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- Herausgeber: Jonathan Ball
- Kategorie: Fachliteratur
- Sprache: Englisch
- Veröffentlichungsjahr: 2024
After state capture, South Africa is f*cked not in a good place. The system is down. How do we reboot? Our is not the first country to find itself in a difficult spot. China, India, South Korea, Vietnam and many others have gone from being economic basket cases to powerhouses, lifting millions out of poverty. So how can we pick ourselves up and fix things? In this book, Roy Havemann argues that right now we need to focus on six basic 'E's: Eskom, Education, Environment, Exports, Equality, and Ethics. Havemann lays out how we can practically bring in lessons from other countries and learn from their achievements and mistakes, for example, how China, Greece and Colombia solved load-shedding, how different South American countries are dealing with inequality and how Brazil and Kenya are upgrading their education systems. He shows that we are slowly moving in the right direction. Our own 'Operation Vulindlela' delivery unit, which is a joint initiative of the Presidency and the Treasury, is implementing change where it's needed but more can be done to accelerate reforms to make South Africa a success. Sometimes the solutions to our problems are right here in our very own country – all that is needed is for us to recognise and harness them.
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Jonathan Ball Publishers
JOHANNESBURG & CAPE TOWN
‘This book will make you smarter. Packed with lively anecdotes and lessons from history, economics, and the world, How to Fix (Unf*ck) a Country explains the hole South Africa is in and how we can climb out.’
– Carol Paton, News24
‘… a pragmatic and innovative approach on how to overcome some of the historical and structural challenges that have held back efforts to set South Africa on a sustainable growth path.’
– Ralph Mathekga, author of When Zuma Goes and The ANC’s Last Decade
‘If South Africa would follow the proposals in this book, its economic prospects would look very different.’
– Judge Dennis Davis
‘Roy has written a thought-provoking book, making economics accessible and fun as he deploys his six “E”s to find ways out of South Africa’s stagnation.’
– Hilary Joffe, Business Day
‘I loved the approach of the book: keep it simple, stupid, because it’s the economy, stupid. Nothing stupid about it though.’
– Michael Avery, anchor of Classic Business
‘Make South Africa grow again. That is the golden thread animating this book. From Eskom and Education to an Ethical and Effective state, Roy takes us on a tour of the binding constraints to progress, one that is both even-handed and optimistic. If you happen to be running the country, please read this book.’
– Dr Nic Spaull, Bill & Melinda Gates Foundation
‘An engaging and accessible canter through the musing of someone who was at the heart of policy-making.’
– Peter Attard Montalto, Krutham
To the millions of South Africans without jobs
CONTENTS
FOREWORD
One of the very first things I did when I became Minister of Finance, in 2018, was to bravely put together a party made up of economists – and one farmer. I called it the Economic Growth Colloquium and I hosted it at the South African Reserve Bank Conference Centre. I am particularly proud of the Conference Centre, as it was added when I was the eighth Governor. So you could say I had some home-ground advantage.
I needed that home-ground advantage. Economists are a cantankerous and argumentative bunch. To have one of them at a party might be seen to be careless; to invite two of them would be a misfortune. We had a room full of them. Can you imagine what it was like? Michael Sachs, who is one of the smartest economists in the country, quipped afterwards that the only thing he learnt after two days was how to spell the word ‘colloquium’.
But Michael was just being his usual contrarian self. It was not the only thing we learnt. The first lesson is an enduring one – economists are full of ideas, they have all thought long and hard about growth, and they actually largely agree. Well, almost all of them. Indeed, afterwards a group of economists wrote a letter complaining that they were not invited to the colloquium – despite some of the signatories being in the actual room and presenting!
What is the collective noun for economists? A babble. If you put a babble of economists together on a topic as broad and wide as economic growth, you might find discussion with them quite tedious. But that was not the case. We covered many issues: the lack of a stable supply of electricity, the difficulties of getting an education system going, the slow and complex logistics chains, and so forth.
To create a bit of vigorous debate, I brought along a farmer from my home town in Magoebaskloof. We discovered that what a bunch of Johannesburg economists and Pretoria policy-makers thought about economic growth was completely different from what life is actually like on the ground for someone trying to run a business in a deep rural area. The farmer brought a breath of fresh air. He spoke about the practical things. He needs roads to get his oranges to the local market. He needs a port to get his oranges to a global market. He needs electricity to run the farm. He needs skilled workers to deal with an increasingly sophisticated business.
From that colloquium, the National Treasury published a paper, called ‘Towards a growth agenda for South Africa’. In true Treasury tradition, the paper was a dense technocratic exercise that pulled together years and years of research on economic growth. The young guns in the economics team at the Treasury called it their Microeconomic Manifesto, and like all good revolutionaries they were quick to explain it to anyone who listened. Of course, unlike other manifestos, it came with a long reference list; lots of footnotes, plenty of technocratic words likes ‘logistics chain’, ‘network industries’ and ‘telecommunications reform’; and, of course, that lovely phrase that economists bang on about incessantly, ‘structural reform’.
Those of us who have read the secret dictionary of economists know what they mean by such fancy words. A ‘logistics chain’ is really that road, train and port the farmer wants. ‘Telecommunications reform’ really just means bringing in cheaper WiFi and a cell connection that works everywhere. And ‘structural reform’ is not some terrible medication. It is about keeping up with the rest of the world – expanding your cell phone network to deal with the latest advances, making sure that the way you provide electricity is not how they did it during the days of the Model T Ford, and building ports that work efficiently. This seems like common sense – why economists have to befuddle it all by calling it ‘structural reform’ is one of those great mysteries of the world.
We then put the paper out. Gosh, the hullabaloo! Cabinet listened. The ANC National Executive Committee listened. Then Cabinet adopted the plan.
But in the last few years since the plan was published, a lot has happened. This book is an opportunity for us to pause, regroup, and look forward. How much of that plan have we adopted? What more do we need to do?
The Treasury plan was an exercise in technocratic English, written by a set of super-competent Treasury mandarins with a string of economics degrees from Harvard, Oxford, the London School of Economics, and so forth. This book is different. It is designed to be a much more accessible introduction for a general audience. Nevertheless, if it stokes your interest, please look at the endnotes, read the books cited, and engage with the ideas.
This book aims to be a bit controversial. It is not a detailed treatise on the latest and deepest reaches of academic thinking, packed with dense ideas and complex academic formulae. Rather, it aims to provide the general reader with a bit of a tour of the important proponents of growth theory and their big ideas, and then to put forward some simple ideas on how to get South Africa’s economy moving. It is ultimately a story about economic cooks and their recipes.
How is it that certain countries advance quickly, become wealthy and successful? Some countries, like China, have boomed periodically – in ancient times, in medieval times, and in modern times. Others, like Greece, boomed only in ancient times, and still others, like South Korea, have only boomed in recent decades. For our purposes, the question is: how is it that some poor countries suddenly take off? This question has puzzled economists, anthropologists, sociologists and investors for decades. The book starts with one of the most famous quotes in economics. Robert Lucas, one of the fathers of modern economic development theory, famously said when speaking at the prestigious Marshall Lecture in 1985: ‘Once one starts to think about [economic development], it is hard to think about anything else.’1 Indeed, once one realises how absolutely central economic growth is to progress, it is really impossible to think about anything else.
The great thing about the world is that, in 2023, people everywhere are living longer and are more well-off, better educated, and generally politically more free than in 1923, one hundred years ago. Martin Luther King famously said that ‘the arc of the moral universe is long, but it bends toward justice’, meaning that there is an unrelenting drive towards the realisation of rights for millions. Similarly, given the great ingenuity of the people on this earth and in this country, there is a relentless drive forward in terms of economic progress. Through raising millions out of poverty, economic growth brings about a type of economic justice. Although it is slow, the world economy continues to grow, and slowly, year by year, millions are lifted out of poverty. With the right policies, the lives of our children and grandchildren can be much better than those of our grandparents and our great-grandparents.
As we stand here in the early 2020s, this book takes a defiantly positive approach. Just as the past century has seen great leaps forward in the world, so too the next century is likely to see great leaps in justice and material progress for everyone. This may seem strange: while the great sweep of history has been generally positive, right now things are looking more than a little worrying. Apart from all the short-term issues, there are two long-term challenges: climate change and inequality.
On climate change, we urgently need to overhaul the production structure of the economy so that it stops harming the earth. We cannot go on pretending that pumping tonnes and tonnes of carbon into the atmosphere is a good thing. We must make a change. We have done this before – once upon a time, there was a hole in the ozone layer, but we banded together to close it. We can do the same with carbon emissions. Those that say that growth and climate reform work against each other are wrong. We can build a growth agenda that protects the earth. It is not about stopping growth; it is about directing growth in the right way.
The challenge of inequality similarly bears down upon us. One of the themes in this book is the idea that when countries grow, some are left behind. Sometimes this is because of where they are situated and what their education levels are. Too often, even as the world is slowly becoming more and more democratic, people are left behind and do not benefit from economic growth owing to their race or gender. We cannot be complacent. While the great arc of history bends toward progress, it only bends because we choose to bend it. Everyone should work to bring about a world and a country that seek to grow and succeed.
This book aims to create a conversation. My hope is that it stimulates a discussion on growth. We need it.
Tito Mboweni
Magoebaskloof, 2024
INTRODUCTION
Is there some action a government of [South Africa] could take that would lead the … economy to grow like [India’s] or Indonesia’s? If so, what, exactly? … The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
Adapted from Robert Lucas, ‘On the Mechanics of Economic Development’ (1988)
Why are some countries so much more successful than others? How can we get South Africa to be one of the successful ones? These two simple questions led to this book.
Some people live in countries that are successful. Here average income is relatively high and distributed more or less equally. Few live in poverty. Health care is available. Education is of good quality. There is a plan for climate change.
Others live in countries that don’t work. Perhaps their incomes aren’t as high, or perhaps some people are very rich while others are very poor. Health care is weak. Education is expensive. They are at the mercy of climate change – they have neither a plan to slow it down nor a plan to deal with its effects.
And others live in failed states, where almost nothing works.
None of this is destiny. Countries that were once successful, like Argentina, are no longer. North Korea, with abundant natural resources, is poor. South Korea, which has no minerals and a relatively small population, is now among the richest places in the world. We South Africans know the type of country we want – the successful type. This book is about getting us there.
Take post-war Japan. World War II devastated the country.1 But between 1945 and today, the average Japanese person has become ten times richer and now earns US$45,600 per year, or R830,000. Two generations ago, Japan was a poor country. Today, Japan faces new challenges, but being poor is not one of them.
Some countries have seen their fortunes improve in a much shorter space of time. We only have to look around the world to see examples of countries that have got their policies right and those that have got their policies wrong.
Three countries lie on the south-eastern border of China – Bangladesh, Laos and Myanmar (formerly known as Burma) – and a fourth, Thailand, is close by. On paper, these four are reasonably similar. They are densely populated. As neighbours of China, they are as close to the engine of the world economy as can be. They all have coastlines and relatively young populations. But they are vastly different. In 2022,2 the average annual income per person in Thailand was $21,000, and in Vietnam $13,500. But in Laos, it was $9,400; and in Myanmar, just over $5,000. Malaysia, also nearby, has a gross domestic product (GDP) per capita of $33,500. What is it about these countries – all very close to one another, with similar geography and people – that makes one seven times richer than another?
GDP per capita for the whole world is about $21,000, whereas for South Africa it is only $16,000. So if we South Africans could only attain the average world GDP per capita, our economy would become one third bigger. We have an economy about the same size as that of Malaysia and Singapore. But Malaysia has just more than half the number of people we do (33 million). Singapore has only five million people. They are much richer per person than we are.
How is this possible? Well, there are many things that matter: history, culture, institutions, religion – all of these play pivotal roles in determining the trajectories of countries. Yet it is also undeniable that the countries I have mentioned adopted certain policies that made them successful. This book is about those policies. Without them the countries could not have hoped to be as rich today as they are.
Our tour of the world in the ‘Examples of Success’ chapter will show how the basics matter: technology, skilled people, investment, and the appropriate ‘rules of the game’. We will see in the case of China how growth transformed the country. Under the leadership of Deng Xiaoping, the country opened up to the world, found its niche and exploited it. We will see from Vietnam and Kenya how education has re-engineered their economies and empowered their people. Travelling to South Korea – once a basket case kept alive by American grants – we’ll admire the lasting boom created by investment in infrastructure and a focus on exports. Africa is the future. We look at Kenya and Rwanda, two African countries that, while not perfect, show us a path forward.
To get us there, I drill into a list of things we can do practically. This book has six E’s: Eskom, Education, Environment, Exports, Equality, and An Ethical and Effective State. Easy enough. This is not an exclusive list; it is a priority list.
Let’s start with Eskom and its fellow state-owned companies. For the sake of your blood pressure, I will not repeat many of the facts that we know so well about it. The year 2023 was easily the worst ever for load-shedding, with uninterrupted electricity on only thirty days.3 All South Africans – rich, poor, black, white, and all the shades and income levels in-between – have increasingly sat in the dark for hours on end in the last few years.
Those fortunate to be employed have worried about how safe their jobs are (can my place of work survive without electricity?). It is no longer just a mild annoyance about missing your favourite soap opera on TV because there is load-shedding between 5 pm and 7 pm – it is now about your food rotting in the fridge, municipal water systems being unable to work, your kids not being able to study for their exams, and whole neighbourhoods being in the dark with criminals lurking in the shadows.
Of course, the matter is not really complicated; it is just basic maths. South Africa needs around 30 GW (gigawatts) of electricity to get through a normal summer, and around 35 GW to get through a normal winter. Stage 6 load-shedding means the system is short of around 6 GW. And so, to get rid of loadshedding, we need to quickly build at least 6 GW of new power generation, with some extra for a reserve margin. (Trying to fix the existing ageing power stations is just throwing good money after bad.) And how do we do that? Well, make it easy for everyone (Eskom, the private sector, companies) to build new power stations and sources of renewable energy. How?
Again, we turn to the world. ‘Load-shedding’, ‘blackouts’, ‘brownouts’ – power cuts are not unique to South Africa. Many countries have experienced a version of load-shedding from time to time. Most countries responded quickly. We look at the experiences of China, Greece and Colombia. Each of these countries has faced power problems, for a variety of reasons. China experienced rolling blackouts between 2003 and 2006 because it grew too fast. In 2015 Greece was in the middle of a financial crisis and its people could not afford the electricity supplied, some of which came through a complex deal with Russia. And in Colombia a drought in 1992 caused the main source of electricity supply – a hydroelectric plant – literally to dry up.
All three countries followed a similar route. They untangled their single electricity companies, focusing on keeping parts of these under state control and opening up the remainder to a mix of state and private companies.4 Private sector generation quickly jumped in to fill the gap and the power crisis disappeared. We can do the same.
The second E is for Education. That said, it is not only education that matters, but how a person uses that education – their skills and know-how. Nelson Mandela famously said: ‘Education is the most powerful weapon which you can use to change the world.’5 An educated person can steer his or her own future. On reading and maths tests, our children score very poorly compared with other middle-income countries. We will see how other nations have used education as a springboard to economic success: here Brazil and Kenya stand out.
The place where one is born, or the colour of one’s skin, or the income of one’s parents – none of these should determine the life chances of a child. For us to become a successful country, all children need a solid education, and the brightest and the best should be able to get the best education the nation can offer. There needs to be a relentless focus on the basics: reading, reading and reading. Too few of our children can read for meaning. By giving learners the right textbooks, and teachers who know what they are doing and who monitor and test learners regularly, we can vastly improve this core skill.
Some of our government schools deliver an exceptional education. From one of these government schools come the richest man in the world, a Booker Prize-winning author, the chief executive of this book’s publishing house, top international and local lawyers, judges of the Constitutional Court and the High Court, Springbok rugby captains and, indeed, the author of this book. And that is just from one of South Africa’s many excellent government schools.
To improve the life chances of children, a simple fix would be to expand functional public schools as well as learner transport to allow for bright hard-working children from poor areas to travel to well-resourced schools, and for the state to pay for their education when they get there. Many of these schools are set on grounds with room for expansion, and many principals would be willing to accept more learners provided their fees were paid. A longer-term solution would be to build well-resourced schools in poor areas.
Education benefits a country sometimes as much as the educated do. In the short run, while we develop our own people, we also need to bring in scarce skills from elsewhere. Visas for highly skilled people are crucial and should be easy to apply for and obtain.
Then the Environment. The technologies of the past – fire, oil and coal – have brought us great economic success. But this has been at the cost of the environment. The world is slowly heating up. In the early 1900s, the average temperature in South Africa was 16.7 degrees Celsius. In the early 2000s, this had risen to 18.5 degrees, which means that over the past two centuries South Africa has become nearly 2 degrees warmer.
Fortunately, technology is rapidly developing and will assist in slowing and even reversing this rapid temperature increase. Albert Einstein didn’t win the Nobel Prize for relativity: he won it for a paper he wrote in 1905 in which he explained the photoelectric effect – the marvellous ability of certain metals to generate electricity when in contact with the sun. The Wright brothers worked out how to get an aeroplane to take off from the ground, exploiting the idea of aerodynamics. That insight has been applied to the humble windmill, turning it into a wind turbine. A single big wind turbine powered by an airfoil can generate remarkable amounts of electricity. Since the days of the Wright brothers, we have worked out how to make this process extraordinarily efficient, so that today generating electricity from the sun and the wind is cheaper than any other way. This means that we can shift from a reliance on the old technologies of the internal combustion engine and the coal-fired power station to the new technologies of wind and solar. This will allow the world to transition to ‘net zero’ – where, overall, the world produces no carbon dioxide – with little economic cost. Indeed, in South Africa, we stand to benefit as we are a sunny and windy country.
This shift can be complemented by two incentives – carrots that can support a gradual shift of industry. One is to raise the carbon tax, which makes it more expensive for carbon emitters to produce. This will incentivise them to avoid the tax – and doing that will make them cleaner producers. Together with the carbon tax, we can introduce the trading of carbon credits. A carbon credit is like negative carbon dioxide – you get one when you create a way of taking carbon dioxide out of the atmosphere. This is, of course, remarkably easy: through the process of photosynthesis, plants are able to convert carbon dioxide into oxygen. And new technologies can make dirty industry cleaner. With all these things in place, over time we can reduce our carbon dioxide and ensure that the earth does not overheat.
Then there are Exports. South Africa has a population of 62 million, earning an average of $16,000 per person when adjusted for purchasing power parity and inflation. The world has a population of 7.9 billion, earning an average of just less than $21,000 per person. Not only are there many more people out there that can buy what we make, but they earn 1.3 times what we do. It makes huge sense for us to export our goods and services into the much bigger, richer world. Indeed, we are part of Africa, a continent of one billion people. These are huge opportunities for our companies here. Already, we can celebrate the successes of our multinational firms such as Shoprite and MTN that operate across the continent.
One challenge is our ports. These are among the most inefficient in the world. We are not the first country to face this problem. We can learn from China, which opened up its ports to private sector operators. Within a few years, these ports added significant capacity and allowed for an export boom. The second step is to develop our existing capabilities further. The sun and the wind give us huge advantages in the export of energy such as green hydrogen; our country is blessed with plentiful deposits of minerals such as manganese that are needed for the new green world; and our agricultural sector can add new high-value products like blueberries to our export basket. But, as always, if our ports are not working, then producing goods is a waste of time. They should be our immediate priority. Similarly, we need to improve our railways and our roads – the entire logistics chain.
Then we move on to Equality. South Africa has extraordinarily high levels of inequality. In this book I show that there is a golden thread between unemployment and inequality. The unemployment rate is over 30%, while the expanded unemployment rate, which includes discouraged work seekers and those not actively looking for work, is around 40%. For the youth aged 15 to 24 years who are not in school, the expanded unemployment rate is, incredible as it may sound, nearly 60%.
If we include the unemployed, South Africa’s Gini coefficient (a measure of inequality) is 0.67.6 If you consider only people earning a taxable income, the Gini coefficient is 0.36. And so the first way to tackle inequality is to get more people into work. This requires the economy to start moving – essentially by doing the simple things proposed in the rest of this book. But, of course, in the meantime poverty is pervasive – as well as morally repugnant and politically divisive. I look at the social grant system and argue that it is largely effective at moving money to those who need it most. Around half of all South Africans receive a grant of some sort.
Yet South Africa is in a perilous fiscal situation. Since 2013, the public wage bill has increased by 74% above inflation; both debt and interest rates on that debt have skyrocketed; and debt is now our largest budget line. Further public spending would worsen the cost of living crisis by hiking inflation further. We simply can’t afford a further expansion of grants without first growing the economy – otherwise we could become bankrupt. The medicine should not be worse than the disease.
Given the close link between inequality and unemployment, the most effective way to reduce inequality is to get people into jobs. And for that we need to get the economy moving. We need to take difficult yet obvious decisions to improve electricity supply, send our goods to export markets, and find ways of absorbing the millions of unemployed people.
Our final E is for Ethical and Effective Government. Why do we have so many unethical people in our country? In both the private and public sectors, black and white, rich and poor, corruption has seeped into our fabric. It seems that the saying is true: power tends to corrupt, and absolute power corrupts absolutely. We need to double down on our enforcement capability. We also need a more effective ‘government’. This is a complex beast.
Yet we have all struggled to cook supper because there are no lights or power, or stood for hours in a queue at Home Affairs, or had to get up early to apply for a motor vehicle licence – times when we despair of ever achieving a capable state. We all know that feeling when you arrive at a government facility and someone says: ‘The system is down.’ Oh no. The system is down, both literally and metaphorically. Again.
For many readers, the ideas in this book will not be spectacularly new. Reforms of the electricity market have been government official ‘policy’ since 1998. The concept of the capable state is at the heart of the National Development Plan of 2012, and attempts to obtain private sector financing for infrastructure have been tried for years. Sometimes, as with the Gautrain, they have succeeded. And so we know that it is not the ideas that are lacking. It is about getting them implemented.
In this book I look at what other countries have done to deliver reforms quickly and effectively, through a central team that drives change and has the full backing of the Presidency. South Africa is doing something similar with its Operation Vulindlela, which means ‘clear the path’. We need to start work by getting one or two things right. A stable supply of electricity would be a good start.
In this book I do not prescribe ideological answers. Ideologies are for philosophers. This book tries to be more practical.
For too long South Africa has been trapped in a ‘binary’ of the state versus the private sector, as if there is a competition between whether South Africa should be a completely state-led country or whether it should be wholly privatised. These ‘binary’ debates have animated the South African discussion about the economy for so long that they have become stale. But, as the youth of today keep reminding us, the world is non-binary.
To understand how to balance the state and the market, we turn to the ideas of Chen Yun, the author of China’s first five-year plan. He is perhaps best known for his story of the ‘bird cage’. In his telling, the market is like a rare bird, and the government is like a bird cage. The government wants to protect the bird from predators and from flying away. But if the cage is too small, the bird will suffocate. In his words: ‘The cage is the plan, and it may be large or small. But within the cage the bird [the economy] is free to fly as he wishes.’ Similarly, if the government is too overbearing, the economy will suffocate. But if the government turns a blind eye to the worst excesses of capitalism, we may be overrun by powerful monopolies, inequality, lack of social mobility, corruption, and the rule of the rich.
Throughout this book I will draw on lessons from China and the careful opening up of the Chinese economy through a process that one could describe as ‘tactical flexibility’, guided by an exceptionally meritocratic bureaucracy. The description the Chinese used for their policy approach was ‘crossing the river by groping for the stones’ – a beautiful Chinese proverb about how one attempts great things through careful trial and error, in a step-by-step way. The Chinese way has been to avoid ‘shock therapy’ – the sudden opening of the bird cage7 – and instead to progress in stages, one day at a time.
I do not discuss fiscal and monetary policy in much detail other than to show that successful countries have pursued prudent fiscal and monetary policy. This is because this is a book about economic success. Prudent fiscal and monetary policy are vital foundations on which growth can rest, and they are useful tools to manage short-run fluctuations. But neither can deliver meaningful long-run prosperity. Indeed, all our country examples show that badly managed finances and loose money can collapse a country, not fix it.
The time has come for some tactical flexibility in South Africa: a pragmatic programme of action for change. Putting in place the basics will lay the foundation for growth. But enough with the starters. Let’s get on to the main course. We look at examples of success from around the world.
EXAMPLES OF SUCCESS
Now, there are two different attitudes towards learning from others. One is the dogmatic attitude of transplanting everything, whether or not it is suited to our conditions. This is no good. The other attitude is to use our heads and learn those things that suit our conditions, that is, to absorb whatever experience is useful to us. That is the attitude we should adopt.
Mao Zedong
Economic success is hardly ever accidental. Successful countries have always pursed a deliberate strategy. To set the scene for what we our strategy should be, I pick out some examples of success, each with a lesson for South Africa.
Common themes quickly emerge. In China, the rolling back of the state and reform of state-owned enterprises unleashed success. In India, fixing the finances of the country, together with untangling red tape, was critical. South Korea shows how getting government and business aligned around a common vision – South Korea Inc. – created prosperity. It is similar in Botswana, where a joint venture with a global mining giant unlocked success. In Kenya, education was a lynchpin of growth, and in post-apartheid South Africa, introducing democracy and removing distortions lifted our growth rate to 6%. Finally, two countries from South America – Bolivia and Colombia – show us the importance of dealing with crime, corruption and inequality.
Our story starts with a death.
The death of Chairman Mao
On 2 September 1976, Mao Zedong, the founder of the People’s Republic of China, had a heart attack. He lay in a coma for nearly a week. But on the morning of 9 September 1976 the life-support machines were turned off. He was 82. Two years later, Deng Xiaoping succeeded him. Deng delivered a plan that transformed China. Between then and now, the World Bank estimates that over 800 million people in China have been lifted out of poverty.1
I first visited China in 2011. Even then the scale of the place was breathtaking. A train travelling at over 300 kilometres an hour transported me from Nanjing, a city as big as Johannesburg and much richer, to Shanghai, one of the great cities of the world. Seeing the skyscrapers and railway systems made it difficult to imagine that only thirty-five years earlier, China had been a rural country with extensive poverty, closed off from the rest of the world.
Although growth is slowing, the average income in China is still far behind that of many other big advanced economies, which suggests that there is still a huge opportunity for China to continue its boom.
First, the plan. China’s growth plan can be summarised in two phrases. The first is gaige kaifang (), which means ‘opening up’ – the idea that China needed to open up to the world. The second is ‘crossing the river by groping for the stones’ (), the idea that change should be gradual and experimental. If something worked, it was expanded; if something failed, it was stopped.
At the heart of China’s success is the concept of ‘comparative advantage’.2 This is the idea that countries should not try do everything; rather, they should focus on the things that they are relatively good at. To explain this idea, let’s consider the world of sport. If you look at the medal tables for the Olympics, you’ll see that some countries dominate in some sports, and others in other sports. Kenya does exceptionally well in long-distance running and Jamaica in sprints. Both countries spend huge amounts on these two codes, both of which they were already good at to start with. In the 2020 Olympics, Azerbaijan came fifteenth overall, winning more medals than many other big countries. Why? It won almost all its medals in combat sports, something that the country has become very good at. South Africa generally wins its medals in swimming.3 Why? We have sunshine and swimming pools.
Of course, if you want to be successful you can’t only keep on doing what you are good at. You need to advance into other areas and make the circle bigger, thereby increasing your comparative advantage. Ricardo Hausmann and Barney Klinger4 argue that the easiest way to grow is to move into new industries that are similar to what you are already good at. Take the sport example. A country that is naturally good at swimming – because of swimming pools and sunshine – can easily become good at water polo or diving.
Deng’s great reforms allowed China to find what it was good at, and then ruthlessly exploit those strengths so that it could drive change forward and move from one area of expertise to another. This is the big difference between closed economies and open economies. Closed economies try to do everything at home – from sourcing the raw materials all the way through to producing the end product. In these economies, too much time and resources are spent on things they do badly, and not enough resources are spent on the things that they do well. It’s a bit like a swimmer being asked to compete in long-distance running.
From China, we can draw lessons for the reform of state-owned enterprises, which accelerated from 1985 onwards. The centrepiece of the reform was the Law of Industrial Enterprises Owned by the Whole People.5 It reorganised state-owned companies from being puppets of the Beijing bureaucracy to autonomous, productive enterprises. Deng thought that political interference in state-owned enterprises would make it more difficult to develop China. His idea of a state-owned enterprise was to create a strong independent entity with a clear mandate, and then let the experts get on with it6 – what is known as fangquan rangli.
The next phase of the reform process came about after Deng made a tour of the southern part of the country to create support for ongoing and more radical reforms. This led to a drive to make state-owned enterprises even more efficient. In a campaign known as ‘grasp the large, let go of the small’, Deng shut down small state-owned enterprises and raised the productivity of the large ones to the levels of private firms. Chang-Tai Hsieh and Zheng Song of the University of Chicago estimate that this policy led to about a fifth of all productivity growth in China between 1998 and 2007.7
Then in 2013 Xi Jinping, the current Chinese president, launched a further set of sixty reforms.8 These aimed to discard anything that inhibited consumer-led growth. They included a property tax, more land rights for farmers, more rights for migrants, and yet further steps to get rid of state control in various sectors to allow them access to more capital. These reforms have been implemented at a slower pace than previous ones, and now in the 2020s it looks as if China might start to slow. But the great boom of China, set in motion by the Deng reforms, has brought incredible benefits to millions of people.
