PRETORIA – Each day there is a talk about how South Africa can grow its economy. This is even more topical as a result of the coronavirus fallout continues to keep the economy in a worst state it could have ever be. Thus, the focus is on the new economy that needs to be developed in the post-COVID phase.
So far there are no concrete proposals as both the National Treasury and South African Reserve Bank (SARB) continue to play hardball in the worst economic crisis that any country can endure. So much has been written about the role of fiscal and monetary policies can play in reviving the economy, but less attention has been given to the industrial policy.
South Africa is already fully integrated to the global economy following its accession to the World Trade Organisation (WTO) in 1995. Many people blame this for the manufacturing sector that continues to flounder. With millions losing jobs as an result of COVID, South Africa’s overly financialised economy is unlikely to provide solutions to the rapidly expanding unemployment. But manufacturing is the easiest bet because it can easily combine capital-intensive and labour-intensive industries.
But that is not the point of this discussion. A country such as South Africa that appears to be struggling from all fronts, it needs to decide on the type of industrial policy and approach it wishes to pursue.
Increasingly, the role of the state in economic development is receiving renewed focus. Thus, this article advocates for state-driven development in the post-COVID period in order to build a truly inclusive economy that will address the majority of socio-economic challenges that face the country today. With the economy already on its knees, a new, fresher approach that draws politics and economics closer together is required. The functioning of markets alone is not sufficient to create a ‘new’ South Africa that was promised decades ago. The time is now for that to happen.
The state as a leader in economic development
Chinese economist Justin Yifu Lin argues that economic development is “a process of technology innovation, industrial upgrading and structural change.” So, it is important consider appropriate policy choices that can facilitate industrialisation and technological upgrading. However, in most instances there is a temptation to think that export-led growth industrial strategies will bring prompt results and also yield other critical economic development outcomes such as employment creation, growth and improved standards of living.
As a result, scrambling to set up special economic zones (SEZs) and similar interventions is quite rampant since there’s a belief that international investors will flock in and that the country will inadvertently attain its development goals.
The problem with this approach is that it reduces the state’s role in economic development to a mere facilitator rather than a leader. Of course with neoliberalism being a dominant force, this is not entirely surprising.
In her book ‘The Entrepreneurial State: debunking public vs. private sector myths’ (2013), Mariana Mazzucato believes that economic success of any nation “is a result of public and state funded investments in innovation and technology, rather than a result of the small state, free market doctrine that often receives credit for the country's strong economy.” Mazzucato says this is exactly what the US did to create large companies like Apple and Google. She adds, “If the rest of the world wants to emulate the US model, they should do as the United States actually did, not as they say they did.”
To make the strongest case for state-led economic recovery in the post-COVID period, this article provides a case study of Mexico and its economy which suffers from the effects of the neoliberal framework which continues to inform its economic outlook. Justin Yifu Lin and Ha-Joon Chang unanimously assert that there are very few countries, if any,
A little bit about Mexico and its recent political history
Located in the southern border with the US, Mexico is perhaps one of the few countries in the world in such an unenviable position. Maybe the Philippines comes in a close second because of its geographical positioning in relation to the big and strong Chinese state. Based on this reality, Mexican President Díaz (1876-1880 and 1884-1911) once said, “Poor Mexico, so far from God and so close to the United States.”
Diaz was correct but Mexico was never always this poor. A thriving nation in the pre-colonial period, Mexico was home to some of the greatest civilizations on earth, namely Aztec, Huastec, Izapa, Maya, Mixtec, Olmec, Purépecha, Teotihuacan, Toltec, Totonac, and Zapotec.
This was long before this once thriving part of the world was conquered and bludgeoned into a state of despair by the menacing Spaniards. Millions of people died in the hands of the conquistadores and left Mexico poor. Notwithstanding the arrival of marauding Spaniards, the modern Mexican state has an interesting history.
Very few people are aware that Mexico was once one of the largest states on earth, with a border stretching from perhaps what is today the city of Seattle in the north to Chiapas in the far south. In the latter parts of the eighteenth century, the Spaniards encountered Russian settlements in California. Meaning, Spanish Mexico shared a border with Russia. The emergence of the US as the neighbour in later years, however, launched Mexico’s endless troubles which started with land invasions to deep economic problems the country still experiences to date.
History books indicate that, like most of Latin America, Mexico won its independence from Spain in the period 1810-21.
In 1845, the Republic of Texas was annexed by the US after seceding from Mexico. And, in he following year, the Mexican-American War “was provoked by the US as a war of conquest,” adds Roger Harris. Then Mexico was forced to sign the Treaty of Guadalupe Hidalgo in 1847, where it lost nearly half its national territory. With Texas already gone, the war resulted in the US gaining parts or all of California, Arizona, Nevada, Utah, New Mexico, Wyoming, and Colorado. A few years later, what was called the Gadsden Purchase of 1853 gave southern Arizona and New Mexico to the US, this was said to be part of “the spoils of war.” Overall, Mexico lost 55% of its territory to the US. It is no wonder that some people in Mexico don’t agree that there is anything called illegal immigration to the US by Mexicans. They argue, “we did not cross the border, the border crossed us.”
Mexico is one of the countries that benefited from the Haitian revolution against France that ended in 1804 but with dire consequences for the once prosperous nation (Haiti) when European powers forced it pay billions of US dollars in reparations from freeing itself from exploitation and slavery.
The Mexican Revolution took place from 1910 to 1920. Harris argues that this was “one of the first of the major 20th century revolutions,” together with those of Russia (1917), China (1949), Vietnam (1975), etc. When the Mexican Revolution took place the then weak US empire was engaged in World War I thousands of kilometers away, so it could not multitask to stop the Mexicans from revolting against a repressive rule.
Nevertheless, this resulted in some great achievements, namely: it guaranteed labour rights, nationalized subsoil rights, secularized the state and curbed the power of the Roman Catholic Church, and gave inalienable land rights to indigenous communities. In addition, it advanced women’s rights. As a side issue to note, many women “fought as soldiers and even commanders in General Emilio Zapata’s revolutionary army.”
Also linked to the Revolution, president Lázaro Cárdenas in 1938 nationalized all oil reserves, facilities and oil companies. He boldly established Petróleos Mexicanos (PEMEX), a state-owned firm, and barred all foreign oil companies. The US retaliated with passing a policy that “backed efforts by American companies to obtain payment for their expropriated properties.”
The US owned companies included Jersey Standard and Standard Oil Company of California (SOCAL – now Chevron). México has always been pressured to reform its oil and gas sector. The Washington Post reported in 2014,“Finally, Pemex privatized parts of the monopoly.” Admittedly, the sad reality is that just over a hundred years later, “many of these gains [from the Revolution] have since been eroded,” particularly with yet another conquest of Mexico through economics this time around.
The Mexican government estimates that “a third of the population lives in moderate poverty, and 10 percent of that lives in extreme poverty.” Millions of Mexicans either die or live in fear as a result guns and narcotics involving its powerful northern neighbour.
Neoliberalism, export-led growth strategies and failures
In 1994, the North American finance capital came in the form of the North American Free Trade Agreement (NAFTA) (today called the United States–Mexico–Canada Agreement or USCMA) and similar neoliberal arrangements. Harris says, “Neither free nor restricted to trade (e.g. it includes military cooperation), this stealth conquest facilitated the repatriation of foreign investment profits and the further integration of Mexico into the US economy.”
Forget the US rhetoric that the likes of Mexico benefit unfairly from the US because the pain was self-inflicted. The NAFTA agreement compelled Mexican government to end its supports for agriculture, which paved way for entry of US and Canadian agricultural products without duties. This destroyed much of Mexico’s agricultural sector. A friend and fellow alma mater James Kitchin conducted an important study that looked at the reasons why people left central Mexican states (provinces). The death of the agricultural economy in Mexico gave rise to a massive migration to both large cities and the US. Mexicans followed the border, so to speak.
In addition to agriculture, one of the most contentious aspects of the US-Mexico trade is the maquiladora programme which still draws millions of people to the border towns with the US, particularly Tijuana off San Diego. As part of this programme maquiladora manufacturer, as an illustration, “operates by importing raw materials into Mexico either tariff free (USCMA) or at a reduced rate on a temporary basis and then using Mexico's relatively less expensive labour costs to produce finished goods for export.” The sad and absorbing story of workers in the maquiladoras is best narrated in the movie ‘Border Town’ (2006), starring Jennifer Lopez and Antonio Banderas.
Also, most of the retail sector in Mexico is dominated by US stores like Walmart and Costco. Mexico is the second largest consumer market after Brazil and the largest e-commerce in the whole of Latin America. So, this means that Mexico is an extension of the US commercial jurisdiction in almost all its sectors. This integration comes at a huge for Mexico’s economic sovereignty where poor working conditions and appalling salaries continue to be a bone of contention. For many years to date, in MBA classes world over professors have praised the highest penetration by the US companies in the Mexican market, yet they ignored the real issue of the destruction of people’s lives in Mexico.
Mexico is often touted as an export-oriented economy which is highly efficient. But there are few things that are least spoken about. The Brookings Institution claims that “Mexico’s dependence on the US market is proving to be a greater risk than most had assumed.” Mexico sends 80% of its exports to the United States, according to Forbes’ Shargy Angulo. What makes matters worse is that these exports account for nigh on 30% of Mexico’s GDP.
In spite of the trade arrangement, US president Donald Trump never gets tired to threaten Mexico with tariffs. The Brookings Institution adds, “the export-fueled motor has not proven strong enough to overcome the significant drag created by multiple structural deficiencies and has instead propelled a part of Mexico forward while leaving much of the country behind.”
In almost all development indices of the OECD such as poverty and education, Mexico ranks low and this makes the country to always feature in the bottom places. Had Trevor Manuel succeeded to take South Africa to the Paris-based organisation, México would be whipping boys of this club.
Not only is México dependent on the demand in the US economy but it is also one of the largest consumer of ‘Made in USA’ products including natural gas. Noting this peculiarity which meant lack of economic sustainability in the long-run Mexico has tried to diversify its trade by signing trade agreements with over 40 countries, including the European Union, Japan, Israel, and much of Central and South America.
Bloomberg’s Daniel Moss says that this attempt to reduce dependence on the US economy has been undermined by the signing of “the rejiggered North American Free Trade Agreement [which] pulls the Mexican and US economies closer together.” The USMCA, as NAFTA is known today, “draws supply chains further inward among the US, Canada and Mexico, and away from the outside world.”
Moss continues to paint a grim picture on the US-Mexico relationship by arguing that “Mexico is mortgaged diplomatically, as well as commercially and economically. In some ways, it’s an emerging market that’s pasted onto a developed country’s pace of growth and fully integrated into the fabric of America’s economic life.”
He who pays the piper calls the tune
With all the troubles that Mexico has faced due to its proximity to the US and as a result of “the global playbook of muscular regionalism” in USMCA, Washington continues to tighten the noose and blatantly flexes its muscles on its southern neighbour. Ever since Trump came to power, Mexico is under severe pressure to accept whatever the US dictates what it must do.
Not only Trump wants a wall built to separate the two countries as a way of keeping out a large influx of migrants, but he also appears to instruct the southern neighbour in terms of what it can or cannot do. That is in the nature of a relationship that is dominated by one party through its investments in another country’s economy. Washington has taken its “new colonialism” to new levels in recent years.
Both the US and Canada always sourced Mexicans and people from the small Caribbean countries as a seasonal workers particularly in agriculture and in other low-paying jobs many sectors. The US maintains a series of laws and diplomatic agreements with Mexico, starting as far back in 1942 when the first the Mexican Farm Labor Agreement was signed. Collectively referred to as bracero programme (from the Spanish term bracero, meaning "manual labourer"), this relationship continues to shape socio-economic relations of the countries.
Bearing this in mind, the ongoing tariff threats exclude seasonal workers. It states, “Workers who come to our country through the legal admissions process, including those working on farms, ranches, and in other businesses, will be allowed easy passage.”
Mexico being the second largest supplier of goods to the US in 2018, with imports totalling USD352 billion as per Goldman Sachs, the government of President López Obrador has its back against the wall. Mexico produces cars every month and is also home to technology and aerospace companies in places like Baja California (Tijuana & Mexicali), Sonora, Nuevo Leon (Monterrey), Chihuahua (Ciudad Juarez), Queretaro, Tamaulipas, Coahuila, San Luis Potosi, Puebla, Jalisco and Aguascalientes.
And, US companies such as Ford, General Motors, John Deere, IBM and Coca-Cola have significance presence in Mexico. The deeper problem is that the model currently pursued by Mexico exposes the shortcomings of trickle down economics, and laissez-faire approach to economic development.
South Africa has derived little progress from the AGOA arrangement and this is not the type of post-COVID economy that the country should aim for. The purpose of a differently designed economy should be, in the words of words of Ha-Joon Chang, to formulate an
Justin Yifu Lin sees the state “as midwife, not permanent nursemaid.” In terms of this approach, governments “provide substantial protection and subsidisation to firms that are not viable without government subsidies and protection and cannot quickly become internationally competitive.” With state intervention, therefore, this article doesn’t propagate for wastage and plunder but it sees government spearheading innovation and opening new opportunities for its largely marginalised African majority.
This is a form of asset allocation which is currently under the tight, hostile control banks as lenders who determine who can succeed or not. Free markets lead to gross underdevelopment if not properly managed. Hence, South Africa would need a stronger state with better institutions as well as a different ideological orientation. Otherwise, the country will continue to build a stench of poverty and underdevelopment.
Indeed, poor Mexico is so far from God and so close to the United States! And nothing is about to change any time soon.
Based in Pretoria, Siyabonga Hadebe is an independent commentator on socio-economics, politics and global matters.