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Introductory note from the author…
Dear Subscribers,
After my visit to South Africa earlier this year I wrote a document for consideration by people in the South African
Communist Party and the ANC I had met, hoping they would adapt my ideas and make them their own. I have not heard
whether this is happening. I also sent the document out of courtesy to the South African New Economics Foundation which
had organised my trip. I did not intend them to circulate it but they sent it out to their members a few days ago and,
as a result, Economic Reform Australia and Boudewijn Wegerif's Money Matters e-mailed it to their subscribers. A Moslem
magazine in South Africa is putting it into print. So the cat is well and truly out of the bag, so my proposals might as
well be circulated here too. Details apart, they would be equally applicable to many other countries. I'd be grateful
for suggestions for improvements.
Best wishes,
Richard Douthwaite
Ireland
A Four-Step Programme to Transform South Africa
Introduction:
Most people who were involved in the anti-apartheid struggle are disappointed about how little progress it has been
possible for the country to make since 1994. They recognise that the policies imposed on the country by the World Bank,
the IMF and the global economic system generally have prevented the necessary radical changes from being carried out and
share Dennis Brutus' view that these institutions are a new kind of tyranny.
This paper suggests four steps that would free South Africa from that tyranny and enable it to achieve its full
potential. The steps are:
STEP 1. Restore the Financial Rand
Comment: This proposal involves keeping flows of money from imports, exports, tourism and interest payments - current
account flows - apart from flows of investors' capital. It does this by operating two foreign currency exchanges, with
independent exchange rates, one for each type of flow, exactly as happened when the Financial Rand system operated in
the apartheid era. The point of keeping the flows apart is that, at present, if there is an inflow of capital to the
country - perhaps to buy a South African company - the increased availability of foreign currency means that the
strength of the Rand increases and that, as a result, South African exporters get fewer Rands for the foreign currency
they bring home. This naturally hurts them. It also hurts companies producing for the home market, because competing
imports become cheaper.
If the flows are kept separate, however, each exchange rate adjusts so that export earnings always equal the cost of
imports, and inflows of capital always equal outflows. This gives the government much more freedom of action. It means,
for example, that if something happens which causes a lot of South Africans to try to move their capital overseas, the
exchange rate in terms of dollars or pounds they will get for their money will rise to discourage them without putting
up the exchange rate that other South Africans have to pay to get foreign currency to buy imported goods. Consequently,
this proposal would allow the government to adopt policies that benefitted its own people but which upset international
and domestic investors. It would cease to matter whether a foreign company decided to invest in South Africa or not as
all its decision to do so would mean would be that people who wished to move their capital out of the country would get
more foreign currency in exchange. It would be the same with foreign loans - they would simply improve the terms on
which the better-off could move their capital offshore.
STEP 2. Strip the commercial banks of their power to create money and have the government create it by spending it into
circulation instead.
Comment: Like other industrialised countries, South Africa allows its commercial banks to create around 95% of all the
money in circulation in the country. The banks do so by granting their customers loans without taking the money their
customers borrow from anyone else's account. (The remaining 5% is the value of the notes and coins issued by the central
bank) Because the banks charge interest on the money they create in this way, allowing them this privilege boils down to
giving these private financial institutions a massive subsidy.
Much more seriously, this system of creating currency also makes the economic system very unstable. This is because
unless the volume of bank lending increases year after year, the amount of money in circulation in South Africa will
fall. This, in turn, will mean that less buying and selling can be carried on, jobs will be lost, investment will
decline and the economy will enter a recession. To avoid such a situation, the government has to adjust its policies to
ensure that people are sufficiently confident about their futures and that of the economy as a whole to continue to wish
to borrow on an increasing scale. Naturally, this puts a serious constraint on the government's freedom of action as the
interests of potential borrowers, who are always the better-off, have to be put before those of any other group.
If, however, the government created the money itself and spent it into circulation, the money supply would not contract
if investor confidence fell. Money would stay in circulation permanently unless the government itself decided to tax
some of it away, perhaps to prevent the economy overheating. This would make the economic system very stable because, if
one industrial sector declined, the same level of spending power would still exist and other sectors would expand to
absorb it.
Putting this proposal into effect would require the South African government to restrict the banks to acting as
financial intermediaries that simply lend one person's (or one company's) savings to another. Over a period of, say, ten
years, the government would gradually replace all the debt- based money in circulation in the country with money it had
created itself. This would give it a great deal of money to spend over the conversion period. Part of this money could
be used to clear all the country's internal debts, part to fund vast public works projects such as providing decent
housing and other facilities in the townships. A great deal of work could be created.
When the conversion period was over, the government would only be able to spend more money into circulation than it took
out in taxes if the economy was growing and more money was therefore required to facilitate trade. Otherwise, increasing
the amount of money in circulation would be inflationary.
In short, this proposal would make the economy much more stable and reduce the government's dependence of maintaining
investor-confidence. It would also provide a massive capital windfall that could be used to transform conditions for the
underprivileged section of the population in the space of a very few years.
STEP 3. Having freed itself from external and internal constraints by steps 1 and 2, the government should then
initiate a massive tax reform.
The three main elements of this would have to be carefully co- ordinated. They are:
i) Introduce quotas on the use of scarce resources that belong to everyone. Sell the quotas by auction.
ii) Abolish all taxes on labour, including income tax and VAT.
iii) Introduce a citizen's income funded from the revenue raised from the sale of quotas introduced under element (i).
Comment: Element (i) involves the imposition of quotas on, as a minimum, the use of fossil energy, land, fisheries and
the road network. For example, the use of fossil energy could be restricted, with the amount the country permitted
itself to use declining annually at a pre-set rate. In such a scheme, each year's fossil energy quota would be sold by
competitive tender to producers and importers of fossil fuels. The quota would probably be expressed in terms of the
weight of carbon dioxide each fuel's use would release so that South Africa is already compliant with the Contraction
and Convergence method of limiting global warming if that is adopted internationally. To avoid unbalancing South
Africa's overseas trade, exporters of fossil fuels, or goods produced using fossil fuels, would receive a rebate to
cover the cost of purchasing the CO2 quota required to make or mine them, while a tax would be placed on imports
sufficient to buy enough quota to cover their production.
This system would
* create jobs by encouraging South African producers to switch to technologies with lower levels of fossil energy use.
These replacement technologies would be more labour intensive, thus helping to cut unemployment. At present, firms are
constantly introducing labour- saving technologies which generally require the use of more fossil energy, with the
result that, if the economy does not grow at 3% a year, the total number of people employed falls. Higher energy prices
would reverse this trend. It is likely that the agricultural sector, in particular, would take on much more labour, thus
providing work in the rural areas where there are very few jobs at present.
* give South Africa a head-start with the changes that it is going to have to make not only as part of the global
response to climate change but also because world oil production is going to peak within the next decade. In particular,
the certainty that steady cuts in energy use are going to be made, and the likelihood that energy prices will rise in
real terms, will enable government bodies and businesses to plan properly. The country will thus avoid the waste that
would result if everybody continued to pretend that world oil and gas supplies are likely to be cheap and abundant for
at least the next 25 years.
* enable much more local production to take place for local use by putting up transport costs. Smaller-scale producers
selling in their own areas would get a competitive advantage over bigger ones in other areas, a change that ought to
give the opportunity for many more African entrepreneurs to emerge.
The government would also sell a limited number of permits for the use of other public resources. With fish stocks, for
example, scientists would calculate the maximum weight of fish that could be caught without reducing the stock, and each
year boat-owners would be required to bid for the right to catch part of this limited quantity.
Similarly, traffic engineers would calculate the optimum number of vehicles on a particular stretch of road, and tolls
would be set at rates which varied according to the time and the day of the week to ensure that this level was never
exceeded. Roads on which traffic rarely exceeded the optimal level would be unaffected.
Land is already subject to quota. As Mark Twain said: "They're not making any more of it." South Africa should adopt a
system which would require landowners to have the site value and the improvements to their properties assessed during
the first year of its operation, Year One. When the property was subsequently sold, the improvements would be re- valued
according to their worth at the time and the vendor would be allowed to keep their full current value, plus the value
the site as assessed in Year One. Any increase in the site value would go to local or national government. (Equally, the
government would pay compensation for any fall in site value). Similar arrangements would apply if the title of a
property was transferred to a relative. Thus, if agriculture became more prosperous as a result of, say, the public
paying higher prices for produce, only the increased incomes would benefit the farmer. The capital gains from the
increase in land value would be captured by the community. The same would apply if the site of a commercial or other
property became more valuable in an urban area.
As revenue from the sale of these tolls and quotas slowly built up, the government would be able to reduce taxes on
labour. It should probably reduce VAT rates first and then switch to raising the income-tax threshold, so that fewer and
fewer people became liable to pay it. The reason for wanting to eliminate all taxes on labour is that it is silly to tax
a factor of production which is in excess, thus making its use more expensive, while at the same time having low, or no,
taxes on the use of scarce natural resources like fossil energy.
It is frequently argued that income taxes need to be maintained to avoid the gap between rich and poor becoming even
more extreme. However, if people were prevented from becoming wealthy except through their work because:
* taxes on unearned income were maintained or even increased, * all gains from increases in land values were collected
by the community, and, * death duties and a capital transfer tax made it impossible to transfer significant wealth from
one generation to the next
it ought to be possible to eliminate taxes on earned income altogether while at the same time narrowing the gap between
rich and poor. Moreover, the introduction of a citizen's income system would also reduce that gap considerably.
A citizen's income is an essential component of any tax reforms involving energy because as the poor spend a higher
proportion of their income on energy and products made with large amounts of energy than do the rich, they would suffer
great hardship without one as energy prices rose. Moreover, everyone is entitled to expect a share of the income
received from payments that are essentially rentals on the use of common property.
STEP 4: Adjust the balance between urban and rural
Comment: The rural areas of South Africa are very depressed. Unemployment is high, incomes are low and the net flow of
money from urban areas is very weak, largely because the price of agricultural commodities is low in relation to other
goods and services and a very high proportion of the earnings from the sale of produce leaves the country immediately in
payment for industrial inputs to the agricultural system, such as fertilisers, pesticides, machinery, fuel and packaging
materials. In many country districts, pensions are almost the only source of cash.
Rural poverty creates acute problems not just in the country but in urban areas too. Among these are:
* There is a very poor market for domestically-produced consumer goods in the countryside, even though rural people
would like to buy them. This reduces the level of employment in urban centres.
* The constant flow of employment-seekers and their families from the rural areas overtaxes the resources of the places
to which they move and leads to congestion, shortages, pollution and crime. Moreover, this flow sets up a positive
feedback. If the government devotes resources to housing the new arrivals and building schools and other facilities for
them, this creates work and incomes in the urban areas which, in turn, encourages more migrants to come.
The government's strategy should therefore to reverse the population flow and get people moving back to the rural areas.
A Citizens' Income system would make this very much easier to bring about because it de-links the possibility of getting
an income from the place in which one lives. To promote the change, a higher rate of Citizens' Income could be paid to
those collecting it in rural areas than in urban ones.
The higher costs of agricultural inputs as a result of the quota on energy use, plus the higher transport costs, are
going to create opportunities for more food production for local use in rural areas. This should be encouraged by
promoting organic and other forms of low-external-input agriculture. These have the advantage of requiring more labour
per unit of output. Another plus is that in order to prevent the build-up of pests and diseases, farms need to grow a
wide range of crops in small areas. Because of the management problems this entails, it encourages a movement to a much
smaller farm size. This, in turn, allows more people to be farmers rather than farm workers.
My recommendation is that South Africa should attempt to become a world leader in the production of organic meat, fruit,
vegetables and grain. The provision under Step 3(i) for an export rebate to cover the additional costs incurred by the
operation of the fossil-energy quota would mean that there would be no obstacle to the emergence of a good export market
for these. However, the health of the population, the creation of employment, and the sustainability of the country's
economic, social and environmental systems, should be the main motives for going organic rather than any possible export
gains.
There are many more tactics that could contribute to bringing about a rural revival such as the creation of rural banks
and money systems. These need to be developed in a wider report. Overall, however, a rebalancing between urban and rural
would:
* Remove the need for expensive and basically unsustainable infrastructural project is the urban areas.
* Reduce crime, pollution and congestion.
* Provide a wider range of employment and self-employment opportunities.
* Enable people to fulfil themselves by becoming more self-reliant, because in the rural areas they would have access to
the resources to do more to provide for themselves.
Summary
The first three steps I propose would free the South African government from having to constantly concern itself with
keeping the business community and internal and external investors happy. They would provide it with a lump sum to
invest over the next few years and enable it to achieve a more even distribution of employment, incomes and wealth
within a decade. The fourth step would take a lot of pressure off the urban areas and allow lower energy-using, more
self-reliant communities to develop throughout the country.
Obviously, a great deal of elaboration is required to make these four steps into fully developed policy options. I would
be happy to work with others to develop them further if asked to do so.
Richard Douthwaite, Cloona, Westport, Ireland. Tel/fax (353) 98 25313. e-mail richard@douthwaite.net