A young economists approach to thinking about Public sector inefficiencies  

Finance Minister Pravin Gordhan and his Deputy Minister Nhlanhla Nene, SARS Commissioner Oupa Magashule and Treasury DG Lungisa Fuzile arrive at Parliament (http://townpress.co.za/live/2016/01/sars-review-a-chance-to-regroup/)Finance Minister Pravin Gordhan and his Deputy Minister Nhlanhla Nene, SARS Commissioner Oupa Magashule and Treasury DG Lungisa Fuzile arrive at Parliament (http://townpress.co.za/live/2016/01/sars-review-a-chance-to-regroup/)

 

South Africans approach the topic of state capture with an understandable sense of moral discontent. For the last two years after the enigmatic sacking of our well-respected finance minister, Nhlanhla Nene, we have been inundated with illuminating details of a plethora of machinations to loot the state. In essence, what we are witnessing is an orchestrated suppression of the state and its ability to change the fortunes of those still riling from the challenges of structural inequality inherited from the morally repugnant Apartheid regime. Given this, I draw inspiration from the theoretical frameworks I have learnt throughout my academic career in an attempt to initially make clear, the impacts of a public sector that is at war with itself. My secondary aim is to illuminate on the immediate and long-term knock on effects of such on the South African populace. In order to achieve these objectives, I will firstly discuss the paradigms/views of the role of the public sector and how that translates to the economy. Thereafter, I will define how the public sector is positioned within an economy and discuss the tools available to the state. Finally, I will conclude by providing the reader with a benchmark model of the economy by applying normative economics as an inspiration for the youth to use structured economic thinking as a means of creating a more capable state. Differently put, I aim to provide a framework for analyzing and thinking about a state that can once again propel us to the vanguard of all emerging economies.

1) Three overarching views on the role of government

There are three overarching views on the role of government in the economy. That is, mechanistic, collective and a developmental state paradigm. The aforementioned views each have an overarching characteristic that dictates its approach on the role of the public sector within the economy. A high level explanation of each of these paradigms is outlined below:

  1. Mechanistic View: This view is almost exclusively related to the maximization of individual welfare. Essentially, this view proposes that government is created “by the people and for the people” and sees governments role merely extended towards correcting market failure. These interventions can take such diverse forms as safety regulations for the workplace, laws banning racial and sexual discrimination in housing and public housing provisions. The result of which is the increased focus on the allocation of resources in order to achieve economic growth. One could think about it as a capitalists view on the role of government within an economy.
  2. Organic view: This view sees society as a natural organism with the government placated at the heart of it. Subsequently, individuals have significance insofar as they are part of the community. This view is the antithesis to the mechanistic view in that the good of the individual is secondary to that of the collective. Simply put, this paradigm focuses on the maximization of social welfare and national interest over the individual. Such a state would intervene in issues relating to the distribution of income and may be more averse to a fully-fledged capitalist economy. More specifically, it is aligned to a Soviet Union state before the fall of the iron curtain.
  3. Developmental state view: A developmental state is often described as a combination of the two aforementioned paradigms. That is, it reflects a state that prioritizes individual and social interests collectively. Conceptually, it is a mixture of both a liberalized open economy and state orientated development. Some primary examples of such a state include both Botswana and China respectively.

The aforementioned discussion provides the reader with a conceptual idea of the different paradigms that should be utilized in order to direct a certain role for the public sector within an economy. It is worth noting that the author has not elaborated on which view is right or wrong. Rather, it was used to assist the reader in understanding their own preferences/paradigm and applying it to the following frameworks and models that will be outlined below. Given this, the next step then would be to describe the levels of government within the South African economy specifically.

  1. The structure of the state and the tools available to it

When thinking about the public sector within South Africa, a good starting point would be to highlight the different levels of the state. This provides high-level background into the structure that would then provide the author with the scaffolding necessary to analyze the tools available as well as the impact of state capture on the states ability to increase the level of utility for its citizens.

The democratically elected state within South Africa is broken down into three main buckets, each with its own delegation of authority. The central government, which includes cabinet ministers and their departments, is at the heart of the state. Their directives and policy formulations cascade down into the second later of government. In other words, the local and provincial governments who then have to implement them along with various other service delivery outputs that are aligned to the provision of public goods and the needs of the electorate. Thereafter, you have the third layer of the state, which reflects publicly owned companies such as Eskom, Transnet and South African Airways (SAA), amongst others.

Figure 1. The composition of the public sector within South Africa

Screen Shot 2017-10-05 at 12.13.01 AM

In an ideal world, three levels apply would apply their policy directives in conjunction with their mandates and any one of the aforementioned paradigms in order to maximize the economies potential. The tools that the public sector would use in order to achieve this include:

  1. Expenditure
  2. Taxation
  3. Financing
  4. Regulation

The use of these tools is an important stepping-stone in understanding the following diagram (figure 2.) that specifies the public sectors central role in the economy. Essentially, government collects taxes through SARS from households and firms in exchange for public goods and services such as schools, roads, water and infrastructure. Moreover, it spends money on acquiring labour and capital from the factors market in order to fulfill its objective of providing for its citizens who have the power to vote it out. It goes without saying, but as is highlighted in figure 2 above, the government essentially has a significant impact on the entire economy. Its inefficacy not only affects firms and households, but also the factor and goods markets at large. Moreover, these markets closely align to private households and firms who assist in creating a more robust and dynamic economy capable of creating jobs. Therefore, one can see clearly, the effect of an inefficient use of expenditure, financing, taxation and regulation on the various segments within an economy. Conversely, one can also see the positive impact that efficient and spendthrift public sector could have.

Figure 2. The role of the state within the South African economy

Screen Shot 2017-10-05 at 12.13.09 AM

  1. The Benchmark model and the impact of state capture

The important thing about theory is that is provides us with a framework that structures our thoughts. This approach is superior, when discussing policy, to a generalized and over-emotional discussion. Succinctly put, it provides us with the scaffolding/building blocks necessary to analyze various different scenarios that can be deduced from the real world. Given this, the benchmark model on the economy provides us with a useful way of thinking about the impact of inefficiencies within the various agents represented within figure 2.

The benchmark model represents a general equilibrium case and determines the quintessential level of economic efficiency within the country. Put another way, it represents an economies ability to achieve the maximum level of economic growth. In order to define economic efficiency, one needs to understand allocative and technical efficiency. Essentially, allocative efficiency analyzes the ability of an economy and its producers/firms to produce an optimal mix of products/commodities in accordance with the demand of its consumers. Moreover, technical efficiency implies that an economy’s existing resources are utilized in most efficient manner possible in order to produce maximum output given the constraints. An economically efficient economy would produce at either point B, C or D on the concave curve within figure 3. Given this, point A to the left of these points represents economic inefficiency and describes the South African economy that recently just escaped a technical recession whilst the rest of the African continent and world continues to grow.

Figure 3. The benchmark economic model
Screen Shot 2017-10-05 at 12.13.19 AM

In figure 3 above, in order for an economy to grow it needs to produce at a point to the right of A. Our model highlights the need for an increase in the quantity and/or productivity of factors of production (labour, capital etc) through savings and investment (physical and human capital formation) and technological advancements. To this end, the representative agents within the economy need to be assured that they will garner returns needed in order to invest in an economy. To this end, the recent development within the public sector (Nene-Gate, state capture and inefficiencies within our State Owned Companies- South African Airways in particular) does not instill that much confidence within domestic and international markets.

Given this, what is clear that in order for us to achieve economic efficiency and fulfill the promise of a better life for all, confidence within our public sector needs to be restored. Fortunately, this article has provided us with the framework to understand how we can start thinking and engaging on these issues. For example, we need to have robust and hard discussions as to what role the government should play within the economy. This includes assessing the political parties and their view of the public sector within the economy. Thereafter, we need to focus on reinstating quality and efficiency within the public sector by analyzing the implementation of fiscal policy tools. This should be done in the context of the public sectors role in the economy and its ability to enhance the goods and factor markets. This will be a long and arduous task. That said, by acting boldly and holding the government and those at fault accountable, we should instill the confidence needed will attract the investments that are required. As predicted by our model, this will ensure that we achieve a higher level of growth and reinstate our position as a robust and capable economy going forward.

 



Appendix:Assumptions of the benchmark model

  1. 2X2X2 model (2 people A, B; 2 products X,Y; 2 factors of production capital , labour)
  2. No external influences on consumption; both individuals have fixed tastes (well-behaved indifference curves.
  3. Production processes with perfect factor substitutability, diminishing marginal productivity and constant returns to scale (well-behaved isoquants
  4. Consumers: maximize utility and producers: maximize profits
  5. Commodity and factor markets are perfectly competitive

 

 

About the Author

Carlos Baeta
Proudly South African. Masters student at Fordham University in New York. Entrepreneur, young leader, coffee addict and an avid Liverpool fan. Let's change the world.

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