Sunday, July 31, 2005

Well, someone likes the EU model

The someone is South African President Thabo Mbeki, whose recent pronouncements on economic matters have included a hint that he might send financial help to his neighbour Robert Mugabe (having consistently refused to critcize the man’s tyrannical and murderous policies) and a reiteration of “black empowerment”.

The latter is something of a problem since under Nelson Mandela race definitions were removed from the South African constitution. So, who are the blacks who will be empowered, if they cannot be defined constituonally? There has been much talk that the empowerment goes to any friend and relation of President Mbeki.

Speaking at Sandton at a conference of Progressive Governance President Mbeki made it clear that he envisaged even more government intervention in economic matters. “Market fundamentalism”, whatever that might be, in his opinion, has proved to be ineffective in fighting poverty.

Well, not quite, as he acknowledged, since China seems to be advancing rather rapidly and attracting a great deal of investment. But that would not work in Africa.

“People will talk about China and so on, which has received vast quantities of capital from the rest of the world, but not many of us are China.”
That is undeniably true. So, the Chinese way is not for South Africa. The one to follow, according to Thabo Mbeki is that of the European Union, which “has used massive resource transfers to fight underdevelopment”.

President Mbeki seems not to have noticed that on the whole the European Union has not been a huge economic success, most of the economic development having taken place before various countries joined.

As for transfer of funds aiding development, here is what Marian Tupy of Cato Institute says:
“Unfortunately, the European aid programs fuel the perception that aid is instrumental to reducing poverty if only it is targeted well. That is a myth.When the main bulk of the EU regional aid started to be disbursed in 1975, 44 percent of the EU population lived in the regions that qualified for it. By 1997, however, that percentage increased to almost 52 percent. Clearly, the program failed in its main task of reducing the differences between rich and poor European regions.”
It is, indeed, curious how rarely we hear of the fact that as the European Union developed, so the proportion of poor regions in need of hand-outs increased. That had not been the original idea behind the regional aid and various structural funds.

Dr Tupy then cites the example of Ireland as one showing that aid is not what leads to development but sensible tax policy:
“Even more tenuous is the link between more aid and faster economic growth. When Ireland joined the European Economic Community in 1973, it was one of Europe's poorest nations. By 2001, Ireland could boast one of Europe's highest per capita incomes of $27,170. What went right? It sure wasn't European aid. In fact, the Irish growth rates increased at the same time that European aid was decreasing in proportion to the size of the Irish economy.”
Ireland remains rather a problem in these discussions. Undoubtedly it is the tax cuts that have led to its economic development and growth in personal income. But would the government have so gaily introduced tax cuts if it had not known that there was European aid coming and they did not have to take any hard decisions? Somehow, I doubt it.

European aid may well have decreased in proportion to the size of the economy but it remains very high and Ireland is not about to give it up any time soon.

Then again, South Africa is not about to emulate Ireland in its tax policy. This is a country which, with a catastrophically high level of AIDS and other diseases, taxes at the retail end medical drugs that come in from the large pharmaceutical companies free or at a very low price.

For the moment Thabo Mbeki is talking of emulating the EU by transferring money from the richer part of South Africa to the poorer one, though he also says that he does not want to weaken or destroy the richer parts, not wishing, perhaps, to follow the EU's example in every way. But the prognosis on his ideas is not too good.

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