Economics is known as the imperial science, in the sense that its haughty adventures into other fields have produced economic theories of marriage (a shared washing machine costs half as much), the origin of language (speech facilitates barter and exchange), racial discrimination (racists will go out of business due to higher labour costs), conservation (private ownership of wildlife promotes its preservation), and many others.
Economists make only one assumption about human nature – that people are self-interested – and this has proved to be remarkably useful in describing the basis of human reason, the necessity of competition and the pursuit of private interests. The observation has proved to be highly portable to areas of enquiry into human behaviour that are not economists’ usual subject matter. To the dismay of Marxists, it was an economist (Friedrich Hayek) who showed in 1927 that the communist enterprise was bound to fail.
What, then, do economists make of South Africa’s “developmental state”? It should be noted that a developmental state is not just an economy, but a society with significant government participation.
The singular lesson of the communist experiment is that self-interest does a better job than “the public good” of promoting higher incomes and living standards. People are motivated by their material incentives, of which money and market prices are only the most transparent; and when the government hands out more than R1 trillion in a year (as the South African government will in the current fiscal year), material incentives flourish.
Governments are good at spending money, of course. Each person employed in the private sector in South Africa produces R133 545 worth of output in a year, whereas each person employed in the government sector spends R208 391 a year. The government’s “take” of private income is 33.7 percent, most of which goes to the compensation of employees, representing 88.6 percent of government gross value-added.
But that still leaves a whopping R765 billion of the non-wage budget to be divvied up between government departments (internal production) and private contractors (outside purchases). Naturally, private contractors are preferred: the gross operating surplus in the government sector (an indicator of capital productivity) was just R39 483 a worker in 2011, compared with R106 353 a worker in the private sector.
Even after making an allowance for the fact that outside purchases are open to corruption through bribes and tender fraud, private contractors are still preferred: in 2010 the amount of wasteful and corrupt expenditure (R21bn, according to the auditor-general) was just 2.4 percent of government purchases from the private sector. In fact, we should hope for more corruption.
Fierce and open competition between bribe-takers will lower the market-clearing value of bribes, reduce the economic returns to bribery and ensure that bribes will be affordable to only the most efficient private contractors. Economists would predict that, if the penalties for bribe-taking officials were eliminated, the bribe would fall away. Few political scientists think about corruption this way. By viewing it as a social hazard, they unwittingly do more harm than good despite their best intentions.
Economics is the dismal science. Its theory of human motivation is shallow and graceless, but its predictions of behaviour are correct. If the government is serious about developing infrastructure, it should seek more private sector participation in government, not the other way round.
* Loane Sharp is a labour economist at Adcorp.