A. From Left-Keynesianism to Fiscal Austerity

Although the South African government’s current macroeconomic policy is guided by a neoliberal framework, the Growth Employment and Redistribution strategy (GEAR) its apparent hegemony conceals the persistence of a powerful left-Keynesian orientation to economic and social policy debates in the democratic movement dating back to the late 1980s. This approach can be identified with two separate, but linked projects. The first was an intellectual project based among groups of progressive academic economists who established the Macroeconomic Research Group (MERG) to develop a framework for macroeconomic policy in South Africa. (MERG, 1993) According to one of its key participants, MERG envisioned a two-phased "crowding-in" approach to a growth strategy for South Africa. According to Padayachee, this entailed "A state-led social and physical investment programme as the growth driver in the first phase, followed by a more sustainable growth phase which would see private sector investment kick in more forcefully as growth picked up." (Padayachee, 1997:9) However, in spite of the fact that MERG was initiated by the ANC’s Department of Economic Policy and that it developed the furthest articulation of a left-Keynesian programme, its policy recommendations were never adopted by the democratic movement.

The second project - the Reconstruction and Development Programme (RDP) - overlapped with MERG in terms of personnel and policy prescriptions, but came out of COSATU. The RDP originated in an attempt by labour to produce an accord that would tie a newly elected ANC government to a labour-driven development programme. In 1993 and 1994 a number of intellectuals based in the unions and NGOs developed successive drafts of a policy framework. In its final formulation, the RDP envisioned as a first priority "beginning to meet the basic needs of people: jobs, land, housing, water, electricity, telecommunications, transport, a clean and healthy environment, nutrition, health care, and social welfare." (RDP, 1994:7)

Running parallel to this left-Keynesian project was a set of local and international pressures that were profoundly changing the ANC’s expressed economic policy. From the 1950s the ANC was publicly committed to a state-interventionist redistributive strategy, as articulated in its central policy document, the Freedom Charter’s commitment to nationalisation. This policy was publicly reconfirmed by Nelson Mandela on his release from prison in February 1990. The ANC’s standard developmentalist position - which was consistent with the "southern compromise" referred to above - had by the late 1980s and early 1990s come under substantial pressure. If Mandela had entered prison at a time when nationalisation was an article of faith, he was released into a world where monetarism and its obsession with inflation and the reduction in state expenditure had become the new orthodoxy. (Hood, 1994)

From 1990 there were a series of economic policy reversals through which the ANC leadership came to adopt positions increasingly consistent with the neoliberal orthodoxy. By late 1993 the ANC had made a number of concessions in macro-economic policy. They accepted a clause in the constitution that guaranteed the independence of the Reserve Bank and agreed to retain its highly conservative governor. They also agreed to retain the NP-appointed Minister of Finance. Finally, in November 1993 - at precisely the moment when MERG was releasing its left-Keynesian policy framework - the ANC concluded a secret $850 million loan agreement with the IMF. In return for the loan the ANC agreed: not to ease monetary policy; to prioritise inflation reduction; to contain government expenditure (indeed to cap the debt/GDP ratio and to reduce it progressively in subsequent years); and not to raise taxes. (Gelb, 1998)

These agreements were not in keeping with the thinking of both the MERG and the groups drafting the RDP, which was proceeding through its final drafts.  Upon its release the MERG essentially disappeared: it was no longer consistent with the ANC’s macroeconomic policy reversal. The RDP however, was central to the ANC’s electoral strategy and could not simply be abandoned, above all because it was being promoted by COSATU. Instead it was amended to make its macroeconomic thinking more consistent with the new position. In particular, its macroeconomic orientation was redefined away from the unions’ commitment to "growth through redistribution" (an important emphasis in MERG) to a direction more attractive to domestic and international capital, with commitments to fiscal discipline and macroeconomic balance.

The redrafted RDP was sharply criticised on both procedural and substantive grounds at a special COSATU congress held in August 1993. The redraft was presented for adoption without being debated within COSATU structures, and its content had been changed to include a statement that "coherent, strict, and effective monetary and fiscal policies will be a cornerstone of our RDP." (Etkind and Harvey, 1993) The re-formulation provoked considerable debate at the Congress over what was seen as the thin end of the neoliberal wedge, that would constrain - if not undermine - the possibilities for a left-Keynesian project as envisioned by both MERG and the RDP authors. However, COSATU adopted the program without suggesting an alternative to this call for fiscal discipline at the heart of the RDP. The RDP soon became the paradigm within which all development policies were to be discussed, an extended wish list in which the homeless, the landless, workers, and international bankers could take equal comfort. In other words, it became all things to all people. (African National Congress, 1994)

From 1994 to 1996 the RDP became ostensibly the guiding document of the Government of National Unity, located in an RDP Office within the President’s Office, under the immediate authority of Minister Without Portfolio Jay Naidoo - ex-General Secretary of COSATU. Within months the Alliance’s election document was redrafted into an official government White Paper. (Parliament of the Republic of South Africa, 1994) However, the principles and programmatic objectives of the original RDP were reconceptualised as a long-term strategic vision to realign all government effort around clearly stated economic targets, leaving little room for labour-, or indeed civil society-driven change. (Götz, forthcoming)

Furthermore, the macroeconomic shift noted above became even more pronounced in the White Paper which significantly strengthened the emphasis on fiscal discipline that first appeared in the draft presented to the 1993 COSATU special congress. It developed a more robust commitment to an export-led growth strategy while loosening the RDP’s original emphasis on a basic needs strategy stressing instead the need to reduce state expenditure, privatisation, and promoting private sector expansion.

In the first year and a half of the new government, the two parallel thrusts - left Keynesianism and macroeconomic conservatism ran parallel to each other, leading to a muddle in government policy. This confusion was heightened by a measure of ineptitude in the RDP office, and rivalry between it, the Department of Finance, and the Department of Labour which had begun implementing a labour-friendly legislative agenda, focussed on the new LRA and NEDLAC.

B. Contestation over Economic Policy

The first major public contestation over the neoliberal drift occurred in December 1995, when the government announced its intentions to privatise important state assets. Labour responded by threatening a general strike and demanded the right to negotiate the terms of restructuring. After intensive discussions between the NEDLAC labour caucus(4) and senior government ministers, the National Framework Agreement was accepted in February 1996. But while labour challenged an important element in government policy, and had won important concessions, it had not yet developed an alternative macroeconomic framework.

Instead, in January 1996 business opened the public debate on economic policy with a document advocating a standard neoliberal solution: economic deregulation; dramatic reductions in the deficit; trade liberalisation in the form of lower tariffs; rapid privatisation; lower corporate taxes; and increased labour market flexibility to be achieved through dual labour market policies. (South Africa Foundation, 1996)

Soon after business’ document was published, COSATU released an alternative plan, "Social Equity and Job Creation," inspired by left-Keynesian thinking that became the common position in the NEDLAC labour caucus. (Labour Caucus, 1996) The plan attacked neoliberalism and proposed instead a public and private investment policy geared towards job creation and growth. Central to the strategy was an active industrial policy to develop the manufacturing sector along with social adjustment measures to provide for the social costs of restructuring the economy. Importantly, the document proposed a redistributive fiscal policy based on a strongly progressive tax system to redirect spending towards social services for the poor. The program articulated a vision of regional reconstruction and development tied to support for a third world debt write-off and closer trade union solidarity. Finally, it incorporated demands for worker participation, both at the shop floor in the form of union-based Workplace Forums and at the sectoral and national levels.

In the meantime, the Government was converting the RDP White Paper into a formal policy, the National Growth and Development Strategy (NGDS). The NGDS continued the ambiguous straddling between neoliberalism and the redistributive and equity orientations of the original RDP. (Inter-governmental Forum, 1996) However, this document was withdrawn when critics within the ANC and the SACP and COSATU opposed both its content and the non-consultative process by which the document was written. As a result of this deadlock in the Alliance, the NGDS was never publicly released.

However, the new government’s first major currency crisis - starting in February 1996 - quickly overtook this debate, as the value of the Rand plummeted by more than 25%. (Lloyd and Rix, 1996) In this context the government moved quickly to calm domestic capital and foreign currency markets by embracing a conservative macroeconomic framework developed by a team of policy makers including senior civil servants, technocrats from the Development Bank of South Africa and the World Bank. In June, after considerable internal disagreement within the Triple Alliance, Finance Minister Trevor Manuel finally released the new strategy, "Growth, Employment and Redistribution" (GEAR). (Department of Finance, 1996).

GEAR put forward ambitious targets. It aimed to achieve a "fast-growing economy which creates sufficient jobs for all workseekers." It also envisioned redistribution of income, the provision of sound services to all, and the achievement of 6% growth and the creation of 400,000 jobs per annum by the year 2000. (Department of Finance, 1996: 1) The controversial aspect of the plan was the means identified to achieve these goals. Its integrated strategy highlighted fiscal deficit reduction, gradual relaxation of exchange controls, reduction in tariffs, tax reductions to encourage private sector (and especially foreign direct) investment, and restructuring of state assets (privatisation).

The ANC sought to win support for this shift in policy within the Alliance through a series of informal meetings with senior SACP and COSATU officials in the weeks before GEAR was released. ANC leaders stressed their precarious international position and the need to project confidence during the crisis, and argued that GEAR was the best means for doing this. The Alliance partners, while acknowledging the pressures on the government, queried the origins of GEAR and were critical of the lack of consultation. Indeed, the actual document was not tabled in the meetings - the COSATU and SACP leaders, according to one participant, were shown only the section headings.

However once GEAR was released, the Alliance partners were angered both by its content - which they now saw for the first time - and because the government asserted that it was "non-negotiable", a position that was reiterated by many ministers and government spokespersons. These two factors provoked anger from COSATU as well as among many figures in the SACP. COSATU General Secretary Sam Shilowa publicly criticised GEAR - tellingly at a seminar marking the 75th anniversary of the SACP - describing the strategy as an "unworkable and unwinnable" plan that "poses serious difficulties for the working class and the country as a whole." Most significantly, Shilowa identified the distance the ANC government has moved rightward from the original RDP by indicating that GEAR could never have emerged from the ANC before the 1994 elections. (Sunday Times, 1996; Sunday Independent, 1996)

Despite these criticisms, GEAR was ultimately formally endorsed by the ANC’s National Working Committee, on which COSATU and SACP representatives sit, though both COSATU and the SACP have rejected the policy. Yet no formal agreement could be reached in either COSATU or the SACP on how to deal with GEAR: some felt that the policy should be given a chance and the government should not be attacked during a crisis; others wanted openly to oppose the policy. The issue threatened to be divisive both within and between the parties to the Alliance; as someone close to the process put it, "the debate became so shrill that people walked away from it."

However, silence over GEAR did not mean acquiescence, and during 1997 the terrain became more fluid. Firstly, line ministers experienced the consequences of GEAR’s fiscal restraint and the implications this policy held for delivering on the government’s social programs. Secondly, GEAR has not come close to delivering on its ambitious promises of employment creation, redistribution, growth, and foreign investment. (Marais, 1998)

In this context, both COSATU and the SACP became increasingly critical of GEAR. COSATU’s 6th National Congress rejected GEAR but did not demand that the ANC drop the policy. It was argued that the policy was not cast in stone and could be successfully contested in many ways short of a direct confrontation with the ANC. The basis for this contestation came from the major document presented at COSATU’s congress, the report of the September Commission on the Future of Trade Unionism. (COSATU, 1997; Webster and Adler, 1997) A crucial recommendation in the report was that COSATU establish greater autonomy in its alliance with the ANC, "support the ANC when it adopts progressive policies, influence it wherever possible, and oppose the ANC when it adopts >anti-worker’ positions." (Webster and Adler, 1997:14)

Importantly, the economic chapter of the report, "Reclaiming Redistribution" contained a more systematic and considered statement of the left-Keynesian position first put forward in COSATU’s Social Equity document. This vision includes socialising the investment function and building a "social sector": although the private sector remains the largest sector, the report recommended its transformation into a "stakeholder sector" where "no longer only the rights of shareholders prevail, but also the needs of workers, communities and society." The report believed that this could best be done through strategic engagement with the state and capital at the enterprise, sectoral, and national levels. The report also recommended that union leaders commit themselves to taking a central role and responsibility in shaping economic and social development as well as the functioning of the public sector. This latter was seen as "the basic foundation for translating into reality the citizenship rights enshrined in the constitution" through the delivery of services, the stimulation of economic growth and by advancing significant forms of collective ownership. (Webster and Adler, 1997:13-14) These prescriptions were endorsed at COSATU’s Central Committee meeting in June 1998 and tied to a clear set of alternative macroeconomic policies that call for demand-led growth, stimulated by reduced interest rates and more flexible policies on debt, state spending, and taxation.

The ability of COSATU as well as the SACP to avoid a direct confrontation over GEAR has largely disappeared. Not only has GEAR failed to perform anywhere close to expectations, but a further decline in the value of the Rand in May and June 1998 alongside dramatic interest rate increases have raised the spectre of a recession. In this context both President Mandela and Deputy President Thabo Mbeki have used high profile speeches to COSATU’s Central Committee and the SACP’s Congress to rebuke both organisations for questioning the government’s economic policy. As Mandela told the SACP:

C. Explaining the Shift in Economic Policy

If COSATU and the SACP are influential alliance partners with the ANC how did they come to this point of conflict over economic policy? On the face of it, South Africa is well-placed to resist orthodoxy. Not only was the ANC’s policy orientation opposed to such directions, but South Africa was not suffering from an immediate debt crisis, which should have given the international financial institutions less leverage over the course of economic policy.(5) How can the shift in economic policy be explained?

The most important factor in this shift was the changing locus of international influence that arose out of the collapse of the Soviet Union and the east block. Not only did this discredit left economic policy, it also ensured that the most important international actors in South Africa’s transition were to be the United States and its allies, Britain, Germany, and Japan. The price these powers demanded for disciplining the apartheid government and extending promises of material aid to the ANC was a commitment by the ANC "to embrace western-style free-market principles." (Landsberg, 1994:291; Landsberg and Kabemba, 1998)

The full opening to the west meant not only that the ANC was now for the first time welcome in Downing Street and the White House, but as it was increasingly perceived as the government-in-waiting it gained access to international financial institutions, banks and corporations. These organisations vigorously and enthusiastically promoted neoliberal policies and a thick web of contacts began to develop between their representatives and ANC policy makers and intellectuals, particularly economists. These contacts included a welter of private conferences and workshops as well short-term secondments of key officials to the World Bank, the IMF, and western banks. Others were invited to participate in economics refresher courses and graduate programs in Washington and elsewhere. The result was a powerful ideological shift in the thinking of key policymakers in the ANC. Commenting on this shift, two left economists observed that:

These perspectives corresponded well with the interests of a growing professional middle class and business group emerging out of the movement that stood to gain materially from the rightward shift in economic policies. For these strata - black and white - market-oriented policies delivered direct benefits through the prospect of buying privatised state assets and gaining access to discounted shares in private companies. As important, however, these ideas helped justify their newly acquired wealth and to rationalise the persistence of South Africa’s highly unequal society. "Africans...should not feel ashamed about making money," the political commentator Jabulani Sikhakhane wrote recently:

The rapprochement between leading figures in the ANC and international capital had a domestic counterpart in which the movement grew closer to local capital. These links were forged in a fashion similar to the external connections. From the late 1980s, but particularly after the ANC was unbanned, far-sighted South African businessmen courted black businessmen, intellectuals, and politicians, offering them attractive directorships and shareholdings in established companies. Moreover they engaged ANC leaders in a series of workshops and scenario planning exercises where the two sides could meet and discreetly discuss "options" for South Africa’s future. In the process business could exert influence over the thinking of important leaders while simultaneously facilitating their entry into the ranks of the bourgeoisie. For Bond (1996) this "elite compromise" determined the direction of macroeconomic policy in the country, redirecting it from the stated redistributive goals of the RDP towards a policy in the interests of dominant domestic and international class interests.

There are two problems with the elite - or conservative - compromise. The first is that it is not delivering sustainable growth, and it is unclear whether it can ever do so. The second is that the compromise occurred over the heads of those who supported the ANC during the liberation struggle and elections and who stand to bear the brunt of the decline in consumption that accompanies neoliberal adjustment. It is these groupings who were chastised by Mandela for criticising the economic policy reversal. In other words, these policies have generated the familiar tension identified at the outset between economic liberalisation and the consolidation of democracy.

D. From Class Stalemate to Class Compromise?

The challenge to this elite compromise has come from the labour movement and (in an increasingly close relationship with COSATU) the SACP, as well as a broader constituency of NGOs, community organisations, and sections of the church. However, at this point these forces do not have the capacity to impose their alternative economic policies on either the state or domestic and international capital. Nor is the government and capital able to satisfy the economic demands of this constituency through GEAR. Neither can they crush opposition.

In other words, South Africa may be entering a class stalemate where neither capital nor labour are able to win their demands and adequately protect their interests. A class compromise is impossible unless all key actors perceive the stalemate and recognise the need to bargain and make concessions. In the mid-1980s, negotiations between the apartheid state and the democratic movement did not begin until both sides realised they could not achieve their objectives without making concessions. For an economic compromise in the 1990s what would such concessions look like, and under what conditions might they be forthcoming?

A class compromise must aim at a non-zero sum solution appropriate for a labour surplus economy in a semi-peripheral country. Such a compromise would prioritise high growth in which capital invests in a manner that generates sustainable jobs, without undermining the living standards of currently employed people. As with all compromises this involves trade offs for all parties.

In return for organised labour accepting wage stability and variation in employment conditions, they would gain two concessions. The first would take the form of a social wage. Currently South Africa could be described as a residual model of a social welfare state, the core of which is the provision of a basic pension for everyone in need. (Standing et al., 1996:407) For example, in 1994-95 R8 billion was paid out on social pensions to 1.7 million pensioners; a sum of R470 per month is paid to all women aged 60 and over, and to all men age 65 and over. According to one expert, "International poverty professionals are shocked at (and many disapprove of) the >high’ level of the state social pension compared to, say, the unskilled wage levels." (Lund, 1998)

This example illustrates that South Africa already possesses some attributes of a welfare system. The challenge is to deracialise this system by breaking away from what Nattrass and Seekings (1996) have called "the apartheid welfare state regime". This involves difficult trade offs and tough choices, such as providing benefits for all at the cost of reducing the relatively high level of benefits historically enjoyed by non-blacks.(6) COSATU has embraced the logic of this argument, and has called for an investigation into the ways in which "social insurance and the provision of social assistance can best be integrated to achieve the most effective - and widest possible - social security net." (COSATU, 1996)

The integration of labour market variation and welfare allows a degree of "regulated flexibility" in the labour market - greater job and wage inequality - in return for a minimum standard of benefits, thereby ameliorating the impact on workers of downward variation. The advantage of such tradeoffs is that variation gives incentives to individual capitals to invest and create jobs, while the social wage provides workers at the lower end of the labour market and the unemployed with a degree of income security. Moreover, labour will be more accommodating of flexibility where workers’ concessions can be offset by a system of public benefits. These benefits are extremely important in a labour-surplus economy where job creation will be slow, while the consequences of adjustment are felt immediately.

Part of the concessions can be accomplished through negotiations in the current industrial relations institutions: in particular industry-wide bargaining councils, as well as through workplace-level forms of codetermination. These enable workers and employers to bargain on concessions and to reach agreements acceptable to both. Furthermore, they also enable the parties to negotiate improvements as conditions improve, thereby helping to ensure that concessions do not become permanent.

But the concessions also require an active and strong developmental state to maintain a system of social welfare that is integrated with these labour market agreements. (For a similar emphasis, see Torres, 1996) Moreover, public benefits are not limited only to the forms of transfer payments. Recalling the "productivist welfare" arguments made above, they also currently include a range of public expenditure on education, training, health, transport and housing essential to a modern economy. Concretely, such benefits assist job creation directly by producing a higher skilled, more secure workforce, but also help contain employers’ costs (for example on medical aid), thereby creating multiple incentives for job creation. As above, these transfer payments need to be integrated with the system of labour market compromises.

The second major compromise involves capital relinquishing unilateral control over investment and production decisions. This entails embracing codetermination at the workplace and bargaining at the industry and societal level to reach agreements over macroeconomic policy that encourage growth and redistribution. In the absence of such joint decision-making it is unlikely that the surpluses generated through wage stability and labour market variation would benefit the population as a whole.

In return for labour gaining increased control over the distribution of the surplus capital gains a more productive workforce and flexibility conducive to job creation. These are necessary conditions for the stability of profit over the longer term, and provide capital with an incentive to participate in the compromise. But this incentive is not open-ended. Business not only gives up a measure of control over profit and investment to workers, but also concedes power to the state: it must accept being brought fully into the state’s tax regime. Taxation of the increased profits generated by flexibility provides a major portion of the income stream to fund the redistributive and productivist welfare policies. An important part of the compromise is an emphasis for all parties on policies that are oriented towards the stability of profit over the longer term as opposed to high rates of profit in the short-term.

Thus far we have argued that a class compromise is desirable to resolve the tensions between political democratisation and economic liberalisation. We have also identified the concessions that would to be made to make a workable compromise in a labour surplus semi-peripheral economy. Finally, we have pointed to the development of a range of institutions through which such a compromise could be bargained.

These are necessary, but not sufficient conditions for a compromise. In order for such a compromise to take place it is necessary for all the parties to share a perception of stalemate and be willing to accept a sub-optimal solution to the impasse. As we have identified above, a stalemate in economic policy has emerged. Yet none of the parties are willing to make the concessions necessary for such a compromise. For the moment all of the parties perceive the possibility of achieving their aims without conceding to their adversaries.

The state continues to refuse to negotiate the terms and elements of an alternative to GEAR. In the face of the policy’s weaknesses, their best offer remains more of the same, and a growing intolerance of criticism. For capital, its "triumph" lies in the collapse of socialism and the apparent omnipotence of globalisation and its capacity to discipline labour on a variety of fronts. They remain committed to an even purer version of GEAR and to a dogmatic adherence to labour market flexibility that would require a reversal of many of the institutional and labour market advances noted in Section 2. Finally, labour is pursuing many of these compromises in practice, but its rhetoric and official policies block its capacity to make wage and labour market concessions in a strategic fashion that would yield positive outcomes to itself, the unemployed, and to capital and the state.(7) It is, in other words, conceding the flexibility business seeks without gaining much in return.

For the moment none of the actors are oriented towards a compromise. What would the conditions be for these orientations to change? To understand these conditions we return to the political "miracle" and the forces that shaped the concessions that enabled it to occur. Firstly, the parties have to enter a situation of stalemate where neither party is able to achieve its objectives. Secondly, the stalemate has to lead to a situation where the costs of not compromising begin to outweigh the perceived gains to be realised by standing fast (such as increasing levels of social disorder). Thirdly, the parties must have access to - or be in a position to create - institutional arrangements that allow for bargained agreements to be reached. Fourthly, it is necessary for there to be organisations that can mobilise and restrain followers according to the organisation’s strategic and tactical vision. Fifth, it is imperative that individuals are willing to risk making strategic choices that may break with their organisation’s prior commitments. Sixth, the international context must be conducive to the settlement - or at a minimum, does not serve to affirm the parties’ unwillingness to compromise.

On each of these points conditions in South Africa were favourable to a political settlement that began in the mid-1980s and culminated in the 1994 election. On a number of these points conditions are becoming favourable to a class compromise, but not on all. The first condition has been met: South Africa has reached a stalemate where government’s and business’ insistence on staying the course is being met with increasing levels of resistance. The third condition, as we argue in Part 2, has been met and is one of the most important legacies of South Africa’s transition to democracy. Surprisingly, the sixth condition is beginning to be realised. A growing number of influential neoliberal economists and policymakers are questioning the efficacy of their economic and social policies. Most notably, World Bank chief economist and vice-president Joseph Stiglitz has "called for an end to >misguided’ policies imposed from Washington." (Hanlon, 1998) As Galbraith remarked recently, when asked whether he thought there would be a Keynesian response in the United States,

But significantly, the other critical conditions do not yet exist. The parties have not yet been disciplined by the threat of disorder such that they perceive a sub-optimal solution as preferable to class stalemate. Furthermore, it is not yet clear whether organisations - including those of business and labour, as well as the state - would be able to bring their constituencies along on a compromise or that there are leaders willing to make bold departures and tough strategic choices, such as those that made the political settlement possible.