Keynote Speech on Intergenerational Equity at the launch of the Transformation Audit 2013

Keynote Speech on Intergenerational Equity at the launch of the Transformation Audit 2013

Distinguished guests, Ladies and gentlemen, I am grateful to the Institute for Justice and Reconciliation for giving me this opportunity to share some thoughts on the concept of intergenerational equity. I hope I will be able to persuade you that a full understanding of intergenerational equity issues is one of our critical and over-arching challenges in South Africa today.  Whilst congratulating the IJR for the publication of its Transformation Audit (TA) 2013, I should also underline the point that the timing of the launch of IJR’s Transformation Audit could hardly be any more apt as we move from our customary State of the Nation Address of the President on February 13th, 2014 to the forthcoming Budget Speech of the Minister of Finance, on February 26th, 2014. This is a period filled with debates on key strategic issues facing the nation, the country and its economy.  To deal with the critical subject of economic ‘exclusion’, which is the subject matter of TA2013, we need to effectively address the underlying drivers of the phenomenon. The symptoms of the systemic economic exclusion are evident in the widely acknowledged triple evils of poverty, unemployment and inequality. In my view, the neglect of intergenerational equity issues over the past twenty years of democracy in South Africa has been one of the major contributors to the emergence of a systemic and structural socio-economic exclusion within our society. It is high time, that we, as a society, honestly reflect on the lessons we have learned from our own twenty years of democratic policy experimentation.

So let us begin with a short discussion of the concept of intergenerational equity itself.

Intergenerational equity is a complex issue in public policy, especially when it is seen through the lenses of political economy, philosophy, applied ethics as well as in public policy. More often than not, the notion is invoked in discourses around environmental sustainability and or in politics of public debt. The concept, however, is much deeper and wider in scope.

 Intergenerational equity encompasses a variety of important issues. This is so because society is the intermediary among past, present and future generations. All social processes, be they political, economic, technological, ethical, or environmental have a systemic and dynamic impact upon the overlapping generations’ welfare. At the same time, human beings are predominantly “present-oriented”. In effect, they discount the future heavily the more distant it is or is perceived to be. This means, generally for human beings the present is more important than the near future and the near future is more important than the distant future. Furthermore, human activities and enterprises are, more often than not, subject to uncertainty and imperfect information.

These simple but factual realities do have profound and far-reaching consequences for the success and failure of nations.  Moreover, our use of the natural resources, our approaches to the ecosystem, and commitment to the refinement of the political economy institutions, the social and ethical framework we promote and the ease with which we commit resources to social and human integrity are all affected by our implicit or explicit regard for the principle of intergenerational equity.

For South Africa, at this juncture in its social democratic evolution, intergenerational equity has an added significance. Two decades into the foundational years of its new democratic dispensation, compelling evidence and complicated syndromes of disregard for intergenerational equity are emerging in South Africa. From the failure of the public basic education system, the widespread collusive and extractive conduct amongst the business corporations, to the near collapse of the public sector administrative and management capabilities, particularly at the local government levels, glaring and worrisome signs are in evidence that social welfare across generations is being disregarded, or even compromised.

In recent years, intergenerational issues related to the ecosystem have received much attention under a variety of topics. For environmentalists and economists the operative word is sustainability.  The concept of sustainability has a long tradition in academic economic literature, dating back to the 18th century when the sole concern was the ability of the earth to provide sustenance for a growing population. In modern times, however, it was the Brundtland Report, Our Common Future (1987), which placed the intergenerational equitability at the centre of the global political economy discourse. The Report’s often-quoted definition provided a technical and ethical challenge for humanity worldwide by stressing that “sustainable development is development that meets the needs of the present generation without compromising the ability of future generations to meet its own needs.”

As important as the natural resources are the human-made resources and capabilities that collectively constitute a dynamic and an ever advancing civilisation. In econometric literature this is often referred to as the “made-capital” of a nation, in contrast with the natural endowment of the country. For each generation, then, the national resource (or capital) endowment is made of the natural endowment plus the inherited made-capital. In this regard each generation’s heritage subsumes vital components such as culture, knowledge, socio-economic and political institutions, logistical infrastructure, and the effective governing legal paradigm. Social capital is a critical component of made-capital.

The reality of the social structure and its evolution over time is that both benefits and costs are, more often than not, externalised. In effect, neither the full benefits nor the entire costs of a given generation’s decisions are born by it or by its members. Thus, the substance of intergenerational equity is complex, and its operational requirements are made of both tangibles and intangibles. Importantly, the implications are not merely theoretical and academic: the future trajectory of the society’s developmental path is largely defined by the depth of our understanding of, and commitment to intergenerational equity.

The operational intricacies of distributive justice multiply when we intersect the above principle of trans-generational morality with the intra-generational mal-distribution of resources. At the heart of the controversies and complexities of redistributive justice lie the assumptions made about the nature of the human being on the one hand, andthe political economy construct of society, on the other. Furthermore, the fact that these two are themselves interactive makes the matrix even more complex.

With regard to the nature of human beings, two polar assumptions have driven the entire philosophical, psychological and political economy research right through the history. Eric Beinhocker (2007) summarizes the points clearly:

“If one digs deeply into the Left-Right divide, down to its philosophical and historical core, one finds two conflicting views of human nature. On the Left is the view that human beings are inherently altruistic, that greed and selfishness stem not from human nature, but from the construction of the social order, and that humans can be made better through a more just society. The lineage of this view descends from Jean-Jacques Rousseau and Karl Marx.

On the Right is the view that human beings are inherently self-regarding and that the pursuit of self-interest is an inalienable right. The most effective system of government is one that accommodates rather than attempts to change this aspect of human nature…….The Right claims, however, that if people pursue their self-interest through the mechanism of markets, then the general interests of society will be served as well. The lineage of this view descends from Hume, John Locke, and Thomas Hobbes.” 

Socio-political experimentations based on the assumptions of the Left and the Right have both failed to bring about an order that is capable of dealing satisfactorily with redistributive justice issues. It is no exaggeration to argue that both contemporaneous and intergenerational equity have been made worse if judged by the prevailing disparities of wealth and income as well as the compounded crises of ecological and sustainability concerns. Clearly a new paradigm, based on an alternative and a more nuanced perspective on human nature is needed.

Modern scientific research in psychology, economics, anthropology and game theory has highlighted the serious flaws in the simplistic assumptions made by both the Left and the Right about human nature. The nature of human beings, recent research agues, has a blend of the conditional co-operator with the altruistic punisherThis critical revision of our assumption about the nature of human beings opens up a new paradigm of thinking and a vast range of consequent systemic possibilities. Together with a range of other recent scientific research in the fields of thermodynamics, networks, dynamic systems evolution, analytics of disequilibrium economics, and empirical psychology, thestrong reciprocity assumption paves the way for what is currently known as Complexity Economics. Complexity Economics is a clear and substantive departure from nearly four centuries of traditional economics, reflected primarily, but not exclusively, in neoclassical economic analysis.

 Meanwhile, and in the immediate future, the requirements of intergenerational equity entail the balancing of human attributes namely- the conditional co-operator with thealtruistic punisher. Arthur Dahl (2013) offers a framework for transition, he notes:

“We desire a world of peace and prosperity, but much of economic and psychological theory depicts human beings as slaves to self-interest. Yet it can be argued that well-being for everyone necessitates a more just and sustainable social order. This would require qualities like moderation, justice, love, reason, sacrifice and service to the common good, which must be harnessed to overcome the traits of ego, greed, apathy and violence, which are often rewarded by the market and political forces driving current patterns of unsustainable consumption and production, in which the well-being of a few is attained at the expense of the many….. A new social contract must have a broader view of human well-being founded on ethical principles.

In pursuit of our new thinking paradigm, two attributes of the social order are of critical relevance. The first attribute is that the political economy system is dynamic. Scientifically, this means the system’s current state is strongly related to its previous state, and its future state is a function of its current variables. By way of illustration, consider a country’s national stock of capital – a critical variable in determining actual and expected growth rates. Capital accumulation is a dynamic process. The rate at which the national stock of capital is increased or decreased will be determined by the stock of capital at the start of the period, eg: initial conditions, the rate of capital accumulation or destruction, and the time period. The same analysis holds for unemployment, savings, technological progress, the development of the country’s commercial jurisprudence, the evolution of accountability and legal institutions, and numerous other processes.

The second attribute is the fact that within the complex web of the political economy system, there are countless processes with feedback loops too. This means developments in one dynamic process influences another set of processes within the system. For example, what happens to the investment process has direct implications for unemployment, capital accumulation, growth, savings, and other processes. These effects are both contemporaneous as well as trans-generational.

The dynamic nature of the political economy structures, therefore, has profound implications for both pecuniary and non-pecuniary variables that govern intergenerational equity. The interactions between politics and the economy, the governance institutions, and the culture of citizen participation in the society are critical factors in the success or failure of nations.

A significant contributor with long term impact on sustainability of social development and human prosperity is the embedded value system that manifests within society’s operations. Such values and codes of conduct need not be legislated or somewhat formalised; rather they need to be internalized within the society’s political economy organs.  With the help of such values, social trust is engendered and over time social capital is created, maintained and augmented. Intergenerational prosperity is dependent as much on social capital as on financial and technological capital. The co-evolution of these forms of capital ultimately leads to, and is required for, sustainable development across generations. 

Amongst the quantitative indicators of intergenerational equity is the aggregate level of investments (savings) done by each generation in ensuring the sustainability of growth over time. National savings is an important intergenerational variable insofar   as savings are the key source of funding for national investment. Without investments, economic growth is a near impossibility. In the absence of adequate national savings, investments in the national economy have to rely on foreign capital flows into the country. Imported capital, in turn, can be fickle and footloose. More seriously, when a country is dependent on imported capital for a significant share of its national investments, this in turn creates ongoing currency volatility and financial market sensitivity to domestic socio-political dynamics.

There is no particular level of aggregate investment which is technically optimal and universally applicable across the various phases of business cycles and technological waves. That said, “the rule of thumb” in economic development history suggests that, over time, for the sake of sustainable growth, each country should spend an average of 5 to 8% of its GDP on its socio-economic infrastructure. 

South Africa’s average national investment, as a ratio of GDP, has fallen from its height of over 7% in mid-1970s to the current level of below 3%. This sustained under-investment has created a cumulative gap in the required stock of socio-economic infrastructure which, in turn, has undermined growth and retarded social development. At the time of writing, some of the manifestations of such backlogs are present in the lack of adequate energy, roads, export logistics, and public education and health facilities, and urban amenities. Furthermore, for a number of years to come, it is highly likely that the country will struggle to catch up with the cumulative backlog.

South Africa’s portfolio of natural endowment is heavily resource-based. As such, development and sustainability of its growth depend heavily on well-planned and appropriately sequenced stock of complementary infrastructure. Not only does it need adequate and reliable energy, it simultaneously needs rail, harbour, water and  human skills, amongst others. So, the level of investment, per se, is only one requirement; the other is to get the mix, the scale, and the timing of such investments right.

Next to infrastructure investment trends, the stock of public debt and its relative magnitude constitute one of the most commonly debated intergenerational statistics. South Africa’s public debt trends remain fairly benign. However, from an intergenerational perspective, whilst public debt ratios remained prudent, the stock of national socio-economic infrastructure also remained considerably below its optimal level. If seen as a national balance sheet, it can be argued that the asset side of the ledger, i.e. the stock of infrastructure, is woefully weak with accumulated backlogs, whilst the liability side, i.e. the national debt, is moderate at present. The former inhibits the actual and expected growth which in turn, and over time, causes material sustainability concerns for government debt. Current and future generations are set to suffer welfare losses as a result.

The most serious issue surrounding SA’s public debt is not its level, or its relative size to GDP, but rather the quality of public expenditure. In effect, liabilities accumulate and there is little corresponding addition of social welfare for the present generation and the promise of future growth and welfare for the generations to come.

A further break-down of fiscal expenditure reveals additional insights into the composition of public expenditure and its intergenerational implications.

 Education is the most significant intergenerational item of budgetary allocation. Over the period 1995-2013, on average 20% of government budget is allocated to this vital investment in future generations. A further disaggregation of the education budget reveals a sound allocation of resources among the various cohorts of the younger generations.

Judged by the aggregate budgetary allocation to education, or assessed in terms of the intra-generational allotment to the various types of education, South Africa’s fiscal allocations are sound and in line with principles of intergenerational equity.    However, the problem arises with the quality of education. Widespread shortage of skills within the society is but one of its manifestations after nearly 20 years of the country’s democratic dispensation.

It is a fact that the modernization and technological upgrading of the economy post-1994 have increased the economy’s skills intensity sharply. Meanwhile, the country’s human capital development policy has remained oblivious to this critical fact. Whilst much has been done to promote access to the public schooling system, little has been achieved with regard to quality improvement of the education offered. Consequently, ‘unemployability’, widespread vacancies and huge skills gaps have emerged concurrently.  The upward mobility of the poor has been curtailed; hence their participation in the economy is severely undermined. The poor and their off-spring, who rely on public schooling, have been trapped in the vicious cycle of poverty and dependency.  Within the country, the so-called ‘second-economy’ has expanded as a result. I submit that our current human resource development policy is set to perpetuate the second-economy phenomenon for a long time to come.

At present there is no credible solution for this critical structural anti-poor and intergenerational inequity factor. Of course there are many expressions of concern and numerous initiatives to deal with the various aspects of the education crisis in the country in a piecemeal manner. Yet all these expressions and interventions fade into insignificance in relation to the enormity of the challenges facing the country in eliminating one of the most important systemic contributors to the anti-poor and intergenerational injustice of South Africa’s public policy architecture. It is stating the obvious that the issue is profoundly political and, as yet, no political leader since 1994 has had the vision and/or the courage to tackle it effectively. Put differently, no sizeable black middle class has arisen yet to create the necessary political pressure for change in the public education system. The rich, both black and white, opt out of the public education system and the poor are unable and helpless in holding the government accountable.

Next to education, the budgetary spend on social protection is the next item with significant intergenerational consequences. Social welfare has been the fastest growing expenditure category over the past decade and half. With the extension of Child Welfare Grant to the age of 17, announced in October 2009, this budgetary item has been set to rise sharply. It is a matter of time before welfare expenditure exceeds that of expenditure on Education, which is the largest budgetary allocation within the National Budget. It is noteworthy that ever since 2000, the share of child grants has consistently increased in the budget. Government’s expenditure mix is bound to continue in favour of welfare spending. Over the next 3 to 5 years, a growing level of fiscal stress is likely to emerge primarily as a result of the trade-offs  between ‘Welfare Expenditure’ and ‘Socio-economic Infrastructure Expenditure’. This will be more so, if GDP growth rates fall and stay below 3% per annum.

 The creation and augmentation of human capital is essential for breaking out of the vicious circle of poverty. Historic evidence suggests that it takes at least one generation to make a real dent in systemic poverty provided a sound education system operates within a well-integrated national human resource development framework. This is a key plank of a platform for sustainable socio-political stability and intergenerational upward mobility.

Seen in the context of the calculus of overlapping generations’ assets and liabilities, at present the low returns on education investment together with the ballooning child/youth grants expenditure constitute a sure liability for future generations without a corresponding revenue generating capability. The extension of this grant to the unemployed youth has both sociological as well as fiscal implications

As mentioned earlier, socio-econometric processes are dynamic with feedback loops. The poor education system and its resultant low skills base of the country’s labour force leads to a ‘low productivity –low wage’ emergent outcome. This in turn leads to households’ financial vulnerability, and a low and sub-optimal national savings rate.

Saving-consumption behavioural patterns are by nature inter-generational. In other words, in general, it is difficult to change savings patterns in the short term.

The foregoing trends point to a fairly problematic, if not worrisome, pattern with regard to the intergenerational equitability of resource allocation. Such pecuniary trends are indicative of a political economy policy paradigm that discounts future generations’ welfare heavily. As a corollary, the current generation places an undue  premium on its own consumption and wellbeing. In the process, deep distortions and systemic complications in the political system are created too.

Intergenerational equity is a complex multifaceted notion, which is easier said than done. In general, when resource allocation is tilted in favour of the present generation it is harder to correct the imbalances than the other way around. Visionary and resolute political and social leadership is, however, required to achieve success in this regard. A range of institutional, systemic, social and individual changes are required too.

Within the analytical paradigm of Complexity Economics, I am convinced that    the evolution of the complex adaptive system of socio-economic structures requires a set of norms for success. The adoption of such norms defines the current and likely drivers of competitive advantage and social progress over time. SA has one past, but numerous futures! Which one will be realized depends on the decisions we make today!