Intergenerational Equity and the Political Economy of South Africa

Posted by on Feb 24, 2014

Intergenerational Equity and the Political Economy of South Africa

To watch the full keynote address video by Dr. Abedian go to the following link: http://youtu.be/oC5lseYIgxk

Intergenerational equity is a complex issue in public policy. The complexities may be compounded when one views it through the lenses of political economy, philosophy, applied ethics as well as in public policy. More often than not, the notion is invoked in discourses around environmental sustainability and or in politics of public debt. The concept, however, is much deeper and wider in scope.

There is a range of sub-issues that are embedded in the term “intergenerational equity”. This is so because society is the intermediary among past, present and future generations. All social processes, be they political, economic, technological, ethical, or environmental have a systemic and dynamic impact upon the overlapping generations’ welfare. In the meantime, human beings are predominantly “present-oriented”. In effect, they discount the future heavily the more distant it is or is perceived to be. In effect, the present is more important than the near future and the near future is more important than the distant future. Furthermore, human activities and enterprises are, more often than not, subject to uncertainty and imperfect information.

These simple but factual realities do have profound and far-reaching consequences for the success and failure of nations.  Moreover, our use of the natural resources, our approaches to the ecosystem, and the political economy institutions, the social and ethical framework we promote and the ease with which we commit resources to social and human integrity are all affected by our implicit or explicit regard for the principle of intergenerational equity.

These issues have preoccupied philosophers since time immemorial and entered classical economic thought. However, the modernist pursuit of economics as a value-free “technical” science, particularly within the framework of neoclassical economics, effectively marginalized the intergenerational topics. The contemporary emergence of institutional economics coupled with environmental concerns and globalization, has repositioned intergenerational issues at the centre stage of the global political economy discourse. For the discipline of Economics, this offers an interesting, but challenging, vista. In reality, ethical values are implicit and exogenous in virtually all models. Economics is yet to fully internalize this fact.

For South Africa, at this juncture in its social democratic evolution, intergenerational equity has an added significance. Nearly twenty years into the foundational years of its new democratic dispensation, compelling evidence and complicated syndromes of disregard for intergenerational equity are emerging. From the utter failure of the public basic education system, the widespread collusive and extractive conduct amongst the business corporations, to the near collapse of the public sector administrative and management capabilities, particularly at the local government levels, glaring and worrisome signs are in evidence that social welfare across generations is being disregarded, or even compromised.

In the remainder of this chapter, the concept of intergenerational equity will be explored in more detail in Section 2, followed in Section 3, by an analysis of the patterns and trends in resource allocation across generations in South Africa. The analysis of non-pecuniary investments in future generations will be examined in Section 4. Section 5 will look into the challenges of intergenerational equity rebalancing. The final Section will end with some conclusions.

 

2 – Intergenerational Equity: Definition, Application & Significance

Intergenerational equity is a principle of distributive justice which concerns the relationship among past, present, and future generations. We could conceptualize the basic contours of an equitable relationship among generations in many ways. From a social contract perspective, it is instructive to imagine that all generations are partners in an implicit social contract defining rights, duties, and obligations among generations.   The contractarian approach, however, ignores the intergenerational effects of power dynamics as well as the critical role of the individual. The structure of political power and the binding influence of current generation interest groups shape the future.

Every national community, indeed the entire worldwide human community, is comprised of multiple, complex, overlapping, and interdependent systems that constitute our environment. Generically, this environment is made up of two components: one is the natural environment; the other is socially constructed, i.e. human-made. Throughout history, there have been profound philosophical and existential debates about the privileges and responsibilities of each generation with regard to each of these components.

In the recent past, intergenerational issues related to the ecosystem have received much attention under a variety of topics. For environmentalists and economists the operative word is sustainability.  The concept of sustainability has a long tradition in academic economic literature, dating back to the 18th century when the sole concern was the ability of the earth to provide sustenance for a growing population. The interplay of biological forces, exhaustible resources, and humman-made technologies has been the focus of ongoing intellectual enquiry ever since.  In the past century, Harold Hotelling (1931) formalised the Economics of Exhaustible Resources. Ever since there have been both opponents and proponents. But it was the Brundtland Report, Our Common Future (1987), which placed the intergenerational equitability at the centre of the global political economy discourse. The Report’s often-quoted definition provided a technical and ethical challenge for humanity worldwide by stressing that “sustainable development is development that meets the needs of the present generation without compromising the ability of future generations to meet its own needs.”

Theoretically, the case of natural resources, exhaustible or otherwise, seems fairly straightforward insofar as we do not create them we only inherit such resources. It therefore stands to reason to postulate, as Frischman (2005) highlights: that the present generation does not have a superior claim to the Earth’s resources and consequently that each and every generation is both trustee for the planet with obligations to care for it and a beneficiary with rights to use it.” (p.463) Intergenerational equity in this regard, therefore, rests heavily on the internalisation and operationalisation of this fairly straightforward moral principle of trusteeship. In the complex dynamics of social evolution, however, the principle of stewardship intersects with the equally compelling presence of trade-offs amongst decision options and uncertainty of outcomes

As important as the natural resources are the human-made resources and capabilities that collectively constitute a dynamic and an ever advancing civilisation. In econometric literature this is often referred to as the “made-capital” of a nation, in contrast with the natural endowment of the country. For each generation, then, the national resource (or capital) endowment is made of the natural endowment plus the inherited made-capital. In this regard each generation’s heritage subsumes vital components such as culture, knowledge, socio-economic and political institutions, logistical infrastructure, and the effective governing legal paradigm. As will be argued later, social capital is a critical component of made-capital. From the perspective of intergenerational equity, the treatment of such human-made resources is morally more complicated. It may be argued that the generation that created such resources has a superior claim to their benefits. As a corollary, the costs associated with, or damages arising from the current generation’s decisions ought to also be borne by it (or its members).

The reality of the social structure and its evolution over time is that both benefits and costs are, more often than not, externalised. In effect, neither the full benefits nor the entire costs of a given generation’s decisions are born by it or by its members.  Prime examples of these are investment made in building accountable political and legal institutions, economic and industrial infrastructure, investment in research and development, social security contributions, the national debt, and global warming. For societies that have experienced wars of liberation, or domestic national struggles towards unification, the costs and benefits of such periods of disruptions are born disproportionally by the successive generations during and post engagements.

Thus, the substance of intergenerational equity is complex, and its operational requirements are made of both tangibles and intangibles. Importantly, the implications are not merely theoretical and academic: the future trajectory of the society’s developmental path is largely defined by the depth of our understanding of, and commitment to intergenerational equity. It is interesting to note that as early as 1838, Abraham Lincoln, the visionary USA president, in his Lyceum Address, recognized the enormity of the moral burden of trans-generational equity with the following words:

“We find ourselves in the peaceful possession, of the fairest portion of the earth, as regards extent of territory, fertility of soil, and salubrity of climate.. We toiled not in the acquirement or establishment of them—they are a legacy bequeathed us, by a once hardy, brave, and patriotic, but now lamented and departed race of ancestors. Their’s [sic] was the task (and nobly they performed it) to possess themselves, and through themselves, us, of this goodly land; and to uprear upon its hills and its valleys, a political edifice of liberty and equal rights; ‘tis ours only, to transmit these, the former, unprofaned by the foot of an invader; the latter, undecayed by the lapse of time and untorn by usurpation, to the latest generation that fate shall permit the world to know. This task [of] gratitude to our fathers, justice to ourselves, duty to posterity, and love for our species in general, all imperatively require us faithfully to perform.” (quoted in Frischmann, 2005).

Lincoln’s above speech envisions a powerful overlapping generational social contract, rooted in equity, inspired by a moral duty for the promotion of prosperity, and driven by a strong reciprocity principle. Each generation inherits a wealth of pecuniary and non-pecuniary resources. In return for this boon, it is obliged to maintain and augment these resources for bequeathing them to the generations that follow.

The operational intricacies of distributive justice multiply when we intersect the above principle of trans-generational morality with the intra-generational mal-distribution of resources. Economic and moral philosophers have grappled with these interrelated issues for centuries. The contemporary interest of philosophical discourse on the subject was ignited with the publication in 1971 of John Rawls: A Theory of Justice. The Rawlsian paradigm which re-introduces the idea of the social contract has been a significant but controversial intervention. Libertarian, Marxist, institutionalist, egalitarianist and feminist critiques of Rawls abound.  Yet, Amartya Sen, an economic philosopher and a one-time student of Rawls, in his book, The Idea of Justice (2009), accredits A Theory of Justice for revitalizing the socio-political discourse on the critical issues of redistributive justice.  Sen offers a profound critique of Rawlsian paradigm by highlighting the shortcomings of the ‘contractarian tradition’ and by emphasizing the significant impact that human behaviour has on  institutions’ ability to bring about and maintain a ‘just society’.

At the heart of the controversies and complexities of redistributive justice lie the assumptions made about the nature of the human being on the one hand, and the political economy construct of society, on the other. Furthermore, the fact that these two are themselves interactive makes the matrix even more complex.

With regard to the nature of human beings, two polar assumptions have driven the entire philosophical, psychological and political economy research right through the history. Eric Beinhocker (2007) summarizes the points as follows:

“If one digs deeply into the Left-Right divide, down to its philosophical and historical core, one finds two conflicting views of human nature. On the Left is the view that human beings are inherently altruistic, that greed and selfishness stem not from human nature, but from the construction of the social order, and that humans can be made better through a more just society. The lineage of this view descends from Jean-Jacques Rousseau and Karl Marx.

On the Right is the view that human beings are inherently self-regarding and that the pursuit of self-interest is an inalienable right. The most effective system of government is one that accommodates rather than attempts to change this aspect of human nature…….The Right claims, however, that if people pursue their self-interest through the mechanism of markets, then the general interests of society will be served as well. The lineage of this view descends from Hume, John Locke, and Thomas Hobbes.”  (P. 418)

Curiously, based on these opposing philosophical perspectives, and ultimately personal views, competing systems of governance have been constructed, ideological battles have been waged and socio-economic constructs have been subjected to revolutions and upheavals over the past two centuries. Yet, socio-political experimentations based on the assumptions of the Left and the Right have both failed to bring about an order that is capable of dealing satisfactorily with redistributive justice issues. It is no exaggeration to argue that both contemporaneous and intergenerational equity have been made worse if judged by the prevailing disparities of wealth and income as well as the compounded crises of ecological and sustainability concerns. Clearly a new paradigm, based on an alternative and a more nuanced perspective on human nature is needed.

Modern scientific research in psychology, economics, anthropology and game theory has highlighted the serious flaws in the simplistic assumptions made by both the Left and the Right about human nature. Recent scientific empirical research conducted within a mutli-disciplinary framework and tested in a variety of socio-economic, racial, tribal and developmental regions, suggests that human beings are neither altruistic nor selfish. They are better defined as conditional co-operators and altruistic punishers. Herbert Gintis, Samuel Bowles and Ernst Fehr (2005) label this type of behaviour as strong reciprocity, which, they define as “a predisposition to cooperate with others, and to punish (even at personal cost if necessary) those who violate the norms of cooperation, even when it is implausible to expect that these costs will be recovered at a later date.” (quoted in Beinhocker 2007, P. 419)

This critical revision of our assumption about the nature of human beings opens up a new paradigm of thinking and a vast range of consequent systemic possibilities. Together with a range of other recent scientific research in the fields of thermodynamics, networks, dynamic systems evolution, analytics of disequilibrium economics, and empirical psychology, the strong reciprocity assumption paves the way for what is currently known as Complexity Economics. Complexity Economics is a clear and substantive departure from nearly four centuries of traditional economics, reflected primarily, but not exclusively, in neoclassical economic analysis. No doubt it will take years, possibly decades, for the tenets of Complexity Economics to evolve and its systemic ramifications to unravel.

Meanwhile, and in the immediate future, the requirements of intergenerational equity entail the balancing of human attributes namely- the conditional co-operator with the altruistic punisher. Arthur Dahl (2013) offers a framework for transition, he notes:

We desire a world of peace and prosperity, but much of economic and psychological theory depicts human beings as slaves to self-interest. Yet it can be argued that well-being for everyone necessitates a more just and sustainable social order. This would require qualities like moderation, justice, love, reason, sacrifice and service to the common good, which must be harnessed to overcome the traits of ego, greed, apathy and violence, which are often rewarded by the market and political forces driving current patterns of unsustainable consumption and production, in which the well-being of a few is attained at the expense of the many….. A new social contract must have a broader view of human well-being founded on ethical principles.  (P. 3)

With regard to the political economy construct of any given society, recent scientific research and cross-country comparative analysis offer equally insightful and instructive findings. Two attributes of the social order are of critical relevance to our analysis. The first attribute is that the political economy system is dynamic. Scientifically, this means the system’s current state is strongly related to its previous state, and its future state is a function of its current variables. By way of illustration, consider a country’s national stock of capital – a critical variable in determining actual and expected growth rates. Capital accumulation is a dynamic process. The rate at which the national stock of capital is increased or decreased will be determined by the stock of capital at the start of the period, eg: initial conditions, the rate of capital accumulation or destruction, and the time period. The same analysis holds for unemployment, savings, technological progress, the development of the country’s commercial jurisprudence, the evolution of accountability and legal institutions, and numerous other processes.

The second attribute is the fact that within the complex web of the political economy system, there are countless processes with feedback loops too. This means developments in one dynamic process influences another set of processes within the system. For example, what happens to the investment process has direct implications for unemployment, capital accumulation, growth, savings, and other processes. These effects are both contemporaneous as well as trans-generational. For example, enhancing the scientific research and development capabilities in the current period affects the current generation, but more so and more likely on the future capability of the nation in this field. Likewise the strengthening, or weakening, of the country’s judicial infrastructure has implications for both current and future generations.

The dynamic nature of the political economy structures, therefore, has profound implications for both pecuniary and non-pecuniary variables that govern intergenerational equity. The interactions between politics and the economy, the governance institutions, and the culture of citizen participation in the society are critical factors in the success or failure of nations. Acemoglu and Robinson, in their review of Why Nations Fail (2012), articulate the following relationships:

“Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively. Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works. For example, it is the political institutions of a nation that determine the ability of citizens to control politicians and influence how they behave. This in turn determines whether politicians are agents of the citizens, albeit imperfect, or are able to abuse the power entrusted to them, or that they have usurped, to amass their own fortunes and to pursue their own agendas, ones detrimental to those of the citizens. Political institutions include but are not limited to written constitutions and to whether the society is a democracy.”

A significant contributor with long term impact on sustainability of social development and human prosperity is the embedded value system that manifests within society’s operations. Such values and codes of conduct need not be legislated or somewhat formalised; rather they need to be internalized within the society’s political economy organs.  With the help of such values, social trust is engendered and over time social capital is created, maintained and augmented. Intergenerational prosperity is dependent as much on social capital as on financial and technological capital. The co-evolution of these forms of capital ultimately leads to, and is required for, sustainable development across generations.

In light of the foregoing account, four protagonists emerge as the primary contributors to intergenerational prosperity and equity, namely, the national resource (capital) endowment (both natural and made), the individual, the political economy institutions, and the society as defined by the embedded value system which is, formally and informally, espoused.

The empirical quantification of the foregoing aspects of intergenerational equity is not readily available. There are, however, some aspects that lend themselves to tracking by proxy indicators. For example, The Sustainable Governance Indictors Project of the Bertelsmann Foundation, titled Intergenerational Justice in Ageing Societies: A Cross-national Comparison of 29 OECD Countries, makes an attempt at generating an Intergenerational Justice Index (IJI). It uses four pecuniary variables to construct its IJI, namely:  child poverty, public debt per child, ecological footprint, and; the extent of bias against older generations. Non-pecuniary variables are excluded from this proposed IJI.

In what follows, some of the key pecuniary and non-pecuniary indicators of intergenerational equity will be discussed for South Africa.

 

3-) Patterns & Trends in Resource Allocation across Generations

Amongst the quantitative indicators of intergenerational equity is the aggregate level of investments (savings) done by each generation in ensuring the sustainability of growth over time. National savings is an important intergenerational variable insofar as savings are the key source of funding for national investment. Without investments, economic growth is a near impossibility. In the absence of adequate national savings, investments in the national economy have to rely on foreign capital flows into the country. Imported capital, in turn, can be fickle and footloose. More seriously, when a country is dependent on imported capital for a significant share of its national investments, this in turn creates ongoing currency volatility and financial market sensitivity to domestic socio-political dynamics.

This is particularly significant with regard to the type of investments that lay the foundation and create the framework for unlocking the economy’s inherent potential. This is central to the ‘made-capital’ referred to earlier. Made-capital itself is dependent on economic structure. For an economy whose natural endowment is primarily mineral resources, the type of investment needs to be focused on the mix of infrastructure that enables growth and development in this sector. Appropriate rail facilities, harbour logistics, industrial beneficiation capabilities, adequate and reliable energy and water supply are examples of such investments. By contrast when an economy is largely tertiary sector oriented, its investment requirements are vastly different.

There is no particular level of aggregate investment which is technically optimal and universally applicable across the various phases of business cycles and technological waves. That said, “the rule of thumb” in economic development history suggests that, over time, for the sake of sustainable growth, each country should spend an average of 5 to 8% of its GDP on its socio-economic infrastructure.

South Africa’s portfolio of natural endowment is heavily resource-based. As such, development and sustainability of its growth depend heavily on well-planned and appropriately sequenced stock of complementary infrastructure. Not only does it need adequate and reliable energy, it simultaneously needs rail, harbour, water and human skills, amongst others. So, the level of investment, per se, is only one requirement; the other is to get the mix, the scale, and the timing of such investments right.

During the 1970s, 1980s, 1990s and 2000s, neither investment in public infrastructure nor its optimal mix received much attention. These periods also coincided with considerable political and social upheaval, accompanying the dawn of the new democratic dispensation in the country in 1994. For completely different reasons the periods prior to, and post 1994, infrastructure investment requirements were neglected. From an intergenerational viewpoint, the neglect of adequate investments in public infrastructure in these periods will exact heavy costs on the subsequent generations.

Next to infrastructure investment trends, the stock of public debt and its relative magnitude constitute one of the most commonly debated intergenerational statistics. More often than not, the stock of public debt is perceived as bequeathing a liability to future generations, and as such it is regarded as morally questionable. However, whether or not public debt is a burden depends largely on what it has been used for. If debt is accumulated due to the current generation’s welfare expenditure, or war financing, or abusive and extractive practices   in the public sector, then the accumulated government liabilities will entail negative effects on the generations that follow. On the other hand, if the bulk of public debt is due to investments in productive national socio-economic infrastructure investments, then the effect on future generations will be potentially positive. The latter type of public borrowing is conducive to the expansion of the economy’s productive capacity, hence future growth, job creation and social development.

South Africa’s public debt trends remain fairly benign. Post-1994, the government’s fiscal policy paradigm resulted in a substantial decline in public debt GDP ratios. From a high of 50% of GDP, the public debt ratio fell to as low as 28% in 2008. Meanwhile, debt service charges reached a peak of 20% of government budget before sliding to a low of 7.6% in 2010. At the time of writing, both these ratios are on the rise due, in large part, to government’s anti-cyclical fiscal policies.

It is a fact that the modernization and technological upgrading of the economy post-1994 have increased the economy’s skills intensity sharply. This, in turn, has accentuated the systemic skills mismatch problem. Meanwhile, the country’s human capital accumulation has proved to be wanting. Whilst much has been done to promote access to the public schooling system, little has been achieved with regard to quality improvement of the education offered. Consequently, ‘unemployability’, widespread vacancies and huge skills gaps have emerged concurrently.  The upward mobility of the poor has been curtailed; hence their participation in the economy is severely undermined. The poor and their off-spring, who rely on public schooling, have been trapped in the vicious cycle of poverty and dependency.  Within the country, the so-called ‘second-economy’ has expanded as a result.

In any modern economy, skills and work experiences are the two key contributing factors for upward mobility and intergenerational equity within the society. This is especially so as the economy becomes more sophisticated and its skills intensity rises over time. Over the past decade alone, the South African economy’s skill intensity has risen by more than 10%.

Rising skills intensity necessitates a matching qualitative upgrade in the school curriculum, in addition the teaching skills of the educators combined with the instructional leadership of the school principal need to be upgraded. This is not to under-estimate the importance of other factors such as the quality of infrastructure, the management system and the quality of education budget administration.  Over the period 1994-2013, there has been little evidence of improvement in these variables. As a matter of fact there has been a dilution of mathematics and science standards in the public schooling system and there have been no signs of any improvement in the quality of teachers and their ability to upgrade their capacity to teach more effectively. To complicate matters further, the political leadership has placed much too much emphasis on reconfiguring the system to improve the ‘matriculants pass rate’- an indicator that in and by itself is technically distortive and even misleading.

The prevailing stand-off between the Teachers’ Unions and the government has not helped matters either. Obviously, incompetent teachers and their union leaders resist any meaningful ‘skills audit’ or performance management. The ongoing politicization of this simple, but vital, exercise has exacted a heavy toll on the poor, and has arguably condemned many of the contemporary scholar cohorts to a future life of unemployability and poverty. The poor global ranking of SA education performance places both current and future global competitiveness of the country at serious risk.

At present there is no credible solution for this critical structural anti-poor and intergenerational inequity factor. Of course there are many expressions of concern and numerous initiatives to deal with the various aspects of the education crisis in the country in a piecemeal manner. Yet all these expressions and interventions fade into insignificance in relation to the enormity of the challenges facing the country in eliminating one of the most important systemic contributors to the anti-poor and intergenerational injustice of South Africa’s public policy architecture. It is stating the obvious that the issue is profoundly political and, as yet, no political leader since 1994 has had the vision and/or the courage to tackle it effectively. Put differently, no sizeable black middle class has arisen yet to create the necessary political pressure for change in the public education system. The rich, both black and white, opt out of the public education system and the poor are unable and helpless in holding the government accountable.

Social welfare has been the fastest growing expenditure category over the past decade and half. With the extension of Child Welfare Grant to the age of 17, announced in October 2009, this budgetary item has been set to rise sharply. It is a matter of time before welfare expenditure exceeds that of expenditure on Education, which is the largest budgetary allocation within the National Budget. It is noteworthy that ever since 2000, the share of child grants has consistently increased in the budget. Government’s expenditure mix is bound to continue in favour of welfare spending. Over the next 3 to 5 years, a growing level of fiscal stress is likely to emerge primarily as a result of the trade-offs between ‘Welfare Expenditure’ and ‘Socio-economic Infrastructure Expenditure’. This will be more so, if GDP growth rates fall and stay below 3% per annum.

It may be argued that such welfare expenditure is in fact a socio-political imperative to safeguard the poor and the vulnerable and as such it is an investment in socio-political stability. There is a grain of truth in this argument. Yet this is not a sustainable policy. Nor is it a strategy conducive to a developmental society with rising levels of prosperity. Critically, in the medium to long-term fight against poverty, and for the sake of intergenerational upward mobility, there is no substitute for an effective education and human resource development system. The creation and augmentation of human capital is essential for breaking out of the vicious circle of poverty. Historic evidence suggests that it takes at least one generation to make a real dent in systemic poverty provided a sound education system operates within a well-integrated national human resource development framework. This is a key plank of a platform for sustainable socio-political stability and intergenerational upward mobility.

Seen in the context of the calculus of overlapping generations’ assets and liabilities, at present the low returns on education investment together with the ballooning child/youth grants expenditure constitute a sure liability for future generations without a corresponding revenue generating capability. The extension of this grant to the unemployed youth has both sociological as well as fiscal implications

As stated in Section 2, above, socio-econometric processes are dynamic with feedback loops. The poor education system and its resultant low skills base of the country’s labour force leads to a ‘low productivity –low wage’ emergent outcome. This in turn leads to households’ financial vulnerability, and a low and sub-optimal national savings rate. Figure 6 illustrates the trajectory of SA national savings over the past three decades, with a projected trend until 2018.

 

4 – Non-pecuniary Investments in Future Generations.

Important as the pecuniary variables as discussed in Section 3 are, so too are the non-pecuniary investments for the wellbeing of future generations.  At one end non-pecuniary variables pertain to foundational institutions of the socio-political and economic institutions, and at the other end, they relate to the significance of promoting social and personal value systems that help lay the ground for defining the nation, its  social culture, its internalised moral and ethical codes,  and its national welfare objectives.

Through the interplay of these two sub-systems of the non-pecuniary network of variables, social capital, may be created or destroyed. Contemporary research has underscored the importance of social capital as a critical ingredient of a sustainable political economy framework. The promotion of trust among diverse stakeholders is a key ingredient in the process of social capital formation. This is particularly so in heterogeneous societies like South Africa. The accumulation of social trust augments intergenerational social capital via an array of interrelated processes that, inter alia, include trans-generational conversations within the family structures, the workplace, the community initiatives and not-for-profit enterprises. The promotion of reciprocity for the common good is a vital element of intra-generational and intergenerational social capital accumulation.

In effect, each individual or each agent lives in multiple “networks” such as her/his religious, neighbourhood, professional, cultural, tribal, or ideological groupings. Systemically, society is the collection of a large number of individuals or agents who each has membership in different networks. Social trust, within a particular cultural norm, admits and promotes cooperation across and amongst varied networks. “In the terminology of Complexity Economics”, Beinhocker (2007) argues, “if cultural norms provide the micro rules of agent behaviour, then social capital is the emergent result of agents creating cooperative networks.” (p.435) But inter-network cooperation obtains within a given institutional and legal platform, commonly defined by the governing constitution of the country.

SA constitutional democracy has been recognised as a progressive platform for the establishment and maintenance of an inclusive social development system. The Bill of Rights, together with the separation of powers among the legislative, the executive and the judicial arms of government are the essential pillars of the democratic dispensation. Furthermore, South Africa’s modern history has been synonymous with an independent SA Reserve Bank and a credible and active Auditor General Office. The establishment of both the Office of Public Protector and the National Prosecuting Agency have further strengthened the constellation of the governance institutions, promoting accountability, access to justice, and the protection of property rights. These are vital requirements for creating a political economy system of governance that has the promise of facilitating a prosperous socio-economic dispensation with resilient intergenerational prospects.

The significance of institutional structuring cannot be over-emphasized. Acemoglu and Robinson (2012) survey the evolution of diverse political economy institutions over a wide range of geographies, with varied socio-political and ideological histories over a span of a few centuries. Societies with “inclusive” as opposed to “extractive” institutions, they argue, have a clear superior chance of success in bringing about stable, sustainable and prosperous societies.  Their illuminating political economy review underlines the importance of inclusive institutional structuring for sustainable development. They note:

This synergistic relationship between extractive economic and political institutions introduces a strong feedback loop: political institutions enable the elites controlling political power to choose economic institutions with few constraints or opposing forces. They also enable the elites to structure future political institutions and their evolution. Extractive economic institutions, in turn, enrich the same elites, and their economic wealth and power help consolidate their political dominance. (P. 95)

Political and economic institutions, which are ultimately the choice of society, can be inclusive and encourage economic growth. Or they can be extractive and become impediments to economic growth. Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth. But this means that the choice of institutions—that is, the politics of institutions—is central to our quest for understanding the reasons for the success and failure of nations. (P.9 7) 

By design, SA governance institutions are inclusive. Furthermore, the country has a well-established and a century-old judicial system with a credible and tested jurisprudence. Operationally, however, in recent years there is growing concern about the over-politicization of some of these institutions for partisan and individual gains. Corruption and criminality have manifested themselves widely across both the private and public entities. Over the past five years, two successive commissioners of police, a number of ministers and premiers as well as some high profile members of the provincial executive committees (MECs) have been caught in corrupt activities. Private sector entities ranging from construction, manufacturing, to the telecommunication firms, have been found guilty of collusive and extractive behaviour. State-owned enterprises and agencies (SOEs) likewise have been riddled with cases of ongoing misuse, abuse and corrupt use of their public resources. The most recent survey of the perceptions of corruption across various sectors in SA reveals a disturbing pattern.

It may not be an exaggeration to suggest that the two interrelated phenomena of corruption and crime have been the topmost blights on the face of an otherwise successful, if not wondrous, democratic transition in South Africa. Increasingly, it is evident that the South African liberation movement’s social democratic revolution is tripped up by corruption. There is a growing danger that not dealing effectively with corruption could lead to the institutionalization of corruption, the rationalization of corrupt practices and the taking root of a culture of greed and self-enrichment at all costs.  In the terminology of Acemoglu and Robinson, institutions that are designed for and intended to roll out an inclusive and accountable socio-political dispensation for the future generations, are captured by “extractive practices” for the opportunistic material gains by the current generations’ political elite.

For intra-generational equity and sustainable prosperity, an effective check on poverty is a key imperative. Nearly twenty years into the democratic dispensation, the failure with regard to poverty eradication is the single most prominent concern in the context of intergenerational welfare and equity. Not only in absolute terms, but also in a global comparative context, South Africa has a serious poverty problem.

Poverty is a complex phenomenon. By its nature, poverty is not self-eliminating- indeed it has a built-in self-perpetuating tendency. As it is well-acknowledged, the private sector economy is not set to eliminate poverty, although it could be a critical partner in the process. As such the role of the public sector in poverty alleviation is an indispensible one. The persistence of wide-spread poverty and, indeed, its deepening since 1994, is in part a powerful reflection of the declining efficiency and effectiveness of the public sector in the country. In its 2013 Governance Indicators Series, the World Bank provides an indication of the extent of decline in SA government effectiveness.

The raising of public sector productivity is a prerequisite for the ability of the economy both to tackle poverty and to raise wage levels for the working classes.  The logjam between organized labour and government over the past decade has been one of the key contributors to the declining productivity in the public sector. By not creating and facilitating a public service working environment conducive to performance we have seen the deepening of a culture of mediocrity and bureaucratic formalities within the public sector. This is inimical to poverty eradication, sustainable growth and trans-generational social development in general. When the culture of mediocrity sets in it takes decades to eliminate and generations suffer as a result.

Operationally, public service delivery is inherently labour-intensive, and labour-intensive production processes more readily lend themselves to the systemic inefficiency and     x-inefficiency syndromes. Such processes are typically far more management-intensive and system-intensive and require ongoing performance assessment. Yet these are the very attributes that the South African public sector operations lack at present.

Furthermore, since 1994, the social imperative of black economic empowerment has deepened the politicisation of the public service. This is not to say that prior to 1994 the public service was not politicised; indeed it was heavily populated by the protégés of the then ruling National Party. The political changes since 1994 transformed the racial composition of the public service but did not transform the managerial culture of its operations. It is then not surprising that the same abuses of public resources that existed in the dying years of Apartheid have continued. Managerial ineptitude, misapplication of public resources, and corruption are rife right across the three spheres of government. It is this managerial culture that generates inordinate amounts of wasteful inefficiency and exacts a heavy welfare loss, particularly on the poor, – at present and intergenerationally.

Furthermore, all the evidence suggests that in times of sustained economic growth, an ineffective public sector widens the income distribution gap, thereby deepening the structural unemployment and prolonging systemic poverty in the country. It is therefore not surprising that the super-cycle of growth over the past decade and half has left South Africa with an income distribution pattern more unequal than before. The longer public sector inefficiency persists, the more complex effective developmental, sectoral and micro-financial management becomes.  By extension, intra-generational equity becomes so much more difficult to achieve.

Comparable global experience, moreover, shows that changing the operational culture of a complex and varied organisation, such as the public service, takes time and requires diligence from the political leadership. In the absence of such behavioural and managerial transformation, the promise of better public service delivery and cost-effective fiscal management of the country is likely to remain a  mere slogan.

These government failures belong to the non-pecuniary intergenerational issues and must be addressed urgently. The desired outcome is fairly easy to define. First, government operations have to become a great deal more efficient so as to be able to ‘do more with less’. Secondly, the government structure has to undergo a tectonic shift to be able to plan and implement a well-coordinated public sector investment programme with a view to expanding productive capacity, cater to the quality public service delivery, and underpin sustainable economic performance. The National Development Plan (NDP) defines this as a “capable state”. To achieve these outcomes, the public sector’s necessary requirement is an extensive professionalization. A further and complementary requisite is the incorporation of a code of ethical conduct within the sector.  These are vital ingredients of a medium to long term poverty eradication strategy.

Much like poverty, public sector inefficiency has many causal roots. It is often tempting to attribute such organizational inefficiencies to a single and elegant factor. The empirical studies worldwide suggest otherwise. One factor amongst the primary contributors, however, is the rift between the country’s socio-economic “formal (professed)”, as opposed to “informal (practiced)” ethics. This duality is not unique to the public sector either. I have argued elsewhere that, like many societies nowadays, South Africa is trapped in an evident ‘value duality quagmire’ with considerable socio-political consequences, especially for the poor and their offspring.

Apart from this duality of values, there are other forces that have contributed to the rapid rise of public sector inefficiencies and public resource misuse in the country. The political imperative of socio-economic transformation has necessitated policies such as affirmative action, black economic empowerment, and preferential procurement policies. Furthermore, the nature of the political transition in South Africa and the evolution of the process of change of power, in 1994 and beyond, have given birth to ineffective political deployment strategies by the ruling party without due regard for competence, be they at national or sub-national spheres of government. Whilst these policies and corrective measures have been created with good intentions, and there may be some rationale for them too, in practice one of the unintended consequences of such political and regulatory interventions has been the rise in corruption and abuse of power, particularly with regard to public resources. As far as governance is concerned, their most deleterious effects are manifest at the local government level. With regard to the broader developmental impact, the combined effects of the above mentioned factors are much wider and equally detrimental.

The duality of values has been accentuated by the processes of socio-political transformation. In general, it is much easier to create convergence of values in homogeneous societies as opposed to communities where tribal, cultural, religious and ideological differences prevail. Interestingly enough, for the classical economists the consistency of values was almost axiomatic. For example, on the socio-economic significance of honesty, Adam Smith in his Theory of Moral Sentiments argued that a well functioning society was dependent on compliance with what he termed a “code of honour”. The absence of a ‘code of honour’ ultimately leads to corruption in one or other form. Corruption in the society acts much like a cancer in the human body – if not stopped will spread! Whilst initially some acts of corruption may even be deemed to be expedient, their ultimate and cumulative effect will be detrimental to the developmental path of the society. Most significantly, corruption erodes the moral authority of the state and the party in power.

There is convincing and growing evidence that the facts as well as the allegations of corruption in South Africa have gradually tarnished  internal and external perceptions of the state operations, as well as the political authority of the government. As a result, the poor’s trust in government has been considerably undermined.  Whilst the economy and the society at large suffer the consequences of widespread corruption, the poor within the society bear the brunt of its impact. After all, the poor are far more dependent on the performance of the public sector. The rising disparity of income, the growing gap between the rich and the poor over the past decade is, in part, due to the growing spread of corruption across all sectors and spheres of the economy. Given the historic inequalities inherited from the previous dispensation, it is South Africa’s manifest moral failure ever since the dawn of democracy in 1994 that it has failed to curb the scourge of corruption.

The last, and by no means the least, of the systemic anti-trans-generational equity and upward mobility factors in today’s South Africa, is the nature of our economic growth and its inherent limitations. Since 1994 there has been a growing recognition that for the country to make a meaningful dent in poverty eradication, sustainable job creation, and the promotion of trans-generational upward mobility, the average sustainable growth has to be lifted to a multiple of what it has registered so far. This means the country requires an average GDP growth rate of between 6% to 9%, sustained over a period of 15 to 20 years. For such growth levels to be a real possibility there is a need for a much higher level of social trust as well as stakeholder convergence on approaches to economic growth and development.

The contested and fractured approaches to economic policy-making since 1994, has become almost one of the defining features of public policy making in South Africa. No sooner is a policy announced than either organised labour or the business organisations cast serious doubts on its motive, legitimacy and validity, never mind its success. Thereafter, every effort is made to discredit the announced policy and ensure its procrastination and delays in implementation. Whilst open engagement with policy approaches and their technical underpinnings and objectives is an integral part of the democratic process, a protracted contestation and ongoing adversarial ideological battles over policy is not conducive to sustained high growth levels. In essence, these adversarial approaches ultimately divert attention from the medium to long-term issues and channel resources and energies toward short term crisis management. The opportunity cost of this modus operandi is considerable and, for the poor, it is unbearable. Future generations are set to suffer the consequences accordingly.

One of the major casualties of South Africa’s contested public policy domain has been a near total neglect of the country’s industrialization base. Despite numerous public policy statements and pronouncements, South Africa has experienced a real decline in its industrial base. More specifically, the key productive sectors of agriculture, mining and manufacturing have been neglected over the past decade or so. This process of de-industrialization has been costly in terms of job losses and the loss of productive opportunities. In the manufacturing sector alone, over the past decade, over 500 000 jobs have been lost and the relative contribution of this sector has declined from 22% to 16% of the GDP currently. A similar trend is true for the mining sector, agriculture and agri-businesses. The effects of these trends on poverty of the current and ensuing generations have been considerable.

These sectors are vital for medium to long term success in the fight against poverty, and for trans-generational social development. A focus on rejuvenating the country’s industrial base within a framework of an integrated beneficiation of mineral and agricultural resources requires a much higher level of collaboration and stakeholder commitment than has been the case thus far since 1994. The re-industrialization of the economy demands coordinated policy implementation and cross-sectoral coordination amongst stakeholders in mining, manufacturing, and the finance sector, amongst others. Policy contestation is not going to deliver on this vital socio-economic objective.

The above analysis of non-pecuniary elements of intergenerational equity is by no means exhaustive. Rather, it is illustrative of a select number of factors highlighting the fact that, in addition to quantifiable variables such as investment in multi-generational infrastructure, and the quantum of public debt bequeathed to the future generations, there are other foundational variables that do not lend themselves to statistical quantification, yet are key to the success or failure of economic prosperity and social development of future generations.

 

5 – Challenges in Rebalancing Intergenerational Equity.

As argued in the preceding section, it is safe to argue that South Africa’s political economy resource allocation is heavily tilted in favour of the current generation. Moreover, intra-generational resource allocation is in favour of the urban and the politically connected elites. Rebalancing this distorted configuration requires first, and foremost, the establishment and the promotion of a sustainable and prosperous South African socio-economic and political system. Configuring the society for success over time and across generations is the overarching challenge. This topic has been the subject of much scientific and historical research in the recent past.

Niall Ferguson (2011) in his analysis of Western ascendancy over the past 500 years, identifies six “killer apps” as the drivers of socio-economic prosperity, namely ; (i) competition, (ii) scientific revolution, (iii) the rule of law, (iv) modern medicine, (v) the consumer society, and (vi) work ethics. (pp 305-306) Acemoglu and Robinson (2012) in their impressive research on Why Nations Fail, emphasize the importance of ‘inclusive political economy institutions’ and highlight the dangers of politically driven and expedient ‘extractive practices’. Whilst such retrospective analyses of socio-economic prosperity, or failure, are instructive, they often do not fully take into account the time-sensitive dynamics of socio-political and economic evolution.

Social development, by its nature, is an adaptive evolutionary complex process. As stated earlier, the four protagonists of socio-economic prosperity (or decline) are: the individual, the societal culture with its embedded value system, the political economy governance structures, and the national capital endowment. Each of these four protagonists is subject to its own dynamic evolutionary process.  And, the interplay of the four defines the contours of social progress over time. Furthermore, there is need for a set of norms to guide and govern the conduct of the protagonists in the iterative game of social progress and wealth generation over time.

Critically, the two interrelated portals of intergenerational equity are the family and the education system. For both intra-generational and intergenerational value transmission, role-model setting, and cultural inculcation, the family fulfils an indispensible and an irreplaceable function. In many respects, the foundations of success in ethical, emotional and cultural evolution is laid within the family. The education system, in turn, reinforces this complex process with a systematic expansion in both cognitive and deductive capabilities. The compatibility of these two portals is particularly critical for social capital formation over time.

As for the individual, intergenerational upward mobility requires a set of norms supporting a strong work ethic, accountability, and self-reliance. As Beinhocker points out: “It is also important to believe that there is payoff to hard work and moral life in this world, and not just in the next.”(p.430) As import are the societal norms pertaining to cooperative behaviour. A belief in non-zero-sum game is a prerequisite for cooperative strategies within the society. Communities and nations that believe in zero-sum games lack mutual trust and find it hard to engage in cooperation. In line with the above mentioned notion of strong reciprocity it is important for the society to promote and value fairness and generosity, on the one hand, and discourage and penalize free-riding, dishonesty and abusive behaviour, on the other.

Societal norms with regard to competition and celebration of scientific and commercial achievements are vital for intergenerational risk-taking and innovations. Last but not least is how the society views time. “Cultures that live for today (or, conversely, are mired in the past) have problems across the board, ranging from low work ethic, to an inability to engage in complex cooperation and low levels of investment in innovation. Why work hard, and invest in cooperation and innovation if tomorrow doesn’t matter? In contrast, cultures that have an ethic of investing for tomorrow tend to value work, have high intergenerational savings rates, demonstrate a willingness to sacrifice short term pleasures for long-term gain, and enjoy high levels of cooperation.” (Beinhocker, pp. 430-431)

These norms collectively and interactively help define a socio-political and business milieu that, over time, helps create an upwardly mobile trans-generational social process. As noted earlier, however, South Africa at present faces a serious crisis of social value system. To turn the prevailing divide between ‘formal (professed)-informal (practiced) values’ within the SA society requires resolute business and socio-political leadership. A key portal in this regard is a quality and functional education system, capable of imparting not only skills but one which also fosters active and responsible citizenship. Clearly, this is not a goal that government on its own can achieve. A much broader set of national capabilities has to be brought to bear on the subject. However, government has a critical role to play in this regard. To this end, a conscious de-politicization of the public service is the first and necessary step.  This needs to be further reinforced by a political and management leadership whose actions are congruent with their formal policy pronouncements.

At the same time, business leadership as well as labour unions and the broader social groupings have equally significant parts to play.  Their commitment to and the promotion of an explicit value system is critical for changing the current pernicious culture of national resource utilization. This is particularly so in the light of the recent revelations about the reprehensible conduct of big business in a variety of sectors as revealed by the Competition Commission reports on price fixing in, inter alia, the banking sector, the petrochemical industry, the construction firms, bread makers, glass manufacturers and cement producers.  The abusive and unethical behaviour of trader union leaders is unravelling too. At the time of writing, the scandal surrounding the COSATU general secretary, Mr Zwelinzima Vavi, is a case in point.  The shameful sexual abuse of students by the lecturers at Wits University is another case of deep moral decay within the society. Equally reprehensible is the reported widespread abuse of the students by their teachers. The reported ill-treatment of children and the elderly within the society at large is yet another case in point. These are but a selected sample of unethical conduct across a variety of social segments. Clearly, the problem is not only confined to these segments.  Procrastination in addressing the value consistency question in the country is bound to deepen a culture of operational mediocrity across private and public sectors and a deepening of inconsistent value systems with their corrosive impact on the society.

Such are the challenges of intergenerational equity in present day South Africa.

This chapter has reviewed the challenges of intergenerational equity in South Africa. Overall the analysis suggests that the country’s resource allocation is skewed in favour of the present generation. Moreover, it has argued that whilst pecuniary investments for the benefit of future generations in the form of education expenditure, child grant and health expenditure have increased considerably since 1994, the non-pecuniary investments in this regard has left much to be desired.

The trans-generational policy framework in South Africa faces many challenges. The toughest of them arises from the absence of a set of well-defined and generally accepted ethical and moral values. As the forefathers of modern economics have convincingly argued, no socio-economic system is sustainable, let alone prosperous, without a set of moral values that are generally internalized across the society. Democratic South Africa is no exception! An environment filled with a duality of values is conducive to operational inefficiency and ethical inconsistencies, as well as social distrust and instability.  In the absence of a coherent ethical code of honour and practice, the poor suffer, the elite benefit materially, but their welfare remains at risk. Future generations, meanwhile, are set to suffer the consequence of inaction today.

In this light, it is a matter of grave concern that the newly released National Development Plan (NDP) of the SA government remains silent on the importance of ethics for economic growth and social prosperity. In fact given the analysis of this chapter, it would have been most appropriate to begin the NDP with a discussion of the role of ethics and moral conduct, especially by those in public office, for social progress. This chapter of the NDP is conspicuous by its absence.

Intergenerational equity is a complex multifaceted notion, which is easier said than done. In general, when resource allocation is tilted in favour of the present generation it is harder to correct the imbalances than the other way around. Visionary and resolute political and social leadership is, however, required to achieve success in this regard. A range of institutional, systemic, social and individual changes are required too.

Within the analytical paradigm of Complexity Economics, this paper has argued that the evolution of the complex adaptive system of socio-economic structures requires a set of norms for success. The adoption of such norms defines the current and likely drivers of competitive advantage and social progress over time. SA has one past, but numerous futures! Which one will be realized depends on the decisions made today!

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