The Democratic Developmental Parliaments and Legislatures
State:
Implications
for
Dr. Jaya Josie, Economic Performance and Development (EPD), Human Sciences Research Council (HSRC)
Chairperson, ladies and gentleman I am humbled by your invitation to talk about the democratic development state and the implications for parliaments and legislatures. The notion of a developmental state has become a buzzword in recent years. Economists and political scientists from as far back as the 1980s have discussed it at length in response to the emergence of the South East Asian (SAE) economies. In this context one of the main characteristics of the developmental state is the role of state intervention in the economy in the presence of market failures. Other features of the SAE developmental states were the protection of local industries and promotion of import substitution and export led growth through state led investment in infrastructure, industrialization, research and development (especially in technology) and human resource development to increase skills and productivity. However, despite some early successes many of SAE and other countries that pursued these policies also succumbed to economic stagnation and the financial crises of the early nineties and later years. However, the notion of addressing market failures and the resultant economic inequalities and other socio-economic disparities goes back to the 18th century. Extreme forms of market failures and devastating impacts of poverty, inequality and unemployment characterized the transition from feudal agriculture to industrialization in Europe. Thus inequality and disparity in society has been a concern for political economists over the centuries and can be found in the writings of Adam Smith in his famous treatise entitled the “Wealth of Nations” published in 1776. For Adam Smith inequality and poverty posed a serious threat to the economy and the interests of the wealthy. He noted in the “Wealth of Nations” that for every rich person there were about five hundred poor and that affluence for a few presupposes the poverty of the many. Such poverty, he implies, may provoke conflict between the rich and poor. Alfred Marshall is often considered to have laid many of the foundations of modern microeconomic theory. What is less known is that Marshall also considered inequality and poverty key variables in undermining economic growth and development. In the introduction
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to his Principles of Economics first published in 1890 Marshall writes eloquently about the role and impact of income inequality on household poverty. But the conditions which surround extreme poverty, especially crowded places, tend to deaden the higher faculties. Those who have been called the Residuum of our large towns have little opportunity for friendship; they know nothing of the decencies and the quiet, and very little even of the unity of family life; and religion often fails to reach them. No doubt their physical, mental, and the moral ill health is partly due to other causes than poverty: but this is the chief cause. (Marshall, 1920, Principles of Economics, Book I) Marshall was keenly aware of the role played by physical infrastructure and public capital stock in the creation and distribution of wealth. In a sense he recognized much earlier the importance of unequal access to public infrastructure services as a key determinant in defining capabilities in the creation of wealth and, how its unequal distribution and inadequacy generates poverty. Discussing physical public goods that are common to all members of a community Marshall noted the right of citizens to security, roads, energy, water and sanitation and housing (Marshall, 1920. Principles of Economics, Book II). He recognized that poor drainage can cause diseases and overcrowding and, slum conditions can lead to poor health and low self-esteem (Book IV, Chapter V, Marshall, 1920). He advocated for government to provide public infrastructure facilities in the interests of the greater good of society and to promote economic growth. Coming back to our present theme the idea of a democratic developmental state for South Africa was first articulated in November 1991 by the then President of the ANC, and later first President of South Africa, Nelson Mandela. In launching the programme for the Macroeconomic Research Group (MERG) to define a new economic strategy for a democratic South Africa President Mandela said, A mixed economy includes both the role of the state and the market in directing re-distribution of wealth and promoting growth of the economy. Many developed and developing countries have different forms of the mixed economy with varying degrees of state and market interventions. In many instances the degree of intervention depends on the level of transformation, readjustment and transition from an 2
economic crisis situation to a situation of stability. History provides us with many examples of state intervention being used as a means of promoting growth and redistribution. The experience closest to us is the use of the state by the nationalist government to promote the interest of whites in general and poor whites in particular. In this case the budget was used as an effective instrument for redistribution. In as much as it was possible for whites to claim a full share of public expenditure irrespective of their tax contribution, so must blacks be entitled to equal treatment by a democratic state. We must reserve the right to use any economic instrument to stimulate growth and effect redistribution to redress historical economic imbalances and injustices. In addition, apart from using the budget previous minority governments have established and administered state enterprises as instruments for economic policy objectives. The biggest threat to democracy, socio-economic justice and economic growth in this country is the monopoly control by a few companies of the whole economy. Thus, for us, state intervention will ensure equal opportunities for hitherto disadvantaged communities and groups from all sections of our society. State intervention, through the provision of incentives, must also redirect small and medium businesses away from the service sector towards manufacturing and the production of input and final consumption goods. Among other priorities we will have to concentrate our efforts on job creation; raising real incomes; correcting racial and gender imbalances; implementing land reform; promoting rural and urban development; providing housing and infrastructural needs and encouraging the growth of small and medium businesses. We will have to focus on bringing down to reasonable levels an incredibly high unemployment rate (about 42%) in the short term. We have to redress imbalances in housing, land distribution, health, education, and social security benefits. We have to provide the community and industry with 3
adequate means of transport, electricity and fuel requirements so as to ensure infrastructural stability for economic growth. These objectives must be the foundation of our policy framework. Over the years labour has been in the forefront of the liberation struggle and is one of the main components of our constituency. Thus we have a responsibility to incorporate labour, wages and income-policies as an important parameter in our macroeconomic framework. It is essential that this be done in consultation and collaboration with the labour movement. Such consultation and collaboration will also have to address the short and long term implications of industrial restructuring strategies to meet the demands of stimulating productivity and industrial growth. Maintaining a balance between meeting socio-economic obligations to the disadvantaged and oppressed people of our country and at the same time stimulating economic growth will be a daunting task at the best of times. It is, however, not impossible. The budget can be used as an instrument to adopt fiscal policies that will meet in the medium-term, to some degree, our social expenditure requirements while guarding against fiscal indiscipline. In the absence of the capacity to effect dramatic transformations overnight, the expenditure side of the budget becomes an effective instrument of redistribution. On the other hand fiscal discipline should not be used as a means to maintain the present discriminatory character of the budget. Twenty years later the launch this year of the National Development Plan Vision 2030 is perhaps one expression of the President Mandela’s great vision for a democratic developmental state. The Plan articulates very specifically broad indicative 20-year policy objectives and targets for economic and social development within the framework of South Africa’s constitutional democracy. In particular the plan implicitly recognizes the need to balance the imperative of meeting the social and economic obligations of our Bill of Rights against the financial and budgetary requirements and considerations of Chapter 13 of our Constitution.
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Clearly, the passing of the various budget votes is the most important entry point for the legislatures to influence the trajectory of the South African democratic developmental state. Parliament has to play a key role in ensuring that budgets are equitably allocated and take account of all constitutional and legal requirements and considerations. It is important for MPs to be adequately briefed and informed about budget allocation rule targeting developmental policy objectives by the relevant legislative officials working under the secretaries of parliament. What then is the meaning of the budget allocation rule? The economist Peyton Young (1994: 8) defines the allocation rule as a method, process, or formula that allocates any supply of goods among any potential group of claimants according to the salient characteristics of those claimants and in keeping with the theories of distributive justice and equity principles of parity, proportionality and priority. Parity means that all claimants should be treated equally; Proportionality recognizes that goods and services must be divided according to the established differences amongst claimants; and, Priority affirms that the person with the greatest need is entitled to a first claim on the goods or services. These principles are at the heart of our system of the equitable sharing of national revenue through the budget and very succinctly expressed in Section 214 (1) and (2) of our constitution. They are also the generally accepted foundations for achieving development through the allocation, distribution and stabilization functions of public finance. Based on these developmental principles of public finance legislatures have to also be knowledgeable and informed about the budget preparation processes that underlie a public sector gearing up for the implementation of a NDP. Chapter 13 of the Constitution presents the financial framework for the South Africa. Section 214 reads as follows: 214 (1) An Act of Parliament must provide for – (a) The equitable division of revenue raised nationally among the national, provincial and local spheres of government; (b) The determination of each province’s equitable share of the provincial share of the revenue; and (c) Any other allocations to provinces, local government or municipalities from the national government’s share of that revenue, and any conditions on which those allocations may be made.
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(2) The Act referred to in subsection (1) may be enacted only after the provincial governments, organized local government and the Financial and Fiscal Commission have been consulted, and any recommendations of the Commission have been considered, and must take into account – (a) the national interest; (b) any provision that must be made in respect of the national debt and other national obligations; (c) the needs and interests of the national government determined by objective criteria; (d) the need to ensure that the provinces and municipalities are able to provide basics services and perform the functions allocated to them; (e) the fiscal capacity and efficiency of the provinces and the municipalities; (f) developmental and other needs of provinces, local government and municipalities; (g) economic disparities within and among the provinces; (h) obligations of the provinces and municipalities in terms of national legislation; (i) the desirability of stable and predictable allocations of revenue shares; and (j) the need for flexibility in responding to emergencies or other temporary needs, and other factors based on similar objective criteria. The Constitution does not speak directly to the issue of equity amongst sub-national governments, though it requires equity for individuals in terms of rights and entitlements to basic services. With respect to the three spheres of government, the constitutional provisions relate to the provision of “equitable shares”. Section 227 of the Constitution reads as follows: 227 (1), Local government and each province – (a) is entitled to an equitable share of revenue raised nationally to enable it to provide basic services and perform the functions allocated to it; and (b) may receive other allocations from national government revenue, either conditionally or unconditionally. 227(2), Additional revenue raised by provinces or municipalities may not be deducted from their share of revenue raised nationally, or
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from other allocations made to them out of national government revenue. From the foregoing, it is apparent that the Constitution approaches the requirement for equity in a particular manner and requires the mechanism of “equitable shares” to play a particularly important role in financing a developmental state with equity through national, provincial and municipal government. From an examination of the constitutional provisions with respect to equity and equitable shares certain conclusions may be drawn. Firstly, with respect to equity one can affirm that: • Equality of all rights and freedoms is a fundamental principle in the Bill of Rights (Chapter 2, clause 9). • Access to basic services is a fundamental right to which everyone is entitled. Basic services include access to adequate housing and health care services sufficient food and water, social security, and basic and further education, as elaborated in the Bill of rights (Chapter 2) of the Constitution. • Every child has additional rights to services, as elaborated in Section 28 of Chapter 2. • Certain equity rights must be subject to progressive realization, as governments must operate within available resources. Thus, within a democratic developmental state, the annual budget will be a key planning tool and will express in financial terms plans to be implemented for each financial year according to the indicative policy objectives and targets set in the NDP. These will be expressed as capital income and expenditure and, revenue income and expenditure budget votes. They will have to be approved by Parliament based on principles of planning and control in the public sector and prepared according to an annual or medium-term budget cycle. The cycle is prepared as follows: • Planning of fundamental aims and policy objectives. • Setting policy targets/outputs/outcomes, operational implementation (personnel & HR resources) planning and periodic (3-6 months) action plans with financial costs. • Setting policy instruments (legal, institutional, financial, administrative, other) • Budget preparation according to vote & programmes.
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•
•
Controlling, measuring and monitoring legal compliance (in South Africa: Public Finance Management Act; Municipal Finance Management Act, other) through Parliament, auditor general, l, independent statutory institutions (e.g. Public Protector, Human Rights Commission) civil society. Reporting, analyzing ing and feedback (in South Africa) through Parliament, intergovernmental institutions (Presidential Coordinating Council, Budget Council, Council Budget Forums, Financial & Fiscal Commission-FFC, Commission South African Local Government Association--SALGA).
Figure 1: The Budget Planning Cycle Plan fundamental aims & Objective
Report, analyze, ffedback & consultation
Control, measure & monitor legal compliance
Set targets, operational & action plans & costs
Budget preparation / vote & programmes
As a key planning tool the annual budget has several important functions of which parliament must be aware. aware It determines income & expenditure; assists policy making and planning; planning authorizes future expenditure; provides basis for controlling income & expenditure; expenditure sets standards for evaluating performance; performance motivates managers & employees and, is the basis for the co-ordination c of programs & multi-purpose purpose organizations and departments. departments We discussed the broad principles and practices that underlie the public financing, through the budget, of our democratic developmental state. Ensuring that the policy objectives, targets targe and instruments are implemented and attained is the main responsibility of the legislatures and their supporting officials. Our parliament has recently passed legislation to facilitate this role of the legislatures. We will discuss this a bit later. For now let us consider how one of
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the NDP’s targets for infrastructure development may be attained. When this policy objective was first articulated the first media reaction was “how will it be financed through the equitable sharing system?” Legislators and their support staff must be prepared for such reaction. An effective equitable sharing system as envisaged in the Constitution and proposed in the NDP must be able to effectively balance the competing demands for macroeconomic stability against the need for equity and redistribution in disadvantaged areas with high levels of socio-economic and spatial disparities. Figure 2 illustrates this virtuous cycle. Figure 2: A Structural View for the Equitable Sharing of Grant Allocations to Provinces/Regions with high levels of Disparities
1. Revenue Pool. Pool of funds from nationally collected revenue for expenditures
6. Data Regional resources, expenditure trends, socioeconomic disparity indicators
7. Data Estimates Backlogs & socio-economic disparity indices 2. Grant Formula. Taking account of backlogs, inequalities, disparities & institutions
5. Impacts Macro & microeconomic impacts on growth & development
4. Equitable Grant Allocations To provinces & municipalities
3. Simulation Model. Estimate equitable grant allocations
Source: Adapted from Petchey, MacDonald, Josie, Mabugu, Kallis: 2007)
For public infrastructure the NDP sets some very ambitious targets. Among others these include increasing the proportion of people with access to electricity from 70% in 2010 to 95% in 2030; ensuring that all people have access to clean potable water and that there is enough water for agriculture and industry; significantly expand the
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proportion of people who use public transport and, more people to live closer to their places of work. All of these targets will require equitable share allocations to national, provincial and local governments. They may also require legal, institutional, administrative and financial policy instruments in order to be implemented. Finally they will require strict monitoring to ensure adherence and compliance with public finance management legislation. It is precisely in these areas where the legislatures have a key role to play in ensuring that the democratic developmental state achieves its policy objectives. In doing so, however, parliaments and their supporting staff have to also be cognizant of government’s need to achieve an effective balance. Given the need to finance public infrastructure services as envisaged in the NDP Figure 2 illustrates how government has to balance the constitutional requirements against the availability of nationally collected revenues. In its deliberations the legislature must be acutely aware that achieving a balance in allocations must involve accounting for differences in the resources required to achieve comparable service levels across regions. These differences arise due to variations in demography and geography among provinces. Historical inequality in levels of development, including critical capital backlogs, is another major determinant of regional disparities. These are typically much more difficult to measure and very few countries attempt to do so in a detailed way. An exception is Australia, where the equalization allocation system incorporates needs in a sophisticated way to determine the horizontal allocation of grants among states. There is widespread agreement that, in principle, difference in fiscal requirements ought to be included in equitable allocations. This is especially true in systems where provinces/regions have little revenue-raising capacity of their own. However, there are serious challenges to costing publicly provided services in a developing economy subject to the vagaries of international commodity price fluctuations, droughts floods and other exogenous factors outside the control of policy makers. These exogenous factors will have inflationary effects on the unit costs of labour, energy, equipment and raw materials and negate any attempt to establish certainty, predictability and stability in grant allocations. Another challenge for estimating unit costs is that the microeconomic demands of provinces/regions may conflict with the macroeconomic
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constraints determining the available pool of funds from the nationally collected tax revenue and other sources. For these and other reasons, in South Africa, the nationally collected revenue is macro-economically estimated and the pool of funds available for equitable shares is determined via consensus achieved through a process of cooperative governance as stipulated in Section 41 Chapter 3 of the Constitution. The consensus is achieved through negotiations within intergovernmental fora such as Parliament; the Budget Council and the Budget Forum and their respective administrative committees made up of officials from national and provincial government departments. The decisions made are supported by extensive technical research. In the South Africa context, the problem is made more challenging by the requirements that the norms and costs of providing basic services inform not only the horizontal division of funds across provinces, but also the vertical division of the equitable share. Although it is the prerogative of national government to determine the vertical division of national revenue, it must nonetheless be done in a way that satisfies the requirements set out in the Constitution. These involve ensuring that the provinces can provide basic services up to the national norms and standards. National government is ultimately responsible for macro-economic management and hence the implementation of fiscal and monetary policies that will facilitate its employment, price stability and growth objectives. There are various dimensions to this. On the one hand, effective monetary management requires overseeing both the money supply and the level of public debt. The former is not an issue since it is the clear responsibility of national government. However the public debt includes not only national public debt but also any debt issued by the other spheres of government. It is clear from what has been said that legislatures and their supporting staff have important roles and responsibilities in the functioning and attainment of a democratic developmental state in South Africa. In 2009 the passing of the Money Bills Act significantly enhanced this role and responsibility. Implicitly the Money Bills Act (2009) provides guidelines for the role of Parliament to ensure that money bills such as the budget and related legislation achieve the objectives of a developmental state. The purpose of the Money Bills Act is to provide the National Assembly and the National Council of Provinces (NCOP) with a
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legislative instrument to exercise oversight of all money bills that come before Parliament. As members of Parliament have a constitutional mandate to pass legislation and monitor the Executive the implications of the Money Bills Act are that it gives members of Parliament a means to ensure that the objectives of the democratic developmental state as envisaged in our Constitution and the NDP are on the right path. Of course there are certain guidelines and limits on the extent to which legislatures can amend the Money Bills. In amending money bills legislatures are obliged to take into account relevant documentation submitted to & adopted by Parliament. Section 8 (5) of the Act also requires that amendments must consider: the balance between budget revenues, expenditures and borrowings and, that the debt levels and debt interest costs are reasonable. This section also provides legislatures with clear guidelines for amending money bills. In amending money bills legislatures have an obligation to be aware of the balance between revenue, expenditure and borrowing; that debt levels and interest costs are reasonable; that there is adequate spending on infrastructure/capital development and maintenance; recurrent spending is not passed on to future generations; short, medium and long term implications of the fiscal framework on the budget, economic growth and development as implied in Figure 2 and, that cyclical factors that impact on fiscal policy and all public revenue & expenditure including extra budgetary funds & contingent liabilities are taken into account. Sections 9 (c) and 10 of the Act also provide guidelines for reports on proposed amendments to the Main Appropriation Bill and Section 11 (3) gives parliament and its committees guidelines for amending revenue bills and revenue proposals. Finally, section 15 presents guidelines for the establishment of a Parliamentary Budget Office. All in all it is evident that the Money Bills Act of 2009 offers the legislatures and parliamentary support staff an effective legislative policy instrument to influence the trajectory of a democratic developmental state in South Africa. While the challenges appear daunting, the progress already made in South Africa’s short history in building a democratic and fair society inspires hope and confidence that the vision of the Constitution and the commitment to a better life for all will be realized.
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