary processes all aimed at achieving a better society. Democratic socialism evolved to include both reformist and revolutionary forms of socialism arising from the pursuit of reform measures and those that evolved from revolutionary measures. Today, the ANC, which is pursuing the National Democratic Revolution, is arguably advancing modern day social and national democratic values. A strong thread links the 1943 African Claims, 1955 Freedom Charter, 1969 seminal Morogoro Conference, 1979 Green Book, and the National Development Plan first drafted in 2012, and with its workshopped 2030 vision of “unfolding learning” knowing that social cohesion is anchored in our strategies to provide services to the people. It seeks to refocus South Africans on what they have in common rather than their differences. Furthermore, South Africa should, as Joel Netshitenzhe put it, “join the progressive humanity in fashioning a more equitable world order from the ruins of the Covid-19 pandemic” (2019). Social democracy has been in “terminal decline in the last decade”, reflected in the lack of voter support for social democratic parties in Europe (Servaas, 2020). However, since the 2008-2009 financial crisis, socialism has made a dramatic comeback in the 21st century. With rising inequality and social decay, socialism is becoming more relevant as people become disillusioned by the lack of ethical good governance and hope of a better life. The Covid-19 pandemic has simply underlined the challenges of inequality, social and economic justice, and poverty. In South Africa, the land issue is directly linked to socio-economic justice and poverty. As Nyerere said: “To us in Africa land was always recognised as belonging to the community” (Lamola, 2018). The land question can therefore be understood as a socio-economic issue. The “forced seizure of land led to the disintegration of the African social and economic fabric” (Lamola, 2018:8). The land question is historically linked to the basic principles of socio-economic justice which can be traced back to the Land Act of 1913, which legally disposed the indigenous population of their land. The Freedom Charter also states that those who work the land should share it. Land was the fundamental source of income for black Africans who were dispossessed without compensation. Establishing an inclusive South African economy The establishment of an inclusive economy demands that we first address the many inequalities that are becoming more pervasive every year, whether it is income disparities, gender anomalies or the accumulation of wealth through unproductive means. In the last decade, a young economist, Thomas Piketty, shot to prominence because he tackled the growing inequality, in his book Capital in the Twenty-First Century (2013). His studies went back two centuries and showed that the rate of return on inherited wealth will always grow faster than the income one earns through one’s compensated labour. However, in his following book – Capital and Ideology – Piketty roots inequality in ideology (2019). He argues convincingly that societies justify this through their political-ideological environment, which shows that inequality is not a natural phenomenon and can be reshaped when confronted effectively through socio-political mobilisation. When one examines the modern legacies of colonialism and slavery, whether in Brazil, South Africa, or China, it becomes clearer that inequality can be transformed if the legal, fiscal and education spheres are confronted effectively. This is the intention of the national democratic struggle as South Africa pursues the establishment of a society in which social, economic, and educational justice prevail. The Constitution provides a solid foundation from which to launch the fight against inequality. The crisis generated by the devastating effects of Covid-19 offers South Africa the opportunity to use more focused strategies to overcome the growing inequality in the country and to track its impact. This is achievable first through the deployment of regular robust oversight institutions from the legislature, civil society, and the executive, and second, by the identification and use of appropriate technical tools that shine light on the multifaceted nature of poverty and the development phenomena. Balancing State power with people's rights Rights and responsibilities are balanced in a social democracy; therefore, the citizens can expect the government to do things for them like providing protection, health services, education, and housing. Citizens also have responsibilities like obeying the law and paying taxes to the state. The rights of the majority in a social democracy are also balanced with the protection of minorities, for example those of the Khoisan community. Thus, social democracy is about achieving a greater balance in society, which arguably South Africa’s system of representative and participatory democracy provides. However, neither the Constitution nor legislation can protect South Africans from corruption, only a paradigm shift in the mindsets of all the people can predispose us to an environment in which integrity, a commitment to serve the people and ethical good governance can create such an enabling environment. Former Statistician General Dr Pali Lehola called this “the eye of the needle” approach, referring to the ANC document which focusses on the disciplined and selfless character of the kind of cadre required to lead. More than 50 years ago, when the balance of forces had shifted against the forces of change and the ANC and other progressive movements were being assailed on all fronts, the Morogoro Conference took place. Three key themes characterised this seminal conference: first, the methodology to be used in assessing and managing the balance of forces in a given conjuncture. The conference took place during the international context of transition to a socialist system following the breakdown of the colonial system, as a result of national liberation and socialist revolutions. The ANC leadership at the conference acknowledged this and realised that their first strategic objective then was to change the methodology in assessing the balance of forces during a given conjuncture. The second strategic objective required the contextualisation of these global changes so that the complex challenges that faced the “people’s government” could be addressed. The leadership during the Morogoro Conference appreciated the urgency demanded to meet the economic needs of the oppressed people, which could only be done if all basic resources were “at the disposal of the people” as a whole and not manipulated by sections or individuals, black or white. The third theme and strategic objective revolved around the national question which Joel Netshitenzhe quotes from the document: “The main content of the present stage of the South African revolution is the national liberation of the largest and most oppressed group – the African people. This struggle must govern every aspect of the conduct of our struggle.” As the document points out, if “properly channelled and properly led”, this would not be in conflict with the principles of internationalism but rather become the foundation for a lasting and more meaningful cooperation that would be self-imposed (Netshitenzhe, 2019). This recognition of a stronger social content had first been raised in the 1943 African Claims and again in the 1955 Freedom Charter. Together with the Morogoro Conference, these documents reinforce the organic social and national democratic character of the ANC. The current inequality arising from distortions in the socio-economic environment that continue to plague South Africa is at the root of unemployment, poverty, and distorted spatial patterns, which threaten to destroy the soul of South Africa. South Africans and people all over the world no longer trust their governments. So, what can be done to overcome this disillusionment? Early this year, in February, Minister Nathi Mthehwa reiterated that “social cohesion can never be separated from economic justice”. To achieve this, Minister Mthethwa believes that a social compact between business, government, labour, and civil society, who agree to “work together to bring about future change”, needs to be put in place (Polity, 2020). Development needs social cohesion In the last ten years or so there has been growing recognition globally and in South Africa that social cohesion in communities, and regions, can rebuild people’s trust in their political leaders. Social cohesion draws upon a broad body of studies and research across the social sciences and is leading to a more effective understanding of “its effects on the economic life” (Ritzen, Easterly & Woolcock, 2000). “Social cohesion” according to them is central to development as it relates “to an inclusive civil society and responsive political institutions” (Ritzen, Easterly & Woolcock, 2000). So how do we define social cohesion? Having read a number of studies on this subject, I believe it relates to the cooperation in a neighbourhood, community, city, and even a geographical area as large as a country. Defining social cohesion, Prof Klaus Boehnke, who has undertaken research across continents including Africa, Asia, America, and Europe, stated that the “commonality of values remains at its definitional core” (2018). As Minister of Arts and Culture Nathi Mthethwa stated in his briefing to the media prior to the Social Cohesion Compact Convention early this year, if it does not “seek to bridge the past divisions and simultaneously deal with the whole question of improving material conditions of the previously marginalised communities … it cannot succeed” (Polity, 2020). University of Cape Town’s Poverty and Inequality Initiative (PII) also identified social cohesion as a significant factor in poverty and inequality and concluded that it is an important policy goal for South Africa. The research argues that without finer definition and measurement it would, however, be to formulate polices that could promote cohesion. An overview of the current environment in South Africa exposes the high incidence of not only poverty and inequality but also violence, gender conflicts and mistrust. These are all factors that influence social cohesion and inclusive development. Alongside other academics the PII project recognises that social cohesion is “multi-faceted” and therefore requires a multidisciplinary approach which includes history, economics, political science, sociology, law, and psychology (UCT, 2018). Through the establishment of an active network of researchers and practitioners whose work speaks to the issue of social cohesion in South Africa, the project aims to engage effectively with policymakers in achieving the vision of the National Development Plan 2030. This research project also recognises the relationship between social cohesion and economic inequality and asks, what kinds of institutional change does South Africa need to promote social cohesion and reduce inequality? It also raises the growing intergenerational divide. Isaac Khambule and Babalwa Siswana, both of the Human Sciences Research Council, argued in a paper on how inequalities are undermining social cohesion in South Africa (2019). The “triple socio-economic challenges of poverty, unemployment and inequality” have been compounded by the high unemployment rate of more than 27 percent, with a youth unemployment rate of more than 50 percent. This has undermined the campaign promise of a “better life for all” and widened the gap between rich and poor (Statistics South Africa, 2014; International Labour Organisation, 2014). This in turn has impeded the country’s aspirations to eliminate poverty through doubling the GDP as noted in the 2030 National Development Plan. Statistics continue to reflect the widening gap between wage disparities, which impacts directly on inequality, along racial lines. According to research done by Uslaner, as quoted by Khambule and Siswana, social cohesion is undermined “because of the racial socio-economic disparities and … the fight for resources with foreign nationals” (2019). Inequalities are not unique to South Africa but are reflected in countries such as Brazil, also identified by Piketty. The South African situation is different by virtue of its high inequality in comparison to other countries. This toxic relationship between inequalities and social cohesion is reflected by the measure of “trust by Statistics SA showing that only 34 percent of South Africans trust” local governments. According to the World Bank in its 2019 Overview of South Africa, it projected a growth of 1.3 percent and accelerating to 1.7 percent in 2020, but that was before the full impact of Covid-19. Unfortunately, progress towards poverty reduction has “slowed”, which is put down to structural challenges and the weak growth since the global financial crisis of 2008. However, there is also a reference to the strategic skills deficit and the reality that South Africa with its dual economy continues to have one of the highest inequality rates in the world, with the Gini coefficient standing at 0.63 in 2015. Again, there is the gap between the top 10 percent of the population, which holds 71 percent of the net wealth, and the bottom 60 per cent holding only 7 percent of the net wealth. The World Bank also confirms that a further negative social cohesion factor, namely intergenerational mobility, continues to pass down its inequality from generation to generation (2019). Again, Ritzen, Easterly and Woolcock of the Development Unit of the World Bank in Paris 2020 refer to the four dimensions of social exclusion: firstly, the economic dimension which it linked to poverty. Secondly, the social dimension, where in some societies, unemployment deprives one of not only income but also of status. Exclusion, according to Ritzen, Easterley and Woolcock, also has a political dimension. This third dimension directly affects “women, ethnic, racial, and religious groups, especially minorities, who find access to their rights being limited”, or impeded in some countries. The fourth dimension, in which South Africa led the way with its identification of “non-sustainable modes of development”, is reflected in the Constitution and the Bill of Rights, where First degree and Second-degree human rights are expressly acknowledged. It is also recognised that unsustainable modes of development “compromises the survival of future generations” and it is this that leads to generations living in poverty, because of their exclusion from the benefits of valid and robust development. Conclusion In times of significant transition and in the face of harsh global economic challenges, social cohesion in a social and democratic society will create space for the government to manoeuvre. Given that South Africa is pursuing a national social democratic path, there is hope that this trajectory of inequality can be changed, but only if we can re-establish trust in our institutions and political leaders. South Africa has a National Development Plan which already identifies the need to address the manifestations of inequality and poverty by anchoring its strategies in social cohesion. People are planet Earth’s custodians and as the NDP has emphasised, social cohesion should anchor the country’s strategies to overcome the increasing poverty, deprivation, and to reduce inequality. The stagnant economy and persistent energy challenges existed before the advent of Covid-19, so a socially just economy with tangible prospects for a better life for even the most vulnerable should be the focus. Strategies that simply offer scenarios that existed pre-Covid-19 are not a potential solution. Instead, a stagnant and socially unjust economy needs a fresh approach that will generate an inclusive economy. Focusing on social cohesion offers a realistic and fresh approach to re-establishing trust upon which to generate implementable policies. References Adelzadeh, A., Malumisa, S. and Benecke, J. 2020. Covid-19 and South Africa’s Future Economic Outlook. [pdf]. Applied Development Research Solutions (ADRS). Available at: https://adrs-global.com/resources/static/downloads/adrs_report_on_covid_19_and_SA_future_economic_outlook.pdf [18 September 2020]. Alt, J.E., Chambers, S., Garrett, G., Kurian, G.T., Levi, M., and McClain, P.D. 2010. The Encyclopaedia of Political Science Set. Washington: CQ Press. Boadi, K. 2000. The Ontology of Kwame Nkrumah's Consciencism and the Democratic Theory and Practice in Africa: A Diopian Perspective. Journal of Black Studies, 30(4):475-501. Boehnke, K. Leader of a panel discussion on Developing a New Economic Blueprint for South Africa: Lessons from Germany, hosted by the Inclusive Society Institute, 20 August 2020. Delhey, J., Boehnke, K., Dragolov, G., Ignácz, Z.S., Larsen, M., Lorenz, J. and Koch, M. 2018. Social Cohesion and Its Correlates: A Comparison of Western and Asian Societies. Comparative Sociology, 17(3-4):426-455. Edigheji, O. 2010. Constructing a democratic developmental state in South Africa: potentials and challenges. In: O. Edigheji, ed., Constructing a democratic developmental state in South Africa: potentials and challenges. Pretoria: HSRC Press. Fine, B. 2010. Can South Africa be a developmental state? In: O. Edigheji, ed., Constructing a democratic developmental state in South Africa: potentials and challenges. Pretoria: HSRC Press. Khambule, I. and Siswana, B. 2019. How Inequalities undermine Social Cohesion: A Case study of South Africa. 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Impact of balance of forces on the cause of social transformation. In: Umrabulo, (49). Nkrumah, K. 1970. Consciencism. New York: Monthly Review Press. Piketty, T. 2013. Capital in the Twenty-First Century. Cambridge, Massachusetts: Harvard University Press. Piketty, T. 2020. Capital and Ideology. Cambridge, Massachusetts: Harvard University Press. Polity. 2020. SA: Nathi Mthethwa: Address by Minister of Sports, Arts and Culture, on the upcoming Social Cohesion Compact Convention (05/02/2020). [Online] Available at: https://www.polity.org.za/article/sa-nathi-mthethwa-address-by-minister-of-sports-arts-and-culture-on-the-upcoming-social-cohesion-compact-convention-05022020-2020-02-06 [accessed: 16 September 2020]. SA Local Government Research Centre. 2014. The SA Local Government Briefing, May Issue. Cape Town. Statistics South Africa. 2011. Census 2011. [Online] Available at: http://www.statssa.gov.za/?page_id=3839 [accessed: 18 September 2020]. Statistics South Africa. 2012. Census 2011 Statistical Release: P0301.4. [pdf] Available at: http://www.statssa.gov.za/publications/P03014/P030142011.pdf [accessed: 18 September 2020]. Statistics South Africa. 2014. Poverty Trends in South Africa: An examination of absolute poverty between 2006 and 2011. [pdf] Available at: http://beta2.statssa.gov.za/publications/Report-03-10-06/Report-03-10-06March2014.pdf [accessed: 18 September 2020]. Statistics South Africa. 2019. Inequality Trends in South Africa: A multidimensional diagnostic of inequality. [pdf] Available at: http://www.statssa.gov.za/publications/Report-03-10-19/Report-03-10-192017.pdf [accessed: 18 September 2020]. Storm, S. 2020. The Economics and Politics of Social Democracy: A Reconsideration. Institute for New Economic Thinking Working Paper Series, (122). [Online] Available at: https://www.ineteconomics.org/perspectives/blog/the-economics-and-politics-of-social-democracy-a-reconsideration [accessed: 18 September 2020]. (Ritzen, J., Easterly, W. & Woolcock, M. 2000). On "good" politicians and "bad" policies - social cohesion, institutions, and growth. [Online] Available at: https://www.researchgate.net/publication/23722390_Ongoodpoliticians_andbadpolicies_-_social_cohesion_institutions_and_growth/link/55e9058208ae65b6389ae666/download [accessed: 18 September 2020]. University of Cape Town (UCT). 2018. Building a social cohesive society. [Online] Available at: http://www.povertyandinequality.uct.ac.za/social-cohesion-0 [accessed: 18 September 2020]. World Bank. 2016. South Africa Overview. [Online] Available at: https://www.worldbank.org/en/country/southafrica/overview [accessed: 18 September 2020]. World Bank. 2019. Overview: South Africa. [Online] Available at: https://www.worldbank.org/en/country/southafrica/overview [accessed: 18 September 2020]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Post-Second World War lessons from selected democratic states, developmental states and populist states Occasional paper 5/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. Author: Prof. William Gumede Associate Professor, and former Convener, Political Economy, School of Governance, University of the Witwatersrand; and former Senior Associate and Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; and author of South Africa in BRICS (Tafelberg) Introduction Prudent macro-economic policy, especially the management of monetary, fiscal, and public debt is more crucial in developing countries wanting to catch up to or surpass industrial countries in terms of development. In the postcolonial period many developing countries who genuinely pushed broad-based development fell short when they neglected fiscal and monetary discipline, undoing their development efforts. Unpacking the terms: “Fiscal policy” relates to the policy decisions on the levels of government spending, taxation and borrowing. Whereas “monetary policy” is the coordination of the supply of money in the economy to influence inflation, the value of the currency and employment. Many developing countries put little focus on curbing inflation, keeping exchange rates stable or managing public debt levels. Furthermore, they often allow large budget deficits, where expenses exceed revenue by huge margins. Milton Keynes in his General Theory made an argument for “functional finance”, the use of deficit spending to overcome “cyclical fluctuations in the economy” (Keynes, 1936). However, many developing countries by the 196os onwards pursued persistent deficit spending which over time ballooned into large national debts (Emenike et al, 2017). For example, by the 1960s many African governments had, on average, budget deficits of 30% of GDP. The Nigerian economist Bade Onimode writes that many African countries have, since independence from colonialism, experienced a “chronic balance of payments crisis” (Onimode, 2000). The economists John Healy and Mark Robinson say: “There was a fairly common pattern to African economic policy in the 1970s and early 1980s which included the following recurring features: the persistence of high and volatile public sector deficits, often financed from the banking system; failure to stabilise inflation, especially in the face of terms-of-trade shocks; lack of clear prioritisation of public expenditure and weak economic appraisal of investment together with overvalued exchange rates” (Healy & Robinson, 1992). Chronic balance of payments crises undermine development Many developing countries also mismanaged their balance of payments situations (Ocampo, 2016). The balance of payments being the record of all transactions between the residents, firms and government of a country and the rest of the world. There are three parts to this record: a current account, a capital account and an official financing or balancing account. The current account is the balance of trade, which includes both government and private sector payments and the earnings on foreign investments excluding payments made to foreign investors and cash transfers. Whereas the capital account is sales and transfers of contracts, ownership of fixed assets and patents. The financial account is the transfers of financial assets and liabilities between residents and non-residents, including banking flows – hot money, portfolio flows – debt and equity and foreign investment flows, and official reserves. Developing countries often struggle to manage their budget deficits, current accounts, and their exchange rates. Setting developmental interest rates – which promote the outcomes set out in the national industrial or developmental plan, keeping inflation manageable and setting sustainable exchange rates are crucial for development. Moreover, public spending is often not disciplined and in many cases developing countries do not use taxes towards increased development. The result is that they pay the price in rising levels of poverty, underdevelopment, and financial instability. Therefore, the challenge for many developing countries is “balancing the competing objectives of economic policy: price stability, exchange rate stability and free capital mobility” (Nassif et al, 2011; Williamson, 2008; UNCTAD, 2011; Rodrik, 2008). Furthermore, the Brazilian economist Luiz Carlos Bresser-Pereira points out how “the experience of the East Asian countries has demonstrated, keeping the budget deficit as well as the current account under control is a necessary condition for keeping the macroeconomic prices right and the macroeconomic aggregates balanced” (Bresser-Pereira, 2017). Naturally then, when developing countries pursue expansionary fiscal policies – whereby they increase public spending to stimulate aggregate demand in the economy – ill-discipline results in unchecked government spending, which may cause harm including rising inflation and crowding out private investment. Developing countries often increase public spending to levels where they end up increasing the budget deficits. The government spends more than it collects in revenue and grants, thereby running a budget deficit, resulting in macroeconomic imbalances. Unless the budget deficit is covered by private savings, it creates a current-account deficit with the rest of the world, obliging the country to borrow to finance said deficit. If the government cannot finance the deficit by borrowing, pressure builds to finance it through depreciation of the national currency. Depreciation then leads to greater exports and, hence, reduces the current-account deficit. The problem with this is, firstly, that many developing countries export single commodities, with prices dependent on demand in buying countries. Secondly, depreciation may lead to inflation, which cuts purchasing power. Another issue is that developing countries often hold their currency at too high a rate for the state of the economy, meaning the country’s exports are more expensive than its imports. And during periods of low growth, an overvalued currency is bad for the economy. Brazil, for example, experienced overvaluation of its currency for most of the mid-1990s period. It has worsened now because many industrial country investors move their money to developing countries when interest rates in those countries are low, to seek higher investment returns. Then, when interest rates increase again or during times of economic and political uncertainty within those countries, the investors move their money out to avoid losses. Post-Second World War macroeconomic management success in Japan For a brief period following the Second World War, during the occupation of the country, the operations of the Bank of Japan (BOJ), the central bank, was suspended and a special military currency used in the country. The bank was restructured in 1949 and began to play its central developmental role in Japan’s post-war economic miracle. The BOJ operated with reasonable autonomy during the post-war period, although critics throughout have criticised it for being too independent (Horiuchi, 1993). Many East Asian developmental states have been successful in reducing the volatility in their currencies by building up large international reserves (Aizenman & Ito, 2014; Rodrik, 2008; UNCTAD, 2011). Many of these states, such as South Korea, Malaysia and Singapore, pegged their currencies to a basket of currencies. In the post-war period, Japan focused its monetary policy on promoting “export- and investments-led growth”, focussing determinedly on ever-diversified exports. A pillar of the BOJ’s monetary policy was called “window guidance”, in which the central bank gives credit quotas to commercial banks, which they must channel to specific industries prioritised by government as growth sectors (Cargill, Hutchison and Itō 1997; Werner 2005). The BOJ would directly communicate the industries that should get quicker loans, thereby directly influencing the activities of commercial banks. Japan’s Ministry of International Trade and Industry (MITI) was one of the key institutions in setting fiscal policy. MITI managed the allocations of foreign exchange to companies, with which they bought raw materials or equipment. Government subsidies to prioritised industries were also crucial to expand industrialisation. To secure foreign exchange, companies had to, in return, support the government’s export and investment-led strategy (Pham, 2017). Many Asian economies, more recently including China, have copied the Japanese monetary policy of “window guidance” as “an effective tool to control the total volume of credit to financial institutions” and to “regulate the growth rates of money and investment spending more easily” (Pham, 2017). In the two decades before the collapse, in 1971, of the Bretton Woods System of linking currencies to the value of gold, the Japanese currency was fixed at 360 yen to the US dollar. The collapse of the Bretton Woods System caused the Japanese currency to appreciate sharply. Japan then devaluated its currency, and in 1973, set a floating exchange rate with the mission to stabilise the exchange rate. In the immediate post-war period, Japan’s external current account had large deficits which were financed by US aid. The country also experienced hyper-inflation. “Monetary policy faced difficulty in pursuing two contradictory purposes at the same time, namely stimulating investments to restore supply capacity and depressing the hyper-inflation” (Suzuki, 2017). During the same period, Japan rolled out a massive infrastructure rehabilitation and expansion programme. In addition, the government had to make large payments in reparations for damage it inflicted during the war – both of which were financed by government bonds, underwritten by the Bank of Japan (BOJ). The government formed the Reconstruction Public Finance Corporation in 1947, underwritten by the BOJ, to issue bonds to state-owned entities for industrial rebuilding. Private businesses also expanded dramatically, borrowing from private banks to finance their expansion. The BOJ provided lending to private banks who in turn provided lending to private firms. Importantly, the country’s savings were channelled into investment projects (Hamada & Kasuya, 1992). The government provided subsidies to crucial sectors, called “priority production system” (Hamada & Kasuya, 1992). By 1948, such subsidies came to 24% of the country’s general account (Hamada & Kasuya, 1992). These subsidies were financed by the Bank of Japan and also increased inflation. The Japanese government had a Trade Financial Special Account which sold crucial imports at a much lower price than the international prices. This was subsidised by the BOJ. This also caused additional inflation. There were strong arguments for deficit budgeting – which was rejected In 1946, then Fiscal Minister Tanzan Ishibashi, in his budget speech, basing his argument on Keynes General Theory, argued: “In order to achieve the goal of resuming production there is no harm if government deficits occur. Since both capital stock and labour force were clearly underemployed, the problem was simply that bottleneck factors such as the lack of raw materials from overseas stood in the way” (Hamada & Kasuya, 1992). The government until the 1950s maintained a balanced of payments equilibrium, maintaining similar levels of investments abroad to foreign investment locally. During this period, infant industries became competitive. Japan, from the 195os to the 1970s, undervalued its currency in relation to the US dollar. Furthermore, throughout the post-Second World War period, Japan undervalued its currency to encourage export manufacturing. Then, from the 1970s, the focus became currency stability (Green, 1990). The government regularly intervened in the market to either buy or sell dollars to gain that stability. Furthermore, the government regulated capital flows (Hutchison, 1984; Suzuki, 1986). Japan’s current account was in surplus since 1968. The country accumulated large foreign reserves and the country’s citizens were encouraged to save. Until 1965, the Japanese government implemented a balanced budget principal. Then, in 1965, the Japanese economy experienced a recession. The government for the first time introduced an expansionary fiscal policy, financing a budget deficit with a national bond (Takagi, 2015). The government maintained price stability – targeting inflation at 5.5% per year. The export growth focus provided a surplus in the country’s balance of payments with the world, and foreign investment was introduced selectively in targeted industries. However, capital liberalisation, whereby foreign companies could enter unencumbered, was only introduced in 1973. From 1966 to 1973, the government financed a deficit on the capital accounts, through the issuing of a national construction bond. The government also built up foreign exchange reserves which, by the early 1990s, totalled over US$100bn – a record amount for the IMF (International Monetary Fund, N.d.). During the period leading up to 1990, Japan’s currency was knocked by three international crises. In 1971, the US withdrew from the Bretton Woods System which pegged the US dollar to the value of gold. This caused an appreciation in the yen, which had been under a fixed rate to the value of the US dollar. The government responded by depreciating the currency and adopting a free-floating currency exchange policy. During the first oil shock, in 1972, Japan’s balance of payments accounts declined. This put pressure on the value of the currency, and so, the government restricted capital outflows (Green, 1990). The first oil crisis in 1973 exposed the deficit financing through national bonds. All throughout Japan’s high growth period, the government used monetary policy as a counter cyclical tool to encourage growth, rather than fiscal policy (Funabashi, 1988; Ito, 1987 and 2003; Takagi, 2015). Another shock to the Japanese yen was the Plaza Accord and Louvre Accord of 1985-1987, which again appreciated the value of the dollar. Between 1980 and 1985, there was a dramatic appreciation of the dollar against the currencies of the major industrial countries – almost 50% against the Japanese yen. All as a result of the US Federal Reserve System fighting stagflation, which hounded the US dollar in the 1970s (Frankel, 2015). However, the intervention went belly-up when the dollar became overvalued (US Department of Treasury, 1983). In 1985 the Ministers of Finance and central bank Governors of the G5 countries – the US, Japan, Germany, France and the United Kingdom – signed the Plaza Accord, which agreed on a planned devaluation of the dollar, with the other countries coordinating their activities with that of the US central bank. By the time of the Plaza Accord the US economy was in recession, its current-account deficit was at 3.5% of GP and its exporters uncompetitive. The intervention helped to narrow the US trade deficit with major industrial countries. By 1987, the devaluation of the US dollar had now decreased the value of the dollar against the yen by 51%, and Japan had restrictions on imports. The appreciation of the yen forced the country to respond with an expansionary monetary policy. It increased the money supply, lowered interest rates and decreased the value of the yen – to increase aggregate demand, the total use of goods and services in the economy. However, this in turn caused an asset price bubble, deflation and low growth. The combination of these would become known in Japan as the Lost Decade (Obstfeld, 1990). In 1987, the US industrial country partners signed the Louvre Accord to stop the devaluation of the dollar. In a coordinated approach, the US would in 1988, reduce its deficit to 2.3% of GDP, cut interest rates and cut government spending by 1% (US Department of Treasury, 1983; Krugman, 1991). All four of Japan, Germany, France and the UK would cut interest rates, reduce public spending and taxes. Japan would reduce its trade surplus. Throughout the period, the Japanese government emphasised currency and price stability. The government maintained a low interest rate policy throughout the high growth phase and contained inflation. It also eschewed used tax increases to finance budgets and channelled savings to support targeted export manufacturing, infrastructure and housing. Lessons from Japan Independent central bank, the Bank of Japan (BOJ) Developmental monetary policy prioritised export- and investment-led growth Ministry of International Trade and Industry (MITI) set fiscal policy Monetary and fiscal aligned to prioritise export and investment-led growth Throughout Japan’s post-Second World War high growth period, monetary policy was used as a counter cyclical tool to encourage growth, rather than fiscal policy The BOJ provided lending to private banks who in turn provided lending to private firms Throughout the post-Second World War period, Japan undervalued its currency to encourage export manufacturing The government regulated capital flows Until 1965, the Japanese government implemented a balanced budget principle Only in 1965, when the economy was in recession, an expansionary fiscal policy was introduced, financing a budget deficit with a national bond The government maintained price stability throughout the postwar period, targeting inflation at 5.5% per year Capital liberalisation, whereby foreign companies could enter unencumbered, was only introduced in 1973 From the 1970s currency stability became the focus Persistent balance of payment crisis undermined Brazil's post-Second World War development In Brazil, the military took power in 1964 and ruled until 1985. The military governments prioritized high growth rates to maintain support. The high initial growth rates – from 1960 to 1980, came through state investments in infrastructure, telecommunications, mining and atomic energy. It was dubbed the Brazilian Miracle. The high economic growth rates came with high inflation and large budget deficits. From 1981 to 1994, growth slowed down, and was accompanied with hyperinflation and large deficits (Ayres et al, 2018). Throughout the period from 1960 to 1994, Brazil’s central bank was not independent (Ayres et al, 2018). Brazil fell into a balance of payments crisis in early 1970s, as global demand for its commodities slumped because of slowdowns in industrial country economies buying its commodities (Ayres et al, 2018). The government pursued import substitution industrialisation, economic diversification and self-sufficiency. The import of products that were already locally produced was restricted. The costs of this conversion were paid by foreign loans. The plan was that over time a structure in the economy would materialise, whereby more local products would be produced for export, and the foreign earnings would pay for the accumulated debt. The Brazil government ran a large current account deficit. In 1973, the deficit was US$1.7bn and by 1980 it was US$12.8bn. Foreign debt became more expensive to repay because of higher interest rates charged by lenders. In the 1960s Brazil introduced what it called “indexation”, in which it tried to align prices, interest rates and wages, to past inflation levels, to keep inflation constant across the economy. This, in the absence of firm monetary policy, actually increased inflation (Ayres et al, 2018). By the mid-60s until the early 1970s, the government increased taxes to plug deficit holes, including introducing value added tax (VAT). Until 1964, Brazil had no official central bank. The Treasury implemented monetary policy through the Bank of Brazil, which was a state-owned bank, while at the same time being a commercial bank (Ayres et al, 2018). The government had in 1945 established a Superintendency of Money and Credit (SUMOC) committee, with powers over monetary policy. The Bank of Brazil had majority seats on the SUMOC, giving it a controlling say over monetary policy. In 1964, the government created the Central Bank of Brazil (CBB). At the same time the government restructured the SUMOC into a National Monetary Council (CMN), which oversaw the central bank. The Central Bank of Brazil has been nominally independent, however, in 1994 the bank was given formal independence, and put fully in charge of monetary policy (Ayres et al, 2018). By 1983 Brazil had the largest foreign debt of any country in the world – standing at US$92bn. The government responded by hiking interest rates to record levels, and Brazil’s terms of trade – the ratio between a country’s export prices and import prices – deteriorated by 10% between 1971 and 1979. The 1973 oil crisis, in which the price of oil spiked, hit the economy badly. In addition, the US ran up large budget deficits in the early 1970s, of US$200bn annually, which forced its main trading partners to increase interest rates. Developing countries such as Brazil with very high foreign debts struggled to pay interest on their debts because of the higher interest premiums. Worse, Brazil imported large numbers of products, from machinery, components and raw materials. Efforts to diversify local production of at least consumer goods were pedestrian. The government also repeatedly devaluated the currency, which increased inflation. Low growth, high inflation and high interest rates caused the collapse of many local companies. The second oil crisis in 1979 gave the Brazilian economy another knock, increasing the foreign debt, as interests on repayments of foreign loans rose further, lowering the terms of trade and worsening the balance of payments crisis. Until then, the early 1980s, the government maintained its strategy to lift growth. However, as the debt accumulated, the government changed tack to foster trade surpluses, by pushing exports, and using the income to pay off debt. The 1982 Mexican debt crisis had a further knock-on effect on the Brazilian economy. The International Monetary Fund and Western commercial banks put pressure on the government to introduce a structural adjustment programme, adopted by the country’s legislature in 1983, which included reducing inflation, cutting wage increases and privatisation of state-owned entities. In 1994, Fernando Henrique Cardoso was elected president, and introduced a stabilisation programme, the Real Plan, with a new currency. Monetary policy was tightened, the new currency was anchored to the US dollar, and inflation was reigned in. Lessons from Brazil Military took power in 1964, ruled until 1985 In 1945 a Superintendency of Money and Credit committee was established, with powers over monetary policy Until 1964, Brazil had no official central bank In 1964, the government created the Central Bank of Brazil Throughout 1960 to 1994, Brazil’s central bank was not independent Treasury implemented monetary policy through the Bank of Brazil, a state-owned bank, operating as a commercial bank Import substitution industrialisation strategy, a trade and economic policy focusing on replacing foreign imports with domestic production The military governments prioritised high growth rates to maintain support Initial growth rates – from 1960 to 1980 - came through state investments in infrastructure, telecommunications, mining and atomic energy. It was dubbed the Brazilian Miracle. The high economic growth rates came with high inflation and large budget deficits. From 1981 to 1994, growth slowed, accompanied with hyperinflation and even larger deficits Overvalued currency in early 1970s undermined export 1970s oil crises caused a trade imbalance Heavy borrowing increased the current-account deficit Current account deficit financed through foreign debt Expected import substitution industrialisation with exports rising over time, which was anticipated to result in trade surpluses, failed In 1983, the International Monetary Fund and Western commercial banks pressured Brazil into a structural adjustment programme, resulting in the reduction of inflation, the cutting of wage increases and the privatisation of state-owned entities. Prudent macroeconomic management under Sweden's Rehn-Meidner economic model Left of centre governments in industrial countries – such as Sweden, which was governed by the Social Democratic Party – maintained prudent monetary and fiscal policies to finance the welfare state (Braconier & Steinar, 1999; Calmfors, 1993; Calmfors et al, 2001; Erlandsen & Lundsgaard, 2007; Forslund and Krueger, 1997). In 1951, Swedish trade union economists Gosta Rehn and Rudolf Meidner, at the Swedish Trade Union Congress, designed what would be called the Rehn-Meidner economic model (Rehn, 1952, 1969, 1977, 1982 and 1987; Meidner, 1952 and 1988), which was based on high growth, low inflation, full employment and income equality (The Swedish Confederation of Trade Unions [LO], 1951). The model was based on a “third away” between Keynesian, central planning and neoclassical economics. After the Second World War until the end of the 1970s, the Swedish model was “able to combine a relatively fast rate of GDP growth with full employment, considerable economic security, and a rather equalitarian distribution of income” (Lindbeck, 1997: 1273). The Swedish economist, Assar Lindbeck, who chaired what became the Lindbeck Commission - an inquiry in 1993 into the reasons for Sweden’s economic decline in the late 1980s and early 1990s - listed seven crucial institutional elements of the Swedish “third way” model. These are according to Lindbeck (1997: 1274): “ (a) large public-sector spending and high taxes; (b) a stabilisation policy, to foster full employment, with an active labour market policy as a tool; (c) government intervention to influence aggregate saving, credit supply, and investment, as well as their allocation, by public sector saving, capital market regulations, taxes, and subsidies; (d) strong central government control of local governments; (e) centralised wage bargaining on a national level; and (f) centralised decision making in the private sector, where a small group of large firms dominates on the production side and where the holdings of financial assets, including shares, are highly concentrated in a few large institutions, banks, insurance companies, and investment firms; with (g) the centralised private sector system being combined with a strong free trade regime.” At the heart of the Swedish model was a growth policy, based on disciplined macroeconomics, with price stability, but still advocating for fair wages, through using an active labour market policy. Immediately after the Second World War, a number of Western European Social Democratic Parties implemented Keynesian policies, which were “counter-cyclical” fiscal policies, by reducing spending and raising taxes during boom times, and increasing spending and reducing taxes during downtimes (Beveridge, 1944). These governments pursued expansive macroeconomic policies. They used expansionary fiscal policy by using their budgets to increase spending or cut taxes; and expansionary monetary policy through expanding the money supply through lowering reserve requirements, lowering interest rates and lowering the currency. In the Swedish model, applied during the country’s golden growth period from the late 1940s to the late 1970s, the “expansionary macroeconomic policy measures are combined with selective fiscal measures and with regulation to conquer inflation” (Erixon, 2010). For example, the Swedish Social Democratic Party reduced possible rising inflation, current deficits and overvaluation of the currency that would result from expansionary policy, by “regulation, including informal incomes policy, and by extraordinary fiscal measures” to “moderate price and wage increases in the most overheated industries” (Erixon, 2010). The Swedish central bank, the Riksbank, had both functional and institutional independence, and was one of the agencies that were directly reporting to Parliament (Commission of Inquiry, 2007). The country has a National Debt Office, a public entity reporting to Parliament, which ensures that government borrows prudently. The government used restrictive fiscal policy, particularly indirect taxes to hold down inflation. The country introduced consumption taxes – taxing people when they spend money on goods and services, rather than on income or profits, and devaluated the currency in 1949. “Sweden met actual and expected deficits in the current account with a devaluation of the krona, not with deflationary macroeconomic policy measures” (Erixon, 2010). Sweden in the 1950s to the 1970s began to coordinate wage bargaining, to protect weak industries and to manage inflation (Nickell et al, 2005; Johannesson, 1981). Although the model envisaged wage increases linked to productivity, and wage restraint during tough times, underproductive firms would necessarily go under (Rehn, 1982). However, the argument was that new industries would be created simultaneously through investments in new more market-relevant industries, active labour policies, including continuous industrially relevant training and social welfare (Gowan & Viktorsson, 2017). Wages are determined centrally through collective bargaining. This often resulted in uncompetitive and low-productivity firms, that were unable to afford the agreed wages, to collapse. More productive firms secured comparatively lower wages “than they would have to pay in a ‘free’ labour market” (Ryner, 2003). In the Swedish model, during recessions, a countercyclical fiscal policy, reducing spending and raising taxes during boom times, and increasing spending and reducing taxes during downtimes, was still part of the macroeconomic arsenal. In the model, during a recession the temporary use of budget deficits, moderating wage increases and selective employment subsidies in weaker industries are practical options. To prevent inflation, the government used prudent public finance management. It pursued strict fiscal policy, focusing on generating budget surpluses. Uncompetitive companies with high costs and poor price structures struggled, whereas highly productive companies, with favourable cost and price structures were advantaged (Erixon, 2010). Through effective coordination of the economy, the government continually shifted employees from low-growth to high-growth sectors (Blanchflower et al, 1995). The government managed an active labour market policy: comprehensive industrial skills, training, education, life-long adult-education programmes to cushion the “losers” (Erixon, 2010). Full employment was seen as unemployment below 3%. A core part of the Swedish welfare state was universal education, health and pensions. The model also has a high degree of gender equality, including in the labour market. Private property rights and the freedom of companies to trade internationally were pillars of the model (Bergh, 2017). Progressive taxation, including that on property, funded many of the welfare programmes (Lindbeck, 1997). During the 1950s to the 1970s, Sweden extraordinarily for the country’s size, had large global engineering firms – SAAB, Ericsson, SKG, Electrolux, Volvo and others – which by the 1960s had accounted for 20% of the country’s total exports. In the early 1970s there were criticisms that wage constraints in profitable firms meant that massive profits went to a small circle of private company shareholders and owners. The Swedish Trade Union Confederation (LO), ally of the Social Democratic Party, proposed the establishment of a worker controlled, “wage-earner” funds, which would be funded through taxes. The proposal would give trade unions a direct say in the investment decisions of listed companies. Organised business saw it as a “collectivism of corporate ownership” (Gylfason, 2020). The Swedish government established commission in 1973, proposing employees become shareholders over time. This would be done through setting up sector-based wage-earner funds which would get a proportion of company profits through shares. These funds would be managed by employees. Proportions of the proceeds of the wage-earner funds would be reinvested in their companies, used to finance research and specialist management training for employees, to provide them with the skills to run businesses. However, the wage-earner fund proposals were not implemented – as it faced opposition from employer organisations (Gowan & Viktorsson, 2017). More importantly, the disagreement over the wage earner proposals would collapse the famous Swedish tripartite consensus model (Lindbeck, 1997). Sweden was also hit by the 1973 and 1979 oil crises. The Bretton Woods System of fixed exchange rates, with the US dollar’s value fixed to gold, was ended in 1971, essentially collapsing the fixed currency system (International Monetary Fund, 1972-810). In addition, Sweden struggled in the new conditions to stabilise the value of its currency. The rise of Japan and East Asian developmental states now also provided competition to Swedish global manufacturing. Furthermore, the global recessions sparked by the oil and currency crises meant diminished markets for Swedish products – the Swedish economy faced headwinds (Erixon, 2010). The Swedish Social Democratic Party lost power in the 1976 elections; and only returned to power in 1982. A limited form of wage-earner funds was established in 1984, funded through “excess” profit tax over a 7-year period, rather than through acquiring company shares (Gowan & Viktorsson, 2017). It was not employee managed. The Swedsh Social Democratic Party lost power again in 1991, and the funds were privatised by the new government post-1992, after the Social Democratic Party were out of power again. In the post 1970s oil crisis period, Sweden, whether governed by the Social Democratic Party, or the centre-right coalitions that took power for periods thereafter, struggled to maintain Sweden as an open, competitive economy. And amid the global economic crises, together with increased competition from the rising East Asian economies, they battled to maintain the social benefits of the welfare state, (Bergh, 2017). Until the early 1990s, successive governments tried to maintain the economy’s competitiveness through currency devaluations (Lindbeck, 1997). The policy of high marginal taxes to fund the welfare system, saw many high net individuals seeking ways to avoid tax; and at the same time generous welfare benefits discouraged many who could work from seeking work (Bergh, 2017). The support to companies to protect jobs often led to the cushioning of uncompetitive businesses. Rather than innovate to stay competitive, many companies sought government bailouts. Furthermore, wages increasingly rose above productivity increases, causing rising inflation. “Repeated currency devaluations led to both a lower living standard and investment-sapping uncertainty” (Bergh, 2017). Between 1991 and 1993, struck by the most severe financial crisis since Great Depression that hit several Scandinavian countries, the Swedish government instituted an inquiry into why the successful post-war model had faltered after three decades and how it could be refined for new times. Both the government and opposition parties accepted the criticisms and advice of the report and implemented its key proposals to modernise the Swedish welfare state (Gylfason, 2020). Lessons from Sweden “Third away” between Keynesian central planning and neoclassical economics Growth policy, based on disciplined macroeconomics, with price stability, but still advocating for fair wages, using an active labour market policy Expansionary macroeconomic policy combined with selective focused fiscal measures Combat possible rising inflation, current deficits and overvaluation of the currency that result from expansionary policy Through regulation, including informal incomes policy, fiscal measures taken to moderate price and wage increases Focused on generating budget surpluses Restrictive fiscal policy, using indirect taxes to lower inflation Dealt with expected deficits in the current account through a devaluation of the currency Actively coordinated wage bargaining to protect weak industries and to manage inflation During recessions, a countercyclical fiscal policy, reducing spending and raising taxes during boom times The temporary use of budget deficits during recessions, moderating wage increases and practical options such as selective employment subsidies in weaker industries Increasing spending and reducing taxes during downtimes part of the macroeconomic arsenal To prevent inflation, the government used prudent public finance management Central bank, the Riksbank, has been relatively independent and one of the agencies reporting directly to Parliament Botswana's prudent macroeconomic management is an African post-colonial exception Botswana is one of the few African countries since colonialism to pursue prudent macro-economic policy, especially the management of monetary, fiscal and public debt (Maipose, 2008). When Botswana became independent in 1966 it was among the poorest countries in the world, but through prudent economic management, the country achieved real GDP growth averaging 9 percent between 1965/66 and 2005/06. The country is now an upper middle-income country (Rodrik, 2003). Immediately after independence, Botswana borrowed from abroad, like many African countries (Maipose, 2008). However, the foreign loans were used for infrastructure, unlike in most African countries in the immediately post-colonial period. Botswana also immediately went searching for foreign investment, specifically to develop new industrial sectors (Maipose, 2008). Many African countries immediately after independence discouraged the entry of private investment, often nationalising or indigenising, replacing the owners, managers and employees with locals, frequently members of the governing party, not necessarily with the experience to manage sophisticated private sector firms (World Bank, 1989; Young, 1982; Elbadawi, 1996; Rosberge and Jackson, 1982; Ndulu & O’Connell, 1999; Collier & O’Connell, 2007). The government was also tougher on corruption than most African countries. In 1976, it enacted a law, the Finance and Audit Act, which made accounting and project officers personally liable for waste, misuse and stealing of public funds (Crisuoldo, N.d.). The government ran budget surpluses for 16 years since 1982; and only in 1998/99 ran up a budget deficit (Harvey, 1997; Gaolathe, 1997; Lewis, 1993; Mupimpila, 2005; Sentsho, Eds.; UNDP, 1998). It judiciously accumulated foreign reserves and used the savings from these to finance the budget deficits of the 1998/1999 and 2002/2003 financial years. The Botswana government has a National Employment, Manpower and Income Council which annually determines public service wage increases. The Council does this by taking into consideration the overall macroeconomic targets, including inflation levels, whether the country has a budget deficit and the levels of public debt. During budget deficit years, the government has capped public salary increases (Maipose, 2008). Like many other African countries, Botswana relied on a single or two commodities – in the case of Botswana, beef. This often causes “boom and bust” cycles, with revenue depending on the price and uptake of the commodity (Brautigam, 1996; Gaolathe, 1997; Hyden, 1983; World Bank, 1989). Since commodity prices are volatile, African economies have years of booms followed by recessions, depending on the global commodity price they export. In 1973, the Botswana government put together a long-term strategy which would build up reserves during boom periods to be used during downturns. The government planned much more competently than most other African governments. “The government explicitly pursued a counter-cyclical policy in the management of foreign exchange reserves and government cash balances, basing year-to-year spending decisions on the intermediate-term forecasts of export earnings and government revenue, and on a realistic view of spending capacity” (Maipose, 2008). Furthermore, the Bank of Botswana has exceptionally been one of the most independent central banks in Africa, where central banks are often appendages of the governing party or used by the leader as a private bank. It has been central to consistent exchange rate stability, low inflation and sustainable current account levels (Hill & Knight, 1999). The Bank of Botswana also judiciously invested commodity surpluses. Monetary and fiscal policies are tightly coordinated between the central bank and the Department of Finance and Development Planning to ensure alignment of objectives. The Pula has been consistently under-evaluated to “a level below the perceived equilibrium” (Maipose, 2008), to promote exports. In 1973, the Botswana government resolved to establish three funds to stabilise debt, reserve and to fund local development. In 1979, the Public Debt Service Fund (PDSF) and the Revenue Stabilisation Fund (RSF) were established. The main Revenue Stabilisation Fund became the repository of export surpluses to finance the budget during downturns. By 1995 Botswana had the highest domestic savings rate in Africa at 45% of GDP (Motsomi, 1997). In 1975 it was 16% of GDP (Motsomi, 1997). By 1984, all gross fixed capital formation, the acquisition of new fixed assets, minus disposals, by government, business and households were financed by local savings (Maipose, 2008; Motsomi, 1997). The Botswana government have maintained strict discipline in using the Revenue Stabilisation Fund only for the purposes of creating budget surplus during downturns and not for other things, as is the case in many African countries which set up such funds (World Bank, 1989; Elbadawi, 1996). The government also built up large foreign exchange reserves. “The high level of foreign exchange reserves is a result of a deliberate policy to accumulate as much as possible for unexpected changes regarding the balance of payments” (Maipose, 2008). The Public Debt Service Fund was to pay off public debt. It was financed by appropriations from the national budget, budget surpluses and the profits of investments that were made by the fund. The fund essentially, over time, became an investment fund, loaning funds to state-owned enterprises for the purposes of infrastructure, new investments and buying new stock. Subsequently, the government established the Domestic Development Fund to finance local development. Foreign funding was initially deposited into the Domestic Development Fund. Later, money specifically set aside for capital spending is also deposited into the fund. Development project proposals are evaluated by the fund, and if they meet the requisite standards, funds are disbursed (Maipose, 2008). Depositing donor money into a separate fund, dedicated to development, is also a departure from general African practice of donor funding going uncoordinated to different government departments and local projects (Brautigam, 1996; Gaolathe, 1997; Hyden, 1983; World Bank, 1989). Lessons from Botswana The Bank of Botswana has been one of the most independent central banks in Africa The central bank has been central to consistent exchange rate stability, low inflation and sustainable current account levels Botswana ran budget surpluses for 16 years since 1982 Only in 1998/99 did Botswana run up a budget deficit for the first time since 1982 It judiciously accumulated foreign reserves and used the savings from these to finance the budget deficits of the 1998/1999 and 2002/2003 financial years To ensure alignment of objectives, monetary and fiscal policies are tightly coordinated between the central bank and the Department of Finance and Development Planning The Pula has been consistently under-valued to promote exports Export surpluses finance the budget during downturns By 1995 Botswana had the highest domestic savings rate in Africa - 45% of GDP The government built up large foreign exchange reserves After independence Botswana borrowed from abroad, however the loans were used for infrastructure Botswana also searched for foreign investment, specifically to develop new industrial sectors The government was tougher on corruption than most African countries A National Employment, Manpower and Income Council determines public service wage increases on an annual basis The Council takes the overall macroeconomic targets, including inflation levels, whether the country has a budget deficit and the levels of public debt into consideration During budget deficit years, the government has capped public salary increases The government pursued a counter-cyclical policy in the management of foreign exchange reserves and government cash balances It based year-to-year spending decisions on the intermediate-term forecasts of export earnings and government revenue Developmental fiscal and monetary policy lessons for South Africa Developmental fiscal and monetary policy must, in the public interest, be done in partnership with social partners and be part of an overarching national industrial plan. Brazil during its period of high growth with inflation, balance of payments crises were run by dictatorship – and alternative policy voices were snubbed out. Botswana in the first two decades after independence was more inclusive in economic policymaking, bringing in government and business to cobble together macroeconomic policy. In Sweden, there was a partnership between government, labour and business to jointly strike developmental fiscal and monetary policies. Japan, Asia’s most democratic nation, struck up partnership agreements over economic policy between governing and opposition parties, and with business and labour. Macroeconomic policy must be aligned to and support the national industrial plan. It must focus on growth. However, successful broad-based development necessitates prudent macroeconomic policies. It needs fiscal and monetary discipline. This means keeping inflation at low levels, keeping exchange rates stable and sustainably managing public debt levels. Public spending has to be disciplined. Setting developmental interest rates, keep inflation manageable and setting sustainable exchange rates are crucial for development. Developmental fiscal and monetary policy is complicated, sophisticated and complex. It means the institutions that oversee fiscal and monetary policy must be staffed by competent people. There has to be the policy sophistication to deliberate on the appropriate policy solution, to correctly analyse the environment and to change tactics, when there are economic shifts. All of this demands coordination between the private sector, government and local and global markets. For government to be trusted by the markets, private sector and implementing government entities, it must be seen as credible, honest and competent. In this regard, the National Economic Development and Labour Council (NEDLAC), which has established fiscal and monetary policy chambers in place, should more strongly and urgently perform its central role in charting the fiscal and monetary course South Africa should take to place the economy on a sustainable path to growth. References Aizenman, J. & Ito, H. 2014. Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries. Berkeley: University of Southern California and NBER, April. Ayres,J., Garcia, M.,Guillen, D. & Kehoe,P. 2018. The Monetary and Fiscal History of Brazil, 1960-2016, December 20, Monetary and Fiscal History of Latin America workshop, University of Chicago, LACEA-LAMES, PUC-Rio, Central Bank of Chile, and Inter-American Development Bank. Cambridge, MA: NBER. 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New Haven: Yale University Press. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

BRI and the implementation of the African Continental Free Trade Area Occasional paper 6/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. Author: Daryl Swanepoel MPA, BPAHons, ND: Co. Admin Abstract The geo-political and geo-economic landscape has over the last decade witnessed quite dramatic shifts in political alignment and regional economic integration architecture. One such realignment relates to Africa’s relationship with China. The Forum for China Africa Cooperation (FOCAC) establishes a strategic partnership between the two sides in areas such as politics, economics, international affairs and development. Simultaneously, China has introduced the Belt & Road Initiative (BRI) with similar purpose albeit within a wider geographic area that covers large swathes of Asia, Europe, Africa and Latin America. To add to the complexity, China and South Africa form part of the Brazil, Russia, India, China, South Africa grouping (BRICS), with the same objectives at its core. Moreover, the recent coming into force of the African Continental Free Trade Area (AfCFTA) will impact the way in which future dialogue and negotiations will be conducted between Africa and other international bodies, including those which are the subject of this analysis. This paper firstly questions the impact of the multiplication of institutions on the coordination of programmes envisaged by each of the ‘blocs’. It ponders the effect of such proliferation on the harmonising and synchronisation of agreed to programmes. The paper then also touches on the impact that COVID-19 has had on global supply chains. It suggests that the pandemic has laid bare flaws in its current design; and that it has highlighted the need for adjusted thinking as it relates to the way forward for strategic cooperation within the geo-economic trade blocs. And lastly, it examines what the implications are for the overlapping institutional mandates resulting from the establishment of the AfCFTA, and what bearing it implies for the relationships between Africa, BRICS, and the BRI. It concludes that greater FOCAC/BRICS/BRI programmatic coordination will be required within a new post-COVID-19 order. It identifies the need for the establishment of novel institutional coordination. It weighs up re-shoring versus globalisation and concludes that the right blend ought to be found that can help boost self-sufficiency without turning away from globalisation. It closes with a recommendation that the secretariats of BRICS, FOCAC, the BRI and the AfCFTA consider further structured interrogation and dialogue to determine the merits of the arguments made for the introduction of greater institutional coordination between these bodies. The China-Africa Think Tanks Forum could, the paper suggests, be the ideal body to undertake such research. Abbreviations AfCFTA African Continental Free Trade Area AU African Union BRI Belt and Road Initiative BRICS Brazil Russia India South Africa FOCAC Forum for China Africa Cooperation FTA Free Trade Area 1. Introduction Two significant China-driven global geo-political and geo-economic re-alignment initiatives affecting the African continent are playing themselves out simultaneously. On the one hand, there is the Forum for China Africa Cooperation (FOCAC), which aims to coordinate, in a mutually beneficial manner, China and Africa’s global political, economic, social and international interests. On the other, there is the Belt and Road Initiative (BRI), that aims to integrate, for similar purposes, a broader geo-political constituency that includes large swathes of Asia, Europe, Africa and Latin America. To add to this complexity, Brazil, Russia, India, China and South Africa (BRICS) in essence replicate the objectives within a third geo-political, geo-economic configuration. Concurrently, Africa is itself, through the establishment of the African Continental Free Trade Area (AfCFTA), undergoing its own regional integration. All this while having to coordinate its own internal realignment processes with the realignment processes of the three other inter-regional initiatives. A single integration and re-alignment project on its own is complex and challenging. To manage four such integration and re-alignment processes at the same time, requires great skill and coordination. There is not much evidence to support the notion that sufficient coordination is in place to synchronise the work of the AfCFTA, FOCAC, BRICS, the BRI. This paper examines the phenomena, the need for coordination between these initiatives and explores proposed mechanisms that can give effect thereto. 2. FOCAC, BRICS & BRI: Necessary process or superfluous triplication? To give support to its foreign policy initiatives, the Chinese government has incrementally introduced policy instruments to coordinate their activities and programmes across the various regions they have targeted for strengthened relationships in support of their own development, albeit within mutually beneficial arrangements with their strategic counterparts. From an African perspective the first such coordinating initiative was the Forum for China Africa Cooperation (FOCAC), which held its first ministerial session in Beijing from 10 – 12 October 2000 (PRC,2000). FOCAC has established a strategic partnership between China and Africa, which is working towards greater cooperation between the two sides in the areas of politics, economics, international affairs and social development (Shelton & Paruk, 2008). The second coordinating mechanism involving Africa was the formation of BRICS. It was founded on 20 September 2006 on the margins of the United Nations General Assembly in New York. It was initiated by Russia as BRIC, since South Africa was not part of the initial formation. Its first summit was held on 16 June 2009 (BRICS, N.d.). On 24 December 2010, BRIC was expanded to BRICS, when South Africa was invited to join the group of developing nations. It joined its first summit on 14 April 2011 in Sanya, China (RSA, N.d.). South Africa was invited to join because of its position to make a unique contribution to the BRICS Africa agenda of promoting global economic governance reforms and the institution of BRICS as a credible international organisation. It was a strategic move by the bloc to get a foothold in Africa as a whole (Manda, 2018). Then came the Belt and Road Initiative (BRI) in 2013. It is an ambitious programme which aims to improve regional integration, grow trade and stimulate economic growth by connecting Asia with Africa, Europe and Latin America via land and maritime networks. The initiative has five major priorities: policy coordination, infrastructure connectivity, unimpeded trade, financial integration and connecting people (European Bank, N.d.). With the advent of the African Continental Free Trade Area (AfCFTA), which came into force on 30 May 2019 (tralac, N.d.), BRICS and BRI planning will by extension also impact African countries that are not part of these formations. As such BRICS and the BRI programmes and projects will also by necessity have to be integrated into the AfCFTA planning. It will become increasingly difficult to isolate non-BRI and BRICS African countries from these regional initiatives. At its core, and as illustrated in the table below, the three initiatives, essentially, have the same objectives: Sources: Mackinnon (2016); Dristi Media (N.d.); OECD (2018). The proliferation of regional initiatives in which China plays a central role, is linked to China’s rapidly growing global role and more assertive approach in the international arena (Hass, Rubenstein & Thornton, N.d.). As can be deduced from the preceding sections, China has asserted itself in a growing number of regional initiatives. From an African perspective these include FOCAC, BRICS and the BRI. Whilst affirming the constructive roles that these initiatives play in advancing development, the question arises whether this proliferation best serves the objective, or whether the streamlining of the multiple approaches will enhance greater efficiency in the execution of the mutually beneficial development goals as envisaged in the mandates of the various formations. Whilst each of these initiatives are in essence promoting the same policy ideals, or at least different elements of the same policy areas, and indeed many of the same players, there does not appear to be a bridge between the various initiatives and/or an umbrella coordinating mechanism. This paper highlights, what it believes, a flaw in the multi-lateral coordination architecture. There are practical reasons to invest time and political capital in coordination. These include, amongst others: (i) the elimination of duplications, which can produce unnecessary costs for government, and lost time for citizens and businesses, (ii) the avoidance of contradictions where different organizations, often for good political reasons, implement programmes that are directly contradictory, (iii) minimising displacement, where one organisation, without consultation, may make decisions that create problems for others, (iv) greater efficiency in dealing with cross cutting problems, where scarce resources needed for a range of services often cut across the usual and/or regional lines, and (v) to ensure simple tidiness, through which governments can appear more capable, building public confidence in the process (Peters, 2018). Moreover, political leaders traverse the globe to attend a multitude of multi-lateral meetings, often to discuss the same cooperation issues with different partners. This comes at great expense to the fiscus and exacerbates the already stretched capacity of the civil service. The secretariats of FOCAC, BRICS and the BRI need to contemplate how best to coordinate their individual activities into a cohesive whole, that is to ensure cross-organisational planning and coordination. This may take the form of a new global counter-balancing institution, which essentially absorbs the three initiatives; or a cross-organisational coordinating mechanism, which at the very least eliminates duplication and at best ensures an integrated approach to the global issues they jointly wish to address. This becomes even more important given the very high cost of development projects, the fact that countries along the BRI have different levels of development and at times poor governance, which may hinder infrastructure development and the development of trade and investment (Hind, 2019). China holds the key to FOCAC and BRI coordination, in that, although the initiatives are multi-laterally owned, both are driven by China (Burger, 2017). This means that establishing coordination between the two initiatives could prove less complex than it would be with BRICS, which is not driven by a single country. It may therefore be that coordination does not take on one form, but a combination of forms. The author does not presume to have the competence, nor the mandate, to prescribe such coordination mechanisms, but does offer illustrative approaches that could be applied to effect greater coordination between the BRICS, FOCAC and BRI initiatives. The absorption model This model would entail the fusing of BRICS, FOCAC and the BRI into a single multi-lateral development agency, to carry out a common mandate across all the countries that have subscribed to the various initiatives. There could be different streams within the single entity that will execute the peculiar geo-political and/or geo-economic priorities envisaged by the former formations. (Source: Author, 2020) The collaborative model In turn, this model would retain the three independent initiatives, which would continue to direct their own programmes. They would however agree to coordinate their individual activities in an effort to ensure a greater level of synchronisation aimed at improving delivery effectiveness for the greater good of their subscribing members. This would require the establishment of a coordinating mechanism established by the three secretariats to cede certain activities to either BRICS, FOCAC or the BRI, and/or to supplement and support projects initiated by any one of the three, and/or to carry out individual projects in a manner that effectively integrates the separate initiatives into an aligned result. (Source: Author, 2020) The hybrid model In this instance, the two Chinese-led initiatives – FOCAC and the BRI – would, under the banner of the BRI, be folded into one, whilst BRICS would continue independently, albeit within a cooperative arrangement with the BRI. Within the BRI there could be regional streams that would fulfil the previous regionally executed programmes, but now within an integrated overall master plan. This would entail a similar approach being followed with other regional programmes that also face parallel duplicity akin to FOCAC. (Source: Author, 2020) The exact form and shape of the coordination mechanism remains to be seen. It will be the subject of much intense diplomatic dialogue and negotiation. What that form and shape turns out to be, is, however, in the authors mind, secondary to the indisputable reality that efficacy in policy implementation will require a greater level of structural coordination. Coordination is crucial within the ever more interconnected and integrated world. For them to remain at the cutting-edge of global realignment, FOCAC, BRICS and the BRI will, sooner or later, have to factor these into their execution arrangements. 3. COVID-19 highlights gaps in global supply chain architecture In the previous section the paper dealt with the need for coordination between the various regionally orientated bodies. The COVID-19 pandemic laid bare the negative effect that a lack of coordination has on the global economy. The lock down in China, and later in other countries, for example, disrupted the global supply chains. The global pandemic, according to Marianne Schneider-Petsinger (2020) of the renown Chatham House, suggests that the coronavirus “is transforming the future of supply chains as a tool for policymakers”. She says that a “new era of government policy that inextricably links supply chains with wider industrial policy and strategic competitiveness is already upon us”. As a practical example of such disruption, one may cite the impact that the COVID-19 lock down in China had on the computer sector in South Africa. A large supplier of computer hardware in South Africa was caught unawares. Without prior warning they did not have the time to sufficiently stock their products and as a result, were unable to fill orders for some months. The impact on their financial performance is evident (Anon., 2020). This situation was not an isolated case. As suggested by Schneider-Petsinger, this appears to have been a global phenomenon. Some, such as the United States of America (US) seem to believe that the solution lies in the re-shoring of global supply chains, even if it means a cost to the fiscus, through for example paying subsidies to domestic manufacturers to counter supplies from abroad. The US are not alone. French president Emmanuel Macron has called for greater industrial sovereignty, and the European Union, in light of economic vulnerabilities created by the pandemic, recently adopted the concept of ‘open strategic autonomy’, which seeks a new balance between open trade and efforts to ‘reduce dependency in order to strengthen security of supply. (Schneider-Petsinger, 2020). This paper argues that the solution does not lie in the re-shoring approach. Rather, the right blend ought to be found that can help boost national self-sufficiency without turning away from globalization. By exposing companies to domestic concentration, does not reduce the supply chain risks, for their domestic and international customers, in cases of domestic catastrophe (Schneider-Petsinger, 2020). To illustrate: The same computer hardware enterprise cited earlier, also supplies optical fibre, which, as a result of a Chinese investment, they manufacture in South Africa. When the Chinese economy locked down, their optical fibre supply remained uninterrupted. At the same time, whilst the Chinese side could not, due to the lock down, export optical fibre, the potential existed for them to fill their order books via their South African operation (Anon., 2020). This is the blend argued for: ensuring security of domestic supply without turning away from the benefits of globalisation. Herein lies the motivation for greater coordination between and within FOCAC, BRICS and the BRI. Holistic planning across these regions is necessary to overcome the pitfalls that catastrophe holds for supply chains. By diversifying manufacturing capacity across the regions ensures continuity of supply when one’s domestic economy shuts down, for whatever reason. This requires careful central planning to ensure, amongst others, optimisation of economic complementarity, competitiveness and equal administrative treatment in areas such as customs, residence permits, investment guarantees, etcetera. The groundwork for such coordination has been laid by FOCAC, BRICS and the BRI. However, each of these bodies serve different constituencies, negating, in the absence of coordination, the ability to optimise security of production across the combined membership. Brazil and India are for example not part of the BRI, and FOCAC covers only Africa and China, which excludes the other Asian, European and Latin American countries that form part of the BRI. The coordinating mechanism promoted in the previous section will help overcome such supply difficulties and will promote inter-regional planning. In moving development forward, this paper argues that it is no longer a question of whether coordination is necessary, but rather why such coordination would not be pursued? The COVID-19 pandemic has exposed the extreme vulnerabilities within the global supply chain environment, and its threat to economic growth. Similar vulnerabilities exists within various other sectors as well, for example tourism, health and the environment. Accordingly, it is proposed that FOCAC add to its agenda the question of coordinating its activities with those of BRICS and the BRI. 4. Extending the BRI to AfCFTA There are currently 39 countries in Africa participating in the BRI (Risberg, 2019). At the same time, the AfCFTA has come into force. The overlap between the two sets of countries has implications for the BRI. In accordance with the African Union’s Agreement Establishing the African Continental Free Trade Area (AU, 2012), the general objectives of the AfCFTA are to: create a single market for goods and services, facilitated by movement of persons in order to deepen the economic integration of the African continent and in accordance with the Pan African Vision of “An integrated, prosperous and peaceful Africa” enshrined in Agenda 2063; create a liberalised market for goods and services through successive rounds of negotiations; contribute to the movement of capital and natural persons and facilitate investments, building on the initiatives and developments in the State Parties and Regional Economic Communities; lay the foundation for the establishment of a Continental Customs Union; promote and attain sustainable and inclusive socio-economic development, gender equality and structural transformation of the State Parties; enhance the competitiveness of the economies of State Parties within the continent and the global market; promote industrial development through diversification and regional value chain development, agricultural development and food security; and resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes. In these provisions, there are especially two stipulations that have a direct bearing on the way forward for the BRI – AfCFTA planning. Firstly, it lays the foundation for a continental customs union, and secondly, it aims to resolve the challenges of multiple and overlapping memberships and expedite the regional continental integration processes. Practically, this means that the BRI objective of creating integrated trade markets, including FTA’s, is no longer feasible by means of a bilateral agreement between an individual African country and the broader BRI. Any arrangement with an individual country will be subject to that country’s obligations in term of the AfCFTA agreement. Furthermore, since the AU is moving in the direction of a continental customs union, here too, the BRI will be obliged to consider the aspirations of the broader AfCFTA as opposed to individual African countries. And, in terms of regional integration, the AU has adopted the Program Infrastructure Development for Africa (PIDA) masterplan (AU, N.d.). This plan has as its primary objective the development of infrastructure that will support the economic integration envisaged by the AfCFTA. All of the above would suggest that in terms of developing an African BRI integration plan, BRI architects will have to shift away from negotiations with individual African countries, towards negotiations with the organs of the AU. This in turn places a heavier burden on the BRI planners, in that they will have to understand the intricacies of layered economic infrastructure planning, that is between the individual African countries, at an African continental level and between the continent and the broader BRI. And finally, it appears the author is not alone in his concern relating to overlapping memberships of individual African countries and its impact on trade growth and economic infrastructure optimisation for the continent. In identifying the need to resolve the challenges of multiple and overlapping memberships, they in effect give guidance to the BRI planners. African countries’ integration into the BRI requires coordination at an African continental level. This brings the discussion full circle. Is the proliferation of political and economic integration initiatives necessary process, or, as it relates to FOCAC, BRICS and the BRI, superfluous triplication? The paper leaves the question open for the political leaders to ponder, suffice to suggest that it is an issue worth pondering. 5. Conclusion The status quo relating to the current global multi-lateral institutions has for some time now been challenged as not ‘being fit’ for purpose, in that it is often experienced as transactional, ideologically uncompromising and exclusive in its decision-making. The inability to transform this architecture has gradually led to the establishment of alternative geo-political formations aimed at addressing the divide. Prominent amongst these have, from an African perspective, been FOCAC, BRICS and the BRI. The progression of each has served their objectives well, and they have gathered momentum and good reputation. There is general consensus that FOCAC, BRICS and the BRI have enormously aided socio-economic development on the continent. However, given the recent developments on the African continent whereby progress is rapidly being made in the implementation of the AfCFTA, together with the cross-cutting nature of the stated aims and objectives of the three groupings, questions are starting to be raised as to whether some form of consolidation is required. This paper has elaborated on the question as to whether, from an African perspective, the need for a proliferated approach still holds true, or whether some form of streamlining of the triplication may lead to better coordination and developmental outcomes. It does not venture a firm solution, but does suggest that it is a topic worthy of consideration. 6. Recommendation It is recommended that the secretariats of BRICS, FOCAC and the BRI consider further structured interrogation and dialogue to determine the merits of the arguments made, that is structured cooperation between FOCAC, BRICS and the BRI. The China-Africa Think Tanks Forum could be the ideal body to undertake such research. Whatever the outcome, the exercise should aim at strengthening mutually beneficial multilateralism, since, in the authors view, nations - and indeed the world - are better served through cooperation based on mutual respect than they would be by following an isolationist and/or going it alone approach. References African Union (AU). N.d. Program Infrastructure Development for Africa (PIDA). [Online] Available at: https://au.int/en/ie/pida [accessed: 13 October 2020]. African Union (AU). 2012. Agreement establishing the African Continental Free Trade Area. Addis Ababa: African Union Anonymous (Anon.). 2020. Confidential meeting between author and South African enterprises. BRICS. N.d. History of BRICS. [Online] Available at: https://infobrics.org/page/history-of-brics/ [accessed: 12 October 2020]. Burger, S. 2017. Heartland-to-heartland linkages sought in China-driven industrial superproject. [Online] Available at: https://www.engineeringnews.co.za/article/heartland-to-heartland-linkages-sought-in-china-driven-industrial-superproject-2017-12-12/rep_id:4136 [accessed: 12 October 2020]. Dristi Media. N.d. BRICS. [Online] Available at: https://www.drishtiias.com/pdf/1601129266-brics-1.pdf [accessed: 12 October 2020]. European Bank. N.d. Belt and Road Initiative BRI. [Online] Available at: https://www.ebrd.com/what-we-do/belt-and-road/overview.html [accessed: 12 October 2020]. Hass, R. Rubenstein, D.M. & Thornton, J.L. N.d. The trajectory of Chinese foreign policy: From reactive assertiveness to opportunistic activism. [Online] Available at: https://www.brookings.edu/wp-content/uploads/2018/03/fp_20171104_hass_the_trajectory_of_chinese_foreign_policy.pdf [accessed: 12 October 2020]. Hind, J. 2019. 2nd BRI Summit 2019 Is Underway In Beijing, China. [Online] Available at: https://www.defencedirecteducation.com/second-bri-summitindia-china/ [accessed: 12 October 2020]. Manda, S. 2018. SA is a worthy member of BRICS. [Online] Available at: https://www.sanews.gov.za/features-south-africa/sa-worthy-member-brics [accessed: 12 October 2020]. Mackinnon, T. 2018. The Forum on China Africa Cooperation (FOCAC). BRICS Policy Center [Online] Available at: THE-FORUM-ON-CHINA-AFRICA-COOPERATION-FOCAC.pdf [accessed: 12 October 2020]. OECD. 2018. The Belt and Road Initiative in the global trade, investment and finance landscape, in OECD Business and Finance Outlook 2018. Paris: OECD Publishing, https://doi.org/10.1787/bus_fin_out-2018-6-en People’s Republic of China (PRC). 2000. The First Ministerial Conference of FOCAC. [Online] Available at: https://www.fmprc.gov.cn/zflt/eng/gylt/dyjbzhy/t157577.htm#:~:text=The%20first%20ministerial%20conference%20of%20FOCAC%20was%20held%20in,10%20to%2012%20October%202000 [accessed: 12 October 2020]. Peters, G. 2018. The challenge of policy coordination. Policy Design and Practice, 1 (1):1-11. Republic of South Africa (RSA), N.d. Fifth BRICS summit – general background. [Online] Available at: https://www.gov.za/events/fifth-brics-summit-general-background [accessed: 12 October 2020]. Risberg, P. 2019. The Give-and-Take of BRI in Africa. [Online] Available at: https://www.csis.org/give-and-take-bri-africa#:~:text=China%20lists%2039%20African%20countries,Brazzaville%2C%20Djibouti%2C%20and%20Zambia [accessed: 31 October 2020]. Shelton, G. & Paruk, F. 2008. THE FORUM ON CHINA-AFRICA COOPERATION. A Strategic Opportunity. [Online] Available at: https://issafrica.org/chapter-1-introduction-focac-and-africa [accessed: 12 October 2020]. Schneider-Petsinger, M. 2020. National Self-Sufficiency or Globalization is Not a Binary Choice. [Online] Available at: https://www.chathamhouse.org/2020/06/national-self-sufficiency-or-globalization-not-binary-choice?gclid=Cj0KCQjwoJX8BRCZARIsAEWBFMK8xvGoDUZJ6K0tSj0BdEmv0ajX7PYC5VlsCC0uf9ryQ5Ev16S7UkMaAkHMEALw_wcB [accessed: 13 October 2020]. tralac. N.d. African Continental Free Trade Area (AfCFTA) Legal Texts and Policy Documents. [Online] Available at: https://www.tralac.org/resources/our-resources/6730-continental-free-trade-area-cfta.html [accessed: 12 October 2020]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 7/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. Author: Dante Mashile (Accredited Public Relations Practitioner), National Diploma in Journalism, Certificate in Project Management (Netherlands), BA, Postgrad. Diploma in Telecoms and Information Policy, Master of Development Studies Abstract There is uncertainty about the impact of the proposed National Health Insurance (NHI) on the pricing of pharmaceutical products and the return on investment (ROI) for local pharmaceutical companies. Currently, differential pricing between the public and private sectors exists. Pharmaceutical companies supply the public sector with low-cost products, based on a tender system. Costs can remain low as the public sector is able to purchase in large volumes. Pharmaceutical companies make their profits primarily in the private sector, where medication is sold at higher prices. The NHI pharmaceutical purchasing model will be based on negotiated pricing, with a balancing of government policy that prioritises reduced medicine costs, and the goal of facilitated industrial development. The presence of a single purchaser of pharmaceutical products may give the NHI significant buying and supplying power, with the potential to drive pharmaceutical product prices down by at least 15% through reduced logistics and dispensing fees. However, there is uncertainty about whether a single purchaser under the NHI will necessarily reduce pharmaceutical costs. Pharmaceutical companies may price their loss of profit, currently generated in the private sector, into the price of products supplied to the NHI scheme. Some may also withdraw from the South African market if they are not allowed to price in a way that allows them to match their current profits. This may result in an increase in the price of pharmaceuticals supplied to the NHI scheme, since pharmaceutical companies will still have an ROI obligation to their shareholders. While importing cheaper medicines from abroad remains an option, government may not choose that route because of its negative effect on the balance of payment, employment and domestic capital formation. An opportunity exists for South Africa to explore public-private partnerships (PPPs) in NHI delivery to leverage the expertise of private sector companies and the regulatory and institutional capacity of the public sector. The 2018 Health Market Inquiry report of the Competition Commission found that there is nothing that stops the state from using PPPs in addressing the delivery of healthcare services in the public sector, especially with a rich and a well-developed legal and policy framework for PPPs, under the auspices of the National Treasury (Compcom, 2019). Introduction African health systems are often fragile, and governments’ failure to prioritise healthcare and allocate sufficient resources for health is at the heart of the continent’s fragile health systems (WHO, 2011). The 2001 Abuja Declaration sought to correct this by securing a commitment from African Union governments, which stipulated that at least 15% of national budgets should be allocated to the health sector (Biegon, 2020). However, despite the consistency in health spending, the South African government has yet to reach this target. The consolidated health spending, as a share of consolidated government expenditure, ranged between 13.4% and 14.1% over the 2013/14 to 2019/20 period, and fluctuated between 3.7% and 3.9% of the gross domestic product (GDP) (UNICEF, 2018). The proposed National Health Insurance The National Health Insurance (NHI) proposed by the South African government aims to pool funds in order to provide access to affordable quality care for all South Africans and long-term residents. Care is based on the health needs of the population, irrespective of their socio-economic status (DOH, N.d.). The NHI is founded on the basis of universal health coverage (UHC), which is guided by the principle that every South African will have a right to access comprehensive healthcare services free of charge at the point of use. Care can be sought at any recognised health facility across multiple levels of care, including clinics, hospitals and private health practitioners. The NHI is consistent with the South African Constitution, which states that healthcare is a human right, and this right should not depend on the wealth of the individual or where they reside (DOH, N.d.). The primary principle underpinning the NHI, is social justice. This is recognised through (a) the constitutional right to access healthcare; (b) social solidarity, which refers to financial risk protection for the entire population; (c) effectiveness through the implementation of evidence-based interventions; (d) equity, which ensures UHC and care according to need; (e) affordability, ensuring that services will be procured at reasonable costs, while recognising that health is a public good; and (g) efficiency, which will be ensured by creating new administrative structures that avoid duplication across national, provincial and district spheres of governance. NHI financing It is envisaged that the NHI will be established through the creation of a single fund that will buy services on behalf of the entire population. Funds will be collected through a combination of mandatory prepayment sources, primarily based on general taxes. Most employed South Africans will, therefore, contribute to the NHI Fund. All South African citizens and permanent residents will be allowed to access services included in a basic package of care, such as preventative and primary healthcare, medicines and emergency medical services. This model is similar to that of medical aid schemes and their stipulated prescribed minimum benefits (PMBs). However, two key differences between these models exist (DOH, N.d.). The NHI will cover employed or unemployed long-term legal residents, regardless of their income level. The health condition of clients will influence the type of healthcare that they may receive, not their socio-economic status (the salary that they earn or their employment status). Essentially, under the NHI, the basic package of care will be available to all citizens, regardless of their income, economic status or the nature of their disease. The burden of disease and health outcomes The burden of the coronavirus had further exposed the weaknesses of South African health system and has intensified pressure on the government to implement UHC through the NHI. The NHI aims to bring about healthcare policy reform that will, among other things, address the high burden of disease, allowing government to address the high cost of private healthcare and improve the quality of public healthcare facilities. Government spends vast sums of money on healthcare for the majority of people, and yet, they are receiving poor quality care in public facilities, and health outcomes are still poor. This is due to a lack of focus on disease prevention, and a delay in receiving appropriate, timely and adequate healthcare. The result is higher-than-optimal levels of disability-adjusted life years (DALYs; WHO Metrics) (Grosse et al., 2009; Wang et al., 2018) The effects of NHI: Equitable access through NHI In 2014, the WHO Consultative Group on Equity and UHC published a comprehensive report, Making Fair Choices on the Path to Universal Health Coverage, detailing strategies that countries should adopt when moving towards healthcare coverage for the entire population. The report provided exhaustive guidelines on how to expand coverage to more people, services that should be covered and the prioritisation of healthcare resources to achieve UHC (Wang et al., 2018). Many countries have largely adopted the WHO’s report guidelines to a UHC approach. China, however, followed an approach that would, at face value, not be viewed as uniform and equal. The country’s system was designed to respond to the various needs of population segments in an equitable manner. The Chinese model had bespoke regional differences, including various sources of funding that were initially outside of the national pooling system, but it still increased cover for the majority of the population (Wang et al., 2018). The lesson from China’s experience is that the UHC guidelines should be tailored to the needs of each country and its economy (Wang et al., 2018). The private healthcare sector serves a minority of the population, who have relatively good access to money and resources (Naidoo, n.d.; Discovery, 2019; Sithole, 2015). The cost of medical aid cover for members is, however, rising far quicker than consumer price inflation. The Council of Medical Schemes 2015/2016 Report showed that medicines and consumables dispensed by pharmacists and providers other than hospitals amounted to R22.3 billion in benefits paid to members over that period. However, medical aid members had to settle co-payments of about 20% over and above the member benefits during that period (CMS, 2016). In-hospital consumption of medicines and consumables by medical aid members drives the co-payment expenditure up further (Rovira & Darbà, 2001). It suggests that the inflation of 7.5% for medical care and health expenses in 2020 will translate into member benefit increases of R1.68 billion over a five-year period (Forbes, 2019). According to IQVIA, an American multinational company operating in the health information technology and clinical research space, the pharmaceutical private sector recorded an annual spending of R30 billion in prescriptive medicine and R15 billion in over-the-counter (OTC) medicine in market sales as of July 2020. This amounts to a combined total private sector expenditure of R45 billion (Insights - IQVIA, N.d.). The 2020/2021 consolidated government expenditure on health is R230 billion, which is 103.5% higher than total private sector pharmaceutical medicine costs (R45 billion). Public healthcare expenditure is higher than private sector pharmaceutical expenditure. This warrants the need to harness the combined investments of private and public sector healthcare spending, especially in the context of the NHI. And South Africa must take advantage of the combined and integrated healthcare and pharmaceutical investment of both the private and public sectors, with all the benefits of improved quality of service, affordable service and well-trained healthcare professionals (National Treasury, 2020). South Africa deserves an integrated healthcare system that offers quality of service that is affordable and deriving value for money. Price control mechanisms Improved access to healthcare services has been a focal point in South Africa for two decades now (Bangalee & Suleman, 2015; Moodley & Suleman, 2019). With this, improved access to lower cost pharmaceuticals is required. Various transparent price control mechanisms have been introduced to regulate prices in the pharmaceutical market. These include capped annual price increases, to which the Department of Health (DOH) Pharmaceutical Economic Evaluation (PEE) refers to as a single exit price (SEP) adjustment and mandatory generic substitution for medicines with expired patents (although clients/patients still have the choice to purchase originator products or brand-name products). An SEP is the maximum price at which a manufacturer must sell all scheduled substances to wholesalers, distributors and pharmacies, irrespective of the volume sold. The SEP was introduced in 2004 as part of an attempt to increase transparent pricing of medicines sold in the private market, with the aim of putting a stop to discounts and additional levies on medicines (Bangalee & Suleman, 2015; Chowles, 2017; Moodley & Suleman, 2019; DOH, N.d.). The current pricing of pharmaceutical products The pharmaceutical pricing system in South Africa is regulated by the SEP mechanism in the private sector and by state tender pricing in the public sector. Competition between firms through a bidding system and, to some extent, volume-based pricing determines the state tender price. The relationship between state tender prices and private sector SEPs is unclear. Some companies balance their return on investment by engaging in both a higher-priced, lower-volume market, and a lower-priced, high-volume market for the same product, or across an entire portfolio. The reality may be that some firms, notably the generic manufacturers, operate in both markets based on what achieves the highest profit. However, there are some single-source suppliers that sell to the private sector at similar prices than those offered to the public sector. Others, in both the generic and originator sectors, operate only in the private sector and do not participate in the state tender system at all. The impact of SEP and private sector costs Research has demonstrated that SEP regulation had a positive impact on both originator and generic medicine pricing in South Africa immediately after the introduction of this regulatory mechanism. However, according to Statistics South Africa (Stats SA), the rise in medical scheme fees, along with an increase in food and non-alcoholic beverage prices, contributed significantly to the rise in the consumer price index (CPI), which indicates the price increase of a standard basket of items. Annual consumer price inflation was 3% in September 2020, down from 3.1% in August 2020 (Stats SA, 2020) In February 2020, Stats SA measured the cost of medical schemes, as well as the fees charged by private sector medical practitioners and hospitals. They found inflation on medical products to be approximately 6.4%. Medical inflation consists of various medical costs. Notably, painkillers were up 10.2% and vitamin prices were up 9.1%. The costs of medicines, hospital fees and doctors’ fees contributed to the overall consumer and medical inflation, which have to be contained (Stats SA, 2020). The SEP regulatory system is not entirely fool proof, because there is a possibility that manufacturers could use higher logistics fees to incentivise wholesalers and distributors to stock their own brands and thereby push for those products down the value chain (Bangalee & Suleman, 2015). A better logistics fee structure has a direct lever in creating a preference for certain medicine brands being stocked and distributed in the market. The logistics fee is a strategic area of negotiation between wholesalers and distributors. The logistics fee is a percentage of the SEP and it varies. The average charge is 6%, with the general trend being between 7.4% and 12.5%. In fact, there are differences in the logistics fee as a proportion of the SEP within identical manufacturing groups. The manufacturers offer a logistics fee in order to make their products competitive for retail pharmacy buyers. It is the manufacturer that sets the terms attached to the logistics fee. The SEP should not impact the integrity of the supply chain. Currently, the SEP is not as robust as it could be, leaving room for improvement in the system and for better pricing regulation. The impact of the state tender system Increasingly, the state tender system is being negatively affected by the failure of suppliers to bid because of a lack of supply of raw materials and active pharmaceutical ingredients (APIs), which are the required ingredients in medications. This forces the state to engage in procurement based on quotations received from pharmaceutical companies, and, at times, they have to pay the SEP. It is therefore difficult to determine the net effect on total pharmaceutical expenditure in line with a more active procurement policy under the NHI. There is a likely possibility that some prices that are currently being paid by the state will not be attainable under the NHI. However, in some cases, total expenditure may actually be lower if procurement actively and aggressively uses the monopsony power of the NHI Fund. Mandatory generic substitution Generic substitution policies mandate the availability of generic medicines maintained that generic substitution policies were vital for cost containment, as they prevented brand names from charging inflated prices (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016). These policies cover internal and external reference pricing and the use of limited lists, such as essential medicines lists and treatment guidelines that form the basis of care. Such generic substitution policies have been identified as important cost-saving measures. International/external price benchmarking, a widely used policy instrument to control the prices of pharmaceuticals that are protected by intellectual property rights, draws on countries with similar economic backgrounds and/or geographic closeness, who use it as a benchmark during negotiations between government and the pharmaceutical industry for new medicinal products of high therapeutic value. Additionally, external reference pricing provides institutional buyers and regulators with a benchmark for negotiating the price of a pharmaceutical product. South Africa and other emerging markets have also used this instrument, even though they are outside of the European Union market. The other instrument to use is reference pricing or internal reference pricing. This is what an employer or insurer pays, up to an established maximum price, for a healthcare service. The reference price is set at a level that allows patients to receive a healthcare service from various high-quality providers without an additional contribution. This promotes the rational use of similar drugs to control overall pharmaceutical expenditure with no associated negative health outcomes and with no discriminatory effects. It was noted that when the mandatory offer of generic substitution was introduced in South Africa in 2003, implementation in the public health sector was delayed. However, the private sector (medical schemes and managed healthcare service providers) showed a commitment to use lower-priced generic medicines. That said, even in the private sector, the take-up is lower than in major developed markets (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016). Single medicines selection process To a greater extent, another policy consideration is the use of the single medicines selection process, supported by the more explicit use of health technology assessments (HTAs). This would narrow the gap between the public and private sectors. It is important to acknowledge that the Essential Medicines List (EML) might inform the selection of medicines that should be available at all entities offering NHI services, because, as stipulated in the National Drug Policy of 1995, these could not necessarily be the only medicines available. The regulatory framework governing the EML should require a regular review of the list. HTAs are a fair, evidence-based and a dependable approach to determining the criteria for the inclusion of services and new technologies for incorporation into the NHI healthcare platform. It is also imperative that the HTA is established before the implementation of the NHI. The HTA system could assist in identifying and informing decisions about the funding of health services and technologies. Therefore, South Africa needed a strong and working HTA system that would best inform the provision of the NHI services. Health technology assessment could strategically be one of several tools needed to implement the NHI more broadly and in order to achieve the aim of evidence-based and affordable health care for all South Africans, eventually contributing to the improvement of the nation’s health (Siegfried et al., 2017). Reimbursement model An additional policy that was implemented is a reimbursement model, which is informed by pharmacoeconomic data, and used to set up potential options for an integrated health system (Gray, Santa‐Ana‐Tellez, & Wirtz, 2016). NHI and pharmaceutical purchasing The healthcare market does not operate under the same conditions that exist in an open, competitive market. This is because, in the public sector, the idea of pricing from a consumer or funder standpoint is not a straightforward concept, as services are not sold as they normally would be in the competitive market. The price of goods is not determined by the existence of a market where consumers and producers determine the price. Although input or manufacturing costs may be used to set market prices, marketing and distribution costs are excluded (Ramjee, 2013). The public sector system absorbs all costs that lead to positive externalities – that is – a healthy society. Such benefits are not always recognised by individuals, resulting in lower demand than what there ought to be. There needs to be an incentive for stakeholders in the healthcare sector to maintain the sustainability of the overall sector. The key stakeholders (wholesalers, retailers, hospitals and dispensers) should be permitted to thrive, even under the NHI system. We should caution policymakers not to link one overarching instrument centred on the pricing of medicines to everything associated with NHI. Equally, a singular market-orientated competitive approach will not solve the healthcare morass in South Africa. Enhancing plurality of provision The plurality of provision through the inclusion of multiple care providers in the public and private sectors, was addressed ahead of the NHI implementation (Ramjee, 2013). Differential payment mechanisms used for providers, especially those accredited under the NHI, have been established in order to level out the playing field. Such policy considerations would provide clarity on aspects such as input costs, profit margin and logistics fees, among other costs. The state is able to attain substantial discounts for pharmaceutical and surgical products due to its buying power. However, an assessment of the financial effect of this discounted pricing, and the mix and volume of products purchased, still has to be unpacked. Arguably, there are salient differences in the basket of goods purchased between the private and public sectors. Admittedly, there is a strong relationship between the mix of goods used, the magnitude of discounts obtained, and the differential pricing of goods that are used across the sectors. Despite the benefits that are produced as a result of increased transparency in the prices of medicines, evidence shows that a highly regulated market that pushes for low medicine prices may inadvertently have negative consequences. Price regulation is required, however, price thresholds may lead to wayward economic benefits for pharmaceutical businesses (Bangalee & Suleman, 2015). It follows then that price setting and formulation development purely using the free market would not work in the NHI setting. The public health system can be transformed by a combination of governance reforms and decentralisation, the NHI bill favours a centralisation of the system. The NHI implementation would require supervisory structures, such as boards for hospitals, district authorities (the recently launched District Service Delivery Model, is a model of implementing service delivery, that will ensure a coherent planning, budgeting and execution of service delivery projects in all districts by all three spheres of government could be used here as well) and statutory councils that would be protected from political appointments and interference. Health service delivery should be entirely depoliticised. The private healthcare sector is required to implement the Health Market Inquiry recommendations. With the guidance and backing of the Department of Health, pricing regulator should be established to manage annual price negotiations for hospitals and doctors, and establish an information regulator to bring quality of care information on private and public health services to the surface. The NHI legislative process is required to shape an integrated healthcare system, preferably resembling the best features of a functional, quality healthcare service, which is operationally robust in delivery, to the public and private sectors. The NHI organisational make-up needs to consider the price regulation when establishing its operational structures, to include the concept of the price regulator as highlighted by the Health Market Inquiry Report commissioned by the Competition Commission. Breaking down the sectoral divide The impact of NHI financing The financing mechanism proposed under the NHI will change the way in which citizens purchase healthcare. The funds used to purchase healthcare will be pooled into one central fund, instead of through 10 different government departments and 78 medical schemes. The state will act as the purchaser, using the common sizeable pool of funds. This can be used strategically when purchasing goods and services needed to run the healthcare system. While this single purchaser system is proposed, multiple lower level governmental purchases will be used. The purchasing will be done at the district or sub-district levels. Therefore, the system will be adjusted and provincial Departments of Health, who are currently deemed the health authorities, will no longer act as the purchasers of medications. The final drafting of the amendments to the Medical Aid Schemes Act may impact the SEP. The prices of medications under the NHI, and the reimbursement of medications not covered by the NHI Fund (for example, medicines that are outside of the benefit package or excluded from the formulary) will be adjusted. The NHI will have to consider the potential impact of moving from a system of primarily procuring only one pharmaceutical brand of medicine, to a system based on maximising reimbursement in terms of price. This will allow a broader range of producers to participate in the NHI market. As the market is currently highly concentrated, such a move would encourage new competitors to participate. To preserve the integrity of tendering-based healthcare systems, policymakers and other industry players should regularly inspect the functioning of tendering policies in order to rapidly address problems such as price increases and supply disruptions (National Treasury, 2015). Addressing the divide Possible changes could involve combining public sector and private sector stock, however, with the high out-of-pocket consumption of medicines, the separation between public and private sector stock may remain to some degree. Out-of-pocket medicines are still often covered under complementary insurance. The medical aid schemes have tried to control the rising expenditure by making exclusions to the regulated Prescribed Minimum Benefits package, leading to the rising trend in co-payments. The price of medical scheme contributions has been brought into the spotlight because members are struggling to afford their contributions. The number of out-of-pocket payments has increased as a result of the high cost of premiums (Ataguba & Goudge, 2012) and the exclusion of coverage for certain types of services and providers. The NHI Fund will not be able to pay for all treatments. If the inclusion of treatments in the basic benefit package is based on cost-effectiveness analyses, gene-based cancer treatments, for example, may be excluded. A more profitable market outside of the NHI Fund may always exist, and pharmaceutical companies may be discerning about who they choose to sell to and where. Globally, we have seen tendering used by countries that procure large quantities of products on an infrequent basis (once or twice a year) from a central medical store, which is often reliant on donor funding. Importing medicines has not proven useful in South Africa, even though it has been legally possible since 2003. NHI and pharmaceutical companies' drug pricing The introduction of transparent pricing aimed at ensuring that no one could supply medicine according to a bonus or rebate system, or any other incentive scheme (Moodley & Suleman, 2019). Regulating the pharmaceutical market and enabling access to quality pharmaceutical therapies was attempted through the use of generic medicines in order to lower costs and control prices, while making a transparent price available in the private market (Moodley & Suleman, 2019). SEP in practice SEP allows for the addition of a small mark-up for the dispensing fee of the pharmacist or dispensing doctor. The appropriate dispensing fee is charged by licensed persons and entities. In line with the March 2020 update, if the SEP of a scheduled medicine is less than R128.00, the dispensing fee must not exceed 30% of the SEP. Where the SEP of a scheduled medicine is greater than or equal to R128.00, the dispensing fee must not exceed R38.40 (excluding VAT) (DocWeb, N.d.). The combination of the introduction of SEP and capped annual medicine price increases led to an overall decrease of 22% in medicine prices in South Africa in the first year after the introduction of SEP. The introduction of SEP managed to reduce medicine price inflation, improve medicine price transparency, and ensure that clients pay the same price for medicines irrespective of where they buy them (pharmacies, hospitals or dispensing doctors). Careful consideration of a pricing model that balances fair competition and supports a thriving pharmaceutical sector is essential under the NHI. The annual rate of increase for the sale of medicines is based on an SEP formula, and the Health Minister has the discretion to make decisions outside of this. However, this is not always done. The pharmaceutical industry demanded that the formula must be restructured in order to adequately reflect market forces. The industry’s view is that the percentage increases authorised by the Minister do not accurately reflect real market conditions in line with the inflation associated with input costs, salaries and wages. The likely impact of NHI through a SEP lens Inflation leads to increased manufacturing costs for the pharmaceutical companies, but regulation only permits a price increase at a later stage. This is currently a long delay and is causing financial strain for pharmaceutical companies. Further strain is being felt, particularly by those with low profit margins, due to the depreciation of the rand and the low-price increases permitted. The weakness, from a regulatory perspective, is that untimely implementation will have negative consequences for the pharmaceutical industry and funders, who base their planning on the SEP adjustment. The DOH PEE unit is responsible for enforcing, monitoring and evaluating the SEP within the pharmaceutical industry (MPR, N.d.; DOH, N.d.). Any changes to the SEP have to be submitted to the PEE unit for assessment and approval before implementation. The schedule below shows the structure and breakdown of the Department of Health SEP. a) Manufacturer price contains the direct and indirect cost of manufacturing the medicine, including freight and forwarding costs for imported medicine. It also contains a profit margin. Research and development costs are covered under the manufacturing price. b) Logistics fees are costs added to the manufacturing price to cater for all costs associated with taking the medicine from the manufacturing company to the dispensing pharmacy or doctor. The revenue of pharmaceutical distributors and wholesalers are included in this. Logistics fees are capped at 15% and varies from 9%, depending on the nature of the product/medicine (Bangalee and Suleman, 2016). c) Value-added tax (VAT) is currently at 15%. d) Therefore, an SEP of R100 is broken down as shown in the schedule above. Channel workflows The flow chart below illustrates the value chain from the drug manufacturer to the end user, the client. This value chain differentiates between the private market price and government tender price, and highlights the fact that the NHI will not drive private drug manufacturers out of business simply based on price. Source: (Author, 2020) Based on the two channel workflows above, it can be concluded that: a) The main difference between the tender price and private SEP channel flows is logistics fees. b) Government uses its own economies of scale (lower cost of production as a result of increased volume) and avoids logistics fees completely. Manufacturers may negotiate with government in very rare cases, where delivery does not follow typical government processes. Under government funding, logistics fees will not be included in the pricing of the medicine, but will be included under the NHI operations. Provinces will establish their own distribution arrangements to ensure that medicines and medical supplies are distributed in the most cost-effective manner. Where appropriate, provincial authorities may contract distribution to the private sector. Currently, the distribution of drugs and medical supplies to public sector health facilities takes place at least once a month. c) Depending on the value of the tender and revenue guaranteed from the tender, manufacturers can reduce the tender price to below the manufacturing price, which is a trade-off between higher profits per unit (pricing) and higher profits due to more units sold (quantity). While it is clear that SEPs are higher than tender prices, it is also clear that the difference between the two cannot simply be two-fold. Therefore, the NHI will need to find a new way of pricing medicines effectively. Countries that have established UHC, such as Spain and the UK, show that a regulated framework for drug pricing has to be institutionalised (Rovira & Darbà, 2001). Other common features of the system were generic substitution and reference pricing. However, significant price control mechanisms targeted branded products or originators and not generics. Generic pricing Generic prices were broadly controlled by market forces. South Africa applied the same concept through the DOH PEE. Branded products or originators with existing patents are benchmarked against Brazil, Australia, Canada and Spain (DOH, N.d.). This ensures that the manufacturing price more closely approximates real-world costs and are aligned with international pricing. Generic medicine prices can be lowered to less than the manufacturing cost during the tender process. The flow chart below shows the anticipated value chain from the drug manufacturer to the end user when the NHI is fully implemented. Source: (Author, 2020) In the public sector, logistics fees are unknown, meaning that the end user is not aware of the fees. However, there are costs funded by the taxpayer. These relate to transporting medicines directly to the client. In some cases, the private sector may be used to distribute medicines to clients. Currently, in the private sector, pharmaceutical companies also pay marketing fees to pharmacies and wholesalers over and above the logistic fees paid to wholesalers. The amount paid does not affect the price of medicines, however, it affects the profits obtained by pharmaceutical companies. These fees range from 15-30% of the SEP. Under the NHI monopsony, these fees will be reduced, and are likely to not exceed 15%. These fees cannot cause the price of medicines to increase. It is more likely that they will form part of NHI Fund operational costs. Decreased supply As clients gain access to medicines through the NHI, generics are likely to grab a generous slice of the pie. However, the main challenge for pharmaceutical companies will be to stay competitive by providing more cost-effective products. If government continues to award supply contracts solely based on price under the NHI regime, it will place tremendous pressure on pharmaceutical suppliers of generic medication, who have already dropped their prices significantly in an environment where annual increases are highly regulated. The probable reality is that suppliers who are unable to manufacture other products because of cross-contamination and other restrictions may exit the market. The net result may be that certain firms leave the South African market, and certain brands, including essential medicines, may no longer be available locally. For suppliers whose tenders were unsuccessful, and who may have to wait for the next round of tenders, there is a financial risk to continue maintaining their facilities in order to wait for the next round of tendering. Supply security would be compromised, leading to significant stock-outs as suppliers choose not to increase production during this time. Stock-outs have a negative impact on patient motivation and adherence. This leads to mistrust in the system. The implication is that we may have a more concentrated and potentially less competitive pharmaceutical market, and users may end up losing. The NHI system does not require a highly concentrated market, however, these supply challenges may mean that fewer options are available under the NHI. The NHI system will need to establish security of supply, without disruptions (Wouters, n.d.). The Essential Medicines Stakeholder Forum, comprising industry players, industry associations and healthcare professionals, including non-governmental organisations, is hosted by the Health Ministry. The forum provides guidance to health ministry officials. It encourages them to monitor the impact of tendering on medicine prices and to look for solutions to mitigate issues that arise therefrom. The National and Provincial Departments of Health should entrench a practice to work at improving the accuracy of forecasting methods. Unfortunately, past tenders were characterised by large discrepancies between the estimated quantities and procured quantities for medicines. Policy review regarding tendering needs to be addressed from an NHI perspective to consider issues that affect prices and supply security, namely the weighting of value parameters, fair contract management and the removal of barriers to generic competition (Wouters, n.d.). Medicine shortages and stock-outs, which are already a concern, could worsen. This may be compounded by potential foreign investment declining as multinationals withdraw from the market. Shortages and supply chain breakdowns could result in outbreaks of disease. In mitigating this, government must expand tax rebates for pharmaceutical companies. This will not only allow more clients to have access to affordable medication, it will also promote the sustainability of the South African pharmaceutical manufacturing sector. B-BBEE and economic and industrial development, including price, are competing criteria that the Department of Trade Industry and Competition (DTIC) and the Department of Health consider when awarding tenders. The Department of Health is always motivated by increases in both cost-saving and access to medicines, while the DTIC favours suppliers that procure greater local content and increase local industry designations to support economic growth. Under the NHI, manufacturers will have to strategically affiliate themselves with the NHI Fund. They may have to consider forming public-private partnerships (PPPs) to supply medicine at negotiated prices and in a manner that produces a win-win situation. Under this policy framework, drug manufacturers may either negotiate or bid, depending on the supply and demand. Prices of generics are expected to be determined based on market forces and will drop to an optimal level. Branded and originator products may be less elastic, with prices remaining stable, and will continue to be used across the pharmaceutical product range. Public-private partnerships The Pharmaceutical Task Group (PTG) argued that a well-functioning NHI system will be dependent on a robust supply chain and procurement process (PTG, 2016). The NHI Bill (RSA, 2019) articulated that the purchasing of medicines and medical devices from accredited suppliers should take place in line with (a) principles of evidence-based medicine; (b) applicable treatment guidelines and formularies; (c) the needs of the users that are serviced; (d) volume uptake; (e) demographic and geographic data; (f) outcomes of health technology assessments (HTAs); (g) health outcomes; (h) contractual obligations between the NHI Fund and the service provider; and (i) the availability of trained professionals to administer, use and monitor the medicine or device. Public sector issues The public sector procurement process has challenges that include the non-payment of suppliers, poor supplier performance, unhealthy supplier relationships, a lengthy buyout process, and a shortage of active pharmaceutical ingredients, among others. This is exacerbated by the shortage of raw materials. These are common themes when addressing the shortages of essential medicines, and are a challenge faced by many countries. It is now compelling governments to work together and to coordinate efforts to find global solutions. Suppliers being paid late is contrary to the Public Finance Management Act of 1999, which states that suppliers should be paid within 30 days from receipt of a valid invoice. Unfortunately, the reality is that suppliers are not always paid on time and, as a result, the supply of medicines to hospitals is reduced. Administrative collections of proof of delivery of medicines and invoice processing are ineffectively reconciled in the provinces (Modisakeng et al., 2020). The management of supplier contracts after the tender is awarded is crucial in ensuring supplier compliance and improving essential medicine availability. The National Department of Health and National Treasury should institutionalise contract management to improve medicine availability in public sector hospitals and other health facilities. It is important for public sector tenders to be awarded timeously, with the net result being a reduction in the number of buyouts, easing the burden associated with buyouts at an institutional level and improving medicine availability. These are all considerations for the implementation of the NHI. Implementing public-private partnerships for healthcare delivery The NHI is an opportunity to fully explore the supply chain of medicines in the context of PPPs. The 2019 Health Market Inquiry report of the Competition Commission found that nothing stops the state from using PPPs to address the delivery of healthcare services in the public sector. South Africa has a rich and well-developed legal and policy framework for PPPs, under the auspices of the National Treasury. With regard to policy choices, PPPs could practically enable and empower the healthcare system to feature elements such as client education, client medicine compliance and self-care, and setting up registries as part of health outcomes research initiatives. These could even be done in the period preceding the full NHI implementation. The Office of Health Standards and Compliance (OHSC) was established by an act of parliament, and is aimed at monitoring public health services and addressing complaints of non-compliance, while setting guidelines and providing information on the implementation of agreed health service standards. The OHSC would be a solid foundation for the rollout of the NHI and can support government decision-making when establishing PPPs (Sithole, 2015). The OHSC is focused on driving much-needed improvement in health service quality, changing public health care management and creating core health standards for public and private service providers. The OHSC can assess health facilities in both the private and public sectors. Undoubtedly, the skills and experience of the healthcare industry in relation to supply chain management, regulatory processes and health research could be harnessed in the establishment of PPPs. The policy and regulatory framework should empower the NHI Fund to formalise any PPPs, and those partnerships will assist in achieving the objectives, duties and functions of the NHI Fund. Additional private sector contributions The private sector needs to commit skills and other assets to the NHI infrastructure. Private sector participation could enrich the development of the NHI process. Private sector expertise should be harnessed, especially in the areas of benefit design, clinical risk management, contract management, data collection and management, data analytics, forecasting, risk factor analysis, costing of the benefit package and actuarial expertise. Conclusion UHC is a global priority and more countries are adopting an NHI-type approach. Virtually all of Europe has either publicly sponsored and regulated universal healthcare or publicly provided universal healthcare. It is important to note that universal healthcare does not imply government-only healthcare, since many countries continue to have both public and private insurance and medical providers. No flawless model exists, however, South Africa must attempt to enhance its existing health system to accommodate all its citizens by ensuring accessible and affordable quality care, while buoying the healthcare industry as a whole. The impact of NHI on the pharmaceutical pricing of medicines and on the pharmaceutical sector itself remains uncertain, and can only be adequately assessed after the NHI is fully implemented. This paper described the healthcare landscape and international lessons in how healthcare spend and pharmaceutical prices can be reduced despite constrained public sector national budgets. The creation of the NHI scheme, as a single purchaser of pharmaceutical products and supplier of health services, has the potential to increase the buying and supply power of the NHI Fund with the potential to drive pharmaceutical product prices down by at least 15%. Currently, logistics and dispensing fees amount to 15%, on average, given that the dispensing fee is 30% on medicines with an SEP of less than R128.00, and for those greater than or equal to R128.00, a dispensing fee not exceeding R38.40 (excluding VAT) is allowed. However, the NHI Fund will have to pay for its own logistics and distribution costs, which may be included as an operational line item. Funders of the NHI (taxpayers) will still be funding the transport of medication, in a potentially less transparent way. Ultimately, lower prices are not the only consideration for an efficient pharmaceutical market: there also needs to be choices and a variety of products and providers. The NHI system will still need to involve the participation of wholesalers, pharmacies and private service providers, who will be paid using the NHI Fund. Therefore, prices set by medicine manufacturers are anticipated to drop. Based on the descriptive analysis and the contextual healthcare sector landscape, there is no direct or indirect evidence that the NHI will cause a collapse in pharmaceutical business, but further investigation will be required. There are factors other than price that may impact the healthcare sector more broadly, and to suggest that the drop-in medicine prices as a result of the NHI system may result in the collapse and closure of the pharmaceutical industry would be an exaggeration. Economically, drug prices are defined largely by the manufacturer rather than by the market, and in this case, the public sector will enter into negotiations with the suppliers. The pricing structure does take the manufacturing and development cost of the medicine brands into consideration and has less to do with the features of the public sector market to which these brands will be sold (Zg, 2019). Innovator medicines would naturally not be covered in reference pricing systems because of the lack of a comparative product. Therefore, the NHI Bill’s Health Care Benefits Pricing Committee will have to consider actuarial factors, pharmaceutical factors, epidemiologic factors, health management, health economics, health financing, labour rights and rights of clients in order to recommend pricing of healthcare services. Strengthening the co-ordination of tender publishing and the registration of healthcare products (which could lead to some brands being excluded from tenders) might further weaken competition in the pharmaceutical market. However, the government could play a role in sustaining competition by using the NHI purchasing power to influence and facilitate a larger mix of brands through tendering (Wouters, n.d.). Government’s obligation to provide universal healthcare must be complemented by leveraging the expertise of the private sector and optimising business models to bring in more clients and reduce relative overall system costs. There is a great need for medicine availability, skilled medical human resources and quality care in a comprehensive manner. This could possibly affect the industry as a whole. 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Journal of Pharmaceutical Care Health Systems, 6(2):1-7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 8/2020 Copyright © 2020 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. Author: Daryl Swanepoel MPA, BPAHons, ND: Co. Admin Abstract When the Biden administration assumes office on 20 January 2021, Africa hopes to exit the awkward diplomatic state of affairs presented by the current Trump administration’s laissez faire, even disparaging, attitude towards the continent, and the conundrum caused by the US – China squabble over the coronavirus and trade. It hopes for a reset of relations to those pre-2017. What do analysts expect? Normalisation of US-China relations It is expected that President-elect Biden will usher in a new era of diplomatic normality between the United States and China. Whilst the United States will continue to sharply differ with China on a number of fronts, including, inter alia, differing stances related to human rights, for instance the Uyghur people, the ramping up of Sino-military might, particularly in the South China Seas, and, what it considers unfair trade practices, it is expected to radically adapt its style and approach (Stremlau, 2020; Grobler, 2020; Weseka, 2020). The antagonistic and confrontational rhetoric against China is expected to be substituted with a more nuanced, rational argument, in which it positions itself as a competitor, as opposed to an adversary. It is expected that the current ‘new cold war’ pomposity will give way to, at worst a competitive rivalry, and at best the seeking of win-win solutions capable of containing the domestic “battle with the Republicans for the soul of America” (Stremlau, 2020). That said, the immediate focus of the Biden administration will be on revitalising the American democracy and fashioning the US economy to serve its middle class. China will of course feature, but it is secondary to the pressing domestic priorities. One has therefore to expect Biden to engage in politically popular talk such as that America must lead again, but foreign policy actions will be more measured as the administration works towards regaining its international leadership position (Stremlau, 2020). Moreover, with Biden’s propensity for multilateralism and the restoration of America’s place in the world, it appears that the Biden administration will develop a more coherent policy towards China, thereby enabling the US to navigate the multilateral environment more effectively (Weseka, 2020). Reinvigorating the US-Africa engagement It is really under the Clinton administration that a serious and sustained US – Africa engagement was developed. It deepened under both Presidents Bush and Obama, during which period the US agenda in Africa experienced remarkable bipartisan support in both the Congress and the White House (Owusu & Carmody, 2020). Over the past two decades, Africa’s share of annual US foreign assistance funding increased markedly, with annual aid fluctuating between USD 7 billion and USD 8 billion. Notable programmes receiving funding included Clinton’s Africa Growth and Opportunity Act (Vine, 2016), Bush’s Presidential Emergency Plan for Aids Relief (PEPFAR) (Owusu & Carmody, 2020) and Obama’s Power Africa and Trade Africa programmes (Vines, 2016). In turn, President Trump’s “America First” foreign policy, sadly meant them disengaging with Africa (Owusu & Carmody, 2020). Granted, US aid was not cut; in fact, a country such as South Africa received even more assistance in the form of a US grant of at least R410 million to combat the COVID-19 pandemic in the first half of 2020 (Home, 2020). For now, therefore, African relations with the US State Department remains relatively consistent (Weseka, 2020; US Department of State, 2020). And it is to be expected that going forward, the continuity in the US’s relationship with Africa will continue. The US Foreign Policy architecture with Africa is quiet stable, the State Department’s infrastructure, with embassies across Africa, is in place. And the signature projects, such as the Africa Growth and Opportunity Act (AGOA), will remain. The big change is going to be in interest, style, tone, ideology and thrust (Grobler, 2020; Weseka, 2020). Whilst Biden did not materially deal with Africa during the election campaign, Africa can take its lead from Biden’s stance towards the African-American constituency, which were amongst “his core constituents and key to his bid to make America more of a nation that ‘belongs to all who live in it, united in its diversity’” (Stremlau, 2020). This relationship may well develop into an important link into Africa, be it through African-American participation in the US-Africa Business Council or their (African-American) growing trade and investment activity on the continent (Weseka, 2020). The Biden-Harris Agenda for the African diaspora suggests a resetting of the US – Africa engagement pre the Trump pause, indeed, it may even be bolder. It asserts, amongst others, “America’s commitment to shared prosperity, peace and security, democracy, and governance as foundational principles of U.S.- Africa engagement”, and the restoration and reinvigoration of “diplomatic relations with African governments and regional institutions, including the African Union” (Biden-Harris Campaign Website, N.d.). Biden of course has a personal history defending Africa, and particularly South Africa during the apartheid days. He has for many years served on the US Senate’s Foreign Policy Committee, and has visited Africa many times. He understands the continent. It is therefore not surprising that President Ramaphosa was one of the first foreign leaders that he contacted after winning the election. Possibly due to the new emphasis on multilateralism – Ramaphosa is the current chair of the African Union – and/or due to South Africa being viewed as an entry into the broader continent (Weseka, 2020). It is therefore quiet conceivable that the US will reinvigorate the Obama-era policies towards Africa – in particular, the signature Power Africa project, which was essentially abandoned by the Trump administration. There is also almost certainty that positive movement will be seen in the AGOA discussions, especially important given that it comes to an end in 2025. Here too, continuity is expected, either in the form of an extended AGOA or some new deal, such as a free trade area (FTA) arrangement of sorts (Weseka, 2020). During the Obama administration a number of bilateral discussions were being undertaken for FTAs between the US and individual countries, for example, Kenya. There were also various multilateral consultations at all levels, be it with regard to trade and investment, or peace and security, amongst others, which seemed to have stalled and become dormant under the current Trump regime (Grobler, 2020). Not to say that there was no engagement: The engagement seems however to have been through a peace and security prism, with the main focus being on dealing with terrorism and security. What is to be expected under the Biden regime is that the engagement will be across a far broader spectrum, including trade and investment. One can thus expect the restoration of the important US-Africa dialogue (Grobler, 2020). That said, African expectations will need to be tempered. Whilst US interest in Africa is bound to increase, it should not be expected to top the agenda. The Biden-administration has many fences to mend, with those of its ally, Europe, and major competitors, such as Russia and China, requiring significant attention. The onus will in fact be on Africa to position itself as an active driver of the US-Africa relationship (Weseka, 2020). The US-China-Africa triangular construct Perhaps the time is now ripe to encourage US - China trilateral discussion on African issues. There is much to be gained by cooperation in the fields of public health, maritime safety, and even with regard to military and policing matters, where cross-regional coordination is proving vital in both the domestic and international interest (Stremlau, 2020). One need not look any further than the current impact of the COVID-19 pandemic, which knows no border, thereby necessitating global collaboration amongst friend and foe. Some Chinese and American diplomats (prior to the Trump administration) have in the past promoted the idea of the two sides being responsive to the African agenda. They are of the belief that though competitors, they should strive for win-win-win outcomes. The recent establishment of the African Continental Free Trade Area (AfCFTA) presents itself as a strategic opportunity to do so (Stremlau, 2020). There have been some moves towards greater US – China cooperation, with suggestions for the United States and China to work in complementary ways in Africa. An example being their shared interest in Africa’s stability - the US Africa Command (AFRICOM) has, for instance, started[, albeit prior to the heightened tensions of late,] to engage China in this regard (Fabricius, 2018). Other promising areas for potential “trilateral cooperation include regional economic and infrastructure integration, joint work to address corruption, and mechanisms to support commerce, which could[, amongst others,] include a unified approach to local content provisions” (Brookings, 2013). Whether that is still possible in the wake of the escalated Sino-American tensions, remains to be seen (Stremlau, 2020). Africa, it is supposed, will take its cue from Biden’s ability to lead America back into the realm of multilateral engagement. The prospect therefore is, however, brighter today than yesterday. One of the hurdles for the US to consider in its engagement with Africa is that China has been more coherent and systematic in its approach to Africa. The US has been inconsistent, with policy changing as administrations change. To illustrate, past attempts under Obama (and then Vice-President Biden) aimed at setting up a US equivalent of the Forum for China Africa Cooperation (FOCAC), came to nought under the subsequent Trump administration. And now again, given Biden’s commitment to multilateralism, it is quiet conceivable that there will be a return by the US to such a continental approach (Weseka, 2020). But obviously competition between the two major powers, that is China and the United States, is not going to go away. As previously mentioned, it is fully expected that the Biden administration’s primary focus will, post-COVID-19, be on restoring its domestic economy. How America factors Africa into that equation will be interesting to observe. In reinvigorating US manufacturing, for example, one option may be to focus on the supply of goods and services to the African continent, which will result in it sparring with China, who has become the continent’s major supplier of such. Similarly, in the fields of technology and media, where the US currently has the upper hand with the likes of Google and Microsoft, competition is rife, as Chinese enterprises such as Huawei and ZTE rapidly advance (Weseka, 2020). Hopefully, this will not lead to a clash, but to healthy competition. The unknown, however, is how the US will respond the Chinese approach, which is open to concessional loans, debt relief and grants, something that the US does not really do. (Weseka, 2020). Also, on the military front, where both China and the US have a presence, one will have to observe developments. China is increasing its activity. It is deploying military attachés to its embassies, and increasingly getting involved in peace missions on the continent. It has more boots on the ground than the US. And will the Chinese consider it necessary to protect its growing assets and commercial interests on the continent, or the Belt and Road Initiative, through some form of defence mechanism? It is a topic to consider and observe (Weseka, 2020). That said, with Biden embracing multilateralism, the battleground, it is expected, will move to the multilateral fora such at the World Trade Organisation (WTO) and United Nations (UN). But here to, the US would be interested in developing relationships with continental groupings, such as Africa. China has a well-established relationship with the continent, and has, to a certain extent, under Trump, had free reign in the UN when it came to issues of requiring third party support (Weseka, 2020). This again suggests a shift in US policy from bilateralism to an African multilateral approach through a US type of FOCAC. Finally, the real question is how Africa is going to respond as a collective to the Biden administration. They need to act in a comprehensive and cohesive manner, by developing an African position as regards its expectations from the new US regime. In developing that response, it will have to look at what is in its interest (Grobler, 2020). It should avoid falling into the trap of, in a sense, reliving the cold war, by choosing sides. Africa will have to put its terms on the table and find a way to constructively work with both sides in a manner that best serves its interests (Grobler, 2020). For Biden, it will, however, not be a simple task to put up a pro-US alliance to temper China’s influence. African countries, and indeed many Middle Eastern, even European countries, have a distinct interest in continuing their relationship with China. They share a commitment to dialogue, mutually beneficial economic cooperation and multilateralism (Grobler, 2020). For the US to advance their African policy, they will have to be accommodative in its approach and tolerant of competition. They will have to accept that Africa is, in its own interest, willing and open to the idea of working with all sides. Conclusion Africa has, in the last decades, enjoyed good relationships with both the United States and China, albeit on distinctly parallel tracks. This has greatly aided economic growth and stability on the African continent, whilst simultaneously advancing global development and sustainability. The relationship with China has, in the last four years continued to blossom; with the United States it has, however, in large measure, paused. The approaching Biden administration presents a unique opportunity, not only for the US to revive and bolster its relationship with Africa, but for it to also take a fresh approach in its engagement with the continent. In recommitting the US to multilateralism, the potential exists for the US to reposition itself as both competitor and collaborator, thereby enabling themselves to acquire their fair share of the opportunities that abound in Africa. Such competition would bode well for the continent (Stremlau, 2020). References Biden-Harris Campaign Website. N.d. The Biden-Harris Agenda for the African – American diaspora. [Online] Available at: https://joebiden.com/african-diaspora/# [accessed: 1 December 2020] Brookings. 2013. A Trilateral Dialogue on the United States, Africa and China Conference Paper 2 and Responses. The Commercial Relationship between the United States, China and African Countries: Areas for Trilateral Cooperation. [Online] Available at: https://people.unica.it/annamariabaldussi/files/2015/04/USA-China_Africa.pdf [accessed: 1 December 2020] Fabricius, P. 2018. US and China inch towards awkward cooperation in Africa. [Online] Available at: https://issafrica.org/iss-today/us-and-china-inch-towards-awkward-cooperation-in-africa [accessed: 1 December 2020] Grobler, G. 2020. Interview with Ambassador Gert Grobler, Senior Research Fellow at the Institute of Africa Studies, Zheijiang Normal University. 2 December 2020. Home, W.2020. VSA gee nog geld aan SA vir virusstryd. Cape Town: Netwerk24 Owusu, F. & Carmody, P. 2020. Trump’s legacy in Africa and what to expect from Biden. [Online] Available at: https://theconversation.com/trumps-legacy-in-africa-and-what-to-expect-from-biden-1502 [accessed: 1 December 2020] Stremlau, J. 2020. Personal interview with Professor John Stremlau, Honorary Professor, Department of International Relations, University of the Witwatersrand. 1 December 2020. US Department of State. 2020. U.S. Relations with South Africa. [Online] Available at: https://www.state.gov/u-s-relations-with-south-africa/#:~:text=U.S.%2DSOUTH%20AFRICA%20RELATIONS,%2C%20environment%2C%20and%20digital%20economy [accessed: 12 July 2020] Vines, A. 2016. Trade not aid: Obama’s Africa legacy. [Online] Available at: https://www.chathamhouse.org/2016/09/trade-not-aid-obamas-africa-legacy [accessed: 1 December 2020] Weseka, J.B. 2020. Interview with Dr Bob Weseka, Coordinator: African Centre for the Study of the US, University of the Witwatersrand. 2 December 2020.by Dante Mashile (Accredited Public Relations Practitioner), National Diploma in Journalism, Certificate in Project Management (Netherlands), BA, Postgrad. Diploma in Telecoms and Information Policy, Master of Development Studies - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 1/2021 Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. April 2021 Author: Derek L Fleming Introduction The United States of America (US) has a long and meaningful history of involvement in Africa. Be it at a socio-economic, military, or political level; the US has traditionally, along with its European allies, been at the forefront of development in Africa. The United States’ involvement has, over many decades, been steady. Under the two US administrations prior to that of President Trump, the cooperation between Africa and the United States was given greater impetus. The Africa Growth and Opportunity Act (AGOA) was, for example, introduced by President Clinton, and President Obama is noted for, amongst others, his Power Africa and Proper Africa programmes. However, under the Trump administration, a pause was experienced. In the meantime, China has, especially over the last few decades, been steadily, and successfully, increasing its involvement with Africa. This has developed to the point where it is now Africa’s largest trading partner, a position that is causing some discomfort amongst those powers that have traditionally been the main development partners of Africa. The Trump hiatus, undoubtedly, created a vacuum, and thus an opportunity, for China to rapidly expand its relationship with Africa. Many may argue that this expansion has been at the expense of the US’s interests on the continent. Meanwhile, the relationship between the US and China, at a global level, deteriorated under the Trump administration, at an alarming rate. This meant that Africa was, in a sense, caught between the two global power centres. On the one hand, it wants to maintain its relationship with the US and Europe, whilst on the other, it is enthusiastically expanding its relationship with China. How this dichotomy will ultimately play out on the African continent, remains to unfold. Under President Trump, China had an almost unfettered advantage, in that, whilst the then US administration was insulting the continent, and even though the US did not abandon Africa – aid and investment continued – enthusiasm for nurturing and expanding its traditional relationships waned. Now there is a new administration in Washington and President Biden has indicated a return to normal diplomacy under his watch. This article attempts to interpret the impact that this return to normalcy will have on Africa and China, and how it interconnects in Africa. US-Africa relationship reset and the Chinese nexus Traditionally, the US played an active role on the African continent: politically, economically, and militarily, especially in former British colonies. Under the Trump administration this relationship declined somewhat. All the while, China has seized the opportunities opening in Africa and has over the last few decades been steadily advancing its interests on the continent. The vacuum presented by the previous US administration has served to boost China’s influence. Chinese relations reflect its own social organisation and ways of economically engaging individual African states, in large measure, by taking into account local conditions. Without fanfare and reaching quiet accomplishment, their slogan is ‘Peaceful Development’. Previously it had been ‘Peaceful Rising’. The incoming Biden administration recognizes that the Trump era and its attitude towards Africa requires a dramatic correction of US policy across all 55 continental states. Indeed, Africa was relegated to near last among other regions, pushed by a past presidential disinclination to consider it relevant; and to only be responsive where competitor nations, such as China or Islamic fundamentalists, were perceived to be working a reversal of US economic efforts. Prestige profiling of Americanism occasionally brought out responses. Gratuitous insults from the White House about core African worthiness also worked to reduce the US’s standing. This ill-feeling has receded among Africans and their leaders since Trump left office and now that Biden is taken to be the forerunner of an entirely different period, both in style and substance. Biden’s slogan is ‘America is Back’, alluding to the normal run of diplomacy as the chief driver of foreign policy. Being more rational and predictable, this is reassuring to Africans. Biden wants to enhance the Obama legacy, through first a rebuild and then an extension. AGOA is one economic mode that bears watching. It seems unlikely to be renewed in its present form. Biden and Congressman Gregory Meeks, Chairman of the House of Representatives Foreign Affairs Committee, will, in all probability, substitute AGOA with a new preferential African import access into the US markets programme. The debate evolves around the exclusion mechanism, for example barring Rwanda over used clothes sales from China, and commercially unfair price undercutting, which is working against resentful and displeased US businesses. Currently, AGOA, has a limited reach in that it, in the main, helps Botswana and South Africa. In contrast, China’s preferential loan regime operates with less stringent conditions, such as fiscal reform requirements and prescribed human rights conduct, with over forty African states. Military dimensions On assuming office, Trump had over six thousand Special Forces deployed across Africa. He drove a reduced presence after the death of an operator in Niger in 2017. Biden would likely be confronting a worsening security situation with Islamist fundamentalists actively engaged in five countries: Sinai in Egypt as a key Middle Eastern ally; the Maghreb where France is confronting Al Qaeda; Boko Haram in Nigeria; the ADF in the Democratic Republic of the Congo; and Al-Shabaab (ASWJ) in northern Mozambique. China has no known anti-Islamist Jihadi role at present. The role of Private Military Companies (PMC) is a complicating factor for the Biden policy teams as past administrations have made extensive use of them in Afghanistan and Iraq. The recent Amnesty International report from a respected human rights organisation, on one PMC assisting local police in Mozambique against an Islamic insurgency affiliated with global ISIS, brought on a condemnation by John Godfrey, interim counterterrorism coordinator, in that “Private groups make the fight against terrorism less transparent by self-regulating ‘outside international structures’". In the event the PMC has left the country, a firmed-up position from Washington DC is needed. China has security companies, and where they may deploy into Africa in support of governments, friction will likely occur. Driving US policy on China and Africa Policy and its formulations in the United States happens in closed rooms across Washington DC. On foreign policy it is the committees of the Deputy Under-Secretaries of State, and the Africa Bureau within the State Department, comprising the country desks manned in that Department, which are pivotal. Participants are usually State Department career staffers with academic and diplomatic posting experience. Their product, tasked effort or matters arising from the course of events, passes to the Under-Secretary of State for Africa, onward to the Secretary and his staff, where a regular weekday, late morning meeting of principles, thrash out priorities. The fruits of such deliberations pass onward to the President in written briefing reports. Personal interaction between the Secretary of State and the President, outside of Cabinet meetings, allows priorities to be evaluated into a direction the Chief Executive prefers or raises himself. Under Trump, the antagonism toward China was largely caused by the tariff trade war. Africa was a remoter consideration. China in Africa got noted occasionally, but rarely part of the clash with Beijing. The Pentagon, and the US Navy in particular, stood against Chinese expansion of the latter’s territorial claims in the South China Sea and the Indo-Pacific in general. Therefore, the People’s Liberation Army (PLA) Navy’s intention to establish five naval bases in Africa (in the Seychelles, Tanzania, Djibouti, Angola, and another in West Africa), was, to the US, alarming. It is worthy to note that China has eclipsed the US in having the world’s largest blue-water fleet navy. And there are US concerns relating to China’s expanding missile arsenal and Eastern Pacific submarine deployments. Global balance of power appears to be tipping away from the west, and Africa has noticed. These military concerns remain and will be present during the Biden Presidency, as it does in the Central Intelligence Agency under Biden appointee, Director William Burns, who, in a speech in mid-March 2021, set out China as the foremost US peer competitor. Biden would have signed off on this orientation. Under Biden, some working assumptions of competitiveness with China will remain as part of a logic that cannot be defied, but the method and managed perceptions of deployed policy, will be dramatically different. A changed mix of form and substance is expected. Africans will have to evaluate whether they buy into it, by considering how it affects them, on a case-by-case basis. Legacy complications President Biden will need to confront diplomatic facts on the ground created by his predecessor; a glaring example is the status of the Moroccan occupation of Western Sahara. The issue had led to Morocco leaving the African Union, a body President Obama respected, and Trump effectively ignored. In the final days of the Trump presidency, he brought this Arab state into recognition of Israel. The critiques of Rabat stalling on implementation of the American Baker Plan faded, yet the issue remains. China endorses the implementation of the Baker plan. The opportunity exists for the US and China, both permanent members of the Security Council, to together, move to a solution via the proposed referendum for Western Saharans. Changing US style and substance The Biden first rule for foreign relations is that it should pursue a two-track approach to promoting US interests and values, the international and domestic, mutually reinforcing each other. The crunch comes down to how clashes and contradictions are managed. African matters that could likely trigger Congressional and media responses, will principally be environmental, trade, and human rights issues. Engines of the US view on Africa A general working assumption in the making of state policy around Washington DC is that many can contribute to its inception. These officials do so through advancing and defending their own positions, even though they may well not be adopted in the end. But once policy has been set down, it becomes the line to adhere, unless the President or Secretary of State wishes a review. The decided line is sacrosanct, and everyone gets behind it, even if staffers may have to fake enthusiasm occasionally. Understandably, being in the early days of the Biden presidency, the final, settled view is in transition itself, though it is rapidly firming up across issues. China policy was among the first to be tackled on account of the US security establishment. Within the State Department, priority revolved around reassuring and re-establishing alliances (over forty treaties) ignored or shredded by the Trump White House. And regionally, Africa has gained new prominence, even greater than it enjoyed during the Obama years. As it relates to the anticipated bearing on US-Africa relations, it is worthwhile noting the political realignment within the Executive and Legislative arms of the US: Under Democratic political party control of both Houses of Congress, and the Presidency, three interacting points of original policy formulation exist, which can now be better coordinated into a more coherent international response, both in timing and in content. Trump was often in an uncivil war with his own state bureaucracy and the committees of the House of Representatives. In the United States Congress, the pivotal foreign affairs portfolios are held by African-Americans. It can be expected that they will keenly drive African issues over many years. In the House of Representatives, Gregory Meeks (D-New York), a law graduate and former Assistant District Attorney in New York, is the Chairman of the Committee on Foreign Affairs. This is a high profile and powerful committee. Its decisions often pass as strong recommendation to other committees such as Defence, Treasury and Homeland Security. Trade relations often have their birth here, to be implemented elsewhere. Congresswoman Karen Bass (D-California), a health science graduate, serves on the United States House Foreign Affairs Subcommittee on Africa, Global Health and Global Human Rights. She is also Chair of the Congressional Black Caucus. Bass was seriously discussed as a potential running mate for Democratic presidential candidate, Joe Biden. Biden also considered her for Secretary of Housing and Urban Development and as Secretary of Health and Human Services, but she declined. The new US approach to Africa Spotlight diplomacy According to the House Foreign Relations Chairman, Gregory Meeks, the US needs a more robust US presence across the continent. Policy should not be an echo chamber as before: agencies around Washington DC need to feed their views into the same roundabout of policy formulators. He now foresees within Africa, collaboration on shared challenges and that Africans are to be at the forefront of the Biden relationship with the continent. “Africa is to be brought to the front burner’’ under his chairmanship of the committee. His novel conceptualization is that there will be a greater emphasis on promoting people-to-people exchanges, so as to enhance understanding and shared respect for common values. Meeks explicitly stated that Biden and Congress’s approach is to be a new one, not the Trump view of seeing the continent in terms of being a terrain for global competition between themselves and China. This approach will indeed hold globally. Meeks makes plain he will be working hand in hand with Karen Bass, who heads the Africa Subcommittee in the House of Representatives. Diplomats engaging with her since Biden assumed office, find that it appears China has to date not featured much, whilst Russia seems higher on the agenda. Understanding and shared respect for common principles Congressman Meek’s first public event as chairman of the committee was on Africa. This was purposeful. He acknowledged that the US has considerable work ahead in repairing its relationship with Africa. And that restoring moral credibility and reputation should be the goal. To do this, the relationship needs to be elevated, not isolated as under the previous administration. Collaborative effort with shared benefit: the new baseline Under the new administration the US will continue to advocate authentic democratic principles and values, which they aim to transmit through policy guiding their relationship with international counterparts, the goal being a commitment from both sides to democratic principles, the same as exist “back home here in the USA”. Meeks cites as examples: dealing with police violence, poverty expansion and social discontent within a democratic dispensation across his own country. Against this, the domestic regime of each African state, given their own specific local conditions, will be examined, and critiqued, in order to move towards the US’s interpretation of authentic democratic practice. Control of both Houses of Congress, and the Presidency, allows the Democratic Party to redefine its foreign relations unhindered, which will clearly portray to the world that “the US is back at the table”. This is especially true of Africa, which, to a large extent, was marginalized under the previous administration. Bass and Meeks say the US needs to move away from the Trump administration’s record of reducing countries to pawns in the prejudiced great power game with countries such as China and Russia. This was particularly true in the case of Africa. From Meeks’ perspective this was insulting, as it assumes Africans have no agency to affect and be affected by foreign affairs. Transcending traditional public policy The future relationship under Biden is to be collaborative. While advocating democratic principles, reluctant transition of power in some African countries sometimes makes it difficult, as did the transition in the USA from Trump to Biden. Persuading the international community to be transparent and to protect human rights, depends on the US’s own credibility, and its ability to convince the world that it is able to rise above its own problems, challenges, and inevitable setbacks, in this regard. Climate change Desertification, potable water declines and the risk of poor food security, affects the stability of polities. This is the main linkage that Meeks makes under climate change. To him ‘think global, act local’ requires a planetary effort. The US’s return to the Tokyo climate change protocol, and it is re-joining of the Paris climate accord, is a central tenet of the Biden presidential programme. In his view, congressional Republicans and Democrats hold the position that China is the biggest atmospheric polluter. They are of the view that through the US’s re-joining of the international efforts, reversing global escalation of temperatures, and unpredictable weather events, is achievable. African Urban Development Initiative President Biden, during his electoral campaign, committed his administration to the planning of an urban development initiative, in crucial areas, such as energy access, transportation, and water management. Meeks wants to codify this into an “African Urban Development Initiative”. It is likely that Meeks was informed by Biden’s exposition on the idea in the first place. Here, increased competition between the US and China in Africa can be expected. China, who has built over 150 new cities, leads the world in this regard and has already aided the building of African cities in countries such as Kenya and Ethiopia. Culture and US soft power Congressman Meeks wants to use the concept of cultural heritage and its preservation to advance US foreign policy. Using the soft power of America’s creation and entertainment industries, such as Hollywood, and cross pollination of music and the sports, are his explicit examples. To illustrate, he cites collaboration between the National Basketball Association and the African Basketball League. African Growth and Opportunities Act (AGOA) Created by President Clinton, and already extended for a further ten years, Chairman Meeks seems to be opting to move beyond AGOA by reworking previous administration programmes such as Power Africa and Prosper Africa. He believes that economic engagement should start with the US’s wholehearted support for the African Continental Free Trade Area. He has mooted a number of suggestions, such as the provision of technical support for the trade dispute resolution mechanism. This could be done through the African Union (AU) secretariat, or multilateral mechanisms such as the African Developments Bank’s legal support facility and/or through setting up trade mediation courts based within the regional economic communities. Such assistance is being considered at three levels, namely government, private companies, and the regional economic communities. Meeks envisages a “post AGOA” US-Africa relationship as not being one-sided. Investing in the development of digital networks across the continent, for example, should be done in collaboration with African technology companies. Such formalized support with Africa’s technology sector, would counter the current domination by Chinese companies, such as Huawei. The path of partnerships with African technology companies, incubators and educational institutions involved in the emergent technology sector, needs to be followed in order to create an environment for the building of digital capacity for young Africans. Another important focus has to be US support for a STEM education (mathematics and science) initiative (falling between universal basic education and the TAYI higher programme), so as to enable the African youth to become more integrated in the global economy. He cites, as a way in which the US could become involved: mid-career US corporate professionals should be identified and tasked. They could then be deployed to local African enterprises for a six-month placement, during which time they would be making crucial skills transfer. So too, American educational institutions could bring expertise in online content with continental partners. To achieve this, it is proposed that the US International Finance Corporation play a more active role than it has to date. African diaspora The growing and well-educated African diaspora in the US will be leveraged to enhance US-Africa cooperation. To this end, entrepreneurship and transnational connectivity will be prioritized. Similarly, the US could act as a coordinator to bring about Trans-Atlantic connectivity between Africa and Latin America, where there is also a sizeable African diaspora. The US would want to aid the establishment of the great African cultural museum, which is included in the AU’s Agenda 2063. The museum is to be developed in order to promote appreciation of Africa’s heritage and its vast and dynamic artifacts, music culture and language and its continuing effects on world culture. A larger diplomatic presence The US recognizes that it will fail to be relevant if it does not participate in bilateral and multilateral forums. Presently in several US embassies there are insufficient staff, whilst USAID is often also not present in the country. This lack of a presence can lead to imbalances, when, for example, the Defense Department cannot surge personnel through AFRICOM in order to address emergent needs. In order to avoid US views only being known in capital cities, the priority is to expand across all posts, civilian appointees, and to also staff rural consulates, such as Goma (DRC), Kano (Nigeria) and Mombasa (Kenya). This, it is believed, will build perspectives across all population sectors. US diplomatic structural adaptions Meeks and Bass aim to introduce team formations capable of meeting transnational challenges. These will be dedicated country teams comprising representatives drawn from the departments of state, commerce, and defense, and USAID, who are to be stationed at the African regional economic communities, for example the Southern African Development Community (SADC), and the East African Community (EAC). The work of these formations will have distinct tasking and are to be separate from the bilateral formal diplomacy. US Military in Africa Meeks and Biden share the thinking that there needs to be a “hard look” at the US military’s role on the African continent. The thinking suggests that regional peace and security should be framed through the lens of democracy, good government, and human rights. As such, US security partnerships should be with those African countries that hold free, fair, and credible elections and where local security forces do not perpetuate state sponsored violence against their citizens (such as recent allegations against President Museveni’s win in Uganda over Bobby Wine, who was detained). The current training of African militaries in humanitarian law (war law) is likely to continue. The US is of the view that upstream poverty prevention assists in preventing conflict and that it is key to hold back undemocratic impulses by security establishments. Improved civilian oversight of the military is equally important. To this end, they consider partnerships with civil society organizations, legislatures, and the media, as a means to achieve this. It will, they believe, prevent credible threats to the American homeland in the longer run. The Global Fragility Act will be deployed to reframe the current security stance towards African crises. They have set as a 2030 goal, the reduction by half, the number of chronically unstable African countries. Concerted action at goal achievement Much of the above Meeks-agenda, tracks initiatives yet untried by the United States, but which are already implemented by the Forum for China-Africa Cooperation (FOCAC) initiatives. Surveying and organizing, in a humanitarian way, is a central tenet of the US policy aimed at making gains across Africa. They believe their strongpoint to be their global leadership position, and their ability to mobilize multi-national responses to crises. Of course, they need to be aware that immodesty could well lead to resentment. The three influential Biden advisors: Nicole Wilett, Alison Lombardo and Michael Battle, are credited with helping shape US-African policy. They are well regarded as cogent on African affairs; in that they are well equipped with African research experience. They were formative in the emerging policy with the Democrats in Congress. In contrast, Trump’s African brains trust appears to have been his son and son-in-law who had gone big game hunting in Zimbabwe. Lombardo is now Deputy Assistant Secretary of State for International Organization, Battle has re-joined Duke University, and Willet is with the Open Society in New York City. The latter two continue to play an important informal role in shaping US foreign policy, although they were not taken up into the Administration. Melding domestic policy with foreign policy For the incoming Secretary of State, Tony Blinken, the problem of moving away from Trumpian positions, as he acknowledged at his first Senate appearance, is that not all of the former President’s policies need be reversed (such as the Bureau of Industry and Security). Furthermore, simply re-joining international institutions will, on its own, not be enough to restore confidence in American participation. China’s close ties with Africa present a similar problem. Already economic sanctions and movement restrictions against one hundred of Zimbabwe’s ruling party were renewed by Biden at the beginning of March 2021. Coincidentally, the European Union had done so one week earlier. Zimbabwe’s elites may be personally inconvenienced, but they are unlikely to be toppled when a Chinese veto at the UN Security Council is ready to shield them. Biden is also heir to several other Trump initiatives, such as the International Corporation of China, which was placed atop of a list of Chinese firms blocked from access to US electronics with potential dual use applications. But US-China relations under Biden will shift from a zero-sum approach to one that is competitive, cooperative and contested. The semiconductor manufacturing and supply of rare earth minerals (REMs) are prime examples of China’s strategic access to resources and its monopoly in world production. It is therefore likely that the US will focus on areas in which they are competitive. This will undoubtedly include technology, rule-setting and diplomatic influence. Rule-setting for China will be hard to achieve, as China, under Xi Jinping, will not be a rule taker under a Rules Based International Order (RBIO). So too, diplomatic influence will have its primary thrust through Congress; and in the case of Africa, it will be the Meeks-Bass duo driving the Biden African agenda. Blinken is expected to adhere to Biden’s diplomatic imperative which is informed by what makes the American people and workers more secure, prosperous, and hopeful. Events, such as Covid-19, posited as having its origin in China, while Beijing benefits the most from supplying vaccines faster than the US; and allegations of systemic human rights abuse in Western China, straight-jackets America into a firm stand against China. For Blinken, there are two possible responses: First, an export regime is emplaced so that no American technologies that might be used in repression domestically are exported to China, and secondly, no merchandise produced under repressive Chinese labour conditions should be allowed into the US. The Biden administration would also encourage allies and friends to do the same. African states that incur the same kinds of displeasure could face similar treatment. Already African states with legal systems unfavourable to sexual minorities have been warned by Biden: Ghana, Zimbabwe, Uganda, and Malawi. African states, of course, perceive this as intrusion into sovereign political affairs, where none can be tolerated. China makes no such demands. The US and China meld: Values with interests - Rapture vs Rupture China, for the Biden Administration remains the main international peer competitor and will remain so for decades to come. A reformulated approach is in the making. Tony Blinken, Secretary of State, puts it as a “realignment preferable to rupture”. Not Trumpian in the least. The central tenet of the American and European global governance is a mantra: Rules Based International Order (RBIO). China is portrayed by them to be maverick, often outside RBIO, wild and irresponsible, unsettling, and disruptive. Hence notions floating in the new administration, and which have gained ground, are that China’s role in the World Trade Organisation is counterproductive. China’s status designation as a developing nation, according to them, has to be reviewed. The US Treasury, traditionally, has been counter poised against the Pentagon. Treasury prefers trade and chokes upon tariffs. It rigorously opposes them, with exceptions such as organised criminal enterprise, fiscus mismanagement and unlawful stock market manipulations. Increased goods and services serve a tax base yield they welcome. Janet Yelland, as the Biden appointee, is not belligerent, but does act decisively when reason beckons, such as the reimposition during early February 2021 of personal and corporate sanctions on an Israeli diamond mogul in Africa, that had been lifted by Trump. US-Europe-China competing for influence in Africa In the diplomatic and economic rush into Africa, the United States, France, and the UK, are China's main competitors. China surpassed the US in 2009 to become the largest trading partner of Africa. Bilateral trade agreements have been signed between China and 40 countries of the continent. In 2000, China-Africa trade amounted to 10 billion USD and by 2014, it had grown to 220 billion USD. It peaked in 2015 and the latest data suggests 2019 was 192 billion USD. China expends more effective effort in courting African states and elites, secures more resources and is highly influential through the Forum for China-Africa Cooperation (FOCAC). Seven-point upgrade of FOCAC China defines eight major initiatives with Africans, namely (i) industrial promotion, (ii) infrastructure connectivity, (iii) trade facilitation, (iv) green development, (v) capacity building, (vi) health care, (vii) people-to-people exchange, and (viii) peace and security. A corrective seven-point plan is now to be put forward in 2021. Africans, it appears however, do not see intense industrialization after the Chinese model as a solution. Global competition between industrialists is, however, unlikely to yield disruptive results, given that China has the biggest industrial base worldwide in any event. Intellectual knowledge business, agricultural expansion, tourism, and mining are the conceptual paths towards continental development that African states are converging around. The European Union favours this route over the Chinese proposal on industrialization as the main vehicle for African GDP growth. The US tends to view industrialization as useful when its companies can produce cheaper abroad than they can back home, especially when healthy tax benefits are thrown into the mix. A prime example is Ford Motor Corporation’s 2021 1,05 billion USD investment in its South African manufacturing operations. It is a private-public partnership with all three spheres of government in the South African executive capital (Tshwane) Automotive Special Economic Zone (TASEZ). The Department of Trade and Industry’s Automotive Investment Scheme, no doubt, played a role triggering the investment. The US Government does not actively steer business abroad for its private companies, and from Beijing’s view, China, via overarching “whole nation effects”, in a sense, sees itself as a business in itself and extensively assists Chinese companies. Potential for US-China collaboration in Africa Foremost, both countries should accept a working presence alongside each other – without interference – while in free competition under local law. With Congressman Gregory Meeks this is settled as the way to go. US companies will nonetheless continue, rightly or wrongly, to feel disadvantaged against their Chinese competitors, which they allege enjoy uncompetitive state subsidy and support, with, for example, EXIM bank and others. Mutual support work may take time to build. The chief impediment is discrepant national systems of civil administration and infrastructure building assumptions (national standards from food and agriculture to road and construction codes) and, most of all, national culture, the ultimate determinant. Person-to-person engagements therefore remain the best initial approach, which will undoubtedly lead to a greater chance of success. It is less complicating. Similarly, in the field of US/China policing and military liaison, the focus should be on building lower level working trust among themselves and their African host nations, especially since longer term joint effort seems unlikely at higher levels, given the US National Security posture and contingency plans that continue to factor China as the prime military threat. In this vein, world events remain highly unpredictable. Real and imagined slights upon either state’s prestige by the other can never be excluded. Escalation by military error or miscalculation can bring on crises. Because the US and China find themselves increasingly in close proximity on land across Africa, de-escalation mechanisms at political and military levels should be well functioning between themselves and the African Union. Notwithstanding the aforementioned challenges, it is submitted that outside of public view, a number of problems that pose concerns to both the US and China, can be jointly worked on. These include issues such as: International policing actions on narcotic and environmental smuggling. Joint police training and military joint interdiction of West Indian Ocean narcotics routes from Pakistan to Somalia, Kenya, Tanzania, and Mozambique. Emergency and humanitarian disaster relief coordination (droughts, tsunamis, cyclones, earthquakes, floods, volcanic eruptions). This should include sea and air lift capacity. Inter-operability (Chinese and NATO standards) development of doctrine and training for national militaries confronting insurgencies, especially those affecting mining and civil construction and electricity transmission, which is a serious threat in parts of Africa. Lower-level military formations (tactical and operational) are less constrained by doctrines that hold at the national strategic level. There could be some flexibility and adaptation for joint cooperation when pursuing counter insurgency actions such as dhow interdiction in the eastern Indian Ocean and Arabian Sea. Across the five Islamist insurgencies in Africa mentioned earlier in this article, both sides could provide logistical and material support, including humanitarian training, tactical support, and platoon weaponry. Coordinate greater coherence in adopting international positions on African problems in the Security Council of the United Nations, within a framework of closer consultation with the AU. Biden has signalled AU relevance in an open speech of congratulation on the 34th sitting in February 2021. This gesture got appreciative acknowledgement from a number of African Heads of State, particularly Kenya, Democratic Republic of Congo (chair) and South Africa (former chair). The regular new year’s tour to at least three African capitals by senior Chinese Communist Party (CCP) officials gets attention on the continent. The US also stages occasional visits by administration officials. Biden has hope of attending the 35th AU General Assembly in 2022. If this happens, it would be a significant departure by a US President towards Africa on par with Obama’s visit to Cairo, which aimed to realign with the Muslim world. (Later drone strikes on Arab countries reversed much of this Obama effort, so Biden would need to come with more than solidarity wishes and declared empathy). China places less emphasis on grand gestures, preferring the gradual development of people-to-people contacts informed by its overarching plan. Conclusion Africa has, in the main, for many decades now, enjoyed a long and rewarding relationship with the US. Over the last few years, under a belligerent Trump administration, the Africa-US rapport paused. Under the new Biden administration’s “America is back” approach, it is expected that the relationship between the US and Africa will correct and expand. In a sense, the relationship will return to that of the pre-Trump era. Concurrently, the relationship between Africa and China has been steadily growing, to the extent that China has now become Africa’s biggest trading partner, is a significant investor on the continent, and commands meaningful political sway. Through FOCAC it has an entrenched channel for coordinating its activities within Africa. In this, it has been immensely successful. One conclusion that can be drawn from this article is that whilst Africa is eager to have its relationship with the US normalised, it is simultaneously unwilling to relinquish its bond with China. As the US rebuilds its relationship with Africa, it will have to adjust its approach, cognisant of the reality that the relationship will have to co-exist with Africa’s relationship with China. They will need to position themselves as a competitor for trade, investment, and political cooperation. This article concludes that the competition need not be adverse for the continent, in that it compels the two powers to moderate their competition to their individual advantage, with a concomitant spill-over benefit for the continent. An equally important conclusion is that whilst positioning for advantage, new opportunities, be they militarily, policing against narcotics, emergency, and humanitarian relief, amongst others, are opening up for trilateral collaboration between Africa, the US and China. This article urges an earnest consideration in this regard. Such a multilateral approach will serve Africans best. Information sources This opinion has been developed through interviews and consultations with senior members of the incoming Biden administration and US Congress, open-source materials, former members of US State Department, African ambassadors, and think-tanks. None of the views expressed here are necessarily an attributable, declared position of the foregoing. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 2/2021 Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. May 2021 Author: Yaseen Lockhat BA Geography (Honours), PGDip Planning, MSc Development Planning Abstract Humanity is experiencing an anthropogenic-induced climate emergency. Climate change is framed as an emergency due to the numerous catastrophic physical risks, which are increasing over time. A global response is needed to address the challenges posed by climate change. It will require redesigning many sectors and activities of the economy to reduce its environmental impact, in particular the energy sector which is responsible for a significant amount of the total emitted carbon. The transition to a low-carbon economy is a complex process due to the magnitude of the shift and the dependencies of the economy on the activities that need to change, thus the transition also poses a severe risk. However, the benefits of transitioning far outweighs the costs. It is vital for South Africa to have a holistic climate change strategy, as the country is susceptible to both physical and transitional risks. Introduction Climate change can be described as one of the single greatest challenges that humanity has ever faced. It poses a highly complex challenge due to its interconnected and multifaceted nature. Climate change is a consequence of certain activities within the current societal and economic systems, yet at the same time it negatively impacts these very same systems. Thus, climate change needs to be addressed methodically as it is embedded at a universal level within the global systems people are dependent on. The one thing that is guaranteed by both climate change and climate action, is change. Whether there is climate action or inaction, there will be drastic changes. Humanity is however at a point where the change can be influenced for the better. The globe is faced with a choice. It can either focus efforts on transitioning to a sustainable economy that will ensure a high quality of life for future generations or decide not to respond to climate change, which may result in short-term gains that will be eroded by the rapid deterioration of the physical environment. However, both climate action and inaction pose risks, and this is particularly true for South Africa. This paper will explore the physical risks posed by climate change, the physical risk posed to South Africa, the global response to climate change and its challenges, the South African context, and conclude with recommendations for the country. Climate change of the Anthropocene There is an overwhelming scientific consensus that climate change is driven by anthropogenic activities (Oreske, 2018). Whilst climate change as a process is a cyclical phenomenon that is undoubtedly a part of the earth’s natural climatic process, it was previously thought that humans do not have the capacity to alter or influence a system as large as the earth. However, since the industrial revolution, technological improvements led to the acceleration of greenhouse gas (GHG) emissions, most notably carbon dioxide through the burning of fossil fuels and land coverage change, most notably deforestation. These two shifts, albeit land coverage change to a lesser extent, have led to the drastic increase of heat retained in the atmosphere and ultimately the acceleration of the climate change process (IPCC, 2007; IPCC 2019). Scientific consensus is demonstrated through the Intergovernmental Panel on Climate Change (IPCC), a global body established by the United Nations to consolidate various climate change studies, from hundreds of scientists across the globe, into assessment reports that shed light on climate change ‘implications and potential future risks’ and to suggest ‘adaptation and mitigation options’ to governments and policymakers (IPCC, 2021). The IPCC reports are cited for their credibility as ‘In the scientific community and media, its reports are broadly viewed as the most comprehensive and reliable assessments of climate change’ (DW, 2019). In 2018 the IPCC produced the ‘Special Report Global Warming of 1.5°C’ on the need to curb emissions to 1.5°C above pre-industrial levels. The report is authored by 91 experts from over 30 countries including South Africa. The report paints a bleak picture of the current climate change risk trends, as it reveals that anthropogenic activities have already resulted in climatic changes. Moreover, the IPCC report further reveals that climatic changes will increase, and the associated risks will be exacerbated as global warming continues, with the report emphasising that a mere half a degree of warming may result in significant changes. For example, Dosio et al., (2018) found that at 1.5°C, 13.8% of the global population will experience an extreme heatwave once every five years, whilst this percentage may drastically increase to 36.9% of the global population at 2°C warming. Climatic change will not be evenly distributed as certain regions will warm at higher rates than the global average and consequently, as seen by the example citing Dosio et al., (2018) these areas will likely experience more severe extreme climatic events. This is further reinforced by a study by Arnell et al., (2019) which found that there is an increase in frequency across climatic events when average temperatures increase. Thus, this phenomenon is not unique to heatwaves but is also true for other extreme weather events such as drought and flooding. Figure 1: Climate risks of a 1.5°C change compared to a 2°C change (Source: World Wide Fund for Nature, 2018) Climate change in Southern Africa According to the IPCC ‘Special Report’ (2018) Southern Africa warms at twice the rate of the global average. This means that if the globe warms by an average of 1.5°C, Southern Africa will experience an average rate of 3°C warming. As temperatures increase, Southern Africa is expected to experience drier, warmer conditions with an increase in rainfall variability, and of consequence, an increase in extreme weather events that are linked to these climatic changes (IPCC, 2018; Miller et al., 2020). A closer examination of South Africa indicates that the west of the country may become drier and experience an increase in drought, whilst the north-east of the country may experience an increase in ‘extreme rainfall events’ such as flooding and cyclones (IPCC, 2018; Vogel, 2019; Engelbrecht, 2020, cited in Arnoldi, 2020; Mbokodo et al., 2020). Of particular concern is the threat climate change poses to South Africa’s water security, as the country is already classified as a water stressed country that is ranked as the 30th most arid country (GreenCape, 2020). Physical climate risk Climate change will result in a plethora of physical climate risks and the paradox is that human activities are responsible for climate change, and yet it is also negatively impacted by climate change. In certain instances, this can be the same activity, for example there are agricultural practises that contribute to climate change, such as clearing forests for farmland, and yet agriculture is also impacted by climate change as the changing climatic conditions may result in lower yields (Dean and Green, 2019). The following are examples of risks that are directly attributed to the physical risk of climate change: food insecurity may increase – as shifting weather patterns decrease arable areas; risk to health and physical wellbeing – as more people are exposed to extreme weather events; and financial risk – as it may disrupt business supply chains (Chersich and Wright, 2019; Nhamo et al., 2019; Mbokodo et al., 2020). Often these issues affect the most vulnerable groups and thus may exacerbate poverty, inequality, and other socio-economic issues. The climate change response The scientific body of climate change literature is enhancing and growing and is thus improving the understanding of the physical implications of climate change. In addition, more climate risks are materialising, as risks move from perceived risks to actual occurrences. Thus, the need to respond (to climate change) has become more urgent. The World Economic Forum’s (WEF) annual risk ranking report The Global Risk Report (2021) is dominated by environmental risks that are linked to climate change. The report ranks ‘extreme weather’ as the number one global risk in terms of likelihood, the second is ‘climate action failure’ and the third is ‘human environmental damage’. Only one of the top five risks in terms of likelihood is not classified as an environmental risk, and that is the risk of ‘infectious diseases’, which is ranked fourth. This is profound as even during the global Covid-19 pandemic, climate change poses the greater material risk. A similar trend is observed in the report’s risk impact ranking, with three of the top five risks classified as environmental risk related; ‘climate action failure’ is ranked as the risk most impactful after the risk of ‘infectious disease’. Lately, scientific consensus has broadened to agree that the world is in a climate emergency, which is further testament to the severity of climate change and the need for urgent action (Fischetti, 2021). Figure 2: World Economic Forum Global Risk Report (2021). In response there is a global effort to address climate change and in recent years this effort has intensified. At a global level, the Conference of the Parties’ (COP 21) Paris Agreement (PA) has been instrumental for action against climate change. The PA is a global, legally binding agreement signed in 2015 that commits signatory countries to reduce their carbon emissions and to adapt to the changes that are brought about by climate change. The agreement was signed by 195 countries, including South Africa, who are required to submit a National Determined Contribution (NDC) report, which is a framework document that outlines how a country will achieve their PA targets for both emission reduction and climate adaption. The ‘ratchet mechanism’ within the PA requires countries to update their NDCs by increasing their climate action ‘ambition’, once every five years. Other aspects of the PA cover financing, transparency and loss and damages (United Nations, 2015). Climate action: adaption vs mitigation As demonstrated in the PA, climate change can be addressed via two methods namely, climate adaption and climate mitigation. Mitigation is described by the IPCC (2014, p.4) as ‘a human intervention to reduce the sources or enhance the sinks of greenhouse gasses’. The PA requires countries to reduce their emissions so that global warming is kept below 2°C above pre-industrial temperatures. However, it does encourage countries to preferably limit warming to 1.5°C. To achieve their commitments to the PA, countries must embark on a transition away from high carbon intensity. Countries will need to develop mitigation pathways to transition various sectors of the economy over time. Most countries are focusing their mitigation efforts on the decarbonisation of the electricity sector, as the electricity sector is one of the largest sources of carbon emissions, primarily through the burning of fossil fuels (EEA, 2017; Markard, 2018; Doh, Budhwar and Wood, 2021). In addition, technological advancements in renewable energy, battery storage, and other related infrastructure are further driving the energy transition, as improvements and wide-scale adoption has led to a sharp decrease in the costs of renewable energy (WEF, 2019). Transitioning to a low or a decarbonised economy adds to the complexity of climate change, as the process poses significant risks, which is termed ‘transitional risk’ (CISL, 2019; Oliver Wynman, 2019). Transitional risks may manifest through the following (CISL, 2019): Policy and regulation May increase the cost of carbon intensive business activities, for example the implementation of a carbon tax. Consumer preferences Consumers and clients opting for ‘green’ alternatives, for example individuals preferring electric vehicles over petrol- and diesel-powered vehicles. Technological advancements Innovation disrupting ‘traditional’ activities/sectors. Reputational damage Stakeholders litigating against, disassociating from, or disinvesting from organisations linked to climate change. The transition These risks are most likely to affect individual companies, but it can result in systemic risk if there is a disorderly transition. A disorderly transition can be characterised as a transition that occurs as a set of events that unpredictably and suddenly result in the limiting of emissions or other restrictions on carbon intensive activities. Whilst an orderly transition can be characterised as a transition that occurs steadily according to a long-term plan that outlines the country’s transition strategy (UNEP Finance Initiative, 2021). An orderly transition strategy (roadmap) may be based on a climate scenario coupled with a study that considers when various mitigating technologies become technologically and financially viable to optimally limit emissions in a manner that is least disruptive from a socio-economic perspective. Transitional risk is of particular concern for countries that have a concentration of carbon intensive sectors, including financial institutions with portfolios that have a significant percentage of assets in carbon intensive sectors/activities. Whilst there is risk with the transition, the cost of not transitioning will be far more costly. A study by Swiss RE (2021) indicates a correlation between the rise in global temperatures and economic contraction. With a 2°C increase in temperature, it is predicted that the global gross domestic product (GDP) will contract by 11%, whereas at a 3.2°C rise the global GDP is expected to contract by 18.1%. On a regional basis, the Middle East and Africa are predicted to fare worse than the rest of the globe, with an estimated 14% contraction of its GDP with a 2°C increase, and an estimated 27.6% contraction with a 3.2°C increase. The role of financial institutions in the transition The financial sector plays a critical role in addressing climate change, and thus far this paper has only explored the relationship between climate change and financial risk. But transitioning to a low carbon economy also presents an opportunity for the financial sector, as the process requires significant investment and financing. It is estimated that a global investment of between $1.5 trillion and $2 trillion is needed annually for the next 30 years to achieve carbon neutrality. This represents 1.5% of the world’s combined GDP. That said, it is a fraction of the cost when compared to the cost of allowing climate change to increase to temperatures beyond 2°C (Turner, 2020). To assist the financial sector with navigating through the transition and climate change, the Basel Financial Sustainability Board developed the Task Force on Climate-related Financial Disclosures (TCFD). The purpose of the TCFD is for companies to produce detailed information on their strategic and risk management processes in respect of climate risks and opportunities. The TCFD has created a set of recommendations, which focuses on four key operational areas, namely governance, strategic risk management, and metrics and targets. There is additional guidance for certain crucial sectors, including the financial sector. Ultimately, having credible and standardised disclosures will assist the financial sector in making better long-term decisions (for finance, investment, insurance and even disinvestment) (TCFD, 2021). The just transition It is vital for transitioning countries and companies to do so in a just manner. The ‘just transition’ is a concept that was first promoted by labour unions. The Just Transition Centre (2017, p. 3) describes the International Labour Organisation’s concept of a just transition as: ‘a bridge from where we are today to a future where all jobs are green and decent, poverty is eradicated, and communities are thriving and resilient. More precisely, it is a systemic and whole of economy approach to sustainability. It includes both measures to reduce the impact of job losses and industry phase-out on workers and communities, and measures to produce new, green and decent jobs, sectors and healthy communities.’ A just transition is recognised as a critical component to achieving a successful transition, as it addresses social sustainability risk that may emanate from the transition to a low carbon economy, and without a just transition, socio-economic issues will be exacerbated. Consequently, the notion of a just transition has been adopted by global multilateral organisations as well as within countries’, and even within companies’ strategic plans and roadmaps. Contextualising South Africa's response South Africa is in an invidious position with regards to climate change. On the one hand, the country is vulnerable to several physical climate change risks and on the other hand it is vulnerable to transition risk. South Africa ranks as the largest GHG emitter in Africa and the 14th-largest emitter in the world (McSweeney and Timperley, 2018), with 39% of the country’s total emissions attributed to Eskom (Full Disclosure, 2019) who burns fossil fuels, primarily coal, to generate most of the country’s electricity. Thus, a large part of South Africa’s transitional risk is linked to electricity and the coal value chain. A report by Climate Policy Initiative (CPI) (2019) indicates that South Africa lost an estimated $60 billion of coal export revenue between 2013 and 2017 and is susceptible to a further $120 billion of transitional risk, most of which is predicted to emanate from the loss of coal export revenue as countries transition their energy sector to align with the PA (CPI, 2019). Moreover, major sectors of the economy such as the agricultural, electricity, mining, and transport sectors are vulnerable to both physical and transitional risk, and consequently this places thousands of jobs at risk. These sectors contribute 22% to South Africa’s total GDP (Stats SA, 2021a) and employ 15% of the workforce (Stats, SA, 2021b). South Africa’s climate response predates the country’s signing of the PA. In fact, South Africa is seen as one of the most climate change progressive developing countries, as it has produced several pieces of policy and legislation in response to climate change. Most notably is the National Climate Change Response White Paper (published in 2011), which provides the basis for all other policy and legislation. However, despite the release of the White Paper, the country’s climate response decelerated from 2009 to 2018, as there have been several delays to key policies and programmes amidst political and economic turbulence (Averchenkova, Gannon and Curran, 2019). Despite these delays, the release of the Low Emission Development Strategy (LEDS) (2018), the implementation of carbon tax (in 2018), the drafting of the Climate Change Bill (first draft released in 2017), will all build on the White Paper, together with the recently released draft update of the NDC which was opened for public commentary. In addition to these policies the Presidency has established a Climate Commission, where a broad stakeholder base is focussing on creating a ‘just transition’ pathway to transition to a low carbon economy, and National Treasury (NT) has released a technical paper termed ‘Financing a Sustainable Economy’ (2020). A financial sector-wide Climate Risk Forum (CRF) is currently focusing on implementing the recommendations of the NT technical paper. The purpose of the CRF is to provide a financial sector-wide platform to address climate risk and other, non-competitive, climate issues that impact the financial sector. The CRF’s current focus is to give effect to the general recommendations of the technical paper, which is envisaged to increase the capital allocation to sustainable development and the transition to a ‘climate-resilient economy’ (Climate Risk Forum, 2020). The NT technical paper recommends the development of: A sustainability taxonomy Technical guidance for disclosures as per TCFD The sectors’ competency and capacity (for both the financial and public sector) A climate risk benchmark scenario The sustainable finance landscape As indicated in previous sections of this paper, the finance sector should play a vital role in the climate response and thus the CRF is seen as a critical part of the process to address climate change and its associated financial risks in South Africa, including the provision of sustainable finance to enable the just transition to a low carbon economy. However, despite the establishment of the CRF and the aforementioned policies and initiatives, South Africa is yet to demonstrate an integrated and co-ordinated vision and response to climate change. By way of example, the Independent Resource Plan (IRP) 2019 contradicts the LEDS aim to achieve carbon neutrality by 2050, as the IRP 2019 includes coal in the energy mix post 2050 and allows coal-based power stations to be built until 2030 (Climate Action Tracker, n.d.). In addition, government seemingly wants to expand the country’s economic reliance on fossil fuels as the Department of Mineral Resources and Energy is seeking to promulgate the Upstream Petroleum Resources Bill (released in 2019), which aims to develop the country’s petrol and gas industries following discoveries of offshore gas fields (Reeler, 2021). Such a fragmented and misaligned approach increases the likelihood of a disorderly transition as well as heightened physical climate risk, where mitigation and adaptation strategies to minimise the socio-economic impacts may not be maximised. Conclusion South Africa has scope to enhance its climate response. But if South Africa does not adequately coordinate and address its carbon emission transition and build resilience to climate change, the country may be less competitive, as this may result in the marginalisation of the country on the global stage. To expand, as countries transition, so too will their consumption patterns and, thus, products, manufactured using fossil fuel energy or within countries that do not adhere to international carbon emission commitments, may be subjected to carbon tariffs when exported to compliant countries. South Africa should create an overarching transition strategy for climate change that describes a unified vision for South Africa’s decarbonisation, including the year when carbon neutrality is possible and under what supporting conditions (developed countries committed themselves to providing technological and funding support to developing countries for transition purposes in the PA). Most countries that have set a net-zero carbon goal intend to do so by 2050. Furthermore, South Africa needs a detailed roadmap which is more encompassing than the abovementioned LEDS. It should provide a detailed overview of the sectors and activities that contribute to climate change as well as the sectors and activities that are to be impacted by climate change. The roadmap should contain a detailed adaption plan for impacted sectors and a detailed mitigation strategy for contributing sectors. The mitigation strategy may be based on a study that details how best to transition these sectors and activities based on their economic and technological viability. For example, sectors may not be able to transition due to the lack of carbon neutral technology or the cost to implement such technology, whilst other sectors may require an electricity transition to enable their transition, such as manufacturing and electric vehicles. Therefore, as previously explored, the electricity sector represents a low-hanging fruit as it currently offers a viable transition pathway, which is attributed to the advances in renewable energy technology. The energy sector will be further shaped by advancements in green hydrogen technology as it progresses to a level where it will be a viable source of energy and where it, together with renewable energy, is expected to dominate energy sources globally. South Africa ought to capitalise on these opportunities given the country’s competitive advantage, due to its favourable climatic conditions, by producing renewable energy and green hydrogen. The roadmap should also leverage off work that is currently being undertaken, such as work by the CRF, the Climate Commission and the ‘Just Transitions Pathway Project’ that is being conducted by Business Unity South Africa and the National Business Initiative (National Business Initiative, 2020). The roadmap should combine the findings of all these studies into its strategy. In addition, the strategy should ensure that there is policy certainty, alignment and mainstreaming across all three spheres of government. There cannot be contradictory messaging from departments and all public programmes should align to the climate strategy, for example the department responsible for mining activities should not explore opportunities to increase the country’s coal mining capabilities, but rather it should align to the climate strategy and ensure that there is climate resilient mining infrastructure. This structured approach will allow for the management of an orderly transition, and ensure that there is a just transition, as it can pre-empt the sectors where there will be job losses, provide the necessary upskilling of human resources affected by the transition, and determine sectors where there will be job and economic opportunities. It is crucial for the roadmap to contain a cost analysis of the envisaged transition, as this will assist in allocating and assessing the finances required to undertake the transition, including the quantum of international funding support required. Government will not be able to solely finance the transition and thus would need to crowd in private and development finance by ensuring projects are commercially viable and sustainable. Where projects are not commercially viable and sustainable, government would need to access donor funding or employ innovative financing models, such as blended finance. This once again highlights the importance of finance in addressing climate change, but it also highlights the importance of a detailed climate change roadmap as it will provide credibility and certainty, and thus attract international investment and funding. This paper reinforces that both climate change and climate action will bring about significant change and risk. However, if carefully managed a transition to a low carbon economy can address the many climate change challenges and may even result in benefits that transcend the environment, as a just transition promotes social sustainability. Thus, an adequate climate response offers South Africa a chance to not only respond to climate change, but to also determine its own course of change. In doing so, it may result in solutions for many other challenges that the country is faced with such as the lack of energy security and the high degree of social inequality. References Arnell, N.W., Lowe, J.A., Challinor, A.J. and Osborn, T.J., 2019. Global and regional impacts of climate change at different levels of global temperature increase. Climatic Change, 155(3), pp.377-391. Arnoldi, M., 2020. Climate change will hit Africa much harder than other continents – panel. [online] Engineering News. Available at: https://www.engineeringnews.co.za/article/climate-change-will-hit-africa-much-harder-than-other-continents-panel-2020-01-30/rep_id:4136 [Accessed 6 April 2021]. Averchenkova, A., Gannon, K.E. and Curran, P., 2019. Governance of climate change policy: A case study of South Africa. Grantham Research Institute on Climate Change and the Environment Policy Report. Cambridge Institute for Sustainability Leadership (CISL). (2019). Transition risk framework: Managing the impacts of the low carbon transition on infrastructure investments UK: the Cambridge Institute for Sustainability Leadership. Chersich, M.F. and Wright, C.Y., 2019. Climate change adaptation in South Africa: a case study on the role of the health sector. Globalization and health, 15(1), pp.1-16. Climate Policy Initiative, 2019. Understanding the impact of a low carbon transition on South Africa. https://climatepolicyinitiative.org/wpcontent/uploads/2019/03/CPI-Energy-Finance-Understanding-the-impact-of-a-low-carbon-transitionon-South-Africa-March-2019.pdf Climate Risk Forum, 2020. Terms of Reference. Climateactiontracker.org. n.d. Climate Action Tracker. [online] Available at: https://climateactiontracker.org/countries/south-africa/ [Accessed 20 May 2021]. Dean, M. and Green, C., 2019. Key Takeaways from the IPCC Special Report on Climate Change and Land [online] UN Foundation Available at: https://unfoundation.org/blog/post/key-takeaways-from-the-ipcc-special-report-on-climate-change-and-land/ [Accessed 6 May 2021]. Department of Forestry, Fisheries and the Environment, 2020. Low Emissions Development Strategy 2050. p.58. Doh, J., Budhwar, P. and Wood, G., 2021. Long-term energy transitions and international business: Concepts, theory, methods, and a research agenda. Journal of International Business Studies,. Dosio, A., Mentaschi, L., Fischer, E.M. and Wyser, K., 2018. Extreme heat waves under 1.5 C and 2 C global warming. Environmental Research Letters, 13(5), p.054006. DW. 2019. What is the IPCC and what does it do?. [online] Available at: https://www.dw.com/en/what-is-the-ipcc-and-what-does-it-do/a-50552119 [Accessed 11 April 2021]. European Environment Agency. 2017. Energy and climate change. [online] Available at: https://www.eea.europa.eu/signals/signals-2017/articles/energy-and-climate-change [Accessed 7 April 2021]. Full Disclosure 5. 2021. The Truth About South African Banks’ and Companies’ Ability to Identify and Address Climate Risks. [online] Available at: https://fulldisclosure.cer.org.za/2019/ [Accessed 14 April 2021]. GreenCape, 2020. Water. Market Intelligence Report. [online] Cape Town: Available at: https://www.greencape.co.za/assets/WATER_MARKET_INTELLIGENCE_REPORT_19_3_20_WEB.pdf [Accessed 7 April 2021]. IPCC, 2007. Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Geneva, Switzerland. IPCC, 2014. Summary for Policymakers. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA IPCC, 2018. Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty. IPCC, 2019. Climate Change and Land: an IPCC special report on climate change, desertification, land degradation, sustainable land management, food security, and greenhouse gas fluxes in terrestrial ecosystems. IPCC, 2021. About IPCC. [online] Available at: [Accessed 5 May14 April 2021]. Just Transition Centre, 2017. Just Transition. [online] Just Transition Centre, p.3. Available at: https://www.oecd.org/environment/cc/g20-climate/collapsecontents/Just-Transition-Centre-report-just-transition.pdf [Accessed 20 April 2021]. Kathryn A. Miller, Ndoni Mcunu, Andreas Anhäuser, Aidan Farrow, David Santillo & Paul Johnston.Weathering the Storm: Extreme weather events and climate change in Africa. Greenpeace Research Laboratories Technical Report (Review) 04-2020 Markard, J., 2018. The next phase of the energy transition and its implications for research and policy. Nature Energy, 3(8), pp.628-633. Mbokodo, I., Bopape, M., Chikoore, H., Engelbrecht, F. and Nethengwe, N., 2020. Heatwaves in the Future Warmer Climate of South Africa. Atmosphere, 11(7), p.712. McSweeney, R. and Timperley, J., 2018. The Carbon Brief Profile: South Africa. [online] Carbon Brief. Available at: https://www.carbonbrief.org/the-carbon-brief-profile-south-africa [Accessed 14 April 2021]. National Business Initiative (2020). Launch of the NBI Just Transition Pathways Project. [online] Available at: https://www.nbi.org.za/luanch-of-the-nbi-just-transitions-pathways-project/ [Accessed 1 May 2021] National Treasury (2020). Financing a Sustainable Economy. Technical Paper Nhamo, L., Mathcaya, G., Mabhaudhi, T., Nhlengethwa, S., Nhemachena, C. and Mpandeli, S., 2019. Cereal Production Trends under Climate Change: Impacts and Adaptation Strategies in Southern Africa. Agriculture, 9(2), p.30. Oliver Wyman, 2019. Climate Change Managing a New Financial Risk. Oreskes, N., 2018. The scientific consensus on climate change: How do we know we’re not wrong? In Climate modelling (pp. 31-64). Palgrave Macmillan, Cham. Reeler, J., 2020. Five years after Paris Climate Agreement, why is SA’s response to climate crisis so lethargic?. Daily Maverick, [online] Available at: https://www.dailymaverick.co.za/article/2020-12-08-five-years-after-paris-climate-agreement-why-is-sas-response-to-climate-crisis-so-lethargic/ [Accessed 20 May 2021]. Stats SA, 2021a. Gross Domestic Product (GDP), 4th Quarter 2020. Pretoria: Statistics South Africa. Stats SA, 2021b. Quarterly Labour Force Survey, 4th Quarter 2020. Pretoria: Statistics South Africa. Swiss RE, 2021. The economics of climate change: no action not an option. Zurich: Swiss RE Management Ltd. Task Force on Climate-Related Financial Disclosures. 2021. About the Task Force on Climate-Related Financial Disclosures. [online] Available at: https://www.fsb-tcfd.org/about/ [Accessed 28 April 2021]. Turner, A., 2020. The costs of tackling climate change keep on falling. [online] financial Times. Available at: https://www.ft.com/content/33bb3714-93cf-4af5-9897-e5bf3b013cb7 [Accessed 22 April 2021]. UNEP Finance Initiative, 2021. Decarbonisation and Disruption. United Nations / Framework Convention on Climate Change (2015) Adoption of the Paris Agreement, 21st Conference of the Parties, Paris: United Nations. Vogel, C., 2019. Living with 1.5 and climate change – what may it take? World Economic Forum, 2019.The Speed of the Energy Transition Gradual or Rapid Change? World Economic Forum, 2021. The Global Risks Report. 16th Edition. World Wide Fund for Nature, 2018. Climate Risks: 1.5° vs 2° Global Warming. [image] Available at: https://www.wwf.org.uk/updates/our-warming-world-how-much-difference-will-half-degree-really-make [Accessed 18 May 2021]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 3/2021 Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. June 2021 Author: Sershnee Pillay Abstract This article aims to tackle the issue of financial literacy as a tool to emancipate the South African national economy from global debt and create self-sustaining stability. Drawing on the concept of financial inclusion and the impact that our citizens can have on stimulating the economy, together with models that have worked in international environments, this article highlights the benefits and ideology of financial literacy as a tool in our unique South African context, with recommendations for a way forward. The COVID climate While South Africa together with the rest of the world finds itself in the midst of a global pandemic, naturally all the focus has shifted towards healthcare and infrastructure to support vaccination efforts. This is without a doubt a necessary and vital focus area to alleviate the current situation, but an ancillary fact is that these efforts can only reach as far as our Rand does, and how far is that exactly? Statistics South Africa published data in March 2021 which showed that South Africa’s economy contracted by 7% last year (StatsSA, 2021). In a forecast by Minister Mboweni in the 2021 budget speech delivered in February this year, it was further evidenced that our economy is flailing. The reported budget deficit has ballooned to a record 14% of GDP, more than double the Minister’s 2020 forecast of 6.2% (Hogg, 2021). This points to a disturbing and undisputable fact: South Africa’s ability to care for its citizens is limited by our weak fiscal position. Economic growth has been a long-standing goal for the government and seemingly one which we consistently fall short of, for a multitude of reasons. The impact of which holds dire consequences for the very taxpayers who are caught in the negative cycle of a contracting economy and rising living costs, propelling individuals towards escalating debt to make ends meet. All the while, chasing the ever-elusive economic reprieve of GDP growth. As if this was not concerning enough, there is now yet another contender for our resources in the form of COVID-19. The resulting scenario being a bleak picture of continually perpetuating debt from both a micro- and macro-economic standpoint. South Africans are heavily in debt, be it looking at our own pockets or our collective debt as a nation. This has created the perfect storm for a tiered intervention, one which can address the issue of economic growth at a grassroots level as well as lead us on the sustainable road to recovery as a nation. Financial literacy - the key to economic empowerment To increase our fighting weight when it comes to facing the next potential pandemic or even how we manage our organic finances in a regular climate, the answer lies in strengthening our fiscus. The author is of the opinion that this can be achieved through financial literacy. Financial literacy refers to the ability to understand and apply different financial skills effectively, including personal financial management, budgeting, and saving. Financial literacy makes individuals become self-sufficient, so that financial stability can be accomplished (Biswas, 2021). This definition and elaboration outlines some of the key concepts which are vital to the success of such an intervention. For decades we have been trying to address and alleviate the symptoms facing our country and our poor finances. Financial literacy is the cure that addresses the cause of our financial ill health at multiple levels. Citing a comprehensive study completed by the Human Sciences Research Council on behalf of the Financial Services Board, ”the level of financial literacy among adult South Africans tends to be in the low to moderate range on average” (Discovery, 2018). This alarming fact may well provide the basis for us to understand why we as South Africans do not make informed choices with our finances and are drawn into more and more debt over time. The most unfortunate reality is that in most cases this is by and large due to our upbringing, having learned these behaviours from our parents and other role models while growing up. We have seen and emulated the same behaviours our family’s have followed, only to be, not-surprisingly, caught in the same financial quandary ourselves later in life. General wealth If we consider the way money is handled in a typical South African household, we see that most families are struggling to get through the month and manage their general living expenses. ‘The Household Affordability Index’ compiled by the Pietermaritzburg Economic Justice and Dignity Group (PMBEJD), showed that as of 2019, 56% of the South African population is living on less than R41 a day (BusinessTech, 2019). When faced with a low-income household in situations such as this, the thought of a concept such as financial literacy may present as an inaccessible ideal. Yet if we look into the history books, many a time we can trace back a family’s generational wealth to one particular individual who learned how to make his proverbial ‘R41’ grow into something substantially more valuable, thereby breaking his family’s generational cycle of poverty. The problem then is not a lack of means alone, but a lack of willingness to take a calculated risk for high reward and disciplined gratification, due to a lack of understanding the science of money. If the problem presents itself through bad learned behaviours, but we see in certain instances that the mould was broken, it seems apparent that the solution then is to provide enabling environments, skills and knowledge to equip young South Africans to break the bad money habits earlier on in their lives, thereby giving them the tools necessary to create their own wealth and even build and accumulate wealth for future generations. This is vitally important at this point in time, given the all-time high access to credit and the appeal of this in low-income families. Financial capability The island nation of New Zealand is home to the indigenous Māori population amongst a variety of other cultural and linguistic groups with various generationally learned and accepted financial behaviours, which for the purposes of this research, provides similarities to our own diverse South African melting pot of cultures. The Commission for Financial Capability (CFFC) in New Zealand has initiated the first financial literacy model which has been aligned to the New Zealand Curriculum and across Māori Medium Education (2020). The Programme, named Sorted in Schools, aims to tackle the issue of financial literacy, redressed as financial capability, to curb the spread of debt cycles and encourage better monetary decisions at various life stages, ultimately leading to financial security and a healthy retirement. With its inception and approval from the New Zealand government received in 2017, CFFC has been working on implementing the programme for secondary school students over a four-year period. As communicated by CFFC, “in March 2019, Sorted in Schools launched its first learning and teaching package for years 9-10 for the New Zealand Curriculum. The package is based on the theme of financial identity, and includes topics such as managing my money, debt, savings and goal setting”. “The launch of package two, financial sustainability, followed in June 2019. Financial sustainability includes topics such as KiwiSaver, retirement, insurance and investment.” The programme was adapted and developed for Māori Medium Education and since 2019 has also been rolled out in te reo Māori for years 9-10. At this stage in 2021, it is estimated that ‘Sorted in Schools’ will have rolled out eight teaching and learning packages across years 9-13. Four for the New Zealand Curriculum and four for Māori Medium Education in te reo Māori. The programme is supported by the New Zealand government, including the Ministry of Education, The New Zealand Qualifications Authority (NZQA), the Tertiary Education Commission and the Ministry of Business, Innovation and Employment (MBIE). Through the partnerships and support outlined above, the free, government funded programme has grown with such popularity that it has over 67% of secondary schools in New Zealand signed up to teach their students essential money skills with ‘Sorted in Schools’ (2020). A key driver is equitable access to financial capability, with a keen inclusion and consideration for the programme to reflect the cultural viewpoints of New Zealand’s diverse student population. Emphasis is placed on an increase in collaborative partnerships that support not only schools and students, but also their communities, parents, and families. Why should South Africa care about financial literacy? Looking to a first world nation such as New Zealand and their identification of the need for such skills having resulted in the initiation of a landmark programme such as ‘Sorted in Schools’ for their diverse populations’ needs and future security, one must surely see the value in taking action to adopt our own version of a financial literacy programme suited to our unique needs and future goals as a nation, in the hope of one day also holding first-world status. The question then is how do we duplicate or re-create this kind of programme on home soil? What are the tried-and-tested principles of financial literacy that can lead to positive money relationships and become a proponent for creating generational wealth for the vast majority of South Africans? In a paper on financial literacy and inclusive growth in the European Union, Sweden and Denmark were cited as the world’s best performers in financial literacy rankings – interestingly, the EU also houses below global average performers such as Romania and Portugal. What was highlighted by these findings was that even amongst other developed economies, low-income individuals, women, young people and less educated people tend to consistently underperform in literacy tests (Batsaikhan and Demertzis, 2018). Here too, we see a direct correlation between a stable economy like Denmark and a high financial literacy ranking. If we aim to place ourselves amongst the likes of New Zealand and Denmark with a strong and bolstered economy, we need to encourage initiatives which promote financial literacy activities in the South African context. Therefore, our current education system should be rejigged to include financial literacy, with a clear focus on the following areas: Nurturing a savings mindset/culture: In a popular personal finance quote by Warren Buffett, he said, “Do not save what is left after spending, but spend what is left after saving” (Doyle, 2020). The emphasis is placed on reserving your savings out of your earnings, then from the balance that is left, you should plan your expenses. This is an essential skill which benefits any age group and even a child learning this principle can take the lesson home into their communities and contribute to larger-scale financial literacy. The key is to begin promoting the change in behaviour and mindset at an early age, nurturing the positive shift before negative money behaviours are learnt and accepted as the norm. Debt rehabilitation: This is an important area of learning given the South African context which features elements such as “black tax”, for example, which these days is not wholly limited to race. Most South African families unwittingly and unintentionally create a debt cycle for their child even before the individual has had the chance to start building a security base for themselves. This may manifest in a number of ways, from elderly parents needing support, to siblings who lean on one another to make it through the month, and even in the form of student loans taken out since funding was not available for tertiary education, due to poor planning and ill-managed resources by the adult members of the family early on in the child’s life. Sharing the science of how to free oneself from the crippling reality of inherited debt could be life-changing for many young South Africans and again is a transferable skill which can alleviate a community’s pains, given the correct distribution. Tax efficiency: Teaching the value of understanding saving vehicles such as a Retirement Annuity can really provide the youth with the leg up that is needed when embarking upon the world of personal finances. This is a great example of an avenue that is easily accessible to all through saving even a minimal amount, which translates into big rewards later on and promotes tax savings and planning for the future, potentially unlocking generational wealth creation, if used correctly. Creation of cashflow/ assets/ wealth: Stemming from a basic practical skill like budgeting, individuals stand to benefit from understanding how to make their money work for them, in not just sustaining their lifestyle but improving it for themselves and their families. Most high net-worth individuals who came from impoverished backgrounds generally share a specific trait. They learnt that the science of money means that as your income increases, your lifestyle does not necessarily have to match that elevated paycheque. They applied the simple yet effective technique of maintaining their standard of living and constantly investing the increased income into more and more savings vehicles or investment vehicles, which allowed their money to grow. Over time, they in effect multiplied this effort, meaning that essentially their assets began generating further wealth for them. If this principle can be taught to children coming from low-income households at an early age, there is little doubt that they will have the discipline to make this model work to their benefit. The economic advantages and efficiencies brought about through financial literacy Notwithstanding the clear practical benefits already outlined above, the behavioural shift in the youth from low-income communities would have long-term benefits, such as providing the educational basis to allow for clear and well-informed decision-making regarding their finances. Ranging from establishing clear credit records through understanding the evils of debt cycles, to the removal of what would otherwise be a predisposition to accepting poor financial advice and falling prey to “get rich quick” schemes, the evidence points to the long-term benefit being a more stable financial future. The positives of financial literacy provide a means to free the youth from repeating the mistakes made by generations before them, who unfortunately did not have the same skills, tools, or resources to allow them such freedoms or choices. In a sense it creates a semblance of what could be seen as the beginnings of equality for previously disadvantaged households and families. The macro-economic effects of which would be experienced through a shift in the way our society handles, manages, and interprets their financial security. Behaviourally, it would mean a psychological overhaul of established norms such as cash-based transactions, moving to more evolved means such as digitals funds and electronic fund processing. The safety and security that comes with such systems allows for access to markets previously out of reach, thus opening up the world market for small local businesses. This, together with the technological advances arising in the financial sector, will allow for a trajectory of financial independence unheard of at this level of the economy. What does this mean for the South African economy? These concepts when applied in real-life situations provide an alternative to the current stark reality of many South African youth, who are faced with the prison of poverty and have accepted the life sentence. The introduction of a financial literacy programme has the potential to breathe life into the generation of township economies, allowing the youth of South Africa to create an enabling environment for themselves, which by extension will nourish and feed their own families and communities. The reach is infinite if these spider networks are created through financial literacy drives in schools and even community workshops, which take the message of financial literacy and practical lessons to achieve financial freedom into the communities that need it most. The implied benefits of a successful roll-out of such programmes will intensify entrepreneurship amongst the youth, resulting in job creation and thereby promoting the relevant upskilling needed to drive growth in the various economic industries and sectors. This in itself creates a “big bang” effect, which allows the national economy to flourish, given the spider network of township economies and their self-sustaining structures. How do we kick-start this programme? The recommendation is that, similar to New Zealand’s Commission for Financial Capacity, a public private partnership is needed between the South African government, the Department of Trade, Industry and Competition, the Department of Education and financial services institutions, with a focus on creating wealth through financial planning and financial interventions. The author is of the opinion that this kind of collaboration could provide the operational and technical framework needed for: Classification of the split of funding between the public and private sectors; Creation of the learning material / technical syllabus, with emphasis on catering to the multi-lingual population; Identification of communities which could benefit from the programme (ideally across the whole of SA); The phasing and timelines for roll-out; and The distribution model encompassing specific age groups, schools and their tiered needs and evolution within the programme. Financial literacy holds the key to economic liberation for the South African individual and the multiplied effect of such an intervention is the stimulus that will emancipate the South African economy and help stabilise us in the global economy. Through an inclusive economy which enables its citizens to create their own opportunities, our nation will thrive and become a self-sustaining, empowered country, which every South African will be proud to call home for generations to come. References Batsaikhan, U. Demertzis, M. 2018. Financial literacy and inclusive growth in the European Union, Bruegel Policy Contribution (8:6-9) [Online] Available at: https://www.bruegel.org/wp-content/uploads/2018/05/PC-08_2018.pdf [accessed 25 May 2021]. Biswas, S. 2021. What Is Financial Literacy? [Online] Available at: https://cleartax.in/g/terms,financial-literacy [accessed 28 May 2021]. Business Tech. 2019. More than half of South Africans are living on less than R41 a day. [Online] Available at: https://businesstech.co.za/news/lifestyle/345026/more-than-half-of-south-africans-are-living-on-less-than-r41-a-day/ [accessed 25 May 2021]. Commission for Financial Capability. 2020. Equipping young New Zealanders for their financial futures. [Online] Available at: https://cffc.govt.nz/sorted/sorted-in-schools/ [accessed 26 May 2021]. Discovery. 2018. The link between financial literacy and economic empowerment. [Online] Available at: https://www.discovery.co.za/investments/financial-literacy-and-economic-empowerment [accessed 26 May 2021]. Doyle, G. 2020. Do not save what is left after spending; instead spend what is left after saving. Warren Buffett. [Online] Available at: https://ca.rbcwealthmanagement.com/gerry.doyle/blog/2303780-Do-not-save-what-is-left-after-spending-instead-spend-what-is-left-after-saving----Warren-Buffett/#:~:text=Contact-,%E2%80%9CDo%20not%20save%20what%20is%20left%20after%20spending%3B%20instead%20spend,left%20after%20saving.%E2%80%9D%20Warren%20Buffett [accessed: 7 June 2021]. Hogg, A. 2021. Executive summary of 2021 National Budget Speech. [Online] Available at: https://www.biznews.com/budget/2021/02/24/budget-speech-summary [accessed 27 May 2021]. Sorted In Schools. 2020. [Online]. Available at: https://sortedinschools.org.nz/ [accessed 26 May 2021]. Statistics South Africa (Stats SA). 2021. GDP: Quantifying SA’s economic performance in 2020. [Online] Available at: http://www.statssa.gov.za/?p=14074 [accessed 27 May 2021]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Occasional paper 4/2021 Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town South Africa 8000 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members or Members. August 2021 Author: Isaac Matshego BCom Hons, MCom Introduction The development model pursued in South Africa is neither a laissez-faire approach nor a state-controlled and dominated economy. The United States Congressional Research Service (2020:12) characterises the South African government’s development model as a fusion of pragmatic support for private sector-led growth with state-centric economic planning. The role of the state in economic development is encapsulated in the National Development Plan 2030 (NDP 2030) (RSA, 2012), which envisions the achievement of a ‘capable and developmental state’. This model of development, which places public entities at the core of developmental initiatives, was conceptualised by Johnson (1982). Johnson contrasted the Japanese industrialisation model with the private sector-centred approach adopted by the United States and the United Kingdom. He described the Japanese model as the ‘capitalist developmental state’, or ‘developmental state’ for short. In this model, public entities assume the principal role in planning and executing industrialisation and overall development programmes. This development model was replicated, with considerable success, by most East Asian economies and was particularly successful in Singapore. Historically, South Africa has pursued a developmental state model. Before the democratic transition in 1994, state-owned enterprises (SOEs) played a leading role in electricity provision, steel production, road network management, and even the development of technology to refine coal to fuel. The privatisation programme that started in the late 1990s under the Growth, Employment and Redistribution Programme led to the steelmaker being sold off entirely to private investors on the one extreme, and the partial privatisation of the telecommunications operator, while Eskom and Transnet remained wholly state-owned at the other end of the extreme. Therefore, SOEs still play the leading role in electricity and water provision, as well as operating the rail network, among other functions. This article analyses the challenges encountered on the development front in South Africa, focusing on the shortcomings posed by poorly run SOEs in helping to achieve the goals of the NDP 2030. Firstly, a brief synopsis of the current state of the economy and shortfalls in infrastructure development are presented. A discussion of the weak state of local SOEs is then followed by proposed measures to stabilise and strengthen the management and governance of these entities. State of the economy The South African economy can be characterised as having failed to facilitate the achievement of short-term economic targets and longer-term development goals, that would in turn have raised incomes and uplifted the livelihoods of citizens. Job creation has hardly kept up with labour market growth. Moreover, per capita GDP, an aggregate measure of personal income trends, has contracted since 2015. Even before the onset of Covid-19, indicators of the state of the economy were significantly lagging behind the targets set in the NDP 2030. The economic growth rate was below 2% a year since 2014 and has furthermore declined through the years to a meagre 0.2% in 2019, averaging only 1.7% per year since 2010. Among others, the critical objective in the NDP 2030 is to boost employment. The goal was to reduce the unemployment rate to 14% by 2020 and to 6% by 2030. This target required an average annual economic growth rate of between 5% and 6% throughout the entire period of almost two decades to 2030. However, the 2020 target for the unemployment rate has been missed, and it is looking increasingly unlikely that the rate will be cut by more than half over the next nine years. In fact, the unemployment rate breached 30% in 2020 after it hovered at around 29% over the course of 2018 and 2019. It is also worth noting that these figures are based on the official, narrow definition of unemployment that counts only workers who are actively seeking employment. Once discouraged workers are included, the rate of unemployment is actually close to 40%. South Africa records a mixed performance in the assessment of the quality of infrastructure development. InfraCompass is an initiative of the Group of 20 that assesses the quality of infrastructure development among 81 countries that account for 93% of global economic activity. South Africa is the top performer in Africa in terms of infrastructure development but ranks poorly among the upper-middle-income countries in the survey. In terms of positive indicators, South Africa ranks in the top 10 among all countries in terms of the quality of financial markets’ infrastructure, 12th in planning and 23rd in procurement. However, the country performs poorly in governance (35th), regulatory frameworks (46th), funding capacity (47th), permits (51st) and activity (61st). In the InfraCompass 2020 survey, it did poorly in the value of closed public-private partnerships (PPP) infrastructure deals (scoring just 5.5 points out of 100), which totalled only 0.03% of GDP, compared with the upper-middle-income country average of 0.3%, and in terms of value of closed infrastructure deals with foreign equity ownership, scoring only 7.1 out of 100. These low scores suggest a preference for traditional infrastructure models that are constrained by the capacity of the government and the SOEs to raise debt financing for infrastructure projects. The state of South African SOEs The significance of SOEs in infrastructure development and financing and mobilising private sector funds is elucidated in Amman et al (2016). The paper highlights the role of infrastructure investment in Brazil by reviewing hindrances to infrastructure development, highlighting regulatory constraints and the burden posed by poorly managed SOEs. These entities play a similarly significant role in South Africa. Ehlers (2014) analyses the challenges related to raising infrastructure finance across the world. Ehlers (2014) and Amman et al (2016) surmise that developing economies with poor records of economic development, limited domestic long-term capital markets and sub-investment grade credit ratings incur high capital costs. This situation ultimately limits their ability to build infrastructure at the lowest cost possible. The difficulties engulfing local SOEs, which have resulted in their failure to be drivers of development in the country, are well documented. Most of the rot in the local SOEs appears to have set in over the past decade. Before then, the large SOEs paid dividends to the public treasury regularly. Eskom was a well-managed power utility that won global awards and had a better credit rating than the government in the early 2000s. Transnet secured concessions to operate rail ports in a few southern African countries. South African Airways (SAA) won several global awards, including for being the leading airline in Africa. The extent of the current troubles in these entities has been laid bare at the Commission into Allegations of State Capture, commonly known as the Zondo Commission. Poor management, political interference in operational matters, high debt, weak balance sheets and a shortage of critical skills afflict the entities at the centre of the government’s developmental agenda. These factors have led to poor investment outcomes by these SOEs. Eskom’s generation capacity expansion programme, which started more than a decade ago, has bequeathed to the country poorly built power stations that cost much more than budgeted. In the meantime, power supply shortages remain a burden on the economy. The collapse of SAA is attributable to political and board interference in operational matters, while Transnet acquired rolling stock that is not suitable for the local railway network. SOEs have been a significant burden on the fiscus. The National Treasury transferred a cumulative R232.3 billion to the large SOEs between 2008 and 2020, while another R42.2 billion has been budgeted for 2021 to 2024. The bailouts, most of which are for the power utility Eskom (Table 1), are contrary to the management guidelines set by the National Treasury. The policies dictate that SOEs should be well-managed entities with the capacity to raise developmental financing on the strength of their balance sheets (National Treasury, 2010:95). Public sector corruption and the mismanagement of SOEs inhibit the development of economies, particularly those that have pursued a developmental state model. Mauro, Medas and Fournier (2019) elucidate how corruption diminishes public trust by encouraging tax avoidance and even evasion, which often results in spending on social functions (education, health and even security) being lower in countries with a high prevalence of corruption. Corruption in public contracts ‘distorts the activities of the state and ultimately takes a toll on economic growth and the quality of people’s lives’, with the aggregate ‘cost of corruption being greater than the sum of lost money’ (Mauro, Medas and Fournier, 2019:26). Corruption and the mismanagement of SOEs are not confined to South Africa or developing economies. Japan’s own ‘arms deal’ in the 1970s had government officials accepting bribes in return for approving contracts for the purchase of US military craft (Mauro, Medas and Fournier, 2019). The positive news in the case of South African SOEs s is the excellent state of the development finance institutions (DFIs). The Industrial Development Corporation (IDC) plays a leading role in industrial financing in the country and facilitates the entry and expansion of previously disadvantaged industrialists. The Development Bank of Southern Africa (DBSA) has proven itself a world-class infrastructure financier in the domestic market and Southern African region. The Land Bank, despite its recent financial difficulties, also remains a significant partner for emerging farmers in particular. Other DFIs fill a critical financing void in ensuring funding for small businesses, an area of growth identified as crucial for job creation in the NDP 2030. The generally good state of the DFIs is additional proof that South Africa can have SOEs managed prudently and that they are facilitators of development in a capital-constrained economy. The significance of SOEs in South Africa extends beyond their socioeconomic objectives of transforming the economy to a more inclusive one. They are at the centre of the government infrastructure build programme, with most of the government’s infrastructure megaprojects being planned based on cooperation between national departments and SOEs. The National Treasury (2021:157) shows that the rollout of the government’s R791.2 billion infrastructure development programme over the fiscal years ending in March 2024 will be driven by SOEs, accounting for 37% of the spending. Stabilising and improving the management and governance of SOEs Stabilising SOEs is, therefore, one of the critical components for improving the developmental objectives. Mauro, Medas and Fournier (2019:29) conclude that curbing corruption ‘starts with domestic political will, continuous strengthening of institutions to promote integrity and accountability, and global cooperation’. Progress has been made in stabilising local SOEs in recent years. New boards and management have been appointed at Eskom and Transnet, among others. Leadership at the entities that have historically operated efficiently, such as the Airports Company of South Africa, has been strengthened. The restructuring of Eskom into three separate entities will help to make it more operationally efficient. The establishment of the Transnet National Ports Authority as an independent subsidiary of the Transnet Group has also been announced. Other positive developments include the establishment of the Infrastructure Fund. The fund is housed in the DBSA and will coordinate PPPs between public entities and the private sector. Additionally, ‘Operation Vulindlela’ aims to ensure the efficacy and coordination of infrastructure spending across the public sector. Some progress has therefore been achieved, but more is still to be done. Deloitte (2019) stresses critical tenets for the efficient and effective operation of SOEs: Clarity of purpose. SOEs play a significant role in extending economic and social services that the private sector cannot provide at reasonably affordable costs to consumers. In this case, the mandate of SOEs and the justification for their participation in such activity must be elucidated to avoid conflict with the role of the private sector. Management of SOEs. A clear separation of the roles of management, the board and the shareholder help to inhibit interference in operational matters by those appointed to fulfil fiduciary and oversight functions. The government, as the shareholder, must act boldly to address mismanagement where such measures are justifiable. Importance of capital management. In pursuing their developmental mandate, SOEs commit to strategic projects that are predominantly funded through long-term debt. Therefore, capital management should be divorced from the whims of those in power, who are often influenced by short-term political and pecuniary goals. Fiscal health. Prudent management of the SOEs that shields them from the influence of the executive arm of the government contributes to building well-run entities that become dividend payers to the fiscus instead of relying on bailouts. To this end, establishing an independent board to oversee policy implementation and enforce proper governance and management of SOEs is necessary. At the same time, the government department under which the SOE falls fulfils an additional governance role. Singapore established Temasek Holdings in 1974 as its SOE-holding company, and the company has been transformed into the country’s sovereign wealth fund with stakes in various industries across the globe. China has successfully housed its SOEs in the State-owned Assets Supervision and Administration Commission, which is accountable to the State Council (the Executive arm of government), since the 2000s. Implementing these measures will set local SOEs on a path to better financial positions and improve their contribution towards achieving the country’s developmental goals. Better managed SOEs with solid balance sheets will improve the credit ratings of these entities and enable them to raise capital in local and international markets under favourable terms. Conclusion South Africa continues to pursue a developmental state model. Consequently, SOEs are central to the government’s developmental plan. South Africa’s socioeconomic fabric is similar to Brazil’s, and the country is similarly highly dependent on SOEs for the rollout of national economic and social infrastructure. Therefore, the need to strengthen local SOEs and improve their contribution to development objectives is of paramount importance. Well-functioning SOEs will facilitate the NDP 2030 objectives of strong economic growth and the significant reduction of unemployment and poverty. Measures have already been implemented to improve the management and governance of key SOEs. The government has also put in place policies and entities to facilitate closer cooperation between the public and private entities involved in infrastructure development. The establishment of an overseeing authority of SOEs, in the form of a holding company made up of retired executives from both the public and the private sectors, will help to cushion them from political interference. The management of the SOEs must be aligned with the long-term objectives laid out in the NDP 2030. These steps will help lift confidence, facilitate greater cooperation in fixed investment by the public and private sectors, boost economic growth, ultimately stimulate job creation, ensure reliable energy supply, and eradicate logistical bottlenecks that constrain the country’s export capacity. Table 1: Summary of recapitalisations and bailouts of state-owned companies Source: National Treasury References Amman, E., Baer, W., Trebat, T. E Lora, J.V. 2016. Infrastructure and its role in Brazil’s development process, The Quarterly Review of Economics and Finance, 62:66−73. Congressional Research Service. 2020. South Africa: Current Issues, Economy, and U.S. Relations, Congressional Research Service, R45687, September. [Online] Available at: https://crsreports.congress.gov/product/pdf/R/R45687 [accessed: 27 July 2021]. Deloitte. 2019. Gearing for Growth: Restructuring SOEs for improved governance and performance, in Gearing South Africa for Growth. Johannesburg: Deloitte. Ehlers, T. 2014. Understanding the challenges for infrastructure finance, BIS Working Papers No 454. Basel: Bank for International Settlements. InfraCompass. N.d. Infrastructure Futures Report. [Online] Available at: https://infracompass.gihub.org/ [accessed: 27 July 2021]. Johnson, C. 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925 – 1975. Stanford: University Press. Mauro, P., Medas, P. & Fournier, J-M. 2019. The Cost of Corruption, in Finance and Development. Washington: International Monetary Fund. Republic of South Africa (RSA). 2012. National Development Plan 2030. [Online] Available at: https://www.gov.za/issues/national-development-plan-2030 [accessed: 27 July 2021]. National Treasury. 2010. Budget Review. [Online] Available at: http://www.treasury.gov.za/documents/national%20budget/2010/default.aspx [accessed: 27 July 2021]. National Treasury. 2021. Budget Review. [Online] Available at: http://www.treasury.gov.za/documents/national%20budget/2021/default.aspx [accessed: 27 July 2021]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8001 South Africa All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute. DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of the their respective Board or Council members. Developmental fiscal and monetary policy By Prof William Gumede Associate Professor, and former Convener, Political Economy, School of Governance, University of the Witwatersrand; and former Senior Associate and Programme Director, Africa Asia Centre, School of Oriental and African Studies (SOAS), University of London; and author of South Africa in BRICS (Tafelberg) Abstract Developing countries often pursue persistent deficit spending which, over time, balloons into large national debts and sees the countries pay the price through rising levels of poverty, underdevelopment and financial instability. The result is that these countries pay the price in rising levels of poverty, underdevelopment and financial instability. This article examines the phenomena by considering lessons that can be learnt from selected international jurisdictions. It considers Japan, where the central bank adopted a strategy of reducing the volatility in the country’s currencies by building up large international reserves; Brazil, who in contrast prioritised growth rates to maintain support, which led to runaway inflation and budget deficits; Sweden, who maintained prudent monetary and fiscal policies to finance the welfare state; and Botswana, who’s prudent macroeconomic management reflects an African post-colonial exception. The lesson for the South African policy makers is that monetary policy is about balancing the competing objectives of economic policy: price stability, exchange rate stability and free capital mobility. Introduction Prudent macro-economic policy, especially the management of monetary, fiscal and public debt is more crucial in developing countries wanting to catch up to or surpass industrial countries in terms of development. In the postcolonial period many developing countries who genuinely pushed broad-based development fell short when they neglected fiscal and monetary discipline, undoing their development efforts. Unpacking the terms: “Fiscal policy” relates to the policy decisions on the levels of government spending, taxation and borrowing. Whereas “monetary policy” is the coordination of the supply of money in the economy to influence inflation, the value of the currency and employment. Many developing countries put little focus on curbing inflation, keeping exchange rates stable or managing public debt levels. Furthermore, they often allow large budget deficits, where expenses exceed revenue by huge margins. Milton Keynes in his General Theory made an argument for “functional finance”, the use of deficit spending to overcome “cyclical fluctuations in the economy” (Keynes, 1936). However, many developing countries by the 196os onwards pursued persistent deficit spending which over time ballooned into large national debts (Emenike et al, 2017). For example, by the 1960s many African governments had, on average, budget deficits of 30% of GDP. The Nigerian economist Bade Onimode writes that many African countries have, since independence from colonialism, experienced a “chronic balance of payments crisis” (Onimode, 2000). The economists John Healy and Mark Robinson say: “There was a fairly common pattern to African economic policy in the 1970s and early 1980s which included the following recurring features: the persistence of high and volatile public sector deficits, often financed from the banking system; failure to stabilise inflation, especially in the face of terms-of-trade shocks; lack of clear prioritisation of public expenditure and weak economic appraisal of investment together with overvalued exchange rates” (Healy & Robinson, 1992). Chronic balance of payments crises undermine development Many developing countries also mismanaged their balance of payments situations (Ocampo, 2016). The balance of payments being the record of all transactions between the residents, firms and government of a country and the rest of the world. There are three parts to this record: a current account, a capital account and an official financing or balancing account. The current account is the balance of trade, which includes both government and private sector payments and the earnings on foreign investments excluding payments made to foreign investors and cash transfers. Whereas the capital account is sales and transfers of contracts, ownership of fixed assets and patents. The financial account is the transfers of financial assets and liabilities between residents and non-residents, including banking flows – hot money, portfolio flows – debt and equity and foreign investment flows, and official reserves. Developing countries often struggle to manage their budget deficits, current accounts and their exchange rates. Setting developmental interest rates – which promote the outcomes set out in the national industrial or developmental plan, keeping inflation manageable and setting sustainable exchange rates are crucial for development. Moreover, public spending is often not disciplined and in many cases developing countries do not use taxes towards increased development. The result is that they pay the price in rising levels of poverty, underdevelopment and financial instability. Therefore, the challenge for many developing countries is “balancing the competing objectives of economic policy: price stability, exchange rate stability and free capital mobility” (Nassif et al, 2011; Williamson, 2008; UNCTAD, 2011; Rodrik, 2008). Furthermore, the Brazilian economist Luiz Carlos Bresser-Pereira points out how “the experience of the East Asian countries has demonstrated, keeping the budget deficit as well as the current account under control is a necessary condition for keeping the macroeconomic prices right and the macroeconomic aggregates balanced” (Bresser-Pereira, 2017). Naturally then, when developing countries pursue expansionary fiscal policies – whereby they increase public spending to stimulate aggregate demand in the economy – ill-discipline results in unchecked government spending, which may cause harm including rising inflation and crowding out private investment. Developing countries often increase public spending to levels where they end up increasing the budget deficits. The government spends more than it collects in revenue and grants, thereby running a budget deficit, resulting in macroeconomic imbalances. Unless the budget deficit is covered by private savings, it creates a current-account deficit withthe rest of the world, obliging the country to borrow to finance said deficit. If the government cannot finance the deficit by borrowing, pressure builds to finance it through depreciation of the national currency. Depreciation then leads to greater exports and, hence,reduces the current-account deficit. The problem with this is, firstly, that many developing countries export single commodities, with prices dependent on demand in buying countries. Secondly, depreciation may lead to inflation, which cuts purchasing power. Another issue is that developing countries often hold their currency at too high a rate for the state of the economy, meaning the country’s exports are more expensive than its imports. And during periods of low growth, an overvalued currency is bad for the economy. Brazil, for example, experienced overvaluation of its currency for most of the mid-1990s period. It has worsened now because many industrial country investors move their money to developing countries when interest rates in those countries are low, to seek higher investment returns. Then, when interest rates increase again or during times of economic and political uncertainty within those countries, the investors move their money out to avoid losses. Post-Second World War macroeconomic management success in Japan For a brief period following the Second World War, during the occupation of the country, the operations of the Bank of Japan (BOJ), the central bank, was suspended and a special military currency used in the country. The bank was restructured in 1949 and began to play its central developmental role in Japan’s post-war economic miracle. The BOJ operated with reasonable autonomy during the post-war period, although critics throughout have criticised it for being too independent (Horiuchi, 1993). Many East Asian developmental states have been successful in reducing the volatility in their currencies by building up large international reserves (Aizenman & Ito, 2014; Rodrik, 2008; UNCTAD, 2011). Many of these states, such as South Korea, Malaysia and Singapore, pegged their currencies to a basket of currencies. In the post-war period, Japan focused its monetary policy on promoting “export- and investments-led growth”, focussing determinedly on ever-diversified exports. A pillar of the BOJ’s monetary policy was called “window guidance”, in which the central bank gives credit quotas to commercial banks, which they must channel to specific industries prioritised by government as growth sectors (Cargill, Hutchison and Itō 1997; Werner 2005). The BOJ would directly communicate the industries that should get quicker loans, thereby directly influencing the activities of commercial banks. Japan’s Ministry of International Trade and Industry (MITI) was one of the key institutions in setting fiscal policy. MITI managed the allocations of foreign exchange to companies, with which they bought raw materials or equipment. Government subsidies to prioritised industries were also crucial to expand industrialisation. To secure foreign exchange, companies had to, in return, support the government’s export and investment-led strategy (Pham, 2017). Many Asian economies, more recently including China, have copied the Japanese monetary policy of “window guidance” as “an effective tool to control the total volume of credit to financial institutions” and to “regulate the growth rates of money and investment spending more easily” (Pham, 2017). In the two decades before the collapse, in 1971, of the Bretton Woods System of linking currencies to the value of gold, the Japanese currency was fixed at 360 yen to the US dollar. The collapse of the Bretton Woods System caused the Japanese currency to appreciate sharply. Japan then devaluated its currency, and in 1973, set a floating exchange rate with the mission to stabilise the exchange rate. In the immediate post-war period, Japan’s external current account had large deficits which were financed by US aid. The country also experienced hyper-inflation. “Monetary policy faced difficulty in pursuing two contradictory purposes at the same time, namely stimulating investments to restore supply capacity and depressing the hyper-inflation” (Suzuki, 2017). During the same period, Japan rolled out a massive infrastructure rehabilitation and expansion programme. In addition, the government had to make large payments in reparations for damage it inflicted during the war – both of which were financed by government bonds, underwritten by the Bank of Japan (BOJ). The government formed the Reconstruction Public Finance Corporation in 1947, underwritten by the BOJ, to issue bonds to state-owned entities for industrial rebuilding. Private businesses also expanded dramatically, borrowing from private banks to finance their expansion. The BOJ provided lending to private banks who in turn provided lending to private firms. Importantly, the country’s savings were channelled into investment projects (Hamada & Kasuya, 1992). The government provided subsidies to crucial sectors, called “priority production system” (Hamada & Kasuya, 1992). By 1948, such subsidies came to 24% of the country’s general account (Hamada & Kasuya, 1992). These subsidies were financed by the Bank of Japan and also increased inflation. The Japanese government had a Trade Financial Special Account which sold crucial imports at a much lower price than the international prices. This was subsidised by the BOJ. This also caused additional inflation. There were strong arguments for deficit budgeting – which was rejected In 1946, then Fiscal Minister Tanzan Ishibashi, in his budget speech, basing his argument on Keynes General Theory, argued: “In order to achieve the goal of resuming production there is no harm if government deficits occur. Since both capital stock and labour force were clearly underemployed, the problem was simply that bottleneck factors such as the lack of raw materials from overseas stood in the way” (Hamada & Kasuya, 1992). The government until the 1950s maintained a balanced of payments equilibrium, maintaining similar levels of investments abroad to foreign investment locally. During this period, infant industries became competitive. Japan, from the 195os to the 1970s, undervalued its currency in relation to the US dollar. Furthermore, throughout the post-Second World War period, Japan undervalued its currency to encourage export manufacturing. Then, from the 1970s, the focus became currency stability (Green, 1990). The government regularly intervened in the market to either buy or sell dollars to gain that stability. Furthermore, the government regulated capital flows (Hutchison, 1984; Suzuki, 1986). Japan’s current account was in surplus since 1968. The country accumulated large foreign reserves and the country’s citizens were encouraged to save. Until 1965, the Japanese government implemented a balanced budget principal. Then, in 1965, the Japanese economy experienced a recession. The government for the first time introduced an expansionary fiscal policy, financing a budget deficit with a national bond (Takagi, 2015). The government maintained price stability – targeting inflation at 5.5% per year. The export growth focus provided a surplus in the country’s balance of payments with the world, and foreign investment was introduced selectively in targeted industries. However, capital liberalisation, whereby foreign companies could enter unencumbered, was only introduced in 1973. From 1966 to 1973, the government financed a deficit on the capital accounts, through the issuing of a national construction bond. The government also built up foreign exchange reserves which, by the early 1990s, totalled over US$100bn – a record amount for the IMF (International Monetary Fund, N.d.). During the period leading up to 1990, Japan’s currency was knocked by three international crises. In 1971, the US withdrew from the Bretton Woods System which pegged the US dollar to the value of gold. This caused an appreciation in the yen, which had been under a fixed rate to the value of the US dollar. The government responded by depreciating the currency and adopting a free-floating currency exchange policy. During the first oil shock, in 1972, Japan’s balance of payments accounts declined. This put pressure on the value of the currency, and so, the government restricted capital outflows (Green, 1990). The first oil crisis in 1973 exposed the deficit financing through national bonds. All throughout Japan’s high growth period, the government used monetary policy as a counter cyclical tool to encourage growth, rather than fiscal policy (Funabashi, 1988; Ito, 1987 and 2003; Takagi, 2015). Another shock to the Japanese yen was the Plaza Accord and Louvre Accord of 1985-1987, which again appreciated the value of the dollar. Between 1980 and 1985, there was a dramatic appreciation of the dollar against the currencies of the major industrial countries – almost 50% against the Japanese yen. All as a result of the US Federal Reserve System fighting stagflation, which hounded the US dollar in the 1970s (Frankel, 2015). However, the intervention went belly-up when the dollar became overvalued (US Department of Treasury, 1983). In 1985 the Ministers of Finance and central bank Governors of the G5 countries – the US, Japan, Germany, France and the United Kingdom – signed the Plaza Accord, which agreed on a planned devaluation of the dollar, with the other countries coordinating their activities with that of the US central bank. By the time of the Plaza Accord the US economy was in recession, its current-account deficit was at 3.5% of GP and its exporters uncompetitive. The intervention helped to narrow the US trade deficit with major industrial countries. By 1987, the devaluation of the US dollar had now decreased the value of the dollar against the yen by 51%, and Japan had restrictions on imports. The appreciation of the yen forced the country to respond with an expansionary monetary policy. It increased the money supply, lowered interest rates and decreased the value of the yen – to increase aggregate demand, the total use of goods and services in the economy. However, this in turn caused an asset price bubble, deflation and low growth. The combination of these would become known in Japan as the Lost Decade (Obstfeld, 1990). In 1987, the US industrial country partners signed the Louvre Accord to stop the devaluation of the dollar. In a coordinated approach, the US would in 1988, reduce its deficit to 2.3% of GDP, cut interest rates and cut government spending by 1% (US Department of Treasury, 1983; Krugman, 1991). All four of Japan, Germany, France and the UK would cut interest rates, reduce public spending and taxes. Japan would reduce its trade surplus. Throughout the period, the Japanese government emphasised currency and price stability. The government maintained a low interest rate policy throughout the high growth phase and contained inflation. It also eschewed used tax increases to finance budgets and channeled savings to support targeted export manufacturing, infrastructure and housing. Lessons from Japan Independent central bank, the Bank of Japan (BOJ) Developmental monetary policy prioritised export- and investment-led growth Ministry of International Trade and Industry (MITI) set fiscal policy Monetary and fiscal aligned to prioritise export and investment-led growth Throughout Japan’s post-Second World War high growth period, monetary policy was used as a counter cyclical tool to encourage growth, rather than fiscal policy The BOJ provided lending to private banks who in turn provided lending to private firms Throughout the post-Second World War period, Japan undervalued its currency to encourage export manufacturing The government regulated capital flows Until 1965, the Japanese government implemented a balanced budget principle Only in 1965, when the economy was in recession, an expansionary fiscal policy was introduced, financing a budget deficit with a national bond The government maintained price stability throughout the postwar period, targeting inflation at 5.5% per year Capital liberalisation, whereby foreign companies could enter unencumbered, was only introduced in 1973 From the 1970s currency stability became the focus Persistent balance of payment crises undermined Brazil's post-Second World War development In Brazil, the military took power in 1964 and ruled until 1985. The military governments prioritized high growth rates to maintain support. The high initial growth rates – from 1960 to 1980, came through state investments in infrastructure, telecommunications, mining and atomic energy. It was dubbed the Brazilian Miracle. The high economic growth rates came with high inflation and large budget deficits. From 1981 to 1994, growth slowed down, and was accompanied with hyperinflation and large deficits (Ayres et al, 2018). Throughout the period from 1960 to 1994, Brazil’s central bank was not independent (Ayres et al, 2018). Brazil fell into a balance of payments crisis in early 1970s, as global demand for its commodities slumped because of slowdowns in industrial country economies buying its commodities (Ayres et al, 2018). The government pursued import substitution industrialisation, economic diversification and self-sufficiency. The import of products that were already locally produced was restricted. The costs of this conversion were paid by foreign loans. The plan was that over time a structure in the economy would materialise, whereby more local products would be produced for export, and the foreign earnings would pay for the accumulated debt. The Brazil government ran a large current account deficit. In 1973, the deficit was US$1.7bn and by 1980 it was US$12.8bn. Foreign debt became more expensive to repay because of higher interest rates charged by lenders. In the 1960s Brazil introduced what it called “indexation”, in which it tried to align prices, interest rates and wages, to past inflation levels, to keep inflation constant across the economy. This, in the absence of firm monetary policy, actually increased inflation (Ayres et al, 2018). By the mid-60s until the early 1970s, the government increased taxes to plug deficit holes, including introducing value added tax (VAT). Until 1964, Brazil had no official central bank. The Treasury implemented monetary policy through the Bank of Brazil, which was a state-owned bank, while at the same time being a commercial bank (Ayres et al, 2018). The government had in 1945 established a Superintendency of Money and Credit (SUMOC) committee, with powers over monetary policy. The Bank of Brazil had majority seats on the SUMOC, giving it a controlling say over monetary policy. In 1964, the government created the Central Bank of Brazil (CBB). At the same time the government restructured the SUMOC into a National Monetary Council (CMN), which oversaw the central bank. The Central Bank of Brazil has been nominally independent, however, in 1994 the bank was given formal independence, and put fully in charge of monetary policy (Ayres et al, 2018). By 1983 Brazil had the largest foreign debt of any country in the world – standing at US$92bn. The government responded by hiking interest rates to record levels, and Brazil’s terms of trade – the ratio between a country’s export prices and import prices – deteriorated by 10% between 1971 and 1979. The 1973 oil crisis, in which the price of oil spiked, hit the economy badly. In addition, the US ran up large budget deficits in the early 1970s, of US$200bn annually, which forced its main trading partners to increase interest rates. Developing countries such as Brazil with very high foreign debts struggled to pay interest on their debts because of the higher interest premiums. Worse, Brazil imported large numbers of products, from machinery, components and raw materials. Efforts to diversify local production of at least consumer goods were pedestrian. The government also repeatedly devaluated the currency, which increased inflation. Low growth, high inflation and high interest rates caused the collapse of many local companies. The second oil crisis in 1979 gave the Brazilian economy another knock, increasing the foreign debt, as interests on repayments of foreign loans rose further, lowering the terms of trade and worsening the balance of payments crisis. Until then, the early 1980s, the government maintained its strategy to lift growth. However, as the debt accumulated, the government changed tack to foster trade surpluses, by pushing exports, and using the income to pay off debt. The 1982 Mexican debt crisis had a further knock-on effect on the Brazilian economy. The International Monetary Fund and Western commercial banks put pressure on the government to introduce a structural adjustment programme, adopted by the country’s legislature in 1983, which included reducing inflation, cutting wage increases and privatisation of state-owned entities. In 1994, Fernando Henrique Cardoso was elected president, and introduced a stabilisation programme, the Real Plan, with a new currency. Monetary policy was tightened, the new currency was anchored to the US dollar, and inflation was reigned in. Lessons from Brazil Military took power in 1964, ruled until 1985 In 1945 a Superintendency of Money and Credit committee was established, with powers over monetary policy Until 1964, Brazil had no official central bank In 1964, the government created the Central Bank of Brazil Throughout 1960 to 1994, Brazil’s central bank was not independent Treasury implemented monetary policy through the Bank of Brazil, a state-owned bank, operating as a commercial bank Import substitution industrialisation strategy, a trade and economic policy focusing on replacing foreign imports with domestic production The military governments prioritised high growth rates to maintain support Initial growth rates – from 1960 to 1980 - came through state investments in infrastructure, telecommunications, mining and atomic energy. It was dubbed the Brazilian Miracle. The high economic growth rates came with high inflation and large budget deficits. From 1981 to 1994, growth slowed, accompanied with hyperinflation and even larger deficits Overvalued currency in early 1970s undermined export 1970s oil crises caused a trade imbalance Heavy borrowing increased the current-account deficit Current account deficit financed through foreign debt Expected import substitution industrialisation with exports rising over time, which was anticipated to result in trade surpluses, failed In 1983, the International Monetary Fund and Western commercial banks pressured Brazil into a structural adjustment programme, resulting in the reduction of inflation, the cutting of wage increases and the privatisation of state-owned entities. Prudent macroeconomic management under Sweden's Rehn-Meidner economic model Left of centre governments in industrial countries – such as Sweden, which was governed by the Social Democratic Party – maintained prudent monetary and fiscal policies to finance the welfare state (Braconier & Steinar, 1999; Calmfors, 1993; Calmfors et al, 2001; Erlandsen & Lundsgaard, 2007; Forslund and Krueger, 1997). In 1951, Swedish trade union economists Gosta Rehn and Rudolf Meidner, at the Swedish Trade Union Congress, designed what would be called the Rehn-Meidner economic model (Rehn, 1952, 1969, 1977, 1982 and 1987; Meidner, 1952 and 1988), which was based on high growth, low inflation, full employment and income equality (The Swedish Confederation of Trade Unions [LO], 1951). The model was based on a “third away” between Keynesian, central planning and neoclassical economics. After the Second World War until the end of the 1970s, the Swedish model was “able to combine a relatively fast rate of GDP growth with full employment, considerable economic security, and a rather equalitarian distribution of income” (Lindbeck, 1997: 1273). The Swedish economist, Assar Lindbeck, who chaired what became the Lindbeck Commission - an inquiry in 1993 into the reasons for Sweden’s economic decline in the late 1980s and early 1990s - listed seven crucial institutional elements of the Swedish “third way” model. These are according to Lindbeck (1997: 1274): “ (a) large public-sector spending and high taxes; (b) a stabilisation policy, to foster full employment, with an active labour market policy as a tool; (c) government intervention to influence aggregate saving, credit supply, and investment, as well as their allocation, by public sector saving, capital market regulations, taxes, and subsidies; (d) strong central government control of local governments; (e) centralised wage bargaining on a national level; and (f) centralised decision making in the private sector, where a small group of large firms dominates on the production side and where the holdings of financial assets, including shares, are highly concentrated in a few large institutions, banks, insurance companies, and investment firms; with (g) the centralised private sector system being combined with a strong free trade regime.” At the heart of the Swedish model was a growth policy, based on disciplined macroeconomics, with price stability, but still advocating for fair wages, through using an active labour market policy. Immediately after the Second World War, a number of Western European Social Democratic Parties implemented Keynesian policies, which were “counter-cyclical” fiscal policies, by reducing spending and raising taxes during boom times, and increasing spending and reducing taxes during downtimes (Beveridge, 1944). These governments pursued expansive macroeconomic policies. They used expansionary fiscal policy by using their budgets to increase spending or cut taxes; and expansionary monetary policy through expanding the money supply through lowering reserve requirements, lowering interest rates and lowering the currency. In the Swedish model, applied during the country’s golden growth period from the late 1940s to the late 1970s, the “expansionary macroeconomic policy measures are combined with selective fiscal measures and with regulation to conquer inflation” (Erixon, 2010). For example, the Swedish Social Democratic Party reduced possible rising inflation, current deficits and overvaluation of the currency that would result from expansionary policy, by “regulation, including informal incomes policy, and by extraordinary fiscal measures” to “moderate price and wage increases in the most overheated industries” (Erixon, 2010). The Swedish central bank, the Riksbank, had both functional and institutional independence, and was one of the agencies that were directly reporting to Parliament (Commission of Inquiry, 2007). The country has a National Debt Office, a public entity reporting to Parliament, which ensures that government borrows prudently. The government used restrictive fiscal policy, particularly indirect taxes to hold down inflation. The country introduced consumption taxes – taxing people when they spend money on goods and services, rather than on income or profits, and devaluated the currency in 1949. “Sweden met actual and expected deficits in the current account with a devaluation of the krona, not with deflationary macroeconomic policy measures” (Erixon, 2010). Sweden in the 1950s to the 1970s began to coordinate wage bargaining, to protect weak industries and to manage inflation (Nickell et al, 2005; Johannesson, 1981). Although the model envisaged wage increases linked to productivity, and wage restraint during tough times, underproductive firms would necessarily go under (Rehn, 1982). However, the argument was that new industries would be created simultaneously through investments in new more market-relevant industries, active labour policies, including continuous industrially relevant training and social welfare (Gowan & Viktorsson, 2017). Wages are determined centrally through collective bargaining. This often resulted in uncompetitive and low-productivity firms, that were unable to afford the agreed wages, to collapse. More productive firms secured comparatively lower wages “than they would have to pay in a ‘free’ labour market” (Ryner, 2003). In the Swedish model, during recessions, a countercyclical fiscal policy, reducing spending and raising taxes during boom times, and increasing spending and reducing taxes during downtimes, was still part of the macroeconomic arsenal. In the model, during a recession the temporary use of budget deficits, moderating wage increases and selective employment subsidies in weaker industries are practical options. To prevent inflation, the government used prudent public finance management. It pursued strict fiscal policy, focusing on generating budget surpluses. Uncompetitive companies with high costs and poor price structures struggled, whereas highly productive companies, with favourable cost and price structures were advantaged (Erixon, 2010). Through effective coordination of the economy, the government continually shifted employees from low-growth to high-growth sectors (Blanchflower et al, 1995). The government managed an active labour market policy: comprehensive industrial skills, training, education, life-long adult-education programmes to cushion the “losers” (Erixon, 2010). Full employment was seen as unemployment below 3%. A core part of the Swedish welfare state was universal education, health and pensions. The model also has a high degree of gender equality, including in the labour market. Private property rights and the freedom of companies to trade internationally were pillars of the model (Bergh, 2017). Progressive taxation, including that on property, funded many of the welfare programmes (Lindbeck, 1997). During the 1950s to the 1970s, Sweden extraordinarily for the country’s size, had large global engineering firms – SAAB, Ericsson, SKG, Electrolux, Volvo and others – which by the 1960s had accounted for 20% of the country’s total exports. In the early 1970s there were criticisms that wage constraints in profitable firms meant that massive profits went to a small circle of private company shareholders and owners. The Swedish Trade Union Confederation (LO), ally of the Social Democratic Party, proposed the establishment of a worker controlled, “wage-earner” funds, which would be funded through taxes. The proposal would give trade unions a direct say in the investment decisions of listed companies. Organised business saw it as a “collectivism of corporate ownership” (Gylfason, 2020). The Swedish government established commission in 1973, proposing employees become shareholders over time. This would be done through setting up sector-based wage-earner funds which would get a proportion of company profits through shares. These funds would be managed by employees. Proportions of the proceeds of the wage-earner funds would be reinvested in their companies, used to finance research and specialist management training for employees, to provide them with the skills to run businesses. However, the wage-earner fund proposals were not implemented – as it faced opposition from employer organisations (Gowan & Viktorsson, 2017). More importantly, the disagreement over the wage earner proposals would collapse the famous Swedish tripartite consensus model (Lindbeck, 1997). Sweden was also hit by the 1973 and 1979 oil crises. The Bretton Woods System of fixed exchange rates, with the US dollar’s value fixed to gold, was ended in 1971, essentially collapsing the fixed currency system (International Monetary Fund, 1972-810). In addition, Sweden struggled in the new conditions to stabilise the value of its currency. The rise of Japan and East Asian developmental states now also provided competition to Swedish global manufacturing. Furthermore, the global recessions sparked by the oil and currency crises meant diminished markets for Swedish products – the Swedish economy faced headwinds (Erixon, 2010). The Swedish Social Democratic Party lost power in the 1976 elections; and only returned to power in 1982. A limited form of wage-earner funds was established in 1984, funded through “excess” profit tax over a 7-year period, rather than through acquiring company shares (Gowan & Viktorsson, 2017). It was not employee managed. The Swedish Social Democratic Party lost power again in 1991, and the funds were privatised by the new government post-1992, after the Social Democratic Party were out of power again. In the post 1970s oil crisis period, Sweden, whether governed by the Social Democratic Party, or the centre-right coalitions that took power for periods thereafter, struggled to maintain Sweden as an open, competitive economy. And amid the global economic crises, together with increased competition from the rising East Asian economies, they battled to maintain the social benefits of the welfare state, (Bergh, 2017). Until the early 1990s, successive governments tried to maintain the economy’s competitiveness through currency devaluations (Lindbeck, 1997). The policy of high marginal taxes to fund the welfare system, saw many high net individuals seeking ways to avoid tax; and at the same time generous welfare benefits discouraged many who could work from seeking work (Bergh, 2017). The support to companies to protect jobs often led to the cushioning of uncompetitive businesses. Rather than innovate to stay competitive, many companies sought government bailouts. Furthermore, wages increasingly rose above productivity increases, causing rising inflation. “Repeated currency devaluations led to both a lower living standard and investment-sapping uncertainty” (Bergh, 2017). Between 1991 and 1993, struck by the most severe financial crisis since Great Depression that hit several Scandinavian countries, the Swedish government instituted an inquiry into why the successful post-war model had faltered after three decades and how it could be refined for new times. Both the government and opposition parties accepted the criticisms and advice of the report and implemented its key proposals to modernise the Swedish welfare state (Gylfason, 2020). Lessons from Sweden “Third away” between Keynesian central planning and neoclassical economics Growth policy, based on disciplined macroeconomics, with price stability, but still advocating for fair wages, using an active labour market policy Expansionary macroeconomic policy combined with selective focused fiscal measures Combat possible rising inflation, current deficits and overvaluation of the currency that result from expansionary policy Through regulation, including informal incomes policy, fiscal measures taken to moderate price and wage increases Focused on generating budget surpluses Restrictive fiscal policy, using indirect taxes to lower inflation Dealt with expected deficits in the current account through a devaluation of the currency Actively coordinated wage bargaining to protect weak industries and to manage inflation During recessions, a countercyclical fiscal policy, reducing spending and raising taxes during boom times The temporary use of budget deficits during recessions, moderating wage increases and practical options such as selective employment subsidies in weaker industries Increasing spending and reducing taxes during downtimes part of the macroeconomic arsenal To prevent inflation, the government used prudent public finance management Central bank, the Riksbank, has been relatively independent and one of the agencies reporting directly to Parliament Botswana's prudent macroeconomic management is an African post-colonial exception Botswana is one of the few African countries since colonialism to pursue prudent macro-economic policy, especially the management of monetary, fiscal and public debt (Maipose, 2008). When Botswana became independent in 1966 it was among the poorest countries in the world, but through prudent economic management, the country achieved real GDP growth averaging 9 percent between 1965/66 and 2005/06. The country is now an upper middle-income country (Rodrik, 2003). Immediately after independence, Botswana borrowed from abroad, like many African countries (Maipose, 2008). However, the foreign loans were used for infrastructure, unlike in most African countries in the immediately post-colonial period. Botswana also immediately went searching for foreign investment, specifically to develop new industrial sectors (Maipose, 2008). Many African countries immediately after independence discouraged the entry of private investment, often nationalising or indigenising, replacing the owners, managers and employees with locals, frequently members of the governing party, not necessarily with the experience to manage sophisticated private sector firms (World Bank, 1989; Young, 1982; Elbadawi, 1996; Rosberge and Jackson, 1982; Ndulu & O’Connell, 1999; Collier & O’Connell, 2007). The government was also tougher on corruption than most African countries. In 1976, it enacted a law, the Finance and Audit Act, which made accounting and project officers personally liable for waste, misuse and stealing of public funds (Crisuoldo, N.d.). The government ran budget surpluses for 16 years since 1982; and only in 1998/99 ran up a budget deficit (Harvey, 1997; Gaolathe, 1997; Lewis, 1993; Mupimpila, 2005; Sentsho, Eds.; UNDP, 1998). It judiciously accumulated foreign reserves and used the savings from these to finance the budget deficits of the 1998/1999 and 2002/2003 financial years. The Botswana government has a National Employment, Manpower and Income Council which annually determines public service wage increases. The Council does this by taking into consideration the overall macroeconomic targets, including inflation levels, whether the country has a budget deficit and the levels of public debt. During budget deficit years, the government has capped public salary increases (Maipose, 2008). Like many other African countries, Botswana relied on a single or two commodities – in the case of Botswana, beef. This often causes “boom and bust” cycles, with revenue depending on the price and uptake of the commodity (Brautigam, 1996; Gaolathe, 1997; Hyden, 1983; World Bank, 1989). Since commodity prices are volatile, African economies have years of booms followed by recessions, depending on the global commodity price they export. In 1973, the Botswana government put together a long-term strategy which would build up reserves during boom periods to be used during downturns. The government planned much more competently than most other African governments. “The government explicitly pursued a counter-cyclical policy in the management of foreign exchange reserves and government cash balances, basing year-to-year spending decisions on the intermediate-term forecasts of export earnings and government revenue, and on a realistic view of spending capacity” (Maipose, 2008). Furthermore, the Bank of Botswana has exceptionally been one of the most independent central banks in Africa, where central banks are often appendages of the governing party or used by the leader as a private bank. It has been central to consistent exchange rate stability, low inflation and sustainable current account levels (Hill & Knight, 1999). The Bank of Botswana also judiciously invested commodity surpluses. Monetary and fiscal policies are tightly coordinated between the central bank and the Department of Finance and Development Planning to ensure alignment of objectives. The Pula has been consistently under-evaluated to “a level below the perceived equilibrium” (Maipose, 2008), to promote exports. In 1973, the Botswana government resolved to establish three funds to stabilise debt, reserve and to fund local development. In 1979, the Public Debt Service Fund (PDSF) and the Revenue Stabilisation Fund (RSF) were established. The main Revenue Stabilisation Fund became the repository of export surpluses to finance the budget during downturns. By 1995 Botswana had the highest domestic savings rate in Africa at 45% of GDP (Motsomi, 1997). In 1975 it was 16% of GDP (Motsomi, 1997). By 1984, all gross fixed capital formation, the acquisition of new fixed assets, minus disposals, by government, business and households were financed by local savings (Maipose, 2008; Motsomi, 1997). The Botswana government have maintained strict discipline in using the Revenue Stabilisation Fund only for the purposes of creating budget surplus during downturns and not for other things, as is the case in many African countries which set up such funds (World Bank, 1989; Elbadawi, 1996). The government also built up large foreign exchange reserves. “The high level of foreign exchange reserves is a result of a deliberate policy to accumulate as much as possible for unexpected changes regarding the balance of payments” (Maipose, 2008). The Public Debt Service Fund was to pay off public debt. It was financed by appropriations from the national budget, budget surpluses and the profits of investments that were made by the fund. The fund essentially, over time, became an investment fund, loaning funds to state-owned enterprises for the purposes of infrastructure, new investments and buying new stock. Subsequently, the government established the Domestic Development Fund to finance local development. Foreign funding was initially deposited into the Domestic Development Fund. Later, money specifically set aside for capital spending is also deposited into the fund. Development project proposals are evaluated by the fund, and if they meet the requisite standards, funds are disbursed (Maipose, 2008). Depositing donor money into a separate fund, dedicated to development, is also a departure from general African practice of donor funding going uncoordinated to different government departments and local projects (Brautigam, 1996; Gaolathe, 1997; Hyden, 1983; World Bank, 1989). Lessons from Botswana The Bank of Botswana has been one of the most independent central banks in Africa The central bank has been central to consistent exchange rate stability, low inflation and sustainable current account levels Botswana ran budget surpluses for 16 years since 1982 Only in 1998/99 did Botswana run up a budget deficit for the first time since 1982 It judiciously accumulated foreign reserves and used the savings from these to finance the budget deficits of the 1998/1999 and 2002/2003 financial years To ensure alignment of objectives, monetary and fiscal policies are tightly coordinated between the central bank and the Department of Finance and Development Planning The Pula has been consistently under-valued to promote exports Export surpluses finance the budget during downturns By 1995 Botswana had the highest domestic savings rate in Africa - 45% of GDP The government built up large foreign exchange reserves After independence Botswana borrowed from abroad, however the loans were used for infrastructure Botswana also searched for foreign investment, specifically to develop new industrial sectors The government was tougher on corruption than most African countries A National Employment, Manpower and Income Council determines public service wage increases on an annual basis The Council takes the overall macroeconomic targets, including inflation levels, whether the country has a budget deficit and the levels of public debt into consideration During budget deficit years, the government has capped public salary increases The government pursued a counter-cyclical policy in the management of foreign exchange reserves and government cash balances It based year-to-year spending decisions on the intermediate-term forecasts of export earnings and government revenue Developmental fiscal and monetary policy lessons for South Africa Developmental fiscal and monetary policy must, in the public interest, be done in partnership with social partners and be part of an overarching national industrial plan. Brazil during its period of high growth with inflation, balance of payments crises were run by dictatorship – and alternative policy voices were snubbed out. Botswana in the first two decades after independence was more inclusive in economic policymaking, bringing in government and business to cobble together macroeconomic policy. In Sweden, there was a partnership between government, labour and business to jointly strike developmental fiscal and monetary policies. Japan, Asia’s most democratic nation, struck up partnership agreements over economic policy between governing and opposition parties, and with business and labour. Macroeconomic policy must be aligned to and support the national industrial plan. It must focus on growth. However, successful broad-based development necessitates prudent macroeconomic policies. It needs fiscal and monetary discipline. This means keeping inflation at low levels, keeping exchange rates stable and sustainably managing public debt levels. Public spending has to be disciplined. Setting developmental interest rates, keep inflation manageable and setting sustainable exchange rates are crucial for development. Developmental fiscal and monetary policy is complicated, sophisticated and complex. It means the institutions that oversee fiscal and monetary policy must be staffed by competent people. There has to be the policy sophistication to deliberate on the appropriate policy solution, to correctly analyse the environment and to change tactics, when there are economic shifts. All of this demands coordination between the private sector, government and local and global markets. For government to be trusted by the markets, private sector and implementing government entities, it must be seen as credible, honest and competent. 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