Will South Africa have a Lula Moment?
Pursuit of South Africa’s “Lula Moment” is akin to Searching for Sugarman. As with the subject of the documentary, American musician Rodriguez, we have to ask whether the Lula Moment is still alive in Brazil; and whether the notion itself still enchants and excites.
Brazil’s unique positive achievements in addressing inequality – quite counter-intuitive in the context current global experience – should not be underplayed. However, it is critical that in interrogating its applicability to South African conditions, we should look at the totality of that narrative.
Virtually all South Africans agree that the country’s ideal should be to achieve not only high economic growth, but also social equity. As with Brazil during President Lula’s second term (2006-2010), we seek to do this in a global context of “trickle-up” economics, with growing inequality virtually everywhere. For instance, according to Brian Groom of the Financial Times, pre-tax income of the top 1 percent in the US was 8 percent of national income in 1974; and this had grown to 18 percent by 2008. The package of a FTSE 100 chief executive was about 47 times that of an average employee in 1998 and it had grown to 120 times by 2010.
Brazil’s experience in reducing inequality is even more instructive if we take the example of socialist China: while it has extricated hundreds of millions from poverty in the past 30 years, income inequality continues to ratchet up. It is estimated that the Gini coefficient, a measure of income inequality, rose from near-zero to 0.474 in 2012; while researchers at the Southwestern University of Finance and Economics in Sichuan province argue that it is closer to 0.61, placing it among the most unequal societies in the world.
Estimates put South Africa’s Gini coefficient at 0.68, arguably the second-most unequal society globally. This is besides the 25 percent rate of unemployment and the fact that individuals in about 39 percent of households live below the Poverty Datum Line of R419 a person a month in 2009 prices.
What, then, is the context within which the Lula Moment played itself out? Understanding this is critical to avoid simplicity and selectivity, by positing a kind of “knight-in-shining-armour” approach.
Two issues stand out in this regard. First, it is of much relevance that during President Lula’s second term, global GDP was growing at close to 4 percent on average a year. The major locomotives of this growth, China (10 percent) and India (8 percent), were also gobbling up commodities that Brazil has in abundance; and there were expanding opportunities in Latin America itself and Africa. In other words, Brazil’s economic performance of about 4.3 percent a year in that period cannot be divorced from dynamics of the global economy.
Second, it would not be correct to pose a complete disconnect between the economic policies of Lula’s first and second terms, and between macroeconomic and microeconomic policies. According to researchers at the Global Labour University, during the second term the Lula government took “a different position on economic growth, despite the continuity in the macroeconomic policy based on inflation targets, primary surplus in the government’s budget and the policy of floating exchange rates”.
Some argue that it is precisely because of the fiscal surplus in particular that the government was able to expand access to social grants and stimulate economic growth in general, but also in small towns.
Thus the approach was not one of “right-left” ideological polarity, but of logicality and sensibility.
Of the many lessons in the Brazilian experience, two have stood out in the public discourse. The first and most talked about is the social grants system (Bolsa Familia) and its conditionalities.
South Africans are wont, justifiably, to argue that our social wage system is more extensive, with beneficiaries having increased from 2.4 million in 1997 to 15 million in 2012. This is buttressed by free basic services, no-fee schools, subsidised housing and other benefits to the poor. It is further argued that we do not need the conditionalities, given saturation levels in school enrolment, inoculations and so on. But if there is one thing that we may need to consider, it should be whether these conditionalities can be used to stem the drop-out rate in basic education. Now that the age limit for the child support grant has been extended to the 18th birthday, continued school attendance could be made a prerequisite for receiving the grant. Of the 1.55 million children who started school in 1998, only 0.55 million wrote matric in 2010. Given this drop-out rate to Grade 12 of roughly 64 percent (without factoring in other detailed issues), such an intervention may have some positive results.
The second lesson from Brazil, and the least talked-about, is the minimum wage, which has increased faster than inflation at 38.3 percent overall between 2003 and 2008.
Conventional economics has it that if you bumped up minimum wages in this way, the rate of labour absorption would decline, at the very least. Brazil avoided this through the holistic nature of their socio-economic policies, including through the following logic: “Increased aggregate demand, in this case arising out of social and minimum wage policy, should be combined with industrial policy and a tariff regime that encourage purchase of local goods.
“Measures to incentivise labour absorption should include lower payroll taxes and, for this, a healthy fiscus is critical.
“Economic and social infrastructure should be deliberately targeted; and in Brazil this included massive housing construction which has a major multiplier effect, and reduction in electricity prices (recently by 16 percent for households and by 28 percent for industry).
“Development finance institutions should play a more activist role in ensuring access to credit on the basis of a targeted sectoral and geographic approach.
“All these initiatives should be underpinned by a social compact of sector leaders, who have strategic foresight, as well as popular engagement and mini-compacts across the society.”
In brief, what this experience shows is that it is possible to attain “pro-poor growth and pro-growth poverty reduction”. If we were to draw parallels between South Africa and Brazil during the decade of the 2000s, it can be argued that we experienced roughly similar rates of economic growth; but our economy started to heat up even before the global economic crisis because it had surpassed its trend growth. The South African unemployment rate was reduced from 31 percent in 2003 to 23 percent in 2008 and access to social grants was massively expanded, thus increasing aggregate demand, or buying power. But industrial policy did not adequately respond to this, as we continue to import the very goods that the mass of consumers need.
While economic growth and social grants improved the standard of living of the poor in South Africa, the living standards and wealth effect among the rich across the colour-line seems to have grown faster. There is a minimum wage policy, but unlike in Brazil, the minimum wages are sectoral and the levels in many sectors are quite low. Besides, we have some way to go before attaining a social compact – a deficit of leadership in South African society at large.
And so, shall South Africa have a Lula Moment?
In answering this question, it is necessary to assess whether the Brazilian Lula Moment was precisely that: a transient moment incapable of sustaining itself, with the spirits of the Golden Years weighing heavily on the present. For instance, the Brazilian economic growth rate is faltering. From 7.5 percent in 2010 it has slipped to 2.7 percent in 2011; and it is estimated to have plummeted to 1 percent in 2012. President Dilma Rousseff is quoted as citing, among others, high labour costs, low productivity, poor infrastructure, high taxation and competitive currency devaluations as among the reasons for this state of affairs. Added to this is the unfavourable global economic environment. Incidentally, some of these factors were the very drivers of the Lula Moment.
She is confident, though, that the objective “to transform Brazil into a middle-class population” will be attained. In an interview with the Financial Times she further asserts that Brazil will develop into “a country that produces, that creates knowledge and applies it here…” And the government seems committed to deal with corruption, irrespective of the seniority of the individuals involved.
As for South Africa, we should continue searching for Sugarman, and hope to find him alive and as enchanting as we have always imagined.
n Netshitenzhe is executive director of the Mapungubwe Institute.