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Copyright © 2023 Inclusive Society Institute PO Box 12609 Mill Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute D I S C L A I M E R Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. JANUARY 2023 Ports regulation in South Africa: An equitable tax rate approach by Mahesh Fakir, Ex-CEO of Ports Regulator of South Africa & Prof Mihalis Chasomeris (Corresponding Author), Associate Professor, Graduate School of Business and Leadership, University of KwaZulu-Natal Abstract Background: The Ports Regulator of South Africa (PRSA) allows South Africa’s National Ports Authority (NPA) to use a rate of return pricing methodology called the Required Revenue (RR) model to annually apply for tariff increases. From 2011 to 2017, the PRSA allowed the use of the pass-through of corporate tax rate (28%) approach in the RR model. However, from 2018 it applied an equitable tax rate approach that is derived from the corporate tax rate applied to the group profit, shared between the sums of all the pre-tax profits of profit-making divisions within the group. It can be argued that the equitable tax rate approach should have been used from 2011. Objectives: This paper compares the pass-through of corporate tax rate approach to the use of an equitable tax rate in the RR model from 2011 to 2017. Method: The calculation of the equitable tax rate uses Transnet’s annual segmental financial statements. The results are compared with the revenue results from the pass-through of the corporate tax rate approach. Results: Applying the equitable tax rate (15.73%) as opposed to a pass-through tax rate (28%), the NPA revenue would have been R2.6 billion (US$187m) lower, a substantial saving for port users. Conclusion: Continuing to apply this equitable tax rate approach could result in future annual savings of about R500m (US$36m) for port users if the NPA remains a division. However, if the NPA is incorporated as a subsidiary, then the original pass-through of corporate tax rate approach should resume. Keywords: Port Pricing, Rate of return regulation, Ports Regulator of South Africa, National Ports Authority, Transnet. JEL: R48, Introduction There is economic regulation of ports in several countries including South Africa, Australia, India, Greece, Peru, Philippines, Portugal, Canada, the Netherlands and Brazil (Angelopoulos et al., 2019). The regulation of port prices (tariffs) typically uses either a price cap methodology or a rate of return methodology (Gumede and Chasomeris, 2017). In South Africa, a version of the rate of return methodology forms the basis of what the Ports Regulator of South Africa (PRSA) refers to as the Required Revenue (RR) model (Ports Regulator of South Africa, 2017a). An RR model calculation is used to determine the total quantum of revenue that the National Port Authority (NPA) may collect in any one year from port users after approved adjustments to port tariffs by the Ports Regulator. The RR model incorporates port user payments for infrastructure, operating expenses, and enables the Ports Authority, (as the regulated entity) to make a risk-adjusted return on port assets (as determined by a weighted average cost of capital (WACC) formula) (Gumede and Chasomeris, 2018). Several of the values of the variables used in the calculation of the RR model have been critiqued by port users and other port stakeholders. For example, evidence shows a substantial overvaluation of the NPA regulatory asset base and an unrealistically high asset beta that assumed the NPA to be a higher risk entity than it actually is under regulation. Such issues have resulted in higher prices to port users and higher revenues and profits to the NPA (Chasomeris, 2015; Meyiwa and Chasomeris, 2020). This paper continues the constructive critique of the RR model and focuses on the treatment of tax in the RR model (a form of rate of return regulation). This paper compares the pass-through of corporate tax approach to the use of the equitable tax rate in the RR model. It refines the rate of return methodology and indeed the RR model, by considering the case where a regulated entity is not a ‘stand-alone’ entity, but a ‘division’ within a ‘group’ consisting of many ‘divisions’ not individually liable for the payment of taxes. An Equitable Tax Rate takes the losses of the loss-making divisions that are part of the group into account, and further, the principle of proportionality is applied between the profitable divisions in apportioning and sharing the tax burden to the size of their profits. South Africa’s National Ports Act of 2005 (Act) envisages a commercial ports system whose state ownership of port infrastructure is vested in the National Ports Authority (NPA) as a state monopoly, and further creates the Ports Regulator of South Africa as an independent economic regulator to ensure fairness in pricing (RSA, 2005) and prevent monopolistic abuse. The Act sets out that the NPA be incorporated as a subsidiary wholly owned by the Transnet group (SOC), upon the Act coming into effect. Up to the present, over a decade and a half since the passing of the Act, the NPA has remained a division of Transnet rather than the ‘subsidiary’ envisaged, for reasons beyond the scope of this paper. In the application of its RR tariff methodology, the Ports Regulator had previously treated the NPA as a subsidiary in the calculation of allowed revenue for tax, as incorporation could have happened at any time. In 2017 the Regulator for its 2018/19 tariff determination modified its tax calculation to reflect a reduced tax allowance in treating the NPA as a division. This paper contributes in several ways. First, in attempting to contribute to the work of other Economic Regulators regulating unincorporated divisions of a corporate group, it examines theoretical differences in the tax treatment of regulated subsidiaries or stand-alone regulated entities, as opposed to regulated divisions within a corporate group. It then derives formulae for the new Equitable Tax Rate approach used by the Ports Regulator to assist in correcting such ‘disproportionalities’ arising out of the corporate form of regulated entities. Second, it reports on the development of a model for a new “equitable tax rate” method, which considers the profits and losses of other divisions with a group, for the determination of a fair tax rate for a regulated division within a group. Third, it uses NPA financial statements for the period 2011 to 2017, to provide an empirical application and analyses of the equitable tax rate approach in the calculation of the RR model. The relevant formulae and a practical system of implementing the “equitable tax rate” approach, ensures that the profits and losses of other divisions with a group, is taken into account in determining regulatory tax allowances for a regulated division within an unregulated group using the Required Revenue (rate of return) Tariff Methodology. Finally, it explores and confirms the Ports Regulator of South Africa’s (2017) approach to taxation of the NPA and further, extrapolates this to the calculation of the tariff determinations in previous years in order to estimate future port user savings through reduced port tariffs, as well as the potential loss to port users over the seven years of regulation (2011 to 2017), before the new equitable tax rate approach was conceived and applied. Literature Review South Africa’s system of nine state-owned commercial ports is rare internationally, and the economic price regulation of this system is largely unprecedented. There is one National Ports Authority (NPA) (as opposed to regional or municipal ports authorities). Planning of investment in port infrastructure and marine services is done nationally. Hence, there may be cross-subsidization between ports and port users and a sharing of resources between the nine ports. The NPA also controls the licensing of terminal operators and this has been an issue with some stakeholders that believe there are competition issues and a conflict of interest as the NPA, under Transnet, issues licenses to both private sector terminals and their sister division called Transnet Port Terminals (Meyiwa and Chasomeris, 2020). Consequently, the NPA makes a single annual tariff submission to the Ports Regulator, using the RR model to calculate the required revenue for the entire NPA. This is in contrast to the regulation of ports in other countries like India and Australia. In India, the Tariff Authority for Major Ports (TEMP) regulates the 12 major ports and a separate tariff application submission is made for each port. Thus, the income and expenditure of each port is known by the TEMP. A lack of published audited financial information by ports has hindered public participation in the regulation of South Africa’s ports. Furthermore, as the NPA is a regulated division of an unregulated Transnet Group, together with consolidated accounting techniques, creates further complexities and inadequate access to information that could improve regulation of the port authority. Indeed, a study by Meyiwa and Chasomeris (2020) used content analyses to examine 137 port stakeholders’ submissions from 2009/2010 to 2018/2019. They concluded that the governance structure of the NPA was shown to promote anticompetitive behaviour and they recommend a swift incorporation of the NPA as a stand-alone entity outside of Transnet. Acciaro (2013: 211) reviewed port pricing literature from 1974 to 2013 and found that most studies make use of anecdotal evidence and that “from a methodological point of view, there are very few empirical studies and… most papers that deal with port pricing as a core issue make use of conceptual economic models and game theory.” The regulation of port prices (tariffs) typically uses either a price cap methodology or a rate of return methodology (Gumede and Chasomeris, 2017). South Africa’s National Ports Act of 2005 (RSA, 2005: S30) sets out a commercial ports system of nine ports whose infrastructure is owned by the state through a National Ports Authority as a state-owned monopoly (a part of the Transnet state owned logistics group), and therefore creates the Ports Regulator whose functions in terms of section 30(1) of the Act are to: “Exercise economic regulation of the ports system in line with government’s strategic objectives; Promote equity of access to ports and to facilities and services provided in ports; Monitor the activities of the Authority to ensure that it performs its functions in accordance with this act.” The Ports Regulator in its economic regulation function, has adopted the RR approach that transparently builds up cost and other components. The Regulator (Ports Regulator of South Africa, 2017a:5,6) explains that the RR approach is used to determine fair port pricing for all port stakeholders. It allows cost recovery as well as a reasonable profit (return on assets) to the regulated entity, and therefore allows for all the regulated entity’s operating costs, depreciation, and notably for the purposes of this paper, the profit tax that the entity requires to pay on allowed profit. The method protects port users from “paying excessive monopolistic prices, with the argument being that monopolistic firms should be required to charge the price that would prevail in a competitive market”. This RR approach, in addition, fulfills the requirements of the National Ports Act directives which require that the Regulator ensures that approved tariff levels allow the Ports Authority to (Ports Regulator of South Africa, 2017a: 5): “Recover its investment in owning, controlling and administering ports and its investment in port services and facilities; Recover its costs in maintaining, operating, controlling and administering ports and its costs in providing port services and facilities; and Make a profit commensurate with the risk involved in ports services and facilities”. Indeed, there appears to be consensus in the literature on the importance of cost recovery for port infrastructure (Haralambides, 2002; Santos et al, 2016). In the case of the NPA, in addition to full cost recovery, a return on port assets related to risk is allowed, and is calculated using the RR approach. The formula for the RR, as per the Port Tariff Methodology of the Ports Regulator for Tariff Years 2018/19 – 2020/21 (Ports Regulator of South Africa, 2017a:7), is as follows: “Where: RR = Revenue Required; v = Value of the assets used in the regulated services; d = Accumulated depreciation on such assets; w = Working Capital; r = Regulated Return on Capital; D = Depreciation accounted for in the period of the tariff; E = Operating costs (OPEX); T = Taxation expense; C = Claw-back; ETIMC = Excessive Tariff Increase Margin Credit; WEGO = Weighted Efficiency Gains from Operations; (v – d + w) = Regulated Asset Base”. This formula is an international standard building block model. Tariffs for the year ahead, and two following years of the multi-year methodology validity period, are based on forecasts of the variables of the RR formula listed above. As each year passes, the forecasted assumptions are replaced with actual data, and when all the actual data is available for a tariff year, the formula is used to re-determine the tariff, and a corrective adjustment is made in the following year via the claw-back mechanism (C) (Ports Regulator of South Africa, 2017a). Quantities pertaining to the various variables are either clawed back or given back from or to the regulated entity’s RR, to address any differences between estimates and actuals. Claw-back calculations are performed each year within a multi-year tariff determination system. As actual data for the first tariff year will only be available in the second year, the applicable claw-back, will only be completely implemented in the third year, often on a 50/50 basis. As an example, cargo volumes for any year’s tariff calculation can only be an estimate, until the year has passed, whereupon the actual measured volumes will be used for the calculation of claw-backs. Similarly, any component or variable of the RR formula may thus be estimated as accurately as possible in a particular year, and subsequently rectified using the claw-back mechanism in the subsequent two years when the actual data is known. The items in the formula dealing with “Excessive Tariff Increase Margin Credit (ETIMC)” as well as with “Weighted Efficiency Gains from Operations (WEGO)” (Ports Regulator of South Africa, 2017a:7) are notable modifications by the Ports Regulator to the standard building blocks of the RR approach, and while ETIMC has been used previously by the Ports Regulator as an innovative ‘savings’ mechanism in the regulatory practice in previous years to reduce potential higher than inflation tariff spikes, the WEGO is a new innovation that incentivizes performance improvements in the operation of the ports system by the use of either additional or reduced profits (Ports Regulator of South Africa, 2017a). To correct for differences in estimates, versus what actually materializes in the year in which the tariffs are applied, the RR approach also contains the ETIMC. As explained in the published Methodology: “the ETIMC mechanism allows for large increases in required revenue and/or tariffs that may arise from volume volatility or substantial capital expenditure programmes in future years to be partly offset by moderately higher tariff increases in the short-term” (Ports Regulator of South Africa, 2017a: 7). Thus, amounts that could be clawed-back, reducing tariffs in the following year, could also rather be retained in the ETIMC facility to be used in reducing tariffs in years in which higher prices are anticipated, thus resulting in a smoother price path and greater certainty in pricing. Several concerns about the RR model have been raised including that it may “incentivise unnecessary port capital expenditure (investments)”, “bloat operating expenditure” and set port authority prices at higher “levels that are not in the best interests of the country’s trade competitiveness and economic development objectives” (Chasomeris, 2015; Gumede and Chasomeris, 2017). In addition, port stakeholders (mainly port users) have complained that the application of the RR model has allowed the NPA to generate excessive profits that are not adequately reinvested into the port infrastructure and marine services, but are rather used to subsidise other less profitable divisions in the Transnet Group (Meyiwa and Chasomeris, 2020). Treatment of Taxation within the Revenue Required Approach In terms of South Africa’s Income Tax Act of 1962 (RSA, 1962) (as amended), a “(Pty) Ltd”, as a subsidiary of a holding company pays tax directly to the revenue authorities at the corporate tax rate (presently 28%), whilst the tax liability of a group consisting of divisions is by the group alone. From the inception of the Ports Regulator’s interim methodology in the 2014/15 financial year (Ports Regulator of South Africa, 2013a) and also in the first multi-year methodology for 2015/16 to 2017/18 (Ports Regulator of South Africa, 2014a), taxation has been a pass-through expense set at the corporate tax rate of 28%. In Equation 2 below, “Net revenue before tax allowance is the revenue after all costs, including interest and depreciation, have been accounted for, ie. it is the net return to equity before being grossed up to make allowances for taxation” (Ports Regulator of South Africa, 2013a). The reasons for the 28% pass-through tax rate approach may include simplicity, ease of calculation and certainty to the sustainability of the NPA. In addition, according to the National Ports Act 12 of 2005, the NPA was expected to be incorporated as a wholly–owned subsidiary of the Transnet Group, rather than remain a division, and it was therefore correct for the Regulator to contemplate that this could have happened at any time. Thus, in terms of the Act, it was not inappropriate for the Regulator to assume the incorporation of the NPA into National Ports Authority (Pty) Ltd with Transnet as the sole member and shareholder, as before actual incorporation or registration, the Act deems it to be the Authority and expects it to function as the Authority. The Ports Regulator’s methodology uses a ‘vanilla weighted average cost of capital (WACC)’ to calculate a return on equity, which comprises a “post-tax cost of equity” and a “pre-tax cost of debt” (Ports Regulator of South Africa, 2013a). However, the idea that this is a pragmatic solution of a ‘notional’ tax allowance as an approximation to the actual tax payable by the Ports Authority, in practice comes nowhere close to satisfactory, as the incorporation of the Authority (from a division into a subsidiary) had not materialized more than a decade after the Act had been promulgated, and the warning issued by the NPA (TNPA, 2012:25,26) “[the] Authority is not a legal entity for which tax is calculated and paid. Furthermore, any attempt to estimate a pro rata share of actual tax paid by Transnet may be quite unrepresentative of the tax burden that would have be borne by the Authority had it been a separate corporation.” seemed to be without merit. Indeed, this article will show (see table 5) that over the seven years of regulation (2011 to 2017), tax allowances provided for by the Ports Regulator within its RR tariff methodology have been disproportionately large in relation to the actual tax liability of the Transnet Group in most years. In four of the seven years, the NPA tax allowance was over half (50%) of the actual tax liability of the Transnet Group, and much more than the group tax in FY2016, at 216,30%. A solution that did try to estimate a pro rata share of the actual tax liability of the Transnet group therefore had to be found. In its second Multi-Year Tariff Methodology for 2018/19 to 2020/21 (Ports Regulator of South Africa, 2017a), the Ports Regulator states that it will accept the current corporate tax rate of 28% (t) adjusted in relation to the taxation of the Transnet Group as a whole, as the NPA is a division within the group. It envisaged a proportional tax rate, with assumption that the NPA is an operating division that does not independently pay tax, as opposed to a subsidiary of Transnet Group which would have been liable for its own tax submission. This annually approximated proportional tax rate will be readjusted through the claw back mechanism from information it would obtain from annually published audited Transnet Group Financial Statements. This represented a departure from previous methodologies in intent, and the actual mechanism of how it could work. Indeed, the Ports Regulator of South Africa (2017b: 12,13) concludes that “the continued revenue allowance of 28% of profit for NPA taxes can only be fair for a stand-alone entity paying its taxes directly to the South African Revenue Service (SARS) and that if the NPA remains one of the profit-making divisions of Transnet, among other such divisions, an equitable tax rate for the fair sharing of the group tax payable in any year has to be calculated for all profit-making divisions or business units.” Section 3 explains how to derive and calculate an equitable tax rate. Research Methodology: An Equitable (Proportional) Tax Rate In a group scenario, the profits of profit-making divisions are reduced by the losses of loss-making divisions before tax payable is calculated. Put in another way, if the revenue of each division is equal, then the higher costs of the loss-making divisions add to the lower costs of the profitable divisions, thus reducing the overall taxable profit payable by the group. In general terms the following equations can describe the scenarios with respect to corporate structure and corporate tax liability in any applicable year. Total tax liability in a year for a group of n number of divisions each numbered i =1 to n: Where: t = the corporate tax rate; = Pre-tax Profit of profitable division i; = Loss of loss-making division I; Td = total tax liability of group of divisions On the other hand, total tax liability in a year for the same divisions above treated as separate companies, noting that loss making companies pay zero tax is given by: Where: t = the corporate tax rate; = Pre-tax Profit of profitable company i; Ts = total tax liability of group of divisions treated as separate companies. Where: t = the corporate tax rate; = Pre-tax Profit of profitable company/division i; = Loss of loss-making company/division i; Ts = total tax liability of group of divisions treated as separate companies; Td = total tax liability of group of divisions. Thus, in any tax year, the aggregation of divisions incorporated as separate companies is liable to pay more tax than the corporate group consisting of unincorporated divisions by an amount equal to the sum of losses of the loss-making divisions, which illustrates how the losses of loss-making divisions within a group offset or dilutes the profits of profit-making divisions in reducing the tax liability of the group, leaving the group with comparatively more available cash. If one or more of the divisions in the group are regulated entities, with tax being calculated separately as part of an RR regulatory approach, and tax is calculated on the basis of a pass-through at the corporate tax rate (t) then this could result in: disproportionately larger tax contribution by regulated divisions towards group tax than unregulated divisions; the group obtaining much more cash from the regulated divisions than is fair for the payment of tax by the group; unfairness to the users of the services of the regulated divisions as they would be required to pay higher prices to make up higher required revenue than proportionally necessary for their contribution to group tax. One way for regulators to determine a fair approach to the calculation of taxes, for regulated divisions within a group, within the RR methodology is to determine an equitable tax rate. The formula of an equitable tax rate (te) which, when applied to all profitable divisions treated as separate companies, must result in the tax applicable when the corporate tax rate (t) is applied to the aggregate profits of the group of divisions. In mathematical terms: Therefore, to determine te as outlined in the problem statement above: but the term ( ) is equivalent to the aggregate taxable profit of the group (which accounts for divisional losses) which can be written as Pg Thus, from the equations above, it is clear why the Regulator Record of Decision (Ports Regulator of South Africa, 2017b:13) concludes that the equitable tax rate (te) applicable to any of the profit-making divisions in a financial year will thus be the corporate tax rate multiplied by the (Transnet net profit and divided by the sum of profits of profitable divisions or segments): Where: te = equitable tax rate, t = the corporate tax rate, Pg = Transnet Group total pre-tax profit for the financial year, Σ𝑃𝑖 = The Sum of pre-tax profits of profitable divisions or segments for the financial year. The method for the determination of an equitable tax rate requires two other sets of data, namely the group profit on a year on year basis, as well as group segmental data which shows either the revenues and costs associated with each division or business unit (segmental income statement), or pre-tax profit and loss data per division in the year. In this case it is the Transnet Group, within which the NPA is a division. In addition, it would be useful for such data to have been published over a number of years in order to determine a reasonable moving average of an equitable rate that can be applied in any one year and readjusted using the ‘claw-back’ variable within the RR formula used by regulators. The equitable tax rate formula in future would thus be applied as follows (Ports Regulator of South Africa, 2017b): it would be applied for the NPA as a profit-making division; it would use the claw-back mechanism to readjust the estimated equitable tax rate when audited segmental financials become available; it would be used in the calculation of cost of equity (resulting in a higher return); it would use a five year moving average of previously calculated ‘actual’ equitable tax rate and then utilize the claw-back to readjust for the actual equitable tax rate for the applicable year. The application of the equitable tax rate calculation would be on condition that the Transnet Group annually publish segmental financials that have been audited, for the group and each division, otherwise the regulator will not provide for tax in the RR, and the RR tax allowance would be considered to be already allowed within the profit allowed (Ports Regulator of South Africa, 2017b). Results and discussion: Application of the equitable tax rate in the regulation of South Africa’s ports This section applies the equitable tax rate approach to segmental financial data that was collected from published Transnet Annual Reports from 2011 to 2017. The Transnet divisional profits and losses relative to the Group profits are recorded in Table 1 for five divisions, namely the National Ports Authority (NPA), Transnet Port Terminals (TPT), Transnet Freight Rail (TFR), Transnet Pipelines (TPL) and Transnet Engineering (TRE). All other business units including head office are recorded as all other segments. The total taxable group profit is the arithmetic sum of each of the divisional profits including all other segments and elimination of intersegmental transactions. Table 1: Transnet Divisional Profits and Losses as a Percentage of Group Profits Source: Authors compiled and calculated from: Transnet Annual Financial Statements: segmental reports (Transnet 2012; 2013; 2014; 2015; 2016; 2017; 2018). Table 1 shows losses of loss-making divisions listed in italics whilst those of profit-making divisions are listed in bold. The NPA contribution to group profits has been both consistent and high over the period that it has been regulated. TFR has on many occasions exceeded the NPA profits but has also shown some years of poor profitability as well as losses. TPL as a regulated division has also shown consistent profitability, with Transnet Engineering showing profits in some years and losses in others. In particular, in examining the 2016 financial year, it is clear that the NPA recorded a profit close to thrice that of the group as a whole, due to the lowest aggregate divisional profit and the largest aggregate divisional loss incurred by the group over the seven-year period under consideration. In this regard it is not impossible to conceive that the taxation allowed by the Ports Regulator covered the tax liability of the group as a whole and even contributed to profits of the group, and that this may legitimately be regarded as an unfair burden on port stakeholders who cover this required revenue through user charges for the use of port infrastructure owned by the NPA as well as for related marine services performed by the NPA. Taxation allowed for in the RR of the NPA amounted to R889 million, for financial year ending 2016, whilst the profit tax payable on the R1468 million group profit was only R411 million. This implies that a division within a group benefited from a tax allowance that was 216% of what its group was actually liable to pay to the tax authorities for that financial year. Table 2 aggregates the sum of all profitable segments as well as all loss-making segments in the Transnet Group for the financial years under consideration and calculates the equitable tax rate for each financial year. As expected, the equitable tax rate in each year is significantly lower than the 28% corporate tax rate on profits. The average equitable tax rate over the seven-year period was calculated at 15.73%. Table 2: Calculation of Equitable Tax Rate (%) from Divisional Profit and Loss (R’million) data Source: Authors compiled and calculated from Transnet Annual Financial Statements: segmental reports (Transnet 2012; 2013; 2014; 2015; 2016; 2017; 2018). In any year, regulators are obliged to provide a tariff, before segmental results on profits are known, and the tariff contains within it, the revenue required for the tax liability for the regulated entity as per the RR regulatory methodology. When the corporate tax rate was taken for granted as the correct rate, 28% was always used. Now that it is realized that this results in unwarranted revenue, an approximate tax rate has to be used, then corrected in the following year through the claw-back mechanism allowed for within the RR calculations. It makes sense that instead of using the maximum of the corporate tax rate and then clawing back on this after actual segmental results are published, the average equitable tax rate over several years should be used as a closer approximation of what the actual equitable rate will be when it is published. The claw-back mechanism may then be used to adjust the tax revenue either upwards or downwards as may be appropriate. Table 3: Calculation of Tax on Group Profit at 28% compared to application of the derived Equitable Tax Rate to Profitable segments (R’million) Source: Authors compiled and calculated from Transnet Annual Financial Statements: segmental reports (Transnet 2012; 2013; 2014; 2015; 2016; 2017; 2018). Table 3 demonstrates that the application of the equitable tax rate in each year, to the aggregate of the profitable segments in the group, yielded the exact profit tax on the group profit at the 28% corporate tax rate. Figures in the last column calculated by applying the equitable tax rate to the sum of profitable segments/divisions (te x ΣPi) exactly equals figures in the third column calculated from applying the corporate tax rate to the group profit (t x Pg). This is theoretically demonstrated below as follows: If: It means: which implies that: Where: te = equitable tax rate; t = the corporate tax rate; Pg = Transnet Group pre-tax profit; Σ𝑃𝑖 = The Sum of profits of profitable divisions; P1, P2, P3, … ,Pn = Individual profits of each profitable segment numbered 1 to n. This confirms that if the equitable tax rate as derived, is applied to the profits of each profitable division separately, their tax contributions to the group will in aggregate amount to the group tax at the corporate tax rate (tPg). Thus, a much lower tax rate, the equitable tax rate, applied to the profits of the profitable divisions in each financial year, is sufficient to fund the full annual tax liability of the group albeit that the group pays tax at the higher corporate tax rate of 28%. Thus, a regulator may exercise this equitable tax rate approach for the calculation of an equitable tax share for the particular regulated division within a group, regardless of the non-regulated divisions, as long as their audited segmental pre-tax profit and loss information is made available. More importantly for regulation, is that a regulator of a divisional entity may apply a lower tax rate in calculating the tax allowance for the required revenue of the regulated entity, thus saving the users of the services of the regulated entity money, as long as the lower tax rate that is applied, equates to the equitable tax rate as derived. This is because it is only at the equitable tax rate, that the tax allowed for the regulated division will comprise the minimum fair share of that division (as one amongst all profitable divisions) towards the tax liability of the group as a whole, at the corporate tax rate. Only when there are no loss-making segments/divisions within the group, will the sum of profits of profitable divisions equal the group profit, and only then will the equitable tax rate reach its maximum value, equaling the corporate tax rate. That is, in the equation te ΣPi = tPg , if ΣPi = Pg, then it follows that under this condition te = t. For as long as there are loss making segments/divisions, the group profit will be smaller than the aggregate of profits of profitable divisions, and the equitable tax rate will be lower than the corporate tax rate. Table 4 shows a comparison of tax allowed by the Ports Regulator versus tax allowance calculated using the equitable tax rate formula for each financial year from 2011 to 2017. The equitable tax rate result in each year is significantly lower than the tax previously allowed thus indicating that the use of this method could result in substantial savings to port users. Specifically, a saving of between a low of 27.97% in 2011 to a high of 77.58% in 2016 If the method had been used from the outset, then the average percentage reduction in tax revenues for the seven-year period would have been 43.83%. In quantitative terms this would have amounted to an aggregate saving for port users of just over R2.6 billion (US$187m) over the seven-year period. Table 4: Calculation of tax savings to port users if the derived Equitable Tax Rate to Profitable segments method was applied instead of the corporate tax rate of 28% (R’million) Source: Authors compiled and calculated from Ports Regulator Records of Decision (Ports Regulator of South Africa, 2011; 2012; 2013b; 2014b; 2015; 2016a; 2016b). While future savings to port users depends on the profitability of each of the divisions and the overall profits of the Transnet group going forward, as these are the determinants of the equitable tax rate approach, possible savings to port users in 2016 and 2017 years are over R500 million per year ($36m). It is therefore not inconceivable that the use of the equitable tax rate approach could save port users similar significant amounts in future. Table 5: Addressing the disproportionality: Previous Allowed tax vs Equitable tax rate as % Group tax Source: Authors compiled and calculated from: Transnet Annual Financial Statements: segmental reports (Transnet 2012; 2013; 2014; 2015; 2016; 2017; 2018); Ports Regulator Records of Decision (Ports Regulator of South Africa, 2011; 2012; 2013b; 2014b; 2015; 2016a; 2016b). Table 5 shows that the equitable tax rate is consistently below 50% of the Group tax liability in all financial years, even in 2016 when the largest division in the Transnet Group, TFR made a loss. This makes much more sense as the NPA is only one of five of the usual profit-making divisions, albeit that its profit has been consistently large over the years of regulation. The spread between the smallest (12,7%) and largest (48,48%) tax derived from the use of the equitable tax rate (as a percentage of the group tax) has also narrowed, as compared to the previously allowed tax, which is spread between 19,58% and 216,30% respectively. This indicates greater consistency of resulting tax burden to users. Table 5 also confirms that the use of the equitable tax rate does not result in the divisional tax allowance exceeding the group tax liability in any year, indicating greater fairness and potential future savings to users. Conclusion The simple pass-through of corporate tax rates by regulators using rate of return regulation in the economic regulation of unincorporated divisions of an unregulated corporate group results in unfairly high prices to users and excess revenue to the group. In South Africa, it has been observed by the Ports Regulator, that a tax allowed at the corporate tax rate of 28% on the NPA profit as a part of the required revenue calculation, has been excessive when compared to what the Transnet Group was liable to pay as tax in any particular year, over the period when the “tax pass-through” approach was in effect. While an allowance of 28% of profit for the NPA would have been fair if it was a subsidiary or a ‘stand-alone’ company directly paying its taxes to the tax authorities, while it is still a division, the only fair rate that a regulator should use for the calculation of allowed revenue for taxes should be the Equitable Tax Rate. As compared to a pass-through approach, the Equitable Tax Rate takes into account the losses of the loss-making divisions/segments/business units that are part of the group, and further, the principle of proportionality is applied between the profitable divisions in apportioning and sharing the tax burden in relation to the size of their profits. The use of the Equitable Tax Rate as opposed to a pass-through approach, also ensures that in no period is the tax allowed by the Regulator more than the tax liability of the group as a whole. The Equitable Tax Rate approach therefore addresses this anomaly which is characterised by an unfair price burden on the users of goods and services of regulated divisions, as well as unfair windfall profits for an unregulated group (the Transnet Group) from its regulated division(s) (the NPA). The Equitable Tax Rate formulae derived for the calculation of an appropriate tax allowance in this context, used with the claw-back mechanism, forms a pragmatic system of addressing this problem, as it is simple in its conception and easily implementable without onerous data constraints. Its practical implementation shows how the NPA administered prices could be lowered. Specifically, calculations using Transnet’s annual segmental financial statements show that over the period 2011 to 2017 by applying the equitable tax rate (average of 15.73%) as opposed to a pass-through tax rate (28%), NPA revenue would have been R2.6 billion (US$187m) lower, a substantial saving for port users. Continuing to apply this approach could result in future annual savings of about R500m per annum (US$36m) for port users if the NPA remains a division. However, if it is incorporated as a subsidiary, as required by the National Ports Act, then the original ‘pass-through’ approach of the prevailing corporate tax rate adopted previously by the Ports Regulator, in anticipation of the imminent implementation of the Act, should resume. As this paper attempts to make a contribution on a methodological aspect and a circumstantial legal variation in the practical application of the rate of return economic regulatory methodology as adopted in a South African ports context, it will refrain from making any judgement on the repayment, or the attribution of blame, for the substantial amount of additional taxation allowed over the period concerned, in the absence of guidance on such circumstances within the body of knowledge of the rate of return methodology. This may well be within the scope of a future study. However, to its credit, it is noted that the Ports Regulator did not just blindly apply an academic interpretation of rate of return methodology. Rather it both recognised the circumstantial issues at play, as well as derived the necessary equitable tax formula and thus modified its implementation of rate of return regulation in fairness and to the benefit of port users. It is therefore complimented on standing true to its principles in service to the ports’ community and the wider economy, and for its academic contribution to the modification and application of economic regulatory methodology. References Acciaro, M. (2013). A Critical Review of Port Pricing Literature: What Role for Academic Research? The Asian Journal of Shipping and Logistics, Vol.29 No.2, pp.207-228. Angelopoulos, J., Chlomoudis, C., Flegkas, C., Leonardou, P., & Vrysagotis, V. (2019). Uncharted Waters-Independent Regulation for Port Concessions. 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Annual Financial Statements 2017, Available at: https://www.transnet.net/InvestorRelations/AR2017/Transnet%20AFS%202017.pdf [Accessed: 6 October 2018] Transnet (2018), Transnet. Annual Financial Statements 2018, Available at: https://www.transnet.net/InvestorRelations/AR2018/Transnet%20AFS_FINAL_310818.pdf [Accessed: 6 October 2018]. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Copyright © 2023 Inclusive Society Institute PO Box 12609 Mill Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute D I S C L A I M E R Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. JANUARY 2023 Xenophobia in South Africa: The politics of naming, national contract, and the invention of the foreign other by Dr William Jethro Mpofu PhD in Decolonial Studies (Philosophy, Communication, Politics), Masters in Media and Communication Science, Masters in Political Studies, Post-Graduate Diploma in Media Studies & Honours in African Literature Abstract That the hatred and violent attacks of black Africans from other countries in South Africa is xenophobia might be a simplification and a politics of naming that conceals the racist, classist, and world-systemic origins of the problem. The term xenophobia might conceal rather than reveal the modern and colonial history of the hatred and violation of the foreign other that takes place within such a nation-state as post-apartheid South Africa, which is haunted by the racism and coloniality of the World System, whose legal and political sensibility structures its polity and economy. This essay describes the National Contract that beholds post-apartheid South Africa to a modern and colonial World System which excludes and includes people along the lines of race and the social classifications that come with it. How nations and their states invent themselves and construct and produce the foreign other is discussed to flesh out how the nationalism and patriotism that criminalise the foreign other are rooted in the colonial unconscious of the nation-state and the World System. Xenophobic hatred and violence might be spectacular in South Africa but are not uniquely South African. All nation-states – as artefacts and properties of the modern colonial World System – are racist, nationalist, classist and xenophobic. The hatred and violent attacks of black foreign nationals from other countries in South Africa cannot be understood or challenged without engagement with the racism and coloniality of the nation-state as an artefact of the World System. Keywords: Xenophobia, Politics of Naming, National Contract, World System, Nation-State, South Africa Introduction The foreign other as the outsider to the nation and the other to the state is a true reject of the power that Immanuel Wallerstein (2004) has called, the “World System”. In the World System – that is, an organisation of nation-states punctuated by geographical maps of countries and legal borders of states that produce local citizens and alien subjects – nationality and citizenship have achieved tyrannical currency. Nationality and citizenship have become the talisman of being human and belonging in the nation-state. It is of analytical importance, in this essay, to look at the nation-state as but a unit within the World System, which is the ultimate organising idea that shapes the workings of the economies and polities of nation-states. In such a typical nation-state as South Africa, where the foreign other is a double-outsider that suffers identarian exclusion by the nation and legal exclusion from citizenship by the state, the foreign other is produced into a candidate for multiple forms of hate and violence that, at their zenith, lead to beatings, immolation, and other diabolical forms of murder. Even such a rigorous parliamentary democracy and celebrated Constitution as South Africa’s are not equipped with enough legal and political resources to protect the foreign other. The foreign other in South Africa does not only endure inequality in a land of storied inequality, but also exists under conditions that birth the experience of unequality itself. Unequality as a violence describes the foreign other as located outside the order of equality and inequality but down under the radar of the law, order, and social justice. The condition of the foreign other in the nation-state is darker, in the experiences it produces, than what Giorgio Agamben (2008) called the “state of exception”, where the other is ejected from the sphere of the protection of the law and exposed to the elements of the “state of nature”, which may be worse than the punishments of the beasts in the animal kingdom. It is not only extremely cold and extremely hot outside the arms of the laws of nations and their states, but it is also bloody and, actually, deathly for the foreign other as the imperilled of modernity and the coloniality that accompanies it. One can claim that nation-states, as organised and structured by the World System, are formed against the foreign other, who is positioned as an intolerable and nonsensical outsider. Even democracy, which is understood as the refuge, if not an orphanage, of the oppressed and the excluded of the world does not sufficiently accommodate or protect the foreign other. The limits of democracy as a furniture of western modernity, imposed together with the nation-state on the Global South, are tested and exhausted in the excluded condition of the foreign other. Achille Mbembe (2021) was concerned with the foreign other as the excluded, even in supposedly democratic nation-states that have easily become societies of enmity: Perhaps it has always been this way. Perhaps democracies have always constituted communities of kindred folk, societies of separation based on identity and on an exclusion of difference. It could be that they have always had slaves, a set of people who, for whatever reason, are regarded as foreigners, members of a surplus population, undesirables whom one hopes to be rid of, and who, as such, must be left completely or partially without rights (Mbembe, 2021:20). Displacement and dispossession, the deprivation of place and denial of possessions, come to be the place and the possession of the foreign other, who becomes a powerless object. As a powerless object, the foreign other becomes an item subject to powerful observations and descriptions by scholars, journalists, politicians, activists, and some right-wing anti-immigrant movements like the Operation Dudula movement in South Africa. Never is the foreign other a subject to the observers, sympathetic or hostile, but is always an object to be observed, discussed and displayed. In the punchy essay of 1943, We Refugees, Hannah Arendt is concerned with the painful objecthood of the foreign other in the shape of the refugees who, in their search for subjecthood, call themselves otherwise because “in the first place, we don’t like to be called refugees, we ourselves call each other newcomers or immigrants” (Arendt, 2009:264). The foreign others, by-products of the workings of the nation-state within the World System, do not see themselves the way they are seen, named and described by the privileged others. They seek to reject their production, their being a product of the observation and naming industry of curious scholars, dutiful journalists, powerful politicians and angry anti-immigrant activists who want them gone at best and dead at worst. In this essay I seek to ponder not just the pain of the foreign other but their legal and political paradox. The paradox being that the nation-states of the World System that fear and hate the foreign other, and brutalise them, cannot exist without them; and the foreign other would not exist if it was not for the nation-states as an industry that creates insiders and their outsiders, geographically, legally and politically. It is neither an exaggeration nor a simplification, but it is a veracity that there would be no foreigners if there were no nations and no states. The existence, legal and political reality of nation-states, necessitates the existence of the foreign other, who might in one be nationless and stateless, a national and a citizen of nowhere and, therefore, a child of everywhere. As such, the foreign other might be the true citizen of another, an alternative world system, even if it is for now a decolonial fantasy of a world without nations and a world that is innocent of the colonial crime of borders. As an artefact of the modern colonial World System, which was imposed on the Global South at the pain of genocides and epistemicides of conquest, the nation-state is a crime scene if not a cemetery for the foreign other. Recurrent eruptions of xenophobic protests and violence in South Africa speak to a growing national and state habit of systematically punishing the foreign other. As much as this is true, it is also true that South Africa might be presenting spectacles of violence against the foreign other, but the hatred and exclusion of the foreign other takes place in other African countries. South Africa’s attractive economy, vivid polity, and exemplary democracy have made the country a compelling destination for the foreign other. As such, South Africa is a fitting location for a study of how the World System and its nation-states invents and governs the foreign other who is produced into what Frantz Fanon (1963) called, “the wretched of the earth” – that is, the oppressed of all oppressed. Xenophobia: The Politics of Naming What I refer to as the politics of naming concerning what is understood as xenophobia in South Africa, is that the term xenophobia is used to conceal the true nature of the hatred and violence against black Africans from other countries. I have made the observation that, in actuality, what is circulated in journalistic and scholarly literature as xenophobia in South Africa is systemic and structural racism that is rooted in the colonial and apartheid history (Mpofu, 2020) of South Africa and other nation-states. It is my observation that the term xenophobia, as it denotes the fear and also hatred of foreign others by native nationals of South Africa, tends to conceal rather than reveal the systemic and structural constructs of racism at a world and local scale. These constructs produce and locate black Africans of other countries in South Africa as alien and foreign others who are on the receiving end of nationalist and, ultimately, racist passions of hatred and violence. I note that in a country which has not fully recovered from the homeland racist nationalism that placed black natives of South Africa according to geographical and ethnic lines, the black Africans from other countries take the place of racialised and excluded outsiders, who become candidates for hatred, discrimination and violation. In that way, what is termed xenophobia is, in my view, actually racism and the coloniality of being and belonging that accompanies it. In the South African academy and media, and in political circles, frequent eruptions of protests and violence against black Africans from other countries are referred to, not only as xenophobia, but also “Afrophobia” and “black-on-black violence”. The terms, collectively, construct and distribute the unfortunate impression that black South Africans in their national exceptionalism, fear and hate black Africans from other countries. Afrophobia and black-on-black violence refer to black people of South Africa as low-end brutes who hate others and themselves. The terms xenophobia, Afrophobia and black-on-black violence tend to apportion the blame for violence to the victims, who, in my view, are black people, nationals and foreign others – the systematic and structural rejects of the World System. The construction and production of foreign others within such nation-states as South Africa plays out within their borders, but actually emerges from the World System as the producer and organiser of the nation-states themselves. As understood by Charles Mills (1997:1), “white supremacy is the unnamed political system that has made the modern world what it is today”. White-skinned people are the ultimate citizens and nationals of the World System and tend to be welcome in most nation-states, including South Africa. This observation may be confirmed by the fact that there have not been xenophobic protests and attacks against white-skinned foreign nationals in South Africa. It has also happened that some black South Africans have been attacked and some killed after being mistaken for Africans from other countries in the continent. It is white-skinned people, foreigners and nationals of South Africa who seem to be systemically and structurally insulated from xenophobic violence, protected by the cover of white supremacy, which is the currency of being and belonging in the World System and its nation-states. What W.E.B. Du Bois (1903) described as the pathetic “souls of black folk” was not a reference only to black descendants of slaves in the United States of America, but also to black people at a world scale who are foreigners even within their own continent and nation-states. For instance, that black South African nationals remain marginalised from the mainstream post-apartheid economy is a truism that is in the public domain. In other words, black South Africans might be a political majority in terms of their population, but they remain an economic minority in their peripherisation from the mainstream economy, despite their nationality and citizenship. Where black nationals are economically marginal as they are in South Africa, it stands to reason that foreign black nationals would become the marginals of all marginalised, excluded and loathed. The marginality and exclusion of black South Africans from the mainstream post-apartheid economy led then Vice President, Thabo Mbeki (1998) to conclude that South Africa was “two nations, the one black and the other white”. In Mbeki’s understanding, white people in South Africa belonged to their own economic and social nation from which black people were excluded. The economic and social nation of their own that black people in South Africa inhabit is specifically poor and characterised with stiff competition for life opportunities and resources. In that competition, black Africans from other countries occupy the position of aliens, enemies and other undesirables. What is important to observe is that white South African nationals and white foreign nationals generally remain protected from xenophobic violence by their skin colour and social class, which positions them as the favoured and privileged of the World System, whose logic is white supremacy and racism. In that way, class and race, as social markers and classifiers intersect to exclude blacks in general and black foreign nationals specifically from the South African economy and polity. It is my observation and also argument that what appears to be xenophobia punishing and excluding black Africans from other countries in South Africa, is actually racism (Mpofu, 2020). It takes a decolonial and wider understanding of what racism is to illuminate that the violence against foreign nationals in South Africa is based on racism, which is not only a heritage of the apartheid era but a logic of the World System that governs all nation-states, systemically and structurally. Ramon Grosfoguel provides that expanded and deeper understanding of what racism is and how it works. It is noted that: “Racism is a global hierarchy of superiority and inferiority along the line of the human that has been politically and economically produced and reproduced for centuries . . . The hierarchy of superiority and inferiority along the lines of the human can be constructed through diverse racial markers. Racism can be marked by colour, ethnicity, language, culture and/or religion” (Grosfoguel, 2016 :10). If indeed colour, ethnicity, language and culture are racial markers that can be used to include and exclude one by the other, then it is convincing that black Africans from other countries are victims more of racism than xenophobia in South Africa. In other words, xenophobia, especially in the South African context, is a tributary of the larger systemic and structural problem of racism and the white supremacy that accompanies it in the World System. Unbeknown to them, the black and poor South Africans who choose to attack black Africans from other countries are being vehicles and conductors of white supremacy and racism, which socially manifest as the hatred and fear of foreign nationals in the streets of South Africa. The National Contract in South Africa Contract theory is not only real, but it also continues to widen and deepen in the way in which it illuminates how power works and organises the powerless. From its genealogies and provenances in western philosophy, where philosophers such as Thomas Hobbes, John Locke, and Jean-Jacques Rousseau adumbrated on it, contract theory has been enriched by decolonial thinkers who continue to deploy it to shine light on the dark corners where power hides its multiple violences. Concerning post-apartheid South Africa and the coloniality that haunts the polity and the economy, Melissa Steyn (2012) explicates an “ignorance contract”, where some guilty white perpetrators and beneficiaries of apartheid entertained deliberate forgetfulness and ignorance of the evil of racist rule. They entertain the ignorance so powerfully that Steyn wonders why one can never meet a white South African who owns up to having perpetrated, supported or benefitted from apartheid. From that, one can observe how power uses its privilege to ignore and to creatively forget its violences and plead innocence. In other words, power has the privilege to unknow its crimes and evils by politically contracting itself to convenient and comforting ignorance. British feminist, Carole Pateman (1998) described the “sexual contract”, where the idea of the social contract that is supposed to be foundational to liberal democracy actually conceals a “patriarchal pact that establishes men’s sex right over women” and by extension non-gender conforming peoples in the modern colonial world system. Hidden behind the enchanting modernising and liberating gestures of the social contract is patriarchy, which advances male and heteronormative supremacy. What Pateman achieves is to unmask the logic of patriarchy and sexism, which is systematically and structurally hidden behind the rhetoric of the social contract, much the same way the rhetoric of democracy and constitutionalism of nation-states tends to hide the logic of inequality, racism and other violences. The hate and attacks of foreign others from Africa in South Africa happen as the country’s Constitution is globally celebrated and vivid parliamentary democracy admired as exemplary. From the vantage point of political philosophy, examining the World System, Charles Mills (1997:1) observes in western philosophy “no mention of the basic political system that has shaped the world for the past several hundred years”, and that “this omission is not accidental”. The omission of white supremacy and racism as organising ideas of western and colonial modernity constitutes a kind of “ignorance contract”, where racial power and privilege are comfortable concealing rather than revealing their violences. The gravamen is that “white supremacy, both local and global, exists and has existed for many years; the conceptual claim – white supremacy should be thought of as itself a political system, white supremacy can illuminatingly be theorised as based on a contract between whites, a Racial Contract” (Mills, 1997:7). As a political system, the Racial Contract does not only bind whites, socially and politically, but it forcibly presses its signature on non-whites who are on the receiving end of white supremacy. As such, in nation-state settings such as South Africa, post-apartheid South Africa specifically, the racial contract holds the distribution of power with the many-fingered grip of the octopus. It is for that reason that the celebrated South African Constitution and the storied parliamentary democracy of the Republic do not seem to have sufficient legal and political resources to protect the poor majority blacks who are black foreign nationals from other African countries. From how the Racial Contract envelopes the nation-states within the white supremacist and modern colonial World System, I observe a National Contract where nationalism and patriotism as ideologies and passions are not innocent of racism. The national who becomes a xenophobe pretends and may actually believe that he, she or they are a dutiful patriot charged with the love and duty to cleanse the nation and the country of foreign intruders. That national believes in and fortifies colonial homelands and colonial borders. The xenophobe is at once a racist who cements the bricks of colonial and racist infrastructures of the nation-state, which is a province of the World System. In that way, nationalism as an ideology of power, being and belonging to a nation, tends to escalate or degenerate into the racism that gave birth to it in the very first place. Frantz Fanon (1963) worked hard to illuminate the degeneration of nationalism in the case of West Africa where: “National consciousness, instead of being the all-embracing crystallisation of the innermost hopes of the whole people, instead of being the immediate and most obvious result of the mobilisation of the people, will be in any case only an empty shell, a crude and fragile travesty of what it might have been”. As if writing about present-day South Africa, Fanon noted how “from nationalism we have passed to ultra-nationalism and finally racism” and “these foreigners are called on to leave and their shops are burned and their street stalls are wrecked” (Fanon, 1963). My observation is that the nationalist road, as a passionate and ideological road, leads back to the Racial Contract. The nation-state carries a nationalist and racist birthmark from its violent birth and growth in Europe, where it was colonially transported to be imposed on Africa. As I argue below, the national, in pursuing nationalism and advancing the patriotism to the nation-state, always runs the risk of degenerating into hate and violence against the foreign other who is the systemic and structural other to the World System. Political commitment to the nation-state and its demands on the outsider to the national maps and borders, leads to the Racial Contract, which puts whites at the top of the pyramid of being and belonging in the nation-state and its source, the World System. The causalities of frequent and often diabolical attacks of black Africans from other African countries in South Africa have been explored by scholars, journalists and politicians, in the main. Some have blamed poverty, where South Africans in the scramble for scarce life opportunities tend to hate and attack poor black foreign nationals, who are understood to be parasites on the scanty national cake. Others have blamed black foreign nationals for bringing crime, disease and violence to South Africa – which is mistakenly understood to be an exceptional country, a piece of Europe in Africa – which must be protected from the pollution from other African countries that black foreign nationals bring into the Republic. Black foreign nationals have been accused of taking away not only scarce jobs from South Africans, but also “our women”, who foreigners snatch from the nationals, as if women in South Africa are essentially the entitled property of any South African man. I note the possible credibility of some of these “popular” understandings of the causalities of hatred and fear of black foreign nationals in South Africa, but I insist that the National Contract in its rootedness in the Racial Contract that governs the modern and colonial World System turns some South Africans into xenophobes. In his Reflections on xenophobic violence in South Africa, Michael Neocosmos dismisses the primacy of most of these causalities and blames a “political discourse” that is “the result of political ideologies and consciousnesses” that impassion some South Africans into fear and hatred of black foreign nationals from elsewhere in Africa. To blame is “a state discourse of xenophobia, a discourse of South African exceptionalism and conceptions of citizenship founded exclusively on indigeneity” (Neocosmos, 2008:587). The political ideologies and consciousnesses that possess the state and the nation in South Africa are, in my view, passions of the Racial Contract that produce and shape the National Contract, which weaponises borders, nationality and citizenship against the foreign other. In other words, the foreign other is invented racially by the nation-state and is then criminalised as a loathed enemy that is a candidate for hate, insult, assault and murder. The Invention of the Foreign Other By being and belonging to a modern World System, the nation-state as a domain of power that is housed within a country, carries the memory and sensibility of modernity and coloniality. Regarding post-apartheid South Africa, for instance, Peter Hudson (2013) describes the state as a carrier of the “colonial unconscious” in that the history of apartheid, racism and coloniality haunts the institutions and structures of power in the Republic. That apartheid classified South Africans into races and ethnicities and settled them in homelands, with white people at the centre and black people in the periphery, cannot be ignored in observing how black Africans from other countries are treated in the country. Black Africans from Zimbabwe, Mozambique, Nigeria and other African countries have no homeland to go back to in the history of South Africa, hence the perpetual populist demand that they should go back to their countries. What is simplistically called xenophobia in South Africa is that apartheid “colonial” and racist unconscious that is also a homeland mentality and political sensibility. It demands as apartheid did that black South Africans themselves, and black Africans, go back where they belong in the homelands. What Neocosmos (2008) describes is a South African state and nation that, because of its history of excluding the racial and the ethnic other from the centre of the polity and the economy, cannot help itself from fearing and hating the foreign other. In that way, the South African nation-state is sold and bought to the Racial Contract, which classifies, settles and excludes along the lines of race and the ethnicities that it constructs and circulates. There is more to the assertion by Greg Mills (2011:402) that in the modern world “nations are constructed around a common hatred of their neighbours and a common misunderstanding of their own past”. In its self-understanding as a nation-state, South Africa might be systemically and structurally possessed with a mythologisation of the foreign other as an alien and a pollutant to be gotten rid of. That mythologisation of the foreigner might be accompanied by the imagination of South Africa as pure, different and exceptional from other African countries. In that nations are “imagined communities”, Benedict Anderson (1983) clarifies that nations and their states, such as South Africa, work with the imagination of themselves against an imagination of others as outsiders to be managed in or managed out. Nation-states, such as post-apartheid South Africa, are fertile grounds that systematically give birth to what Mahmood Mamdani (1996) called “citizens” and their “subjects”. The foreign others are constructed, given birth to, by the nation-state as not only subjects but actually objects that are outsiders to the nation, the state, and the country as a geographical entity with its forbidding maps and borders to keep the outsider outside. The passports and permits that are demanded from the foreign others are actually not for helping them “pass the port” of borders or “permitting” them to stay in the country, but rather, they are signatures and monuments to their objectification. The foreign others as imagined and invented by the nation-state and its political imaginary appear as refugees, immigrants, illegal and undocumented travellers and settlers, summarised in the name of foreigners. The foreign others create in the nation-state what Slavoj Zizek (2017) calls a “double blackmail”, where those who are against them and want them out have convincing reasons, and those who sympathise with them and want them documented and permitted to stay also have their compelling reasons, while their condition of exclusion and oppression remains unchanged. Being the foreign other does not only have race to it, but it also has class. It is for that reason the true foreign other is always the poor black African that is a border jumper, an economic refugee, political exile or fugitive from somewhere else in Africa. Xenophobic violence in its diabolical expression pits black poor South Africans against black poor Africans from elsewhere. The educated, professional and monied African from elsewhere enjoys documentation, permanent residence, naturalisation and citizenship. That classy black African becomes more national than some poor South African nationals and benefits from the systemic and structural xenophilia of the state that is reserved for the white persons or those blacks who have been washed white by money. It is in that way that in the nation-state of the World System, nationality and citizenship can actually be sold and bought as a commodity that some can afford while others cannot. The true foreign other in such a nation-state as post-apartheid South Africa is black and poor, excluded and unwanted, a wretched of the earth. The foreign others are colonial subjects that are excluded along the lines of race, class, nationality and ethnicity first in the World System, and next in the nation-state as a legal and political unit that is located in the geographical location called a country, such as South Africa. Conclusion It is my observation, argument and conclusion that what we simplistically call xenophobia, in the media and the academy, is actually a political ideology and passion that combines ideas of race and class. It is a combination of ideas and practices that target the black and the poor for exclusion and for attack. Even the terms “Afrophobia”, “black-on-black violence”, and black on “black hatred” do not capture that at the bottom of violent attacks on black and poor foreign others in South Africa there is racism in its full intersection with classism. I can argue here that those that pass the test of race and class in South Africa, even if they are foreigners, are safe from what we call xenophobia. If what we call xenophobia, in the media and the academy, is actually the fear and hatred of foreigners, then the fortune of white skin colour and possession of big money can wash away being a foreigner and buy nationality in South Africa. As such, what we call xenophobia, the fear and hatred of foreigners, in the media and the academy, is a misleading misrepresentation and simplification of terms. In confronting what we simplistically call xenophobia, we are faced with race in its intersection with class, and in its working with the ideology of nationalism in one nation-state that is housed in one country, South Africa. Colonial borders, state laws, and institutions, political parties, and government, and the population of South Africa are systematically and structurally thrown into a historical and political theatre where the invented foreign others have violence and exclusions performed and deployed against them. References Agamben, G. (2008). State of exception. In State of Exception. Chicago: University of Chicago Press. Anderson, B. (1983). Imagined Communities. New York: Verso. Arendt, H. (2009). The Jewish Writings. New York: Schocken Books. Du Bois, W. E. B. (1903). The souls of black folk. Chicago: McClurg. Fanon, F. (1963). The Wretched of the Earth. New York: Grove Weidenfeld. Grosfoguel, R. (2016). What is Racism? Journal of World-Systems Research, 22(1), 9-15. Hudson, P. (2013). The state and the colonial unconscious. Social Dynamics, 39(2), 263-277. Mamdani, M. (1996). Citizen and Subject: Contemporary Africa and the Legacy of Late Colonialism. Princeton: Princeton University Press. Mbembe, A. (2021). Out of the dark night: Essays on decolonization. New York: Columbia University Press. Mills, C. (1997). The Racial Contract. Ithaca and London: Cornell University Press. Mills, G. (2011). Why Africa is Poor: And What Africans Can Do About It. Johannesburg: Penguin Books. Mpofu, W. (2020). Xenophobia as Racism: The Colonial Underside of Nationalism in South Africa. International Journal of Critical Diversity Studies, 3(2), 33-52. Neocosmos, M. (2008). The politics of fear and the fear of politics: Reflections on xenophobic violence in South Africa. Journal of Asian and African studies, 43(6), 586-594. Pateman, C. (1988). The Sexual Contract. Oxford: Polity Press. Steyn, M. (2012). The ignorance contract: recollections of apartheid childhoods and the construction of epistemologies of ignorance. Identities, 19(1), 8-25. Wallerstein, I. (2004). World-Systems Analysis. USA: Duke University Press. Zizek, S. (2017). Against the Double Blackmail. Milton Keynes: Penguin Books. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Copyright © 2023 Inclusive Society Institute PO Box 12609 Mill Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute D I S C L A I M E R Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or its Board or Council members. Authors: Anton Cartwright Prof James Blignaut Dr Anokhi Parikh Content Contributors: Prof Josephine Musango Prof Tania Ajam Dr Motsamai Molefe Moderator: Prof Zweli Ndevu Project Manager: Daryl Swanepoel JANUARY 2023 Content 1. Introduction 2. Learning from the history of research on population and sustainability 2.1 Biophysical constraints 2.2 Non-biophysical constraints 2.3 Learning from the past 3. Analytical approach 3.1 Modelling carrying capacity 3.2 Model structure, variables and real-world data 3.3 Scenarios to capture the influence of political economy 4. Model results and inference 5. Influences of fertility rates and policy implications 6. Conclusion References Appendix A: Variables and values of input data used Appendix B: Earth overshoot day for respective countries based on “biocapacity” models. Cover page picture source: https://journals.openedition.org/factsreports/5650 List of Tables Table 1: Variables and sources of data for the model Table 2: Scenario parameters Table 3: Carrying capacity over time across four modelled scenarios List of Figures Figure 1: Global population over time compared to trends of a selection of environmental indicators, showing strong correlations but not necessarily causality Figure 2: Number of studies by maximum human population threshold Figure 3: Logistic functions applied in this model to capture the idea of carrying capacity Figure 4: A stylised causal loop diagram illustrating a selection of the various system- wide interactions between the population, the economy and environment Figure 5: The land sub-modelFigure 6:The cereal production and water sub-models Figure 7: The GDP-waste and GDP-greenhouse gas sub-models Figure 8: Modelled global carrying capacity under different scenarios Figure 9: Carrying capacity (S0) over time, per region Figure 10: Modelled South Asia carrying capacity under different scenarios and unchecked population growth “The human question is not how many people can possibly survive […] but what kind of existence is possible for those that do" (Frank Herbert, 1965, Dune) 1. Introduction The past 150 years have been defined by a “Great Acceleration” – the period of rapid expansion of the “economic activity of the human enterprise” (Steffen et al., 2015). This period is associated with innovation, rapid industrial expansion, commodity extraction, unprecedented improvements in agricultural productivity with the help of inorganic fertilisers, pesticides and herbicides, and rapidly rising consumption. The same 150-year period saw the human population increase from 1.2 to 7.9 billion (World Bank Data, 2022) and a raft of environmental impacts, see Figure 1, leading in some instances to the breakdown of environmental systems (McNeil, 2000; MEA, 2005; Dasgupta et al. 2021; IPCC WG2, 2022). Earth system scientists describe this period as marking a fundamental shift from the natural variability of the Holocene (the preceding 11,700-year period) to the Anthropocene in which human activity is the dominant influence on Earth’s geology, ecosystems and climate (Stoermer and Crutzen, 2000; Pearce 2009; Smith and Zeder, 2013; McNeil and Engelke, 2016; Baskin 2020).[1] Figure 1: Global population over time compared to trends of a selection of environmental indicators, showing strong correlations but not necessarily causality Source: Smith et al. (2009) People have always relied on the natural environment for food and fibre and as a sink for the by-products of their economic endeavours, and this reliance has long been the source of concern about resource scarcity, environmental integrity and the implications of environmental collapse for humanity (McNeil, 2000; Crutzen, 2002; Pearce, 2009). As the human population breaches the 8 billion mark for the first time, and in the interests of adding a contemporary perspective to what is both a longstanding intellectual curiosity and concern, the Inclusive Society Institute (South Africa) together with the Global Challenges Foundation (Sweden) commissioned research that explores the interactions between human population, environmental sustainability and human well-being. More specifically, this study sought to answer two questions: i. What is a sustainable human population size on Earth? ii. What are the policy measures that influence population size and population growth rates? The study applied a combination of literature review and systems modelling to propose a range of estimates with respect to the Earth’s plausible “carrying capacity.”[2] Significantly, the research took place in the wake of a 2 years and 11 months drop in life expectancy in the United States between 2019 and 2022 (CDC, 2022). Covid-19 caused at least 6.5 million deaths globally and together with a spike in “unintentional injuries” – a term that is most commonly applied to drug-related deaths – accounted for the sharpest decline in United States’ life expectancy in nearly 100 years. For some, the interconnections between growing populations, habitat destruction and the outbreak of pandemics and societal stresses have created the spectre of checks on the human population (Jones et al., 2008; Dobson et al., 2020; Gibb et al., 2020; Tollefson, 2020). While the loss of life expectancy in the United States has not yet altered global population growth, the data does provide a caution against complacency on the population issue. More specifically, global events since 2019 have rocked the sanguine complacency that has characterised some policy circles that ‘everything will be OK’ or ‘technological fixes will solve our problems’ and instead highlighted the linkages between humans, other components of the natural world, conflict, political power and disease. The research engages this context in answering the research questions and draws the high-level conclusion that consumption, resource management and choices around economic models exert a more powerful influence on sustainability and carrying capacity than population growth. 2. Learning from the history of research on population and sustainability From the outset, much of the research into sustainable population size has been “politically loaded”, often harnessing very human fears about well-being and longevity (Sciubba, 2022). Proponents of this research have drawn from a combination of macro-demographic and Earth system models and micro-scale biological experiments involving pin mould in a petri dish and rabbits in a hutch, to speculate about what happens when the Earth is no longer able to supply the needs of humans. Cohen (1995) observed that the debate about sustainable population size, economic well-being and cultural values has been most fierce when scientific evidence is least available. In reality, there is no shortage of “evidence” but the idea of a “sustainable human population” comprises an “essentially contested concept” that is not well-served by dogmatic, sceptic or even eclectic framings (Garver, 1978, p.168). Contestation has not prevented assumptions regarding the relationship between population size, environmental sustainability and human well-being, being embedded in many aspects of policy, often in ways that are influential but not particularly transparent: macro-economic models rely on population growth to drive economic growth; Intergovernmental Panel on Climate Change’s (IPCC’s) Shared Socioeconomic Pathways include assumptions on population growth and emissions; migration policies are often predicated on the population that a country or its economy is assumed to be able to sustain; local and regional infrastructure planning strategies are based on future levels of population, environmental integrity and economic well-being; and personal and actuarial financial plans make assumptions about future population, economic progress and environmental integrity (Pearce, 2009; Samir and Lutz, 2014). Some of the same assumptions feature in contemporary discourses and popular culture. In the movie Infinity Wars and Avengers: Endgame, the genocidal villain, Thanos, seeks (satirically) to halve the population to cure the world of the ills of overpopulation and resource depletion and bring stability to the remaining half of the population. 2.1 Biophysical constraints One way of understanding different studies of the Earth’s carrying capacity involves examining the assumptions they make regarding what constrains human population. Van Leeuwenhoek, famous for having invented the microscope, relied on an estimate of ‘inhabitable land’ in the world to make one of the first documented estimates of the Earth’s human carrying capacity in 1679. Extrapolating from the population of Holland (then one million people) and applying his estimate of inhabitable land, Van Leeuwenhoek concluded that the Earth could support 13 billion people. Over a century later, Thomas Malthus focused on food availability. Based on his famous model of the differential growth rates in food and population, respectively, Malthus predicted large-scale food shortages and population checks (Malthus, 1798). While Malthus’ model did include events such as war and famine, his focus on food availability failed to anticipate the influence of agricultural innovation and birth control.[3] Paul and Anne Ehrlich focused, similarly, on food supply. In their book The Population Bomb, they forecast large-scale starvation in the 1970s and 1980s (Ehrlich and Ehrlich, 1968). Paul Ehrlich’s subsequent work included a range of commodities, and in 1980 he engaged economist Julian Simon in a bet that the price of five commodity metals would go up in the following decade due to their scarcity. Ehrlich unambiguously lost the bet but retains that he is right about the impact of population, technology and affluence in determining environmental impact. Ehrlich’s I (impact) = P (population) * A (affluence) * T (technology) model was developed with John Holdren and is still widely cited in environmental literature, despite its lack of explanatory power (Ehrlich and Holdren, 1971; Gaffney and Steffen, 2017). Research subsequent to the Population Bomb has considered the interaction between several constraining factors in estimating the Earth’s carrying capacity for humans. The Limits to Growth remains one of the most purchased environmental books of all time and modelled the interaction between ‘population’, ‘agricultural production’, ‘natural resources’, ‘industrial production’ and ‘pollution’ (Meadows et al., 1972). The authors concluded, "The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity" and proceeded to argue that while technological innovation and population control could delay a collapse, only a "carefully chosen set of world policies designed to stop population growth and stabilize material consumption could avoid collapse" (Meadows et al., 1972). Other studies have drawn on different combinations of water availability, energy, carbon, forest products, non-renewable resources, heat removal, photosynthetic capacity, and the availability of land for food production. The same studies adopt a range of techniques in estimating actual maximum population size, including spatial extrapolation, modelling of multiple regions, temporal extrapolation, actual supply of a resource, hypothetical modelling, and dynamic systems modelling (see summaries in Cohen, 1995; Jeroen et al., 2004; UNEP, 2012). Population biologist Joel Cohen posited that the nitrogen cycle, available quantities of phosphorus and climate change were most likely to provide the first binding constraints on population, but conceded that, “no one knows when or at what level peak population will be reached” (Cohen, 1995). Phosphorous, a key ingredient in plant proteins, has long been considered a potentially constraining resource, but this fear has led to the discovery of new phosphate deposits on the ocean floor (Van Vuuren et al., 2010; Edixhoven et al., 2013). Applying the Food and Agriculture Organization’s assumption that there is 1.4 billion hectares of arable land available in the world, ecologist EO Wilson estimated the maximum possible human population to be 10 billion, but contingent upon the significant rider that everyone followed a vegetarian diet and humanity adopted a “generally shared long-term environmental ethic” (Wilson, 2002). Proponents of “planetary boundaries” define a “safe operating space” for humanity based on their assessment of the thresholds of a perturbed climate, stratospheric ozone depletion, ocean acidification, biochemical flows (phosphorous and nitrogen), land system change, atmospheric aerosol loading and biosphere integrity (Rockstrom et al., 2009). Whilst the idea of a safe operating space has been useful in highlighting choices and the interaction between social and biophysical systems, proponents of this idea have struggled with the interaction between their boundaries and the data that has emerged since 2009 (Steffen et al., 2015; Raworth, 2018). 2.2 Non-biophysical constraints The limited predictive power of past studies linking population growth and environmental integrity has led some researchers to question the significance of the relationship (Hickel and Hallegatte, 2021). Given that per capita incomes have risen much faster than the growth in population, it has been suggested that consumption growth (and associated extraction and pollution) might be more of a threat to environmental sustainability than changes in population size (Pearce, 2009; Drupp et al., 2021). This idea is broadly supported by the “Earth Overshoot Day” evidence (Appendix B), the observation that the richest 7% of people were responsible for half the greenhouse gas emissions driving climate change in 2020, and the assessment that OECD countries have contributed 92% of the historical emissions causing climate change (Pearce, 2009; Hickel, 2020). Hickel argues: "The crisis is not being caused by human beings as such, but rather by an economic system that is organized around, and dependent on, ever-increasing levels of commodity production and consumption" (Hickel and Hallegatte, 2021:2). The same focus on extraction, consumption and pollution as the primary threat to the Earth’s carrying capacity is supported by research suggesting that a child born in the United States in the early 2000s would, under the prevailing technologies, produce a lifetime carbon footprint seven times greater than a Chinese child, 46 times that of a Pakistani child, 55 times that of an Indian child, and 86 times that of a Nigerian child (Murtaugh and Schlax, 2009). Others have questioned the very idea of natural resource constraints, given human ingenuity and innovation. Paul Romer won a Nobel Prize for Economics, drawing on empirical evidence to show non-diminishing returns to human and institutional capital in his Endogenous Growth Theory (Romer, 1986). Where Romer’s thinking is extended to include the possibility of non-diminishing returns to ecological capital (i.e., regenerating natural systems), most biophysical constraints on carrying capacity disappear (Van den Bergh, 2011; Smulders et al., 2014; Atkinson, 2015; Hickel and Hallegatte, 2021). Interestingly, while human population continues to grow, fertility rates are falling everywhere, leading to the suggestion that either environmental or social population checks are already in effect (UNDESA, 2017). In 2021 the growth rate was 1.1%, much lower than its peak in 1968 when it grew at 2.1%. The average number of children per woman peaked in 1950 at 5.05 and had more than halved to 2.4 by 2021 (World Bank Data, 2022). More than half the women born in 1990 in the United Kingdom and Wales, had not had children, the first generation to record this statistic (Office of National Statistics, 2021). 2.3 Learning from past research The past 300 years of research and literature on population and sustainability reveals little certainty on global carrying capacity. It does, however, highlight the emotive nature of this research question, the importance of what is measured and the timeframes over which it is measured. Rather than converge, estimates of the human population limits have diverged as the number of studies has increased. The range of published research suggests that populations between 0.5 billion and 1 trillion could live sustainably (Figure 2). Most of the research estimates that sustainable populations would be less than 16 billion, but there is no probabilistic relationship that can be applied between the frequency of estimates and actual carrying capacity of Earth. Figure 2: Number of studies by maximum human population threshold Source: UNEP (2012) Reviewing past research on this topic highlights two potential research pitfalls: difficulties in imputing the contribution of innovation and adaptive human behaviour and whether it is enhancing or undermining carrying capacity (as with Malthus), and the difficulty in making accurate assumptions regarding the ecological, social and economic thresholds that should not be breached if human populations are to be sustained. It is equally clear that most theories of demography and the impact of human populations on sustainability involve a degree of political bias and agenda (Baskin, 2020; Sciubba, 2022). In an extreme example, Garret Hardin author of the gloomy Tragedy of the Commons, called on the equally polemical and provocative need for "lifeboat ethics" in confronting a resource-constrained world (Hardin, 1974). In Hardin’s metaphor, "Each rich nation can be seen as a lifeboat full of comparatively rich people. In the ocean outside each lifeboat swim the poor of the world, who would like to get in." If any were allowed on board, Hardin argued, everyone would drown and accordingly people in the lifeboat had a duty to their species to be selfish. What Hardin’s metaphor failed to impute was that each of the people in the lifeboat was occupying the ecological equivalent of ten places. Gender politics forms a further deep-seated bias in a number of population studies. Not only are fertility rates directly related to women’s rights and agency within societies, but the impacts of environmental degradation are born disproportionately by women (Gifford and Comeau, 2011; Schofield and Gubbels, 2019; Walk, 2021). Understanding the options and decisions available to women is largely missing from studies of population and sustainability, an oversight that undermines the body of research. 3. Analytical approach This study sought to learn from the history of work on this topic before applying assumptions on the relationship between population and environmental sustainability. The overarching assumptions applied are listed below in the interest of transparency, and to locate this research on the wide spectrum of thinking on this topic: i. For the purposes of this study, the Earth is assumed to be the only planet capable of supporting human life. ii. Planet Earth is assumed to be an open system with abundant resources many of which have regenerative capacity, due to incoming radiative energy from the sun. In this the human population on Earth is unlike ‘pin mould in a petri dish’ or ‘rabbits in a hutch’ in the experiments mentioned above. iii. It is recognised that there are many social and ecological factors, known and unknown, that affect the maximum possible human population size on Earth. These factors interact with each other in ways that are difficult to observe or predict. This assumption does not preclude sensible policy responses, but does render any population sustainability model limited in its explanatory power. iv. It is acknowledged that Earth’s ability to sustain human life is already under extreme pressure. Resource extraction and consumption exceeds the regenerative capacity of most planetary systems and numerous ecological systems are in danger of collapse. v. Humanity is assumed to be unequivocally responsible for the prevailing environmental crises, but human impact varies greatly depending on individual income and location. vi. Humans have a remarkable capacity to innovate and adapt their operating systems to meet and sustain their needs. As a result, the inclusion of different human responses to social and environmental pressures becomes critical to estimates of sustainable population. vii. Population is not assumed to be the only parameter impacting on sustainability. Consumption, governance, toxicity of industrial processes and concentrations of both political and economic power appear to influence the environmental pressures experienced today. viii. If something is unsustainable, then it will stop. The working assumption of this study is that Earth systems will continue with or without people, but that population growth will either be curtailed within a sustainable threshold by human decisions, or checked (and possibly decline) where a collapse of ecosystem services causes food shortages, disease, conflict, or environmentally induced declines in fertility.[4] 3.1 Modelling carrying capacity Systems science teaches us that problematic “overshooting” occurs when periods of rapid change confront some form of barrier or threshold and the feedback loops or corrective measures are delayed or impaired (Meadows et al., 2002). Barriers or thresholds can be comprised of time, space or constraints in resources or social capacity, and they can be absolute or relative to rates of regeneration (Meadows et al., 2010). Knowing where barriers or thresholds lie, or whether feedback loops are likely to be positive or negative, can be tricky. The book Collapse – How Societies Choose to Fail or Succeed famously documents the catastrophic consequences for civilisations in which the elite believed they could insulate themselves from the impacts of ecological degradations (Diamond, 2005). In contrast, in rural villages in Kenya, the soil erosion caused by rapid population growth catalysed the social solidarity and environmental responses that led to soil protection and higher crop yields (Tiffen et al., 1993). In this study, the notion of ‘carrying capacity’ is used as the system threshold that should not be overshot (McGuigan, 2022). Carrying capacity refers to the maximum population size of a biological species that can be sustained by that specific environment. This study considers the Earth’s carrying capacity of humans, while recognising that the maximum size of the human population is a function of the environmental systems that interact with and support that population. The modelling of carrying capacity, denotated as “K”, involves estimating the point at which the number of births is equal to the number of deaths and (once migration has been accounted for) population is stable. In the model developed for this study, carrying capacity is assumed to be a function of: Food calorie and nutrient production: As a basic need for all humans calories and nutrients are fundamental to life; two thirds of food calories consumed globally come from just four staple crops: wheat, maize, rice and soybean (Elbehri, 2015; Rozenberg and Hallegatte, 2015; Villarroel Walker et al., 2014; Kim et al., 2019; Queiroz et al., 2021). Demand for food doubled between 1950 and 2000 (Tilman et al., 2002) and the world must produce more food in the 40 years following 2010 than in the previous 8,000 years. Agricultural innovation has driven levels of food production not imaginable by Thomas Malthus, but this has imposed an environmental burden and has its own limits. Between 1950 and 2000, agricultural yields plateaued in Europe and the United States despite a 700-fold increase in fertilisers (Foley et al., 2005; Godfray et al., 2010), and 30-35 billion tons of topsoil is lost every year (Clay, 2011). Water provisioning: Access to freshwater is a requirement for life and economic activity (Gleick et al., 2002). Mining, agriculture, industry and urban waste have polluted and caused salinization of the 35 million km3 of freshwater systems around the world, of which only 50% are currently used by people (Gleick and Palaniappan, 2010). Any notion of freshwater limits must factor in the rates of recharge of surface water and groundwater, respectively. There is an additional 1.4 billion km2 of sea water available. As a minimum, the World Health Organisation estimates that people require access to 50 litres of water per day to live a productive and healthy life. Energy: Access to energy varies greatly across the world, and the model described below did not use an energy parameter, per se, but did capture CO2 as a by-product of energy, as something that has to be processed by “regulating services”. Energy availability and access are a prerequisite for livelihoods, comfort, economic development and health (IEA, IRENA, UNSD, World Bank, 2021). There are strong correlations between access to energy and well-being and the ability to cope with, and respond to, disruptions. How energy is generated, by utilities and households, holds important implications for health and environmental stability both through the pathway of indoor air pollution and the linked between energy and climate change (International Energy Agency (IEA), 2014; Castan-Broto, 2017). Resource extraction and ecosystem destruction: The extent to which societies poison or destroy the ecological integrity that supports life, affects carrying capacity (Hallegatte et al., 2019; Rockström et al., 2017). The accumulation of harmful chemicals in the ocean, freshwater systems, soil and atmosphere, or through accelerated erosion or deforestation, all undermine carrying capacity. This parameter, itself a function of what is sometimes called an extractive economy (as opposed to a circular economy) has a negative impact on carrying capacity. Historically, the presence of these environmental “bads” (extraction and destruction) has been closely correlated with human population (Lenton et al., 2019). Foremost among the risks to ecological integrity is the risk of climate change. To have a 50% chance of limiting warming to 1.5oC, the world can emit 460 billion tCO2e from January 2021 (IPCC, 2021). There are many linkages between climate change and carrying capacity. Among the most obvious are climate-induced crop failures and droughts in China, India and North America (Caparas et al., 2021). There is further evidence, but not yet sufficiently robust to have been included in the model, that persistent environmental pollutants affect carrying capacity in direct and indirect ways. The World Health Organisation notes that increased mortality results from PM2.5 above 10 micrograms per cubic metre of air, that is urban air in many of the world’s cities. There is also growing evidence that a range of phthalates, polychlorinated dibenzo-p-dioxins (PCDDs), polychlorinated dibenzofurans (PCDFs) and, specifically, polychlorinated biphenyls (PCBs) contained in pesticides or released from badly managed landfill sites or the indiscriminate burning of plastics and industrial materials, impact male and female fertility directly. Land: As both a source (food and ecosystem services) and a sink (for the built environment and for waste processing), land is a fundamental component of carrying capacity. While some vertical farming or cellular agriculture technologies may decouple food production from land, these technologies are not available to the majority of the world, and land for ecosystem goods and services remains essential. Land is further required as a place for cities and to accommodate the urbanisation mega-trend. Suitable or optimal urban densities depend heavily on infrastructure and governance, but some high-density cities such as Medellín are associated with high levels of sustainability (Newton et al., 2022). It is not the case that nobody dies of hunger, disease or environmental pollution at carrying capacity, but only that these deaths together with natural deaths equate over the short term to the number of births. Equally, breaching K does not necessarily lead to a population collapse. On the contrary, the model developed for this study applies a logistic function (the Verhulst-Pearl equation[5]) to reflect a population that grows exponentially, but then stabilises around a maximum threshold (an asymptote) at the carrying capacity (Figure 3) (Cohen, 1995; Bacaër, 2011). This is in contrast to an exponential function that does not accommodate a maximum, and as such is not useful in establishing the equilibrium level of K. Figure 3: Logistic functions applied in this model to capture the idea of carrying capacity Source: BioNinja[6] To quantify the Earth’s carrying capacity, this study built and ran a model using Vensim[7] software. The model adopted a ‘systems’ approach recognising that it is functional ecosystem services – rather than a single resource – that sustain human life, and which are under critical threat. In this modelling approach, human populations are either checked or decline when ecosystems stop providing critical services. In this way, the model sought to capture the human population’s dependence on the “living fabric of ecosystems and biodiversity” (MEA, 2005; Sukhdev et al., 2014). This “fabric” is represented by four categories of critical services provided by nature, as popularised by the Millennium Ecosystem Assessment (MEA) and applied by The Economics of Ecosystems and Biodiversity (TEEB) working group, namely: Provisioning services: such as food, freshwater, raw materials, medicinal resources Regulating services: such as local climate and air quality, carbon sequestration and storage, extreme events, soil erosion and fertility, wastewater treatment, pollination, biological control Cultural services: such as recreation, tourism, spiritual experiences and aesthetic appreciation Habitat or supporting services: such as species, genetic diversity. 3.2 Model structure, variables and real-world data No model can fully represent the extent of environmental complexity, but the idea of interacting parameters in an ecological system and interconnectedness between humans, human decisions (as shaped by both agency and culture) and environmental change, remains important to any study of carrying capacity (Sukhdev et al., 2014). The ability to capture the linkages between multiple parameters produces a very different analysis to that which would be applied if parameters were considered independently – for example, if the focus was only on food or phosphates. This is the key advantage offered by a systems model. Selecting suitable proxies for functional ecosystem services and linking these proxies together in a manner that reflects their current real-world interdependency generates the system illustrated in Figure 4 below, complete with positive and negative feedbacks. Figure 4: A stylised causal loop diagram illustrating a selection of the various system-wide interactions between the population, the economy and environment The model relies on existing production modalities to establish the “direction” of the linkages between parameters, based on their positive or negative causalities. The illustration of the model in Figure 4 integrates six ‘loops’: Loop 1 (purple): The mutual relationship between GDP and the size of the population is ambiguous, it can either be positive (reinforcing) or negative (balancing), and thus the relationship is indicated by a “?”; Loop 2 (green): The larger the population the more land conversion takes place and the more fertilizer is used; the more that land is converted and fertiliser is used, the more extraction, solid waste, air pollution and GHG emissions as well as biodiversity impact is experienced; Loop 3 (blue): Higher food production is linked to higher water demand, and higher water demand is positively correlated with higher environmental impact; Loop 4 (red): Higher GDP drives higher resource and energy use, and higher resource and energy use is linked to more extraction, solid waste dumping, air pollution and GHG emissions, which are all linked to increases in the environmental impact; Loop 5 (orange): The environmental impact is negatively correlated with population growth and GDP; Loop 6 (black): The higher the population, the greater the land requirement, and thus the higher the environmental impact. The model’s ‘loops’ are the product of three interlinked sub-models that describe i) land use, ii) cereal production and water use, iii) GDP-waste, GDP-greenhouse gas generation intensities, and greenhouse gas emissions. Real-world data for land, freshwater availability, cereal production, population size and growth, and other variables, drawn from the World Bank’s World Development Indicators dataset, were used to run the sub-models (see Appendix A). The sub-models were run for each of the seven regions for which the World Bank reports data.[8] The regional disaggregation allowed the study to reflect different rates of growth, extraction and degradation, and different relationships between (for example) land and cereal production in different regions. By way of illustration, the ‘land’, ‘climate’ and ‘cereal’ sub-models are described in more detail below. Land sub-model: While Figure 5 shows the land sub-model for East Asia and the Pacific (EAP), all sub-models were run for all seven regions. In the land sub-model, the actual land area is subdivided into five sub-categories or land-use options, namely conservation land, arable land, urban land, land for waste management, and sundry or residual land. The total available land area for each geographic area is fixed and represented by the variable “EAP area” below, but the model allows for the allocation of land across the five land-use categories to vary until the optimum at which “EAP sundry” reaches zero, at which point all other land uses are fixed for that region. The red components of the sub-models reflect relationships between model parameters that can be adjusted by the modeller, whilst the black parameters are endogenous based on underlying formulas. The land sub-model interacts with the cereal production and water sub-models. Figure 5: The land model Cereal-water sub-model: The cereal production sub-model (Figure 6) interacts closely with water parameters and the land sub-model (Figure 5). Cereal production is used as a proxy for the availability of calories and nutrition. The cereal sub-model is populated with actual data for growth in cereal production in each region, but this is constrained by the water availability in that region (as determined by the water sub-model), soil erosion and climatic influences, where climate influences are determined by the emissions level in the GDP-waste and GDP-greenhouse gas sub-model (Figure 7). Figure 6: The cereal production and water sub-models Climate sub-model: The “GDP-waste and GDP-greenhouse gas” sub-model is also constructed for each region, using actual data for waste and emission intensities of a region, projected based on the expected economic growth of that region. Greenhouse gas emissions are linked to temperature, based on the relationship between CO2 concentrations and temperature increases.[9] Temperature is, in turn, linked to agriculture production in the cereal sub-model, to reflect the understanding that crop production is temperature dependent. Figure 7: The GDP-waste and GDP-greenhouse gas sub-models In each region either land, water or food becomes the binding constraint on carrying capacity, depending on whichever becomes the constraining factor first. The carrying capacity of Earth is estimated as the sum of the respective carrying capacities of the seven respective regions. This model structure includes the possibility of trade but not for migration between the regions in establishing K – given that carrying capacity is a hypothetical population number, it is independent of migration. The list of model parameters populated by the modeller (red parameters) is provided in Table 1 with the sources of data listed. The actual values used in the base case scenario for the seven geographic regions are provided in Appendix A. Table 1: Variables and sources of data for the model 3.3 Scenarios to capture the influence of political economy The baseline scenario and first model run (S0) aimed to capture the biophysical concept of carrying capacity in which the existing levels of “technically feasible” crop production efficiency, water use efficiency and land use are attained in all regions, without significant feedbacks that disturb these existing relationships. S0 relies on an indefinite continuation of the data trends between 2010–2020. There is no major climate change disruption, ecosystem collapse or outbreak of famine or disease beyond what has already been experienced in the respective regions. S0 is important in indicating what is hypothetically possible, but does not include real-world political economy distortions that result in market failure and resource use inefficiency. Neither does it factor in disruptions to steady, linear progress. In this sense, S0 is somewhat idealistic. In reality, politics and power matters. Typically, famines are not the result of absolute food shortages, but of asymmetric power relations that block access to the available food (Sen, 1983). To reflect the influence of institutional and political-economy decisions, the model was run for three additional scenarios. The scenarios can be thought of as stories of possible future states, but they are not forecasts or predictions of the future (Rogelj, 2022). The scenarios do not reveal the likelihood of any particular future becoming reality, and it is not the case that the absence of a particular scenario means that this scenario is not possible (Huppmann et al., 2018). The three additional scenarios applied to the running of the model are described below and the assumptions behind all four scenarios are presented in Table 2: Scenario 1 (S1) – A resource constrained, toxic and institutionally dysfunctional world: Under this scenario dependence on natural resources continues and greenhouse gas emissions and waste per unit of productivity increase relative to S0. Negative environmental feedbacks accumulate and relative to S0, and 50% more water is required per unit of food. There is no innovation in food production per unit of land due to increasing toxicity and a lack of technology transfer to low-income countries. Energy production remains carbon intensive, as are sprawling, dysfunctional cities. To capture this plausible future, we limit the sustainable number of urban dwellers to 50 people per hectare. Scenario 2 (S2) – A resource optimised but institutionally constrained and toxic future: The assumptions in S0 apply and food and water production efficiency improve in line with existing trends. However, under continued urbanisation and weak urban governance cities continue to sprawl, taking up valuable land and undermining technology gains. This increase is plausible in many middle-income and low-income countries, and so, implicitly, this scenario involves growing exports of food from these countries. Scenario 3 (S3) – A resource efficient, circular economy, clean energy and institutionally functional future: In this scenario the world benefits from sustainability improvements. Greenhouse gas emissions per unit of economic productivity are 20% lower than S0, despite new sources of emissions from the oceans and permafrost. Technology gains continue to drive resource use efficiency in terms of land, water and food production, and urban governance ensures cities can accommodate 120 people per hectare in healthy, productive and long lives. The model reflects the four scenarios by adjusting the coefficients (the red parameters) in the model. For example, while “resource use” measured by greenhouse gas emissions is always positively correlated with “waste” in the model, the extent of this correlation is higher in S1. Similarly, while food production tends to be positively correlated with fertiliser use, the extent of this correlation is much weaker in S3 than in S1. In general terms the successive scenarios S1-S3, reflect growing degrees of social and ecological sustainability in the global economic model, relative to S0. Table 2: Scenario parameters The study contemplated a fourth scenario (S4) involving structural (non-linear) rates of improvement in resource use efficiency and production. Under this scenario the causal relationships in Figure 4 above do not necessarily apply. It might be possible, for example, for a larger population to require less land to sustain itself or for more food to be produced while water demand goes down. This scenario is plausible if technologies such as precision fermentation and cellular agriculture – which enable food production without land – become mainstream, thereby freeing up land for the sequestration of greenhouse gases and the provision of ecosystem goods and services. Similarly, circular economies (and urban economies in particular) that produce no waste and rely almost exclusively on renewable sources, could see rising levels of GDP everywhere, with simultaneous absolute decreases in greenhouse gas emissions and other pollution. The work of ReThinkX (2021) has referenced some of the existing technologies that could support this scenario, which remains both possible and optimistic. There are, however, few reference points or data for this scenario and it is not yet possible to say how these technologies would cohere and influence societies and economies. As such, an S4 world proved difficult to capture in the model created for this study. 4. Model results and inference Aggregating the model results from the seven regions indicates that the human population was within the Earth’s carrying capacity of 8.79 billion in 2010. Earth’s carrying capacity for humans increases under all modelled scenarios until 2050 as the benefits of existing technology manifest on food production in particular. By the end of the 21st century, global carrying capacity under the normative baseline scenario (S0) is 17,99 billion, well above the expected human population. The results are highlighted in Table 3 and Figure 8. Under S1, negative feedback resulting from pollution, the loss of ecosystem services and diminishing returns to investment in resource extraction, begin to undermine carrying capacity from 2050 onwards, resulting in a 2100 carrying capacity of just 5.77 billion. Under S2, in which resources accessed are used efficiently, but governance remains problematic, carrying capacity peaks in 2075 at 12.25 billion before declining to 11.63 billion by the end of the century. Under S3, which accommodates high levels of technology innovation, well governed and compact cities and managed pollution, carrying capacity is 18.04 billion, marginally higher than in S0 due to fewer greenhouse gas emissions and climate change impacts on food production. S4 was not modelled, for the reasons cited above, but would have produced an estimate of carrying capacity far in excess of 20 billion people. Table 3: Carrying capacity over time across four modelled scenarios Figure 8: Modelled global carrying capacity under different scenarios The disaggregation of the study into regions accommodates differences in ‘start points’ in different geographies in terms of population size and growth rates, income, water-use efficiency and agricultural productivity. The regional differentiation also makes it possible to draw broad inference on the influence of inequality. It does not, however, address inequality within regions or within countries, both of which are understood to be important to the ability to forge and apply policies relating to sustainability. Figure 9: Carrying capacity (S0) over time, per region The model findings in the seven regions reveal that populations already exceed carrying capacity in Sub-Saharan Africa (on account of food production), South Asia (on account of food production) and MENA (on account of water scarcity). The carrying capacity of the regions under the different scenarios is shown in Figures 10-12, which also show the actual population if existing population growth were to continue. The comparison between modelled carrying capacity and actual population allow some inference on when populations have (or will) approach their carrying capacity in the respective regions. Figure 10: Modelled South Asia carrying capacity under different scenarios and unchecked population growth In the MENA region water constraints already exert a profound influence on carrying capacity as is indicated in Figure 9. Figure 11: Modelled Middle East and North Africa carrying capacity under different scenarios and unchecked population growth In Sub-Saharan Africa, food production is a constraint on the modelled growth of population and population has exceeded the region’s modelled carrying capacity since 2010. To a cursory analysis, this finding concurs with the region being a net food importer; Sub-Saharan Africa imported $43 billion worth of food in 2019. Twenty-eight (over half) of the countries in Africa received some form of food aid from the FAO in 2017 and 20% of the population experience hunger daily (Fox and Jayne, 2020). Hunger, however, is much more closely linked to food access and food distribution than food production, and links between food aid and carrying capacity are, at best, indirect. Four countries – Nigeria, Angola, Democratic Republic of Congo and Somalia – are the reason for SSA being a net food importer. Most of the other countries are food exporters, and while the value of food imports rose between 2005 and 2011, so did the value of exports as prices rose. Figure 12: Modelled Sub-Saharan Africa carrying capacity under different scenarios and unchecked population growth What is clear is that SSA countries have not been able to produce food at anything near their productive potential, given their land resources. The 2020 average yield in cereal production in SSA was 1.4 tons per hectare compared to the 7.2 tons per hectare averaged in North America. Considerable scope exists for innovation, investment and technology transfers in the efforts to make the human population more sustainable. In terms of enabling countries and regions to live within their carrying capacity, it is arguably easier to address SSA’s reasons for living above its carrying capacity by increasing the region’s food production than it is to create more land for waste disposal in Europe, for example, or to decouple North America’s livelihoods from greenhouse gas emissions. In terms of carrying capacity and the social and economic stability that living within carrying capacity brings, reconfiguring the relationship between all regions’ quest for survival and the natural world that supports them, is in everyone’s interests (Robins, 2018). Underlying the study results is the importance of how individual views on human nature influence the estimate of carrying capacity. The assumption that people are always competitive, always on a growth quest, always self-interested and acquisitive is baked into many economic and corporate cultures and strategies. Literature, from Descartes to William Golding, juxtaposes individuals against nature and against each other. It need not be this way, however. Notions of eco-civilisation and biomimicry are increasingly looking to human agency to align the direction and type of innovation and progress with nature’s systems. There are many examples in which Hardin’s notion of the tragedy of the commons has not been borne out in real life; in which environmental pressures have yielded higher levels of social cohesion and innovation (Ostrom, 1990). The potential to align with nature’s regenerative capacity holds true regardless of how the relationship between people and nature is understood – and even if you believe that ‘Nature no longer runs the Earth. We do’ (Lynas, 2011: 8) or are sceptical of technology (Baskin, 2020). Crucially, the ability to align economic endeavour with nature’s regenerative capacity – that is, move from S1 to S3 in the model – is available across a range of population sizes, suggesting that how people arrange their livelihoods and interact with the natural world is more important than population size in determining carrying capacity. The fourth scenario (S4) involving structural (non-linear) rates of improvement in resource use efficiency and production was not modelled, for a lack of reliable reference points and data. Although the technologies required for S4 exist, it is not yet possible to say how they will be mainstreamed and influence societies and economies. What emerged in the course of the analysis, however, is that there are combinations of technology, economic activity and resource use that would see the Earth’s carrying capacity exceed 20 billion by a considerable margin. Based on existing fertility trends that suggest human population will stabilise at a maximum of 11.2 billion by 2100, humans will in no way test this carrying capacity threshold, but the thought experiment around S4 highlighted the potential for socio-technical-ecological configurations that would allow for very high living standards at high or low population levels. 5. Influences of fertility rates and policy implications The high-level conclusion from this study argues that consumption and choices around economic and political models exert a more powerful influence (both threat and opportunity) on sustainability and carrying capacity than population growth. The scope of this work, however, included the question: What are the policy measures that influence population size and population growth rates? Given the interest in fertility across society and politics, it is no surprise that countries have sought to intervene in population growth. The focus for sustainable population policies has previously been categorised into those that (i) “make the pie bigger” through technological innovation, (ii) “limit the number of forks” through population control and (iii) oversee “better table manners” through internalising environmental externalities and ensuring inclusive and respective “terms of interaction” (Cohen, 1995). Rationales for population control have differed, and in some instances have been fuelled by neo-colonial and racist ideologies, including the preservation of white power and access to resources in colonised countries (Kuumba, 1993; Hartmann, 1997; Folbre, 2020). After World War II the Draper Committee Report (1958) identified world population growth as a security issue for the United States and private agencies and foundations played an important role in legitimizing population control under the guise of “family planning” (Hartman, 1997). Public resistance, most famously at the World Population Conference in Bucharest (1974), questionable impact, and the growing realisation that economic models and consumption habits exert the greatest influence on fertility rates, has not deterred the pursuit of population control measures in subsequent years. In 2019, nearly three quarters of governments that report to UNDESA had policies related to fertility: 69 had policies to lower fertility, 19 focused on maintaining current levels of fertility, and 55 aimed to raise fertility (UNDESA, 2021). Measures focussing directly on fertility rates have historically had quite poor results. A study in the early-1990s showed that 90% of the difference in fertility rates could be attributed not to population control measures, but to women’s reported desire to have children (Pritchett et al., 1994). More specifically, contraceptive availability did not explain all changes in fertility rates, but could accelerate the declines in fertility rates once women have decided to have fewer children. This finding is supported by the fact that “wanted fertility” among women in Sub-Saharan Africa (4.2 children per women in 2017) and South-East Asia (2 children per women in 2017) has tracked actual fertility closely (World Bank Data, 2022). Accordingly, most national population policies now focus on promoting a desire for smaller families with fewer, healthier and more educated children, and delaying the age at which women have their first child through the provision of education and employment alternatives (UNDESA, 2021). The combination of these policies and social, cultural and economic conditions increasing the livelihood options available to women, has seen fertility fall in all regions and most countries. While Sub-Saharan Africa lags other regions in the world, most countries are near the end of their demographic transitions with fertility (Schoumaker, 2019) (Figure 5). Figure 13: Fertility trends by region 2000-2020 Source: World Bank Data (accessed March 2022) To be consistent with human rights and gender equality, population control measures need to recognise women’s right to reproductive self-determination, physical integrity and privacy, which includes the right to decide the number of children they wish to have, and the right to a full range of information and contraceptive methods. It is critical that women are able to make decisions about their fertility without fear of coercion or violence and that reproductive rights are underpinned by access to health care for women (Centre for Reproductive Rights, 2018). Top-down one-child policies or punishment for early pregnancies are not consistent with these rights and are not considered durable responses. To argue that environmental pressures alter these rights or make for an unavoidable trade-off between reproductive rights and biophysical population checks, is to miss the point that it is resource consumption and pollution in affluent countries in which fertility rates are low that is driving global environmental degradation. It is difficult to parse the impact of population policies on reducing fertility rates relative to the impact of a country’s wider economic, social and cultural context. There is, however, some consensus on five key influences on fertility rates: 1) Investment in women’s education – There is extensive evidence that girls’/women’s education is a critical driver of fertility decline (see Bongaarts, 2020, for a summary of the literature). Murtin (2013) shows that “...average years of primary schooling among the adult population, rather than income standards, child mortality, or total mortality rates, drive fertility down by about 40% to 80% when those years grow from zero (no illiteracy) to 6 years (full literacy)” (Murtin, 2013). The causal forces for this decline are many, including a rise in the age of first marriage (Hurtich, 2017), “greater autonomy in decision making, more knowledge about the reproductive process and contraception, higher potential for earnings, and opportunity costs of childbearing” (Bongaarts, 2020). 2) Improving health systems and family planning services – Fewer deaths in childhood is a key driver of the demographic transition. An overall improvement in health systems is positively correlated with reduced child mortality, which lowers the desire for large families (World Population Review, 2019). Infant mortality has been steadily declining across the world and further declines are expected in all regions, which can be realistically expected to continue driving fertility rates down. Family planning programs on their own tend to have a limited impact on fertility rates (Pritchett et al., 1994). However, once women want to have fewer children, family planning programs can address the unmet need for contraception and are effective in driving down wanted and unwanted fertility. While most governments have had family planning programs for several decades at this stage, the success of these programs has not been uniform (Quak and Tull, 2020). Success has been dependent on the design and implementation of programs, the availability of quality services, the flexibility of programs in adapting to local conditions, adequate monitoring and information systems, and the funding resources available (Quak and Tull, 2020). In SSA, high-quality programs in Ethiopia, Malawi and Rwanda have been associated with declines in wanted fertility, indicating that “a demographic transition can be initiated before achieving economic growth” (Bongaarts, 2020). Although family planning services are provided for free or subsidised in public sector clinics in many countries, women continue to confront barriers to access. These include: A lack of information on the benefits of family planning and healthy birth spacing, a lack of access to services, and a lack of method choice of contraception Long waiting times at public facilities, high transport costs to facilities, and fears of contraceptive-related side effects Specific barriers related to culture and family traditions faced by women and adolescents. 3) Supporting indirect policies that improve socio-economic conditions for women – The literature shows that fertility declines as poverty rates decline. Improved economic prospects tend to delay the age at which women have their first child and reduce the total number of children that women have over their lifetime. Raising women’s income, promoting policies that favour female participation in the labour force, improving land tenure for women, and social protection schemes are critical ways to achieve the reduction in fertility (Pritchett, 1994). Recent declines in fertility rates can be traced to the expansion of women’s access to paid employment. This progress has yet to be matched, however, by women’s rights to remuneration for family care from their children’s fathers and from the state (Noddings, 2002; Folbre, 2020). Historically these policies have targeted women and there is a greater recognition that policies that improve the conditions of women need to target men and boys. 4) Ensuring adequate legal frameworks to protect reproductive rights (e.g., child marriage and abortion laws) – Asymmetries in human rights lead to asymmetric economic equality, and laws and policies that codify the commitment of countries to respect and protect the rights of women are critical enablers of reduced fertility (USAID, 2013; Folbre, 2020). Legal access to abortion can reduce unwanted pregnancies in a safe manner (providing it is accompanied by quality care), yet at present, 41% of women live in countries with restrictive abortion laws.[10] Similarly, laws that increase the age of marriage or prevent child marriage can drive down fertility rates. In SSA, women who experience child marriage are eight times as likely to have more than three children, relative to women who marry after the age of 18 (Yaya, 2019). While legal frameworks are critical to protect reproductive rights, structures of patriarchal power are reinforced by their intersections and overlaps with race, citizenship and class. In this sense, improving intra-household power dynamics and reducing gender-based economy inequality has long been shown as necessary for the effective implementation of legal frameworks (De Beauvoir, 1949; Folbre, 2009). 5) Family planning campaigns – Mass media campaigns can be effective in driving demand for family planning, overcoming knowledge gaps about fertility and contraception, addressing concerns about side effects of contraception, changing norms, and increasing women’s confidence to act (USAID, 2017). Studies have shown that mass media campaigns are most effective when combined with interpersonal communication, community group engagements, and/or social marketing interventions (Quak and Tull, 2020). 6. Conclusion This study explored the interaction between population size, environmental stability and human well-being, to establish the Earth’s human carrying capacity over the course of the 21st century and what can be done to influence it. Estimates of maximum sustainable population size are unavoidably political, and many past studies have been used to drive religious, economic and environmental agendas that have little to do with concern for the survival of humanity. This study sought to avoid ideological biases by building and running a model that captured dynamic interactions between multiple parameters, and by not assuming ex ante that any one constraint or trend would render the human population unsustainable. Earth’s carrying capacity for humans in 2100 ranged from 5.76 billion to 18.05 billion under the four scenarios that were modelled. To place these estimates in context, existing fertility trends make it unlikely that human population will exceed 11.2 billion by 2100, even as longevity increases significantly (UNDESA, 2017). The wide range of possible carrying capacities imply that the unambiguous answer to the research question is, ‘it depends’. Being clear on what carrying capacity depends on is critical for policy and for the harnessing of human agency in pursuit of survival and well-being. The message from this study is that while ecological degradation presents a risk to humanity, this risk is not being driven by population growth directly. Instead, the manner in which resources are extracted, used and disposed of is more influential than absolute population size on carrying capacity and sustainability of human well-being. In this way the study challenges the assumption that current sustainability crises can be blamed on high growth populations, instead pointing to the impact of high extraction, consumption and waste populations. The model findings further suggest that the 2010 human population appeared to be living within the planet’s carrying capacity on aggregate, but not in Sub-Saharan Africa, MENA or South Asia. This is not directly due to populations in these regions causing ecological degradation, but the distribution of technology and investment capital across the world, which ensures they do not have the agricultural productivity (or water in the case of MENA) to produce food at the levels that support their existing population. In formulating policy responses a distinction needs to be drawn between human populations that exceed their modelled carrying capacity for that region but are not necessarily responsible for global ecological degradation, and those that are living within their region’s modelled carrying capacity but driving global environmental change through their consumption and associated extraction and pollution. This finding does not detract from the importance of technology, cultural, gender, investment and migration policies required to align economic progress with the regenerative cycles of nature (Van den Bergh, 2011; Kubiszewski et al., 2017; Schröder et al., 2020). Among other things, this requires discarding the idea of an economic ‘externality’ and adopting systems-based economies with new hybrids of indigenous knowledge and clean technology in all regions of the world to enhance the “decoupling” that appears to have commenced in some sectors and regions (Jiborn et al., 2020; Meyer and Newman, 2020; Dasgupta, 2021[11]). Indigenous populations comprise less than 5% of the world's population and live on less than 22% of the world’s land area, but are home to 80% of the world’s biodiversity. While their level of conventional income and consumption might be below the average of populations in Europe and North America, their well-being is often slightly higher and their relationships with nature provide insights into more sustainable economic models (Reyes-Garcia et al., 2020; Abbi, 2021). Understanding how these communities co-exist with nature is one of the tasks of the Post-2020 Global Biodiversity Framework. 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Prevalence of child marriage and its impact on fertility outcomes in 34 sub-Saharan African countries, BMC International Health and Human Rights, 19(1): 33. Appendix A: Variables and values of input data used Appendix B: Earth overshoot day for respective countries based on “biocapacity” models. The analysis suggests that extraction and consumption currently pose a greater threat to humanity living beyond the Earth’s biocapacity than population - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - [1] The Anthropocene is a contested concept. Some scientists fear that humans are the first species in the history of the planet to comprise a geo-physical source (Wilson, 2002). However, cyanobacteria and fungi have long brought about geological changes including those that gave rise to the plant kingdom (Sheldrake, 2020). Equally, notions of the Anthropocene are void of political context, and suggesting that every human is equally responsible for the environmental disruption and sustainability threat being experienced, is wrong. [2] The notion of carrying capacity was first used by engineers to describe how much cargo a ship could hold, but in the 19th century it was adopted by wildlife managers and later by ecologists (McGuigan, 2022). [3] Exponential population growth would require the growth rate to remain fixed. Instead, we have seen a rapid decline in this rate of growth over the past 70 years. For some people the jury remains out on whether Malthus was an early prophet of the broader environmental and resource crisis, and perhaps merely ‘out’ by a few hundred years with his predictions. [4] This notion of sustainability is consistent with the more common definition of sustainable development that draws from the Brundtland Commission’s 1987 report and describes, “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (United Nations General Assembly, 1987:43). [5] https://www.toppr.com/ask/question/verhulst-pearl-is-associated-with-the-equation/ [6] https://ib.bioninja.com.au/options/option-c-ecology-and-conser/c5-population-ecology/sigmoid-growth-curve.html [7] https://vensim.com/ [8] East Asia and Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), Middle East and Northern Africa (MENA), North America (NA), South Asia (SA) and Sub-Saharan Africa (SSA). [9] https://osf.io/preprints/socarxiv/m4fdu/ https://svs.gsfc.nasa.gov/4110 [10] https://reproductiverights.org/maps/worlds-abortion-laws/ [11] The Dasgupta Review (2021, p. 119) makes the point that, “Well-functioning markets do not harbour externalities”. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8001 South Africa All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute. DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of the their respective Board or Council members. Do government debt growth threshold and inflation regimes mater for inflation in South Africa By Nombulelo Gumata BA, BComs (Hons); MCom, PhD Abstract Do government debt growth thresholds matter for inflation expectations? Yes, they do. It is found that inflation expectations increase across the spectrum in response to positive government debt growth shocks. Using the government debt growth thresholds above and below 10 per cent as the demarcation for low and high government debt growth regimes, it is established that low and high government debt growth regimes exert different effects on inflation expectations across the spectrum. All inflation expectations measures increase in the high government debt growth regime compared to the low government debt growth regime. Furthermore, when the 4.5 per cent inflation rate threshold is used to delineate the high and low inflation regimes, evidence shows that the inflation regimes matter for the propagation of positive government debt growth shocks to inflation expectations. Evidence shows that high inflation regimes amplify the responses of inflation expectations to positive government debt growth shocks in the high debt growth regime. In the absence of the high inflation regime channel, inflation expectations across the spectrum increase less, as shown by the counterfactual responses. The low inflation regime channel lowers or dampens the response of inflation expectations to positive government debt growth shocks in the low debt regime. The policy implications of these results are that government debt growth thresholds and inflation regimes matter for the achievement of the price stability mandate. In addition, the results indicate the importance of co-ordination between monetary policy and fiscal policy, as the conduct of these policies interacts and have spill-over effects on each other’s policy objectives. Introduction Do government debt growth thresholds matter for inflation expectations? If so, what are the implications for the price stability mandate? This paper explores these questions because well-anchored inflation expectations matter for the inflation outlook and the conduct of monetary policy. Why do well-anchored inflation expectations matter for inflation and the conduct of monetary policy? Bernanke (2007) states that the state of inflation expectations greatly influences actual inflation and in turn, the central bank’s ability to achieve price stability. Moreover, Cœuré (2019) asserts that stable inflation expectations at levels consistent with the price stability mandate provide an important nominal anchor for the economy, reduce inflation persistence and curb harmful macroeconomic volatility. As a nominal anchor, well-anchored inflation expectations assist policy makers in dealing with some of the adverse effects of inflation. For instance, it is a well-established fact that inflation (i) injects noise into the price system; (ii) makes long-term financial planning more complex; (iii) introduces a pattern of stop-go monetary policies that are a source of much instability in output and employment; and (iv) interacts in perverse ways with imperfectly indexed tax and accounting rules. Furthermore, high and persistent inflation undermines the public confidence in the economy and the management of economic policy generally (Bernanke, 2007). Friedman (1977) shows that the level of inflation and inflation volatility are strongly and positively correlated and is costly. Higher rates of inflation may cause the reallocation of scarce resources to unproductive activities and thus distort economic efficiency and reduce output growth. In addition, Friedman (1977) argued that inflation may have negative effects on output growth by increasing inflation uncertainty. Ball (1992) showed that the positive correlation also applied to moderate or even low inflation rates and that higher inflation rate increases inflation uncertainty. Georgios (2017) shows that the United States inflation and its volatility have been positively correlated for the period 1800 to 2016 when inflation exceeds 3 per cent. The results of this study indicate a positive relationship between inflation and its volatility when inflation exceeds 3 per cent and a negative correlation when inflation is below this threshold. Pindyck (1991) and Devereux (1989) presented evidence that inflation uncertainty, may lead to real uncertainty which affects output growth and the inflation rate. For emerging market economies, Gillman and Nakov (2004) found that inflation affected growth negatively in Hungary and Poland. Mladenovic (2007) established that in Serbia, high inflation leads to high uncertainty, which in turn, negatively affects the average level of inflation in the long run. Ndou and Gumata (2017) found that in South Africa, periods of elevated exchange rate and inflation volatility are likely to induce more inflation volatility, particularly when inflation is close to the upper band of the inflation target. Furthermore, they establish a negative long-run relationship between economic growth and inflation when using five-year averages for the sample period 1966–2012. The inflation threshold that exerts negative effects in the finance–growth nexus lies within a threshold range of 4–5 per cent. When inflation is above this threshold range, it exerts a negative effect on the finance–growth nexus. What is the link between inflation and fiscal policy? The Keynesian theory suggests that fiscal policy changes have an impact on aggregate demand which results in changes in output and the price level. In turn, the price level can be affected by changes in public wages that can spill over into the private sector wages. In addition, changes in fiscal policy via the tax rates can also affect the marginal costs and consumption expenditure growth. In relation to the adverse effects of headline inflation on inflation expectations, Figure 1 (a and b) shows that inflation and all measures of inflation expectations have been largely within the 3 to 6 per cent inflation target band and trending lower towards the mid-point (4.5 per cent) of the target range post-2009 in South Africa. In addition, Figure 1(c, d and e) show that headline inflation is positively correlated with all the measurements of inflation expectations. On a bilateral basis, the stylised facts show that headline inflation explains more than 50 per cent of the variability in the current and one-year ahead inflation expectations. The correlation is weaker for the two-year ahead inflation expectations. The results of the correlations, therefore, suggests that the immediate inflation outcomes matter more for how agents form inflation expectations. These trends are consistent with extensive literature, such as Sharma and Bicchal (2018), Vargas et al (2009), Mankiw et al (2003) and Fraga et al (2003), which shows that inflation expectations tend to be adaptive and backward-looking. Lastly, the cross correlations in Figure 1(f) show that all inflation expectations measures increase during the first nine quarters, when preceded by high headline inflation. Figure 1: Headline inflation and inflation expectations in South Africa for the period 2000M1 to 2019M12 Source: South African Reserve Bank and authors’ calculations The paper contributes to literature on the subject by establishing the link between inflation expectations and the conduct of fiscal policy via the government debt growth channel. In particular, the paper explores the impact of government debt growth regimes on inflation expectations and whether inflation regimes propagate these effects on inflation expectations. Inflation expectations and inflation regimes are important in the conduct of monetary policy and the achievement of the financial stability mandate. The author is unaware of any papers that conduct this kind of research in South Africa, and especially in terms of the use of government debt growth and inflation thresholds to demarcate high and low government debt growth and inflation regimes. Furthermore, no study in South Africa has, to date, explored the interaction of government debt growth regimes and inflation regimes relative to the mid-point (4.5 per cent) of the inflation target range, on inflation expectations. In addition, the paper fills academic, policy research and methodological gaps by using the threshold vector autoregression (VAR) approach to assess the role of asymmetries introduced by different government debt growth and inflation regimes on inflation expectations. The paper also uses the counterfactual VAR approach (Cafiso, 2019; Elbourne, 2008; Giuliodori, 2005; Ludvigson, Steindel & Lettau, 2002) to establish whether the high and low inflation regimes propagate or dampen the effects of high and low government debt growth regimes on inflation expectations. The results, set out in the paper, show that inflation expectations increase across the forecasting horizons or spectrum in response to positive government debt growth shocks. In addition, using the government debt growth thresholds above and below 10 per cent as the demarcation for low and high debt regimes, the results show that low and high government debt growth regimes exert different effects on inflation expectations across the spectrum. All inflation expectations measures increase in the high government debt growth regime compared to the low government debt growth regime. Furthermore, when using the 4.5 per cent inflation rate threshold to delineate high and low inflation regimes, the evidence shows that the inflation regimes matter for the propagation of positive government debt growth shocks to inflation expectations. High inflation regimes amplify the responses of inflation expectations to positive government debt growth shocks in the high debt regime. In the absence of the high inflation regime channel, inflation expectations across the spectrum increase less as shown by the counterfactual responses. The low inflation regime channel lowers the response of inflation expectations to positive government debt growth shocks in the low debt regime. The results imply that government debt growth thresholds and inflation regimes matter for the achievement of the price stability mandate. The paper is structured as follows: section two presents a brief literature review of the link between fiscal policy and inflation. This is followed, in section three, by a summary of the methodology used in the paper and the data. Section four discusses the empirical analysis of how inflation expectations respond to government debt shocks. Section five explores whether the South African government debt growth thresholds matter for inflation expectations and section six assesses whether inflation regimes matter for the propagation of government debt growth thresholds to inflation expectations. Section seven concludes and provides some policy implications of the findings. Theory and literature on the link between inflation and fiscal policy Theory and literature link fiscal policy and inflation mainly through (i) the long-term effects of persistent fiscal deficits and government debt on inflation; (ii) the impact of changes in various components of fiscal policies (fiscal shocks) on inflation; and (iii) the fiscal theory of the price level, which states that fiscal policy plays an important role in price determination, through the budget constraint associated with the debt policy, spending, and taxation (Christiano & Fitzgerald, 2000; Bassetto & Wei, 2017. The fiscal theory of the price level considers the price level as the crucial adjustment variable that ensures the fulfilment of the government’s intertemporal budget constraint (Kocherlakota & Phelan,1999; Buiter, 1999). The government’s intertemporal budget constraint equates the government’s current liabilities to the net present value of government revenues. The theory assumes that under the condition that the Ricardian equivalence (Bernheim, 1987) does not hold, and with a strongly committed and independent central bank, the imbalances in the intertemporal budget constraint need to be adjusted through shifts in the price level. With the assumption of absent Ricardian behaviour, individuals perceive government deficits as increases in wealth and this induces them to raise spending, thus driving up the price level. By contrast, if the Ricardian equivalence is assumed to be present, the wealth effect of the deficits would be neutral and thus leaving the central bank in control of the price level. The Ricardian equivalence states that the fiscal stimulus in the form of an increase in deficit-financed public spending or tax cuts will lead to a crowding out of private consumption, thus decreasing the effectiveness of fiscal policy in boosting economic activity. This is because economic agents’ consumption is determined by the lifetime present value of their after-tax income and they assume that whatever is gained in the present, will be offset by higher taxes due in the future. Thus, whether government choses to increase spending by debt financing or tax financing, the outcome is the same and demand remains unchanged (Hayo & Neumeier, 2017). With the assumption of absent Ricardian behaviour, individuals perceive government deficits as increases in wealth and this induces them to raise spending, thus driving up the price level. By contrast, if the Ricardian equivalence is assumed to be present, the wealth effect of the deficits would be neutral, thus leaving the central bank in control of the price level. Fischer et al (2002) find that fiscal imbalances (fiscal deficits) tend to explain high inflation in a broad country sample. Catao and Terrones (2001) establish a strong and statistically significant long-term relationship between fiscal deficits and inflation for a panel of 23 emerging market countries. Arratibel et al. (2002) find that headline inflation in central and Eastern Europe is impacted by nominal wage growth; lagged inflation due to a relatively large impact of inflation inertia; oil price; and fiscal policy. Methodology and data The paper uses a Cholesky vector autoregression (VAR) and a counterfactual VAR approach to estimate the impact of positive government debt growth shocks on inflation expectations and to assess whether inflation regimes matter for the propagation of government debt growth thresholds to inflation expectations. The VAR is defined as given in equation (1), where the N x 1 vector yt denotes the set of variables that is of interest in the analysis. The assumption that yt follows a pth-order VAR means that it can be expressed as shown in equation (1). (See Sims (1980a and 1980b), and Christiano (2012) for further reading). yt = B0 + b1 yt-1 + … + Bp yt-p + ut, Eutu ‘t = V, (1) where ut is not correlated with yt-1 ,…, yt-p. It is assumed that p is assigned a large enough value so that ut is not autocorrelated over time. The VAR disturbances, ut ,are assumed to be a linear transformation of the economically fundamentals shock, et : yt = Cet , CC’ = V (2) The economic shocks et are assumed to be independent origins, and therefore to be uncorrelated with each other. Many objects in equations (1) and (2) are econometrically identified, meaning that they can be estimated using data without any further (credible or incredible) assumptions. In particular, Bi and V are econometrically identified. To estimate Bi and V, we simply run a series of regressions and compute the variances and covariances among the regression disturbances. However, C is not identified because the symmetric matrix V has only N(N + 1) /2 indepentent elements while C has 𝑁2 > 𝑁 (𝑁 + 1) /2 unknowns. For most forecating purposes, it is enought to have just Bi and V in this case, no identification assumptions are required. We also use the counterfactual VAR model to assess whether high inflation regimes amplify the responses of inflation expectations to positive government debt growth shocks in the high debt growth regime. The counterfactual VAR model assesses what happens to inflation expectations responses to high government debt growth regimes shocks, in the presence and absence of the high inflation regimes channel given by the gap between the impulse responses as shown in equation (3). ∆Y = (Actual impulse response – counter factual impulse response) (3) Where, ∆Y is the response of inflation expectations. The data used in the study are quarterly (Q) and are sourced from the South African Reserve Bank database. The estimations use current inflation expectations, one-year ahead inflation expectations, two-year ahead inflation expectations, government debt and headline consumer price inflation. The growth rates are at an annual rate. The VAR model in section 4 includes the government debt growth, headline consumer price inflation, current inflation expectations, one-year ahead inflation expectations and two-year ahead inflation expectations as endogenous variables. The recession dummy variable that takes on the values of one during recessions and zero otherwise enters the VAR model as an exogenous variable. The data used in the estimations is on quarterly (Q) basis and start in 2000Q3 to 2019Q4. This is because inflation expectations are only available for this sample period. The growth rates are at an annual rate. The shock is a unit shock to government debt growth. The VAR model is estimated using two lags and 10 000 Monte Carlo draws. Section 7 of this paper concludes the analysis, by conducting a robustness analysis of the results of the responses of inflation and inflation expectations to fiscal policy variables. For robustness analysis, a VAR model with the same variables as estimated in the sections 4 and 5, namely, current inflation expectations, one-year ahead inflation expectations and two-year ahead inflation expectations is used. Headline inflation is added to assess the robustness of the results to changes in the model size. Also government debt growth is replaced with the budget deficit (budget balance as a ratio of nominal GDP) as the shock of interest to assess whether the results are robust to changes in the definitions of the variables in the model. The model includes the recession dummy as defined in the earlier sections as an exogenous variable. The VAR is estimated using two lags and 10 000 Monte Carlo draws. The shock is a unit to the budget deficit. How do inflation expectations respond to government debt shocks? This section starts to answer this question by estimating a VAR model as explained in the methodology section. The results in Figure 2 show that inflation expectations tend to increase across the forecasting horizons or spectrum in response to positive government debt growth shocks. Current inflation expectations increase more than the one-year and two-year ahead inflation expectations at peak response as shown in Figure 2(d and e). In addition, the government debt growth shock explains a higher variation in current inflation expectations compared to the one-year and two-year ahead inflation expectations. The results are robust to the reverse ordering of the variables. Figure 2: Responses to positive government debt growth shocks Source: Authors’ calculations Note: The grey shaded areas denote the 16th and 84th percentile confidence bands. Govt. in (f) = government. Do the government debt growth threshold matter for inflation expectations in South Africa? To answer this question, we use the government debt growth of 10 per cent as a threshold to delineate between the high and low government debt regimes. The government debt growth threshold is taken from Gumata and Ndou (2017).The authors estimate the debt growth thresholds for net debt and gross debt using the sample period 1990Q1 to 2015Q4 based on data obtained from the South African Reserve Bank. They use the Balke (2000) approach in a model that includes gross or net government debt growth, output growth, investment growth, inflation and the ten-year yield on government debt. They established a growth threshold level of 9.62458 per cent for gross debt and 9.50513 per cent for net debt. For ease of reference, the estimated gross government debt growth threshold is presented in Figure 3. Figure 3: Estimated thresholds for net and gross debt growth Source: South African Reserve Bank and authors’ calculations Note: The shaded area denotes the period 2000Q1 to 2008Q3 when GDP growth averaged 4.1 per cent. It is also important to note that in Figure 3, during the period 2000Q1 to 2008Q3 when GDP growth averaged 4.2 per cent (the grey shaded area), government debt growth was below 10 per cent. This contrast with the period post-2009 where government debt growth was generally above 10 per cent and GDP growth averaged 1.47 per cent during 2009Q1 to 2019Q4. Investment growth (gross fixed capital formation) averaged 9.2 per cent between 2000Q1 and 2008Q3 compared to 0.25 per cent between 2009Q1 and 2019Q4. We create two dummy variables that capture these regimes: (i) the high government debt growth threshold which takes on all the values of government debt growth above 10 per cent and zero otherwise; and (ii) the low government debt growth threshold which takes on all the values of government debt growth below 10 per cent and zero otherwise. We estimate two VAR models which include the high or low government debt growth regime dummy, headline inflation, current inflation expectations, one-year ahead inflation expectations and two-year ahead inflation expectations as endogenous variables. The recession dummy that takes on the values of one during recessions, and zero otherwise, enters the VAR model as an exogenous variable. The government debt growth regime dummy variables enter the VAR models separately. The shock is a unit shock to the high or low government debt growth regime dummy. The VAR model is estimated using two lags and 10 000 Monte Carlo draws. Figure 4: Responses to positive government debt growth shocks in the high debt growth regime Source: Authors’ calculations Note: The grey shaded areas denote the 16th and 84th percentile confidence bands The results in Figures 4 and 5 show that low and high government debt growth regimes exert different effects on inflation expectations across the spectrum. For instance, in Figure 4 the results show that all inflation expectations measures increase in the high government debt growth regime, compared to the low government debt growth regime in Figure 5. It is also evident that the two-year inflation expectations increase with a delay of about three quarters, whereas the current and one-year ahead inflation expectations increase on impact. In the low government debt growth regime, all inflation expectations decline. Thus, we conclude that the government debt growth regimes exert different effects on inflation expectations. Figure 5: Responses to positive government debt growth shocks in the low debt growth regime Source: Authors’ calculations Note: The grey shaded areas denote the 16th and 84th percentile confidence bands Do inflation regimes matter for the propagation of government debt growth threshold to inflation expectations? This section estimates a counterfactual VAR model to assess the role of inflation regimes in the transmission of positive shocks to government debt growth regimes to inflation expectations. We assess the role of high and low inflation regimes in transmitting positive government debt growth shocks in the high and low government debt regimes, as defined in the earlier sections. We define the high (low) inflation regime as that in which inflation is above (below) 4.5 per cent. As such, we create two dummy variables defined as (i) the high inflation regime dummy which takes on all the values of headline consumer price inflation above 4.5 per cent, and zero otherwise; and (ii) the low inflation regime dummy which takes on all the values of headline consumer price inflation below 4.5 per cent, and zero otherwise. The counterfactual VAR model includes the high or low government debt growth dummy variable, current inflation expectations, one-year ahead inflation expectations, two-year ahead inflation expectations and the high or low inflation regime dummy variable. The high or low government debt growth dummy and high or low inflation regime dummy variables enter the models separately. The VAR models are estimated using two lags and 10 000 Monte Carlo draws. The actual responses are those derived from the model when the high or low inflation regime dummy is active in the model. The counterfactual responses are those derived in the model when the high or low inflation regime dummy is inactive in the model. The dampening or amplification effects of the high or low inflation regime dummies is the difference between the actual and the counterfactual responses. Figure 6: Responses to high government debt growth regimes and amplification by the high inflation regime Source: Authors’ calculations The results in Figure 6 show that high inflation regimes amplify the responses of inflation expectations to positive government debt growth shocks in the thigh debt regime. In the absence of the high inflation regime channel, inflation expectations across the spectrum increase less, as shown by the counterfactual responses. On the other hand, the results in Figure 7 show that the low inflation regime channel lowers the response of inflation expectations to positive government debt growth shocks in the low debt regime. The actual responses of inflation expectations are lower than the counterfactual responses when the role of the low inflation regime channel is closed in the model. Hence, the low inflation regime dampens the effects of positive government debt growth shocks in the low debt regime. Figure 7: Responses to low government debt growth regimes and amplification by the low inflation regime Source: Authors’ calculations Robustness analysis This section concludes the analysis in this paper by conducting the robustness analysis of the results of the responses of inflation and inflation expectations to fiscal policy variables. The results in Figure 8 show that the results are robust to changes to the model size and parameters or specification. Headline inflation increases in response to positive budget deficit shocks, and this is followed by an increase in inflation across the spectrum. Similar to the results in the previous section, current inflation expectations increase more than the one-year and two-year ahead inflation expectations in Figure 8(d). Inflation and inflation expectations are sensitive to fiscal policy shocks. Thus, it is concluded that the conduct of fiscal policy matters for the price stability mandate Figure 8: Responses to positive budget deficit shocks Source: Authors’ calculations Note: The grey shaded areas denote the 16th and 84th percentile confidence bands Conclusions and policy implications Do government debt growth thresholds matter for inflation expectations in South Africa? We find that inflation expectations increase across the spectrum in response to positive government debt growth shocks. Using the government debt growth above and below 10 per cent as the demarcation for low and high debt growth regimes, we establish that low and high government debt growth regimes exert different effects on inflation expectations across the spectrum. All inflation expectations measures increase in the high government debt growth regime compared to the low government debt growth regime. Furthermore, when we use the 4.5 per cent inflation threshold to delineate high and low inflation regimes, the evidence shows the inflation regimes matter for the propagation of positive government debt growth shocks to inflation expectations. The evidence shows that high inflation regimes amplify the responses of inflation expectations to positive government debt growth shocks in the high debt regime. In the absence of the high inflation regime channel, inflation expectations across the spectrum increase less as shown by the counterfactual responses. However, the low inflation regime channel lowers the response of inflation expectations to positive government debt growth shocks in the low debt regime. The implication is that government debt growth thresholds and inflation regimes matter for the achievement of the price stability mandate. In addition, the results indicate the importance of co-ordination between monetary policy and fiscal policy, as the conduct of these policies interacts and has spill-over effects on each other’s policy objectives. References Arratibel, O., Rodriguez-Palenzuel, D. & Thimann, C. 2002. Inflation dynamics and dual inflation in accession countries: a new Keynesian perspective. ECB Working Paper, No. 132. Balke, N. S. 2000. Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks. Review of Economics and Statistics, 82(2), 344–349. Ball, L. 1992. Why does High Inflation Raise Inflation Uncertainty? Journal of Monetary Economics, 29(3): 371–388. Bassetto, M. & Wei, C. 2017. 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The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. 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The CEO of the Inclusive Society Institute (ISI), Daryl Swanepoel, attended the 6th inauguration ceremony of the Southern Africa Wenzhou Chamber of Commerce, which was held at Gold Reef City, Johannesburg, on Friday, 16 December 2022. In his address to the gathering, Mr Swanepoel shared information of the institutes work, focussing on the need for business to be involved in the economic dialogue of the country. He also spoke of the need to ensure healthy, vibrant and constructive international cooperation. Wishing the chamber success for their new term, he extended an invitation for the chamber and the ISI to work closely on issues of mutual concern. The ISI welcomes constructive dialogue aimed at improving the public policy of South Africa.

Copyright © 2022 Inclusive Society Institute PO Box 12609 Mill Street Cape Town, 8000 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute D I S C L A I M E R Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or its Board or Council members. Authors: Jon Nielsen, Frederik Olsen, Ilze-Marie le Roux and Daryl Swanepoel Editor: Olivia Main DECEMBER 2022 Content 1. Introduction 2. Literature Review: Social compacts, the current-day South African economic realities and the Danish Business/Labour cohesive model 2.1 Social Compacts in the South African context 2.2. The new Social Compact 2.3. The Time is now 2.4. Social Compact buy-in 2.5. The Danish model contrast 2.5.1. The Danish social model ensures good living conditions for the broad class of workers 2.5.2. Strong social partners are a cornerstone in the Danish economy 2.5.3. The Danish welfare state provides equal opportunities 2.5.4. ’Flexicurity’ is a recipe for a well-functioning labour market 2.5.5. It is easy to start and operate a business in Denmark 2.5.6. Fortunate circumstances, social struggles and gradual adjustments 3. Navigating the new Social Compact for a better future amid old problems 3.1. Labour’s approach 3.1.1. Business’ stance 3.1.2. Labour’s stance 3.1.3. Towards Ramaphosa’s Social Compact 4. Drawing inspiration from Denmark’s social model 4.1. Deciding South Africa’s economic model 4.2. Designing an implementation pathway 4.3. Developing an inclusive social compact with triangular commitment 5. Conclusion References Coverpage picture source: https://www.mindtools.com/ayjltrz/understanding-workplace-values 1. Introduction In his 2018 State of the Nation Address, President Cyril Ramaphosa floated the idea of formulating a written Social Compact (Presidency, 2018). The aim is to have the alliance drive the solutions to the country’s most pressing problems, which pivot around South Africa’s flailing economy. Together they will have to tackle record levels of unemployment, widening wealth inequality, deep-rooted poverty and an economy struggling to gain traction. For the Social Compact to deliver successful solutions, the relationship between those involved must be underpinned by cooperation, trust and respect. Whether these characterise the current relationship between Business and Labour, is doubtful. On its part, Labour is quick to threaten with strike action when their demands are not met. Recently, these often included double-digit or above-inflation wage increases (Mkentane, 2022). Business, on the other hand, often blames stringent labour legislation as an obstacle to expanding the labour force. It's a hostile relationship (Israelstam, 2022). This is evident by a recent statement released by the country’s largest trade union, Cosatu, in which they called for nationwide strike action. It described the protest as a ‘pushback and a response by the workers to the ongoing class warfare directed at them by both public and private sector employers’ (BT, 2022a). South Africa’s Social Compact is clearly flawed at a time when the country requires cooperation the most. Labour will have to navigate its stance on how to strengthen its relationship with Business, as Business will have to do with Labour, if the alliance is to deliver any meaningful results. To this end, this article looks to the Danish social model to draw some inspiration on how to build inclusive growth within the framework of a social compact aimed at addressing the serious challenges confronting the present-day South African economy. The Scandinavian labour markets have for many years been able to balance the aims of high prosperity and employment with the aims of low poverty and equality. They have found a way to combine economic dynamism with general economic security. This is in large due to a well-functioning collective bargaining system, a generous public welfare system and a strong social safety net, combined with flexible employment regulation. These features are the results of fortunate circumstances and long historical struggles, which cannot easily be replicated by other countries. But still, the Scandinavian model for social progress can inspire other countries in their search for the right social and economic balances. In this report, we describe the Scandinavian social model, with a special focus on Denmark; and we sketch out how South Africans could take inspiration from the organisation of the Danish society. 2. Literature Review: Social compacts, the current-day South African economic realities and the Danish Business/Labour cohesive model A Social Compact is widely understood to be an agreement among organised members of a society, generally Business, Labour and Government, to cooperate to achieve certain social benefits (C-Span, 2018). These agreements define the reciprocal rights, obligations and responsibilities between the different parties (O’Brien et al., 2009). It has also been the strategy which underpins economic models in many industrialised economies (Luiz, 2018). An efficient social compact has proven a successful contribution to sustained positive economic performance in the social democratic countries in Northern Europe, like Germany, and the Nordic Countries (Fabricious, 2020; Luiz, 2018). The South African Government now hopes a formalised Social Compact will deliver similar results for the country’s sluggish economy. 2.1 Social Compacts in the South African context In the past, South Africa has relied on social compacts in differing formats to achieve certain goals. Most recently, Government together with Labour and Business forged a partnership to ensure a nationwide Covid-19 vaccination campaign (Presidency, 2022a). Such cooperative campaigns are generally developed during negotiations by representatives of Labour, Government, Business and Civil Society at the National Economic Development and Labour Council (Nedlac). Formed back in 1995, it was used as a vehicle through which parties were compelled to collaborate in rebuilding post-apartheid South Africa (Nedlac, 2020). Its aim is to promote growth, equity and participation through social dialogue. It’s also the body through which President Cyril Ramaphosa is attempting to establish a formal written Social Compact. 2.2 The new Social Compact From his first State of the Nation Address (SONA) in 2018, Ramaphosa has been calling for a collaborative Social Compact to drive economic recovery (Presidency, 2018). During his 2022 SONA, Ramaphosa again pledged to forge a framework for a new Social Compact within 100 days in order to grow the economy, create jobs and combat hunger (Presidency, 2022b). The conclusion of the agreement has missed the 100-day time mark and is yet to be finalised. According to reports, a draft document put forward by government was rejected by the Nedlac partners. The draft report has not been publicly released, but some reports by the media may provide a glimpse of some of its contents: Business Commitments: Localisation targets Investment targets Employment targets Employee representatives on company boards Restrictions on retrenchments Increase in taxes to support a larger social security net, like a Basic Income Grant Labour Commitments: Concessions for small and medium enterprises as part of restructuring the Labour market (specifically, legislation and red tape that governs hiring and firing requirements) Support the restructuring of state-owned entities Commit to a multi-year wage agreement in the public sector Lowering entry-level wages to match the global average Government Commitments: Accelerating structural economic reforms Cutting red tape, especially for small and medium enterprises Improving governance and performance of state-owned enterprises Taking action against sabotage of economic infrastructure and corruption Expanding the presidential employment programme Employing more public servants to fill critical vacancies Expanding social security (Mahlaka, 2022a; Paton, 2022) Both Business and Labour representatives at Nedlac have rejected the draft document (Mahlaka, 2022a). Business says government is asking too much, while Labour says it refuses to give up the hard-fought rights of workers. Discussions to finalise the compact continues. 2.3 The Time is now Ramaphosa’s call for the Social Compact framework comes as the South African economy is just scraping by. The country never recovered to the levels of growth seen prior to the 2008 financial crisis. In 2019, a year out from the Covid-19 pandemic, the economy plunged into a technical recession, the third one since 1994 (Sibeko, 2021). The lockdowns that accompanied the arrival of the Coronavirus led to further devastation; and the economy entered its deepest recession in a century (Naidoo, 2020). South Africa’s annual GDP growth (%) 2004-2020 Source: World Bank, 2022a The pandemic further added to the unemployment woes of South Africans. It’s estimated that between 1,5 million and 3 million jobs were wiped out during the pandemic period (Casale et al, 2020). In quarter two of 2022 the country recorded an official unemployment rate of 33,9 percent (Stats SA, 2022a). When taking discouraged job seekers into consideration the rate is notched up to, 44,1 percent which translates to 11,6 million South Africans without a job (Stats SA, 2022a). South Africa’s annual Unemployment Rate (%) 2004 – 2021 Source: World Bank, 2022a Whilst the domestic challenges have remained more or less the same over the past decade, South Africa is facing increasing international pressures. Inflationary pressures have accelerated globally due to increased consumer spending following the pandemic and Russia’s invasion of Ukraine (WEF, 2022). In July, the country recorded a thirteen-year high CPI of 7,8 percent and PPI accelerated to 18 percent (Stats SA, 2022b). As central banks across the world move to stave off inflation by hiking lending rates, the South African Reserve Bank (SARB) has been left with little choice but to follow suit in order to protect the economy against capital outflows (Naidoo, 2022). The repo rate currently stands at 7 percent (as of 6 December 2022) (SARB, 2022), with further hikes to be expected. And as previously mentioned, in Q2:2022 the country recorded an official unemployment rate of 33,9 percent (Stats SA, 2022a). Then there’s the thorn in the side of any proposed economic recovery plan for South Africa: Eskom. South Africa continues to suffer rolling blackouts as the energy giant cannot supply sufficient electricity as a result of an ailing coal fleet – which wasn’t properly maintained – together with deep-rooted corruption and the non-implementation of future energy plans. By the end of August 2022, consumers have already been subjected to 100 days of varying stages of blackouts, the worst since the crisis started in 2008 (Volgraaff, 2022). Estimates as to the damage this may be causing the South African economy ranges from R500 million per day per stage of loadshedding to R600 billion annually (BT, 2021; Pieters, 2022; Bates, 2022). Government, together with Eskom, have provided a roadmap to address the crisis but, even if it is implemented successfully, it will take at the very least twelve months to be completely resolved, during which period the economy will continue to bear the brunt (Mahlaka, 2022b). The South African economy is simply not performing well enough to uplift the millions living in poverty. Without a radical intervention, this seems unlikely to change in the near to medium future. The number of people classified as being poor, differ according to three income standards: Upper-Bound Poverty Line Person earning at least R1 335 (€75,28) per month Lower-Bound Poverty Line Person earning at least R890 (€50,18) per month Food Poverty Line Person earning at least R624 (€35,18) per month (Stats SA, 2021) South Africans living in poverty according to different poverty standards Source: Stats SA, 2020 2.4 Social Compact buy-in It is clear that urgent steps are required to support the expansion of the South African economy. President Ramaphosa hopes his new social compact can play a pivotal role in achieving this goal. For it to be successful, however, it requires the committed buy-in from all participating parties. If past events are anything to go by, this may prove to be quite challenging, due to a strenuous climate between the parties involved. In this paper, we are focusing on Labour and Business’ relationship with the rest of the involved stakeholders. South Africa’s Labour landscape is deeply rooted in the concept of collective bargaining. In 1924 the Industrial Conciliation Act was adopted, which made provision for the establishment of industrial councils (renamed bargaining councils in 1995), whereby registered trade unions could represent the labour force in negotiations with employers (Maree, 2011). This continues to serve at the core of collective bargaining in South Africa to this day. By 1979, the South African apartheid regime was pressured to allow black trade unions, and therefore black members, to register, thereby allowing them access to the bargaining councils for the first time. By 1985, 33 unions formed a conglomerate under the Congress of South African Trade Unions (Cosatu), which assisted in breaking the stronghold of apartheid state (Cosatu, 2019). Cosatu formed the integral third arm of the tripartite alliance, together with the ANC and South African Communist Party (SACP) as the political heads (Cedras et al, 2013). While the ANC leads the alliance, it is understood that political and deployment decisions must be done in consultation with the SACP and Cosatu. A poignant shift in the relationship between Labour and Government occurred on a small hill in 2012. Workers at the Lonmin Platinum mine embarked on a protracted strike when police opened fire (Al Jazeera, 2022). Thirty-four protestors were killed, and 78 workers were injured. A local miner’s response in an interview reveals the depth of the distrust the incident created between Labour and Government (Butjie, 2017): “Cyril was one of us, someone who had come through, understood. That’s why it’s all the more ironic that, 20 years later, Ramaphosa has emerged as one of the chief enemies of the miners he once led to freedom.”[1] It’s been 10 years since the tragedy and despite no-one ever being held accountable for the incident, relations have seemingly stabilised somewhat between the two (Mahlakoana, 2022). But labour-relations in South Africa continues to be among the worst in the world. According to a World Competitiveness Report released by the World Economic Forum in 2018, South Africa was ranked 136th out of 140 countries measured in terms of stable labour-relations (WEF, 2018). According to some experts this can be attributed to the low levels of trust between employers and employees (SBS, 2022). The strained relations are further evidenced by media reports which depict a strenuous relationship between the two (Magubeni, 2022; Mungadze, 2022; Sithole, 2022). Protest actions, or the threat thereof, have become such an integral part of the negotiation process, that South Africa has a so-called ‘strike season’, named for the time of year when most wage negotiations take place (BT, 2022b). The general image of the relationship between Labour and Business, as portrayed in the media at least, is one of opposing teams focussed only on a win or lose outcome. 2.5 The Danish social model in contrast First, a few facts about Denmark. Denmark is a small country of 5.9 million people who are ethnically very homogenous. Denmark has been a collected and independent country for 1,200 years and is part of Scandinavia together with Sweden, Norway, Finland and Iceland. Denmark is the eighth-richest country in the world as measured by the gross national income per capita. This is due to a high level of productivity among workers in general. Denmark is not endowed with large natural resources and is not a free haven for the global elite. The income distribution in Denmark is fairly equal and corruption is almost non-existent. In the box below, are the five basic features of the Danish social model. 2.5.1 The Danish social model ensures good living conditions for the broad class of workers The Scandinavian labour markets are characterised by high employment rates among both men and women. This is a general feature of Northern-European countries and not something specific to Scandinavia, cf. Figure 1A and 1B. Note: The figure shows the percentage of the population from 20-64 years in employment. Data covers 2021. Source: ECLM based on Eurostat. Note: The figure shows the percentage of the population from 20-64 years in employment. Data covers 2021. Source: ECLM based on Eurostat. Normal workers in Denmark and the other Scandinavian countries receive a very high hourly wage. This can be seen by looking at the median hourly wage, that is, the wage rate in the middle of the pay-scale, where half of the employees earn less, and the other half earn more. The median hourly wage rate in the private sector in Denmark ranks number two among European countries, cf. Figure 2A. The other Scandinavian countries are also characterised by high wages for normal workers. If one considers only low-skilled workers, a similar picture emerges. The typical low-skilled worker in Denmark earns a higher wage than in the other Scandinavian countries, cf. Figure 2B. Note: The figure shows the median hourly wage in the private sector (excluding agriculture and fishing) in companies with more than ten employees according to Structure of Earnings Survey (SES), Eurostat. For US we have used data from Bureau of Labour Statistics (BLS) and Confederation of Danish Employees (DA). Data covers 2018 and it is PPP-adjusted w.r.t. Danish prices. Source: ECLM based on Eurostat, BLS and.DA. Note: We have applied same method as in Figure 2A. Unskilled workers are defined as Elementary Occupations (group 9) in Eurostat’s ISCO08 classification. Data covers 2018 and it is PPP-adjusted w.r.t. Danish prices. Data for US is missing. Source: ECLM based on Eurostat. The high wages for normal and low-skilled workers means that the Scandinavian countries have very few low-paid workers compared to other countries. Low-paid workers are defined as wage earners who earn less than two-thirds of the median hourly wage in the respective countries. The Scandinavian countries have some of the lowest rates of low-paid workers in Europe, as shown in Figure 3A. Also, when panning across all citizens – whether employed or not – the Scandinavian countries have low poverty rates. In this region, citizens are defined as poor if their disposable income is below 50 percent of the national median; therefore, poverty thresholds vary across countries. Note: The figure shows the ratio of wage earners above 30 years with an hourly wage less than 2/3 of the median hourly wage. Source: ECLM based on Eurostat. Note: The poverty rate is defined as the ratio of the population with an income below half of the median income in the specific country. Source: ECLM based on OECD. High wages – combined with redistributive taxes and generous social transfers – mean that the overall income inequality is low. Inequality can be measured by the ratio between the income of the poorest and the richest income groups. Figure 4 below, shows how much an average person from the richest fifth earns more than an average person from the poorest fifth. In the Scandinavian countries, the richest fifth earns about 4 times more than the poorest fifth after tax and transfers. This income difference is low by international comparison. In the UK, the richest fifth earn 6.5 times more than the poorest, and in the US the richest earn 8.4 times more. Note: The measurement for inequality is defined as the ratio between the first- and fifth-income quintile’s equivalized disposable income. Data covers 2018 and 2017 for Iceland. Source: ECLM based on Eurostat. 2.5.2 Strong social partners are a cornerstone in the Danish economy The Danish labour market model dates back to 1899 when the social partners agreed upon a basic set of rules regarding – on the one hand – the right of workers to unionise and strike under certain conditions and – on the other hand – the right of employers to organise their own production and hire and fire workers within the boundaries of collective agreements. A prerequisite for the success of this model is that a large share of both workers and employers are organised in unions or employer organisations. Figure 5A shows the organisation rates of workers among 19 OECD countries. About two-thirds of Danish employees are organised in a union. Generally, the trade union movement stands strong in the Nordic countries, even though unionisation rates have been on a decline for the last 25 years. The social partners have a strong voice in the political debate and are directly involved in the economic policymaking through formal and informal consultations with the government. Note: The figure shows the ratio of employers who are members of a union. Data covers 2020 or latest available observation for each country. Source: ECLM based on OECD. Note: The figure shows the ratio of employees covered by a collective agreement in 2018. Source: ECLM based on OECD. In the private sector, it is voluntary for employers to join the collective agreements, but many firms do so, sometimes due to union pressure. Overall, more than four out of five workers are covered by a collective agreement in Denmark. This puts Denmark in the higher end among the 25 OECD countries, as captured in Figure 5B. In the public sector, collective agreements cover all employees, whereas about three out of four are covered in the private sector. The bargaining system is often referred to as a decentralised but coordinated bargaining system. Bargaining takes place on a sectoral level, where the more export-orientated manufacturing sector sets a wage norm which the other sectors then take into regard in their negotiations. Similar systems are found in Sweden, Norway and Iceland as well as in Germany, Austria and the Netherlands. According to the empirical literature on bargaining systems, such decentralised-coordinated systems are often able to combine economic dynamism with high income shares for normal workers (Aidt & Tzannatos, 2008; OECD, 2018). 2.5.3 The Danish welfare state provides equal opportunities In Denmark, a relatively large share of the national income is redistributed among its citizens through public welfare and social transfers. The government provides a broad array of basic goods free-of-charge including healthcare, education, eldercare and social security. As a result, consumers can spend less on those goods. In a sense, the government expands the households’ budget for consumption. In Denmark, government spending amounts to 27 percent of the households’ extended consumption possibilities, as illustrated in Figure 6A below. By international comparison, this is a relatively large share. The Scandinavian welfare states are to a large extent based on tax financing rather than insurance-based financing. Thus, healthcare, eldercare and many social transfers are mostly financed by general taxes as opposed to personal savings and insurances. This means that access is universal and that the quality does not depend on one’s income. This has the effect of reducing the overall inequality. Taxes and transfers reduce the inequality as measured by the Gini coefficient with 42 percent, illustrated in Figure 6B below. Note: The figure shows the extended government consumption as % of households’ total spendings. Thus, high extended government consumption indicates that the government provides many direct transfers to “actual individual consumption”. Source: ECLM based on OECD. Note: The figure shows the reduction of Gini in percent before taxes and transfers to Gini measured on disposable income. Source: ECLM based on OECD. In particular, public spending on education is high in Denmark. Education at all levels is provided free-of-charge, including secondary school, higher education and upskilling for employed and unemployed adults. Consequently, total spending on education amounts to 4.3 percent of GDP, which is almost exclusively government spending. This is shown in Figure 7A below. The high level of public spending is countered by a high number of pupils and students, meaning that the spending per pupil is close to the OECD average. In international surveys of literacy and mathematical abilities, Denmark does not rank in the top – perhaps due to “softer” skills being prioritised in the school system. However, the gap between the more and less skilled is relatively low. If we measure the mathematical abilities of adults and compare the scores in the top and in the bottom, the dispersion of abilities is relatively low in Denmark. This is shown in Figure 7B below. The dispersion is higher in countries with more polarised school systems such as France and the US. In this way, public schooling in Denmark is a cornerstone in ensuring equal opportunities. Note: The table shows the total costs of educational institutions according to Education at a Glance 2022, OECD. Source: ECLM based on OECD. Note: The figure shows the dispersion in mathematical competences among adults according to the PIIAC survey, 2019. Source: ECLM based on OECD. The fact that the public sector is relatively large in Denmark does not mean that it is ineffective. In spite of its size, the Danish public sector has a high effectiveness according to World Bank estimates (WB, 2022b). Furthermore, corruption is almost non-existent (see Figure 8A below). The government expenses are countered by high taxes. This is reflected in the tax burden, which measures the share of total income that is administered by the public sector. As shown in Figure 8B, the tax burden in the Scandinavian countries is in the higher end among OECD member countries. Note: Corruption Perceptions Index (CPI) is the most widely used global corruption index and it measures how corrupt each country’s public sector is perceived to be. Source: ECLM based on Transparency International. Note: The figure shows the total tax revenue excluding taxes on social expenditures in % of GNI. Source: ECLM based on OECD. 2.5.4 ‘Flexicurity’ is a recipe for a well-functioning labour market The Danish labour market is characterised by flexible regulation when it comes to laying off and hiring labour. In countries such as Germany, France and the Netherlands, firms face stricter rules when hiring and firing workers (see Figure 9A below). It is also relatively inexpensive to lay off employees in Denmark, compared to other countries, where substantial severance pay is more common. This flexibility means that companies can adjust more easily to changing economic circumstances. It also means that companies face relatively low risks when creating new jobs. In this way, flexibility helps to ensure more job openings in the economy – even during bad times. This is also an advantage for employees. But a high level of flexibility requires a strong social safety net for the employees. Without a social safety net in the form of unemployment benefits and tax-financed public goods, employees would demand longer terms of notice and higher severance pay. The safety net is an important reason why employees accept contracts with short terms of notice. Compared to other countries, one gets a relatively high share of the lost salary income reimbursed if you become unemployed – at least if one is at the lower end of the pay-scale (see Figure 9B below). During the last decades, however, the replacement rate of unemployment benefits for the average wage-earners has been hollowed out. This threatens the long-term balance of the unemployment system. Note: The index measures the flexibility in terms of hiring and firing employees. The data covers 2019 and it is based on a questionnaire survey among business managers answering: “To what extent do national regulations allow for flexible contracts in terms of hiring and firing employees.” Source: ECLM based on World Economic Forum. Note: The figure shows the net replacement rate in case of unemployment for low-paid workers (less than 67% of the average wage). Source: ECLM based on OECD. The relatively lax rules for assigning and dismissing workers and the relatively strong social safety net form two of the three pillars of the so-called ‘Flexicurity’ system. The last pillar consists of an extensive use of active labour market programmes to increase reemployment of the unemployed. Participation in various programmes of job search assistance, training and activation is required in order to receive unemployment benefits. Further, there are strict requirements regarding the number of jobs to apply for, when to attend meetings with the employment office, and which job offers one can turn down. These types of workfare programmes strengthen the qualifications of the unemployed and increase their chances of reemployment. In addition, public training for employees helps people keep their skills up-to-date and prevents job-losses. Denmark is by far the country in the OECD with the highest expenditure on active labour market policies. The spending on active labour market programmes amounts to 1.4 percent of GDP. This is shown in Figure 10A below. Correspondingly, the share of unemployed participating in training and education is one of the highest among EU countries. Figure 10B shows the three pillars of the flexicurity system – that is, flexibility in terms of hiring and firing, a strong social safety net, and an extended use of active labour market policies. Note: The figure shows the average yearly expenditures to active labour market policies (ALMP), 2015-2020. Source: ECLM based on Eurostat. Note: The figure shows the three essential components of the Flexicurity model. Source: ECLM. 2.5.5 It is easy to start and operate a business in Denmark The productivity of workers and businesses in Denmark is high. Looking at GDP per hour, the Scandinavian countries rank top in the world (see Figure 11A below). This is mainly due to high public spending on infrastructure, research and development, education and spending items underpinning a high employment (affordable childcare and employment policies). The Scandinavian countries all have high government expenditures on investments and ‘production-enhancing’ consumption, as illustrated in Figure 11B below. Thus, firms have access to good infrastructure, technical knowledge and a well-educated workforce. Historically, Denmark has pursued a quite liberal industrial policy, where government has not come to the rescue of companies in trouble. Denmark does not have large, subsidy-requiring companies within, for example, the mining and heavy industry. Note: The figure shows GDP per hour worked in 2021. Please note that the GDP per hour in Ireland and Luxembourg are inflated by both countries serving as tax-havens. Source: ECLM based on OECD. Note: The figure shows government investments and productive consumption decomposed in six sub-groups. Source: ECLM based on OECD. Furthermore, the costs and administrative burdens when starting a new business are relatively low. This is, for example, evidenced by the World Bank’s data on the costs of starting a new business, which are indicated by an average index in the first column of Figure 12 hereunder. According to The World Economic Forum, Danish business leaders do not view government requirements as very burdensome, as shown in the second column of Figure 12. Finally, even though taxes are high, they are collected in a relatively non-distorting way. In particular, they are levied on broad tax bases, which makes it possible to keep the marginal tax rates low. As a consequence, the high taxes only distort the incentives of workers and investors to a lesser extent, and therefore taxes do not hamper growth much. This is shown in the last three columns of Figure 12, where the tax rates on working an extra hour and investing an extra dollar are reported. Source: https://www.datawrapper.de/_/IhINB/ 2.5.6 Fortunate circumstances, social struggles and gradual adjustments The Danish social model was built over many years and is, in many ways, a result of fortunate circumstances and specific power structures in the past. Although other countries can, surely, take steps towards a society more like the Danish, the process of getting there will not be easy and will not be fast. In the global market, Danish firms have specialised in high-value-added products and services that do not rely on the availability of cheap labour. This is, to some extent, a consequence of unions raising wages across the board and the school system ensuring a high productivity among low-skilled workers. That is, of course, not a panacea for prosperity and equality in all countries. Nonetheless, the history of the Danish model might provide some useful take-aways for South Africans. At the close of the 19th century, agriculture was still the principal industry in Denmark, and was dominated by a confident farming class, which organised a strong cooperative movement. ‘Folk high schools’ became a stronghold for general education. Around 1900, rapid industrialisation increased growth in the cities and created strong trade unions as a counterweight to private capitalist power. From the beginning, the trade union movement and the Social Democratic Party were linked politically as well as organisationally. In Denmark and the other Scandinavian countries, the interaction between unions and the party became the key driving force in the development of a highly vital welfare model. The trade union movement secured better pay and improved working conditions in negotiations with the employers. But where collective agreements were unable to provide adequate possibilities, the political friends of the trade union movement took over. Economic inequalities were evened out through tax-funded services within education, healthcare etc., and through a system of economic benefits in case of unemployment, illness and old age. The first great challenge – and also the first huge leap forward – was the Great Depression in the 1930s. Fearing that mass unemployment would spur uprisings and antidemocratic sentiments, the politicians agreed on a social reform that gave social welfare benefits to those in need as a right – not as alms. In the middle of the 1900s, economic and social changes were generated by two vast changes: An extensive urbanisation and women entering the organised labour market. From the 1950s, the standard of living exploded and the share of a generation achieving a higher education increased dramatically. A significant part of this income growth was used for expanding public welfare. The pursued economic policy supported growth in the private sector. Beginning from the 1950s tax legislation, giving the companies very generous depreciation possibilities on all kinds of machinery made a crucial contribution to the renewal of the Danish industrial sector. Furthermore, the prioritisation of public welfare created a domestic market, which gave Danish industry the possibility of becoming a global market leader in valuable niches such as medical products. Likewise, the demand for more environmentally sustainable energy supply after the oil crises resulted in government support for windmill technology, which made Denmark a leading producer of windmills. After the oil price shocks in the 1970s, the unemployment rose dramatically and reached 11 percent in 1981. The rise was expected to be temporary, but it lasted throughout the decade, leading to a surge in the public debt and the current account deficit. At that time the relationship between the social partners was relatively cold and untrustful, although the rules of the bargaining system were respected. Since then, two important aspects have been added to the Danish model. Firstly, occupational pensions have been included in the collective agreements. These personal savings supplement the universal pensions and have meant a massive relief for the public finances. Further, the statutory retirement age is being raised in concurrence with the life expectancy. This is combined with early retirement schemes for the worn-out. Secondly, the requirement that the unemployed participate in active labour market programmes was introduced in the 1990s. This reduced the unemployment rate significantly – from about 10 percent in the 1980s to about 4,4 percent in the 2000s. Other factors such as clever fiscal policies and lower unemployment benefits contributed to this development. But the introduction of workfare explains the lion’s share of the declining unemployment rate (Kreiner & Svarer, 2022). Regarding the relationship between the social partners, it has gradually improved, partly due to Labour and Business both prioritising job creation when jobs were scarce, and partly due to the government delivering welfare, social security and a fair distribution when Business would not. In short, the Danish Model is not the result of one big master plan. Creating social progress for people with normal and lower incomes has been a long and gradual process – fighting and striking balances with employers and centre-right political parties. It has been a step-by-step process in interaction with the changing economic conditions, and sometimes the steps have led in the wrong direction. 3. Navigating the new Social Compact for a better future amid old problems In 2020, President Cyril Ramaphosa tabled his Economic Reconstruction and Recovery Plan. Two years later, during his State of the Nation Address, he called on all stakeholders to commit to a new social compact to give effect to the plan. As we’re nearing the fourth quarter of the year, the document is yet to be finalised. While the country’s extensive economic problems are urgent, the drivers of the solutions are seemingly dragging their feet. It's been 28 years since the first democratic dispensation, yet millions of previously disadvantaged black South Africans continue to live in abject poverty, with little to no hope of an improved future. The deep rootedness of corruption is visible in the country’s decaying infrastructure, deteriorating governmental services and a state-owned energy supplier who can’t keep the lights on. This has detracted from South Africa’s attractiveness on the international stage, with other African and emerging countries doing a far better job of luring investors. It is investment the country can ill-afford to miss out on as the tax-base continues to shrink due to emigration, low levels of economic growth and increasing levels of unemployment. Seeing as the state cannot create sufficient jobs to support the 11 million unemployed South Africans, with a projected economic growth rate of 2,1 percent in 2022 and 1,6 percent in 2023, urgent cooperative measures are required. Government, Labour and Business will have to pull together to see any plan bear fruits. This is, however, hampered by the low levels of trust characterising the relationship that Labour has with Government and Business. Labour is also known to negotiate with a frozen mandate, unwilling to be flexible in its demands. If Ramaphosa has any hope of driving economic recovery with the social compact at its core, Labour’s often harsh stance will have to be reconsidered. 3.1 Labour’s approach 3.1.1 Business’ stance Business is seeking a more immediate relationship with Labour. Some require Labour to move away from its continuous calls for widespread and inclusive consultations on every aspect before a plan can move ahead. The economic crisis leaves little time for lengthy deliberations. Instead, Business is seeking a bilateral approach, which it hopes will speed up these types of processes. It further urges those Labour representatives to move away from long-held ideologies where the state is the controlling entity of an economy and allow for partial or full privatisation to take over where necessary. Labour has been quite vocal in its opposition against privatisation of state-owned entities. These include the unbundling and partly privatisation of the struggling Eskom. Moreover, Business wants Labour to commit to an end goal of adding more employment to the economy. In one conversation, former Finance Minister Trevor Manuel’s quote resurfaced: ‘Jobs are bloody hard to come by, all, jobs, and the more adjectives you add, the harder it gets’ Some suggest that Labour needs to drop the adjectives when it comes to its demands for job creation. Examples include ‘fair’ or ‘inclusive’ as prerequisites for jobs being created. Understanding that getting people onto the income ladder is the core concern. This should however still be done in a regulatory and legislative environment, which prevents exploitative practices. If job creation is embraced as the single goal, it may largely halt meaningless actions that cause further economic damage. One such example, is Cosatu, who recently called for a nation-wide shutdown with regard to the increasing costs of living. The stay-away gained little to nothing but it did remove a handful of people from their place of work, causing damages to businesses and ultimately the economy. This is in line with one suggestion that trade unions move away from the current Positional Bargaining model to an Interest Based one, with the focus on a collective goal as opposed to entering negotiations with a frozen mandate. This will also reposition the process to have a win-win outcome, where currently the general experience is a win-lose situation. Small and medium-sized businesses are viewed as the job drivers in South Africa. Yet, they say they are being strangled by stringent labour laws. Most notably, is a company’s ability to retrench or fire an unproductive employee. South Africa’s regulations that govern this process are notoriously complex and seemingly tend to give employees more benefit compared to the employer. There has long been calls for the relaxing of the so-called hiring and firing processes. It has been noted that these stringent regulations have led to companies limiting the number of staff they employ, thus hampering job creation. Business understands it cannot operate without Labour. It also has a firm grasp on the social responsibility it has in a developing country such as South Africa. What it’s calling for is more flexibility and accommodation from Labour, to allow for rapid expansion of Business to the long-term benefit of all in the country. 3.1.2 Labour’s stance Labour says it too understands its role in making the Social Compact work. Although Labour enjoys an amicable relationship with Business at a Nedlac-level, it’s quick to add that it’s not there to make friends. While Labour says it welcomes the opportunity for consultative processes on important matters, it has accused Government of delaying tactics, citing the conclusion of the Social Compact document as an example. Labour representatives’ further state that there is no need to seek red herrings as solutions to the country’s economic woes. Instead, it believes that Government already controls the necessary levers to make a meaningful impact on the economy. Among Labour’s suggestions is the implementation of a wealth tax to support fiscal spending measures, which could stimulate economic growth. Another is the strengthening of the South African Revenue Service to better enforce tax compliance in the country. Labour says there are less contentious ways to go about creating growth in the economy than what is being proposed by some. It is further clear in its stance that Labour representatives are there to protect and promote the interest of workers. This is done to ensure more inclusive economic growth going forward, while ensuring that workers share in the success they help to create. Labour fought hard to secure a minimum wage requirement of R23,19 p/h, which it believes will assist in narrowing the inequality gap that plagues South Africa. It often accuses management of big companies of displaying capitalist greed by paying their shopfloor employees pittances while the executives pocket millions in salaries and bonuses every year (Steyn, 2022). This also strengthens Labour’s argument that there cannot be any relaxation of the Labour laws, which are meant to protect employees. It’s understood that the initial Social Compact document did suggest certain amendments to the hiring and firing process, with the aim to assist small and medium enterprises. This has since been removed from the draft document on the insistence of Labour that it will not agree to the suggested Labour law reforms. One Labour representative says that the deep levels of distrust by some workers towards Business stems from South Africa’s racial past. Some business owners are white individuals, while the working class is predominantly black South Africans. For many, this highlights the racial divide and the deep income and wealth inequality that continues to exist 28 years into a democratic South Africa. Labour believes it’s the only party currently providing credible solutions to the country’s extensive problems, calling on both Business and Government to catch up. It shares a harsh view of Government’s seeming inability to take control of the crisis, saying it lacks the focus required to lead the successful implementation of a strategic solution to the country’s economic ills. 3.1.3 Towards Ramaphosa’s Social Compact South Africans are seeking a revitalisation of the economy, society and its body politic. The President is insisting a cooperative relationship is the way to bring this about. He has called on Business to take national strategic objectives into consideration in its decision-making process and Labour needs to promote the interests of workers while seeking business sustainability and job creation. From its side, Ramaphosa says Government will create an enabling environment while deploying public resources strategically. The President has emphasised that all parties need to come to terms with the trade-offs that may be required in the process. He faces a tall task, however, to get the required support, as the trust in Ramaphosa and his Cabinet has been watered down. This is largely due to years of inaction to curb gross corruption, the inability to uplift the majority of previously disadvantaged South Africans and the many failed attempts at implementing one or more economic turnaround strategies. While Labour publicly supports the drafting of a Social Compact, when speaking to representatives its frustration is palpable. Meanwhile, Business has openly criticised the process, calling for the Social Compact to be put aside, saying the lengthy consultations are taking up too much time when what is needed is immediate action. It further suggests focusing instead on other strategies – like the President’s Economic Reconstruction and Recovery Plan – that have already been finalised. In principle, Labour and Business understand that a strong Social Compact is required. The specific drafting of one, however, is seen as yet another time-wasting exercise with little faith in the outcome. In some corners, a successful Social Compact already exists in South Africa. A story shared by both sides is that of the Mining Sector. The tumultuous relationship between local mining companies and employees is well documented. In 2020, the Covid-19 pandemic shifted the dynamics, as it forced the formation of a single goal. Organised Labour, employers and communities had to work together in achieving safety for everyone involved. This forged a new relationship built on a shared outcome with mutual respect at the core, which they hope will set the president for future negotiations. Perhaps Ramaphosa and the rest of the social partners can take a leaf out of mining’s book. Dotting down shared goals, as opposed to finding common ground on every other aspect may be a far quicker process, as the problems South Africa face are clear: unemployment, inequality, poverty, and sluggish economic performance. Given the urgent nature of the problems, it seems Business, Labour and Government will have to find a way to work together even if a climate of distrust exists among some. 4. Drawing inspiration from Denmark’s social model 4.1 Deciding South Africa’s economic model The South African economic model remains contested. On the one extreme there is a push for the nationalisation of key industries, the establishment of a state bank, the preservation of State-Owned Enterprises (SOEs) at any cost and the central role of the State in engineering the economy. This seems the stance of organised labour and the more left-wing sections of the ruling party. The Danish model, albeit with a larger than average public service, suggests a smaller role for state-owned enterprises. So too, the creation of an enabling environment for the private sector to thrive, is central to Danish government policy. This is evidenced by their flexicurity labour market and well-designed regulations and tax rules that promote good growth conditions for business. On the other side, the South African Reserve Bank, Treasury, and the more conservative sections of the ruling party – and the main opposition parties – lean more closely towards more neo-liberal economic policies to guide the South African economy. There is a higher reliance on trickle-down economics, than on debt-financing and expanded social safety nets aimed at improving society’s standards of living. The Danish model has shown that generous social safety nets and a market economy can not only thrive side by side, but also puts more consumption spending in the pockets of the ordinary workers – which in itself stimulates GDP growth – and, given the safety net security, allows for a more flexible and productive labour market. The smaller role for SOEs is offset by strict regulation of monopolies and markets for infrastructure-like goods and by a political system that is quite robust to lobbyism and corruption. Officially, South Africa has positioned itself as a developmental state, meaning that it is en route to its final economic destination. What that destination is, is not yet settled, albeit that it is constitutionally committed to the progressive realisation of socio-economic rights, including the right to work, healthcare, security and education, amongst others. Denmark has developed a well-functioning welfare state, in which a vibrant free market co-exists with adequate safety nets to ensure a society generally free from abject poverty and severe inequality. It understands that social upliftment leads to economic growth, and that investment therein is not a choice, but an imperative. Although this requires higher taxation, quality services, delivered virtually corruption free, results in a content and productive society. Step one on the way forward is for South Africa to agree and commit to its economic path; and for stakeholders, principally Labour, Business and Government, to enter into a pact to ensure its achievement. This paper suggests progression towards a social democratic welfare state is best to ensure social justice and equality. 4.2 Designing an implementation pathway It needs to be understood that the achievement of the welfare state is not an event, it is a decades-long process. Denmark, now the eighth-richest country in the world, has been developing its welfare state since the early 1900s. It has progressively advanced by systematically chipping away at poverty and inequality. The provision of tax-funded health services, education, elderly- and childcare, unemployment benefits and its pension regime was introduced alongside a growing market economy. Denmark shows us that comprehensive welfare benefits require two ingredients: higher tax contributions and low unemployment. Supplemented by good healthcare and education, which provides the foundation for a productive and a more industrialised and technologically advanced economy. Thus, the lesson to be drawn from the Danish experience, is that a comprehensive set of safety nets need to be envisioned, designed and agreed upfront, and that an implementation pathway needs to be designed, whereby benefits are systematically introduced as and when economic conditions dictate. With the end goal in mind, the progressive tax and public spending regime can be designed and synchronised with the economic growth trajectory. Crucial though, is that a viable social safety net requires an effective public administration with extensive information on each social security recipient. Thus, the government administration needs to be improved as well. That said: An important lesson from the Danish social model is that broader society must have the courage to start with the implementation of the safety net regime even when the economy is constrained, albeit within the country’s fiscal means. It was within the context of the 1930 Great Depression, that Denmark agreed on a social reform that gave social benefits to those in need. The South African debate with regard to a Basic Income Grant (BIG) comes to mind. Whilst it is not within the country’s means to introduce a fully-fledged social welfare system, the introduction of a more affordable BIG could serve as the foundation on which such a system can be built as the economy strengthens and more people enter the job market. 4.3 Developing an inclusive social compact with triangular commitment The Danish social model tells us at least eight things: The nation as a whole must commit to the country’s social model. Not only must they commit, but each sector must also understand their contribution in the quest to achieve that vision. For this the ‘rules of the game’ must be agreed upon, understood and respected by all in society. There needs to be a high level of trust between the stakeholders and between them and society as a whole. This trust is developed through the delivery of high-quality services within a virtually corruption-free environment. The Danish model has illustrated that people are prepared to pay higher taxes if they know they will receive quality services and that their contributions are spent with high fiduciary care. There needs to be a clear delineation between that for which the state is responsible, and the role of the market. In Denmark, the state is focussed on delivering the social services and the broader infrastructure of the state, and on the development of the regulatory framework for nurturing the free market. The state understands that a growing free market is the cornerstone for job creation and growing tax income, without which the delivery of welfare services will not be viable. Regulations are designed to ensure that it is relatively easy to do business, especially for SMMEs. In a similar vein, Business and Labour understand that one cannot succeed without the other. Both are committed to the system of bargaining councils, which, in turn, underwrite the notion that worker conditions need to be constantly improved within the limitations of enterprise affordability and the need for a fair return on shareholder investment. A discontented workforce neuters productivity, and an unprofitable business discourages the further investment required for growth and job creation. To find the consensus needed to implement the ideals set out above, requires a well-functioning collective bargaining system where large labour unions and employer organisations engage in a repeated wage-setting game underpinned by stable institutions. The collective agreements secure that social conflicts are resolved in a flexible and non-confrontational manner. The presence of welfare safety nets allow for less stringent and more flexible labour laws. This is made possible due to a worker being able to continue his or her life with relative financial security, post being made redundant. South African Business’ insistence on more flexible labour laws should therefore be met with them embracing a more sustainable and comprehensive safety net regime for the unemployed. A comprehensive social welfare model requires less government involvement in the market. Its role should be limited to creating an economic environment in which the private sector can flourish. It should refrain from clinging to loss-making and unsustainable SOEs. The South African authorities will need to adjust their mindset from a penchant for over-regulation, to ensuring greater ease of doing business. For a safety net regime to thrive, the fiscus will require higher taxes, which will only be made possible if enterprises are allowed to flourish. Social welfare benefits must be considered a right – not alms. This means that, as with all rights, obligations need to be attached to the benefits. In Denmark this includes, for example, the obligation of all workers and enterprises to contribute towards the fiscus through salary contributions aimed at financing the the welfare system (unemployment, retirement benefits, etc.), and by compelling the unemployed to seek work and continually upskill themselves. The introduction of a BIG in South Africa would do well in taking such an approach to heart. 5. Conclusion South Africa finds itself in the perfect economic storm. It was never able to really get back on track following the 2008 financial crisis. The Covid-19 pandemic compounded its problems. Insufficient electricity supply coupled with national and international political and economic pressures are squeezing South Africans into an unmanageable position. It’s a tight spot, from which the country can only escape if Labour, Business and with Government decide to pull in the same direction. They need to understand not only the mammoth task at hand, but also their responsibility in finding the way out. Government needs to be focussed on developing the plan to get the country back on track. They will have to create a better environment in which business can thrive. Business will have to accept that it needs to contribute to a greater degree towards social upliftment and justice, with not just profit, but also social upliftment as a bottom-line goal. In turn, Labour must develop the art of continuing the fight for the betterment of the lives of workers, but in a more flexible and accommodating manner. And all three with the greater good in mind. The Danish model suggests that Government, Labour and Business each have distinctive roles to play in building the nation, and that one cannot succeed without the other. The overriding approach is therefore to synchronise their interests in a manner that does not undermine each other, but which is agreed in accordance with the national vision, ethos and value system. South Africa, the authors suggest, should draw inspiration from the Danish social model. It will require great coordination and new thinking. To which end it is proposed that Nedlac, also through the inclusion of civil society, be expanded to be more representative of broader society. And that a process be put in motion to agree the vision, the ethos and value system capable of broad public appeal. It is recommended that in striving towards these goals, a half-measure approach should be avoided. Instead, the requisite social compact needs to be developed comprehensively, inclusively, in a properly structured manner, and to the benefit of all – the broader public through government, the workers through the unions, and business, through their investors. 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SA has had 100 days of load-shedding in 2022 [Online] Available at: https://www.businesslive.co.za/bloomberg/news/2022-09-14-sa-has-had-100-days-of-load-shedding-in-2022/ [accessed: 14 September 2022] [1] Cyril Ramaphosa rose through the ranks of organised labour. He served as both Deputy President and a non-executive director of Lonmin at the time of the Marikana massacre. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

The Inclusive Society Institute participated in an international collaborative research project aimed at answering two fundamental global population questions: What is the sustainable human carrying capacity of earth; and how is that number to be managed and contained? The study was coordinated by the Swedish based Global Challenges Foundation, and the other collaborative institutes were Earth4All and the Swedish Institute for Future Studies. The workshop was held on Tuesday, 29 November 2022, in Stockholm, Sweden. The ISI team comprised Mr Anton Cartwright, the projects lead researcher, Professor Josephine Musango, the project Climate Change content advisor, and Daryl Swanepoel, the ISI CEO. The ISI’s research report will be released in January 2023.

The Inclusive Society Institute (ISI) hosted an Electoral systems and coalitions workshop at Deloitte in Cape Town on Friday, 9 December 2022. The workshop was delivered in a hybrid format with in-person attendance and others joining via Zoom. The presenters at the workshop were Professor Jørgen Elklit, a professor of political science at Aarhus University in Denmark, an electoral systems expert and advisor on democratisation and elections, electoral systems, and electoral administration in a number of countries, including Bosnia-Herzegovina, Afghanistan, China (village elections), Kenya, Tanzania, Lesotho, Jordan, South Africa and his native Denmark; and Mark Garrett, Director General of the Irish Law Society, who previously worked as Chief of Staff to the Leader of the Irish Labour Party, Eamon Gilmore, from 2008 to 2014. Prof Elklit shared his knowledge with regard to electoral systems around the globe, the pros and cons of each and the systems best suited for diverse societies such as South Africa. He emphasised the importance of multi-member constituencies for ensuring inclusion and diversity and which held the best prospect for independent candidates to being elected; and the dangers of single seat constituency, which could lead to one party dominating the constituency component of a proportional representation system. He also introduced the idea of automatic voter registration. Mark Garrett, in turn, shared his vast experience with regard to the Irish political systems, which has for decades now been dominated by coalition politics. He discussed the need for trust and generosity as the basis for any successful coalition.

The Inclusive Society Institute (ISI) hosted its annual lecture on 8 December 2022. The event was hosted in hybrid format, with the in-person presentation being made at the conference facilities of Deloitte in Cape Town with other guests joining via Zoom. The keynote speaker was Professor Jørgen Elklit, who spoke on the topic on ‘Election systems and democracy as tools, to promote social cohesion’. Professor Elklit Professor Jørgen Elklit is a professor of political science at Aarhus University in Denmark, where he attained his doctoral degree. His research and teaching have focused on political parties, Danish national and local politics, elections, electoral systems, electoral administration, the German minority in Denmark, and democratisation and democracy support to countries in transition. Professor Elklit has since 1990 also been active as an advisor on democratisation and elections, electoral systems, and electoral administration in a number of countries, including Bosnia-Herzegovina, Afghanistan, China (village elections), Kenya, Tanzania, Lesotho, Jordan and his native Denmark. Professor Elklit was an international member of the South African Independent Electoral Commission in 1994 and of the country’s Electoral Task Team 2022-3 and was Secretary to the Independent Review Commission in Kenya 2008. He has also had research fellowships abroad and been a visiting professor at the University of Cape Town. He has written and/or edited or co-edited more than 20 books and has a number of articles in professional journals as well as book chapters on his list of publications.

Nondumiso Sithole, advisory council member at the Inclusive Society Institute (ISI), attended the opening of a new conference facility that hosted by the Friedrich Ebert Stiftung Foundation (FES). The launching of the new facility held on the 6th of December 2022, at 34 Bompas Road, Dunkeld West. The FES hosted conference not only challenged its attendees to engage in meaningful conversations on critical matters around issues of social impact such as directly challenging patriarchy but genuinely analysing and exploring the new feminist politics, finding ways to address the issues of intersectional inequalities of race, class, gender and sexuality but generally the progression towards a renewal of progressive projects globally. The event also took the opportunity to pay honor, tribute and remembrance to a legend and pioneer of the late former Commissioner to the United Kingdom Lindiwe Mabuza. Ms. Mabuza was not only an activist and politician but wore many impressive hats, academic, poet and cultural activist. Ms. Mabuza was a feminist icon in her own right and was a trailblazer in advocating for fighting for women’s right through the use creative arts and her passion in education.

The Inclusive Society Institute (ISI) participated in the Foundation for Global Governance and Sustainability’s roundtable on Efforts for Greater Global Resilience Through More Inclusive and Effective Multilateralism. The roundtable was held on 23 November 2022. The objective of the roundtable was to see input from African think tanks, universities and civil society on the global discussion aimed at strengthening multilateralism. The focus was on the conceptualisation of a Global Resilience Council that would create a platform for broader and more effective inclusion of civil society and the academia in the UN policy and programme agenda. Panellists included: Cilene Victor, leader Research Group Humanization, Methodist University, Sao Paulo, Brazil Yoriko Yakusawa, Vice President FOGGS. She is currently a member of the roster of mediation experts for the Inter-American Development Bank Independent Investigation and Consultation Mechanism, and is a part-time lecturer at the Meiji Gakuin University in Yokohama. She also works as an independent journalist and consultant based in Costa Rica. Harris Gleckman, Board Member, FOGGS. He is currently Senior Fellow at the Center for Governance and Sustainability, UMass-Boston and Director of Benchmark Environmental Consulting. Georgios Kostakos, the Executive Director, FOGGS.

Occasional Paper 9/2022 Copyright © 2022 Inclusive Society Institute PO Box 12609 Mill Street Cape Town, 8010 South Africa 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from the Inclusive Society Institute. DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. OCTOBER 2022 by Robert Mopp & Daryl Swanepoel Picture source: apdconnaissances.com Abstract This report traces the development journey of the ‘welfare state’ since it was first conceptualised by Thomas More in 1516. It explores the constant deepening and broader reach towards what is today considered the modern welfare state, characterised as a pragmatic compromise between capitalism and socialism. It emphasises equality, justice and redistribution solidarity. The focus then shifts to its development in the South African context and the report concludes that the state should be regarded as containing considerable features of a welfare state, but that it is not yet a full-fledged one. It exhibits features of an intermediate and residual welfare state, which still requires further development in line with evolving economic capacity. It is also proposed that it may perhaps more aptly be described as a modern social-democratic state to avoid the less positive connotations often associated with the term ‘welfare’ in the South African setting. Introduction After the events of World War II, the welfare state came to occupy a central space in discussions and endeavours to improve the quality of people’s lives. However, central as it may have been, it is easier today to describe the functions of such a state rather than defining it. Most of the literature on the subject identifies the “modern” welfare state as European in design, scope and methodology. At present, there is almost no typology provided for states in the developing world, particularly in Africa. The literature, with its attendant terminology and paradigms, focuses solely on the state as it manifests itself in Europe, a modern reality that makes it challenging to use this prism in reference to a South African welfare state. In its current form, the welfare state is not homogenous, as it projects a variety of shapes. Its genesis is intrinsically linked to the rise of industrialisation and its attendant contradictions, risks and deprivations. Developed to mitigate these risks and provide security for workers initially, it was soon extended to the larger population. As such, the notion of the “well-being” of citizens is paramount within the framework of their civil and social rights. In the text that follows, the genesis of the welfare state will be traced to explore what constitutes this form of state and its typologies. Its intellectual foundations will be uplifted, so that its form becomes more discernible, especially within the context of the respective roles of state and market and the interplay that occurs in this process. The post-1970s crisis period and the changes it wrought will be teased out. Next, the South African welfare regime will be discussed in the context of whether the country identifies as a welfare state within the specificities of its challenges. The question will be asked: Does South Africa conform to the notion of a welfare state, and if it does, what kind of typology applies? Issues around the specificity of a welfare state in a country like South Africa, with its history of segregation and accompanied discrimination and deprivation of the majority, as well as the need for a welfare state – accompanied by high growth rates that will absorb large numbers of workers – to ensure the future cohesion, stability and well-being of South Africa’s citizens and society, will be discussed. Welfare State Genesis The term ‘welfare state’ can be traced back to the idea of a guaranteed basic income, with which it was first associated. A guaranteed income is first mentioned in the 1516 novel by English social philosopher, Thomas More, with its inspirational title of Utopia. Another step in the direction of the welfare state was the “poor law”, introduced in England in 1834, as a system of relief for workers and the poor. Next, classical political economist and philosopher, John Stuart Mill, advocated for a minimum income for all adult men for their subsistence, in his 1848 textbook, Principles of Political Economy. By 1850 most industrialising countries had introduced some updated version of the poor law, allied with labour protection measures in 1883; health insurance in 1883; an industrial accident scheme in 1884; and an old-age insurance scheme in 1889 (Van Kersbergen, 2016). With the rise of industrialisation, these ideas vis-à-vis social welfare languished until they reappeared in Germany in the 1880s under the “conservative” chancellor, Otto von Bismarck. Even though he was fiercely anti-socialist and against workers’ struggles, Bismarck introduced the first form of mandatory social security to protect workers – including the establishment of health funds – building on the measures introduced by the Prussian state in the 1840s. The motivations of Bismarck were deemed to promote a healthy workforce for the smooth functioning of the economy and to “stave off calls for more radical socialist alternatives” (ILO, 2009). It contained a combination of economic and political considerations that “gave the Germans a comprehensive system of income security based on social insurance principles” (ILO, 2009). And then, under the “New Deal” rubric in 1935, then American President Ted Roosevelt introduced the Social Security Act, which combined “economic security” with “social insurance”. Further developments towards the modern welfare state came in 1942 when the Beveridge’s Report on Social Insurance and Allied Services, underpinned by the economics of Milton Keynes, was released. Keynes 1936 treatise, The General Theory of Employment, Interest and Money, revolutionised economic theory and policy, and is seen as providing the intellectual foundation for the Keynesian “welfare state” or welfare capitalism. The report established the first unified social security system globally, which gained it recognition as the first major social welfare framework of the modern welfare state. Beveridge subsequently defined welfare policy as a struggle against five evils: poverty, disease, ignorance, poor housing conditions and unemployment (ills of Want, Disease, Ignorance, Squalor and Idleness). Keynes was in agreement with the proposals contained in the Beveridge report citing, however, concerns as to the affordability of the scheme. In 1945, the UN General Assembly adopted the Universal Declaration of Human Rights, which introduced social and economic rights as the cornerstone of social policy. Article 22 recognises that “everyone, as a member of society, has the right to social security”. By 1960, every developed nation had a core of welfare state institutions in place. Most theorists reference the industrialisation process as pivotal to the development of the social welfare system to ensure the well-being of citizens to lead a fulfilled life. Rawls’s theory of justice and the social contract and Sen’s “capability” theory expanded on the social welfare notion. Solidarity, equality and providing equal opportunities – irrespective of socio-economic background – are other important attributes of the welfare state. A robust role was also accorded the state, namely, to be more interventionist with regards to the market, as well as a high level of trust between social classes, especially between business and labour. Citizens in Scandinavian countries are prime examples of this high level of trust in their governments and top the World Happiness Report. Sadly, in South Africa the opposite is the case, and this results in weak social cohesion. The Welfare State and Social Democracy Social democracy is most often associated with the Scandinavian countries, where it is regarded as a “pragmatic compromise between capitalism and socialism” (Jackson, 2013). Behind this association are the Swedish pioneers of the welfare state – economists such as Knut Wicksell and Gustav Cassel, who studied in Germany under Gustav von Schmoller of the German Historical School. Von Schmoller was a scholar famous for the methodological debate (Methodenstreit) with Carl Menger, a pioneer of the neoclassical school. This was followed by adherents of the Stockholm School of Economics, like Gunnar Myrdal, Bertil Ohlin, Dag Hammarskjöld et al, who shared the vision of the counter-cyclical views of Keynes and the welfare policies designed by Myrdal and Gustav Möller (Carlson, 2016). On a governmental level, the Swedish welfare state model was developed by Social Democratic states from 1933 onwards, spearheaded by the People’s Home (Folkhemmet) concept founded by the leader of the Social Democrats, Per Albin Hansson, in 1928. Hansson used the following words to describe the People’s Home: “A home is founded upon community and affinity. The good home is not aware of any privileged or underprivileged, any pets or stepchildren” (Carlson, 2016). Two more key components of the Swedish model are the labour market model, which was established through the Saltsjöbaden Agreement signed in 1938 by the Swedish Trade Union Confederation and the Swedish Employers’ Confederation, and the Rehn-Meidner model (two Swedish labour economists), which sought to increase structural change through the “solidarity wage policy”. Today, social democracy is a global phenomenon. With its emphasis on equality, justice and redistribution solidarity, the system is – somewhat ironical considering equality and solidarity emanate from the values of socialism – opposed to the inequality created by the free market system (laissez-faire capitalism). Furthermore, when it was conceived in the 20th century, the system proposed the maintenance of full employment, echoing Keynes. Keynes, however, doubted that democracy would continue to survive if it does not counter the problems of mass unemployment and the “arbitrary and inequitable distribution of wealth”, associated with the weakness of the market (capitalist) system (Keynes, 1936). Yet, Keynes believed in the capitalist system, despite its shortcomings, seeing as “capitalism offers the best safeguard of individual freedom, choice, and entrepreneurial initiative” (Keynes, 1936). He saw an active role for government to solve the problems of society and was a proponent of moderate redistribution to help secure full employment. In support of the economist, Skidelsky stated in 2010 that Keynes emphasised sound economics, rather than political ideology and insisted that the state has a duty to supplement and regulate market forces. Keynes’s views were in contrast to the neoclassical school’s belief that market economics have an automatic tendency to full employment equilibrium, are efficient, and generally functioned well (Stiglitz, 2017). This school further believed that markets are more efficient than governments in allocating capital; state spending and taxes should be kept as low as possible; and budgets should be balanced (Skidelsky, 2020). The “Great Financial Crisis” of 2008, together with the economic downturn occasioned by the Covid-19 pandemic, are evidence that that is not always the case, however. In reality, left to its own devices, capitalism has been characterised by outbreaks of instability and rising inequality since the 1980s, associated with the onset of neoliberalism; unfettered free market forces; globalisation; and service economy supplanting manufacturing globally, leading to de-industrialisation in many developing countries, including South Africa. All of which led to increasing dominance of finance capital at the expense of the real economy. What Exactly is the Welfare State? Despite its widespread usage, the welfare state has no simple, single definition. It is heterogeneous and must be seen in its specific context, historical evolvement and political set-up. According to David Garland, the term “welfare state” is misleading. It is not about welfare or welfare for the poor, Garland says. Instead, the term refers to social insurance, social rights, social provision and the social regulation of economic action. Maurizio Ferrera defines it thus: “The welfare state is a set of public interventions related to the modernisation process, which provide protection in the form of assistance, insurance and social security, introducing, amongst others, specific social rights in the case of specific events as well as specific duties of financial contribution” (Antoni, 2018). The welfare state can be thought of as a “device for optimal risk sharing” and acting as an “insurance at birth against unknowable future outcomes, it helps relieve poverty” (Barr, 2018). As risks get shared, Barr proposes, economic growth can flourish. The safety nets that are provided make people more prepared to embark on ventures, as the landing will be softer. There are some real lessons here for South Africa and our challenges on the entrepreneurship front. Using the Swedish social democracy as the quintessential social democratic welfare state exemplar, Goran Therborn noted that such a welfare state displays the following features: full employment; a prosperous open economy that is competitive on world markets; a generous welfare state; and an egalitarian society which, by 1980, had the lowest rates of income and gender inequality in the world. Furthermore, the welfare state is closely associated with the notions of nation-building and common citizenship. It is infused with a spirit of collectivism and solidarity that has the support of both ends of the political spectrum. It also stresses the obligations by governments to ensure the welfare of citizens. This implies a divergence from the ideologies of laissez-faire and economic liberalism. A further component of the definition of the welfare state, which is a key lesson for South Africa’s overdue efforts in reaching an accord, is a social accord between business and labour that ensures stability in the workplace and society. Critiques of the Welfare State A shortcoming of the definition of the welfare state in its current form is that it has little room for the gender dimension. The original Beveridge report and welfare regimes have been criticised for their neglect on this front. Titmuss and Andersen have been criticised on this ground too, albeit less severely. The critique against Beveridge, in particular, was his assumption that men are the main breadwinners, while women attend to household tasks for which they aren’t paid, when the reality was that women increasingly entered the labour market over the ensuing decades. Andersen’s decommodification index was also criticised on methodological grounds. Andersen subsequently responded to these critiques, including the lack of involvement of the global South. He noted the different historical contexts of the North and South and the different development trajectories. Further critiques of the welfare state come from the right of the political spectrum, citing negative elements of the system relating to paternalism and the stigmatising and disciplining of claimants. This includes the claim of “idleness” on the part of recipients and that a culture of “entitlement” will set in, resulting in a dependency on the state. The evidence shows this is not the case. The Scandinavian social democratic states have the highest levels of employment, despite their extensive welfare measures in place. Proof that these benefits are not a disincentive to seek employment. Elsewhere, the jury is still out in this regard, as evidence differs from region to region and country to country. A key paradox and ongoing criticism at the heart of the welfare state that continues to be debated is that it “created a conflict between the priority given to maximising economic growth by boosting profitability and investment and the priority given to maximising democratic legitimation by expanding welfare programmes” (Gamble, 2016). As a result, the affordability and competitiveness of social welfare regimes has taken centre stage since the 1970s “oil crisis”, a point of contention that has been reinforced since the 2008 Global Financial Crisis, despite the positive evidence in Scandinavian countries. In a welfare state, politicians are under pressure to lower taxes for individuals and companies. This engineers an irresistible shift to a regime of low taxes, which gradually eliminates progressivity in the tax system by moving towards flat rates. In a few instances, like in the USA and the UK, some taxes such as inheritance taxes are eliminated in totality. This results, in many instances, in a residual welfare state due to the state losing the capacity to fund anything else. Another criticism is that there has been a retreat from the original insurance principle proposed by Beveridge. Welfare is increasingly being funded from general taxation, which means welfare benefits are no longer regarded as something that has to be earned by recipients who make payment contributions. Instead, it’s regarded as a right, resulting in an entitlement culture within which the contribution principle has been lost. Types of Welfare States and its Intellectual Paradigms Despite the many references to it in the public discourse as singular, the welfare state paradigm is diverse and heterogeneous. In 1950, the British theorising pioneer, Richard Titmuss who’s work surprisingly took place in the context of the Conservative Party’s dominance, advocated for a shift from universal to selective social services, which stands in direct opposition to the “universalism” principle of the Scandinavian welfare system. Titmuss’s classification encapsulates the terminology of residual, meritocratic-occupational and institutional-redistributive (Antoni, 2018). It makes strong provision for market forces, whilst incorporating principles of “equality and the fulfilment of social needs with state services being generous” (Antoni, 2018). Danish sociologist Gosta Esping-Andersen’s influential “worlds of welfare” typology depiction “emerged as somewhat of a master-frame for comparative inquiries” (Svallfors, 2012). In it, he stressed the importance of the relationships between the state, family and markets as key distinguishing factors with which to explain the differing welfare systems. For Esping-Andersen, the “sum total of social welfare depends on the way in which the inputs of state, market and family are combined” and generate welfare outcomes. In addition, the welfare state creates social stability by “tempering the inegalitarian consequences of the market” and creating “de-commodified spheres in which allocation was based on citizen rights” (Esping-Andersen, 1990). With regards to interconnectivity, Andersen argued that the manner in which the social programmes and labour market regimes are connected results in different welfare regimes with different development and operational functioning. According to the Dane, the Swedish model is “universal”, as the basic social security system is based upon income up to a certain level (Carlson, 2016), although this “universal” tag has been questioned, especially by the those in the developing world, who wonder whether it applies as widely as its name suggests. Furthermore, Andersen said that the Swedish social-democratic model is based on the idea of “decommodification” or the notion that people should not be obliged to sell their labour in order to survive. The irony is that Sweden has one of the highest employment rates globally. Andersen’s original 1990 typology was critiqued in the main for its narrow Western European focus and generalisation, without due consideration for countries in Asia, Latin America and Africa. His models were also accused of misspecification. Andersen broadly differentiates between three types of welfare capitalism in the 1970s and 1980s, namely: The social democratic or industrial achievement model, with its highly regulated labour markets and a large ”de-commodified” sphere of public provision (in essence, the models found in the Scandinavian countries of Sweden, Norway, Finland and Denmark); The liberal or residual welfare model of limited welfare provision and “flexible labour markets” (as seen in the Anglo-Saxon countries of the USA, UK, Canada and Australia); The intermediate continental European “social market” tradition/conservative-corporate regime of welfare rights based on secure private sector employment (as seen in continental European countries including Germany and France and elsewhere including Japan). And a fourth category was subsequently added. Known as the Mediterranean or familist model, it is characterised by the rudimentary character of the welfare programmes, weakness of state institutions, the prominent role of the family as a social buffer and a highly fragmented system of social protection. Yet it offers very generous social protection benefits such as old-age pensions (Italy, Greece, Spain and Portugal). (The different development trajectory of most Asian countries should be noted. The emphasis in Asia was on economic growth, with well-being a derivative/by-product of their phenomenal growth. In South Africa, we have a strong emphasis on redistribution, starting with the Reconstruction and Development Programme (RDP) in 1994; some Left critics say that this has faded. This was largely a result of South Africa’s unfortunate political and socio-economic history. Our growth rate was relatively good in the decade prior to 2008, when an average of around 5% was registered. Subsequently, our growth rate has been anaemic.) The social welfare models are further identified and distinguished by the “instruments used; the access rules; the financing methods adopted; and the organisational structures” (Antoni, 2018, Carlson, 2016; Hemerijck, 2020; Noyoo, 2017). The various models and different systems essentially differ on the basis of the “size and composition of public spending; the institutional aspects; the types of services provided; and the funding mechanisms” (Antoni, 2018; Barr, 2018; Carlson, 2016; Gamble, 2016; Hemerijck, 2020). These welfare state models differ substantially in their expenditure. According to various theorists, what matters most for social outcomes – such as social protection and inequality – is the social purposes on which money is spent; how the programmes are organised, taxed and financed; and how transfer/service-orientated they are. The Welfare State Post the 1970s Crisis After the 1970s oil crisis, calamity became the prevailing narrative with reference to the welfare state. Before then, the welfare state’s high point, with almost universal appeal in the developed world, was embodied by the “belle epoque” period of high capitalism, which stretched from 1945 to 1973. The period post 1973, however, was characterised by stagflation (high inflation and low growth, eerily reminiscent of the current period) and heralded the nadir of Keynesian economics, together with the rise of Friedman’s monetarism and the ascent of neoliberalism in the wake of Thatcher, Reagan and Kohl gaining political office. It further witnessed the rise of globalisation and the increasing offshoring of production, which impacted significantly on the welfare state. Social protections came to be in the firing line with a shift to the right and renewed focus on the unfettered power of markets, a self-regulating economy, and a minimalist state. These right-wing critics argued that if their advice is not followed, investment and jobs will be lost. Increasingly, the welfare system was prised open for the private sector, whereas this was previously taboo. The first area that was penetrated was kindergartens in countries like Sweden, although there was strong resistance. On the flip side, in the USA, the world witnessed how Trump could not dismantle Obamacare, even amongst Republican supporters. Despite the shift to the right, it was the social democratic welfare states like Sweden, Norway, et al that showed the most resilience following the 2008 Great Financial Crisis. Their economies slowed down the least and they lost the least number of jobs. The same pattern was seen during the Covid-19 pandemic. In contrast, the Mediterranean states such as Greece and Italy, with their more segmented welfare states (i.e., regulating access to benefits based on membership in occupational or social groups, rather than based on needs or rights) weathered the storm less successfully (Hemerijck, 2020). A key issue that arose after the economic slowdown/crisis of the 1970s, was the rising costs associated with expanding welfare programmes. The shift now was towards cost containment and recalibration of the original expansive model, a movement that was taken a few steps further with the introduction of austerity measures (cutting costs by government) post-2008. Britain, under the Tories, was a prime example of the new direction, which was illustrated even more starkly with the subsequent Greek sovereign debt crisis in the aftermath of 2008. South Africa has not remained immune to cost-cutting, with the introduction of “austerity by stealth” over the last few years. After Covid, another major shift towards the policy of social investment, especially in the European Union (EU), occurred. The policy emphasised investment in people, with measures designed to enhance people’s skills and capacities. The focus was on granting them support towards their full participation in social life. There was a strong link to employability – aligned to the knowledge economy. Synergies between education, employment, gender equity, and social participation were underscored with the objective of the creation of a virtuous cycle of well-being. In relation to these outcomes, Hemerijck said that the national welfare states’ ability to foster institutional capabilities are imperative for an “effective, more service-intensive, social investment European welfare state”. In the present era, a factor that’s impacting the functioning of the welfare state, is how the nature of work has changed due to the Fourth Industrial Revolution (4IR). As a result of the 4IR, higher levels of automation, with its associated drop in employment, together with the rise of other technological advances like robotics, artificial intelligence (AI), the Internet of Things, 3D printing, genetic engineering, quantum computing, blockchain technology have become common place. The coinciding shift to the service industry has led to rising levels of precarity amongst the workforces – a development that places additional pressure on the welfare system as workers struggle to adjust to the high cost of living. South Africa’s Welfare South Africa suffers from a deep malaise characterised by high levels of unemployment, poverty and inequality. Our economic problems are structural and deep-seated and require extensive and thorough surgery. No quick fixes would do. Globally we top the list on all of these metrics. Our Gini coefficient is the highest according to the World Bank, with Stats SA’s Quarterly Labour Force Survey (QLFS) for Q2: 2022 telling us that a mere 648 000 jobs were gained between the first quarter of 2022 and the second quarter of 2022. The number of unemployed persons increased by 132 000 to 8 million out of a total potential workforce of 23,6 million. The official unemployment rate was 33,9%– and 44,1% for the expanded definition. Further bad news is that the economy shrunk by 0.7% in Q2, denoting weaker economic activity, less spending power and weaker confidence overall. This is against the background of the rising food and energy prices; higher interest rates, which dampens economic activity and demand; and the deep, unprecedented cost of living being experienced globally. Even though the democratic state elected in 1994 inherited an extensive welfare policy, it was still skewed in favour of the previously advantaged. The emphasis of the new government was to bring about parity in social disbursements and lessen inequalities. The social policy and welfare regime that followed occurred within the macro context of transforming South African society to grow the economy for all, achieve social justice, overcome the social divisions of the past, and forge a united nation. Social policies and laws were comprehensively overhauled, based on a rights-based approach to social welfare. This was in line with the progressive South African Constitution and strong focus on socio-economic rights, enshrined in the Bill of Rights. Formal racial discrimination in access to services no longer exists and a nationally integrated single welfare system has been created, incorporating all South Africans. Many innovations in social development have been introduced, albeit in stages, and not in an encompassing, universal manner as in the case of the Swedish social-democratic model. A key consideration has been the affordability of the social welfare model in South Africa, which has not been assisted by our weak economic performance, allied to serious political problems like “state capture”, especially since 2008. The social assistance programmes established since 1994 are extensive and have a reach of more than 18 million people every month in the form of grants, old-age pensions, Covid-grants, public employment generating schemes, and the “social wage”. About 10.3 million people have signed up for the R350 special Covid grant (Ramaphosa, 2022). Although these efforts are admirable, it should be viewed against the unequal distribution of income in South Africa. The welfare bill now represents about 50% of all government spending of R1.1 trillion, of which roughly a quarter is distributed in cash (Kantor, 2022). Higher levels of economic growth are required to provide a larger tax base and ensure education and training deliver better qualified entrants to the labour market, based on the social investment policy found in the EU. The table below shows the various instruments and policies that encompass the social welfare regime in South Africa, how extensive it is and how it has grown over the years. The post-apartheid welfare regime Source: National Planning Commission, 2011 Is South Africa a Welfare State? There is a considerable amount of debate about whether South Africa is a welfare state or not. And if it is, to what extent? Founder and Director of the Nelson Mandela School of Public Governance at the University of Cape Town, Prof Alan Hirsch, provides an excellent precis of the democratic government’s economic philosophy, saying the following: “The ANC government had followed a consistent economic philosophy with, at its centre, a social democratic approach to social reform. It is the state’s job to underwrite the improvement in the quality of life of the poor and reduce inequalities, but with a firmly entrenched fear of the risks of personal dependency on the state and of the emergence of entitlement attitudes” (Hirsch, 2005). The following definition of the welfare state by political scientist Maurizio Ferrera, seems apt for South Africa: “The welfare state is a set of public interventions related to the modernisation process, which provide protection in the form of assistance, insurance and social security, introducing, amongst others, specific social rights in the case of specific events as well as specific duties of financial contribution” (Antoni, 2018). According to Prof Robert Van Niekerk, Professor of Public Governance and Social Policy at the University of Witwatersrand – with its universal primary education, statutory social insurance and nascent moves towards national health insurance – does possess many of the characteristics of a social democratic welfare state. Sithole, Patel et al, concur with this view, albeit with various caveats. Van Niekerk also states that the goals of African Claims and the Freedom Charter of 1955 could only be achieved with a democratic, interventionist state that could redistribute wealth and resources. This would entail recalibrating the power and resource dynamics between the white minority and the black majority that commenced with the advent of democracy in 1994. This has shades of the Beveridge programme, introduced under Attlee’s Labour government redistributive programme in post-war Britain. Others pose the problem in the form of a question. Former President General of the ANC, Dr AB Xuma, in the 1943 African Claims document, stressed the equality of treatment for the whole population; a bill of social rights; state medical services; and compulsory education, as well as extension of progressive labour legislation to all racial groups. This was the forerunner of the Freedom Charter of 1955, which demanded income maintenance; universal education; rights to housing; and medical care be provided by the state. In 2012, the then President Jacob Zuma said that “we are building a developmental and not a welfare state. The social grants will be linked to economic activity and community development to enable short-term beneficiaries to become self-supporting in the long run” (Zuma, 2012). Another statement reads, “Whilst acting effectively to promote growth, efficiency and productivity, the developmental state must be equally effective in addressing the social conditions of the masses of our people and realising economic progress for the poor” (ANC, 2007). The concepts of a welfare state versus a developmental state are not divergent, but there is one important difference, with the developmental state’s focus more on economic growth with social welfare as a corollary (this is similar to the rise of the “Asian Tigers” post WWII). Prof Ndangwa Noyoo of the Department of Social Development at the University of Cape Town stated in 2012 that “South Africa is not a welfare state even though it pursues strong state-led social policy programmes to counter the triple challenge of unemployment, poverty and inequality”. Burger (2008) refers to a welfare system in South Africa. In contrast, Sithole takes to task the “myth” that South Africa is the biggest welfare state in the world based on the number of social grants recipients as vis-à-vis the taxpayers, which yield the unacceptably high dependency ratio. He says, whilst the dependency ratio is unsustainable in his view, South Africa is certainly not the biggest welfare state in the world. According to Sithole, the South African welfare system is residualist, which implies minimal state intervention in the daily lives of people. Furthermore, because not all citizens have access to services, only those who qualify in terms of the means test get services. The welfare state benefits therefore apply only to those who can prove that they are unable to meet their own welfare needs. The Minister of Finance, Enoch Godongwana, in February 2022, said that South Africa is fast becoming a welfare state. He told the National Assembly that 46% of its citizens are receiving social grants, which is inimical to economic growth. According to Godongwana, it is the nature of Treasury to generally put the brakes on spending. A Roadmap to Developing a Social Welfare State in South Africa A comprehensive social welfare state requires a capable government – one which can look after its citizens from cradle to grave and provide equal opportunities to all, as well as guidance to the market, while being an active participant in a competitive and growing economy (Weir, 2022; Wills, 2022). Although South Africa is still a long way off from being classified as a comprehensive social welfare state, the ANC-led government has made some strides in that direction. One such stride is South Africa’s guiding principles post-1994, which are rooted in the ruling ANC’s vision to create a social and national democratic developmental state. It reads: The ANC therefore seeks to build democracy with social content, underpinned by a capable developmental state. Informed by our own concrete conditions and experiences, this will, in some respects, reflect elements of the best traditions of social democracy, which include: a system which places the needs of the poor and social issues such as healthcare, education and a social safety net at the top of the national agenda; intense role of the state in economic life; pursuit of full employment; quest for equality; strong partnership with the trade union movement; and promotion of international solidarity (ANC, 2022). Another step forward is the protection of individual rights as enshrined in the South African Constitution, which also contains South Africans’ socio-economic rights, legislating the rights of people to certain basic needs required for a human being to lead a dignified life (Khoza, 2007). This is an important foundation for the country’s most vulnerable and poor to stand on. The government further instituted a targeted approach in developing a social safety net. The majority of its social support programmes are premised on an income threshold before an individual can qualify as a recipient. These include monthly financial support payments for children, disabled individuals and the elderly, as well as government’s Reconstruction and Development housing programme (GroundUp, 2022; LFA, 2022). Limited financial support is also available through the Unemployment Insurance Fund to support, amongst others, retrenched workers and mothers needing maternity leave (SARS, 2022). In 2018, government further agreed to fully subsidise tertiary education for students from poor and working-class households (Gov, 2022a). A few years later, the state stepped in as the Covid-19 pandemic knocked people’s income, by introducing a Social Relief of Distress (SDR) grant of R350 for qualifying individuals (Gov, 2022b). Looking to the future, the National Treasury has earmarked R3,3 trillion over the medium term to support vulnerable and low-income households. The Social Wage represents 60% of government spending over the next three years, with the largest share allotted to basic education, social protection and health services. In the 2022/23 financial year alone, the state supports an estimated 18,6 million grant recipients with an allocated budget of R364,4 billion, equivalent to 3,9% of the country’s GDP (Crotty, 2022). The financial assistance through the country’s extensive grant system equates to nearly 17% of the state’s total yearly expenditure (NT, 2022a; NT, 2022b). This is expected to increase as further social programmes are being considered. A universal health care system is amongst the new programmes being considered for implementation. The National Health Insurance (NHI) is a health financing system with the aim to provide affordable health services to all South Africans, regardless of their socio-economic backgrounds (Gov, 2022c). The state intends to create a single fund that will buy medical services on behalf of the population. Citizens will then be able to access the required treatments at accredited health facilities, which include private institutions. The NHI is scheduled to be operational from 2026. Government is further giving consideration to reshaping the current SDR grant into a basic income grant (BIG) (Osborne, 2022). Whether this will be targeted, like other social grants, or universal, is yet to be determined. The affordability of a BIG will most likely be the determining factor in the extent of such a programme. Supporters of a BIG argue that the financial assistance granted to the poor will be spent on consumer goods, which, in turn, would boost economic activity and therefore growth. Critics, on the other hand, believe the South African government simply cannot afford such a measure at the moment. Despite these progressive steps towards creating a social welfare state, the movement forward remains limited. If models, like the Nordic social welfare state, are used as a benchmark, the South African government still has gaps to fill. These models are generally characterised by universal programmes for sufficient, amongst others, parental support, medical and old-age assistance, and education subsidies (NC-op, 2022). They further seek to provide effective childcare support to parents, as this has proven to increase a country’s labour force participation rate – especially amongst women (Enevoldsen et al, 2020). Maximising a country’s labour force participation through supportive policies is key, as the more people that are employed, the bigger the pool that can contribute to the country’s welfare fund to continue delivering the required social services (Greve, 2007). Another point to be addressed, is ensuring the state provides quality education to develop the required skills for future economic performance (Davids, 2020). South Africa’s education system has repeatedly delivered poor learner results, by international standards. Furthermore, governments of countries considered to be social welfare states operate with near-zero incidents of corruption (Davids, 2020). While these governments still oversee some state-owned entities (SOEs), especially those producing a net social welfare benefit, they’re considered to be value creating and competitive organisations, as opposed to companies burdening taxpayers. These states also enjoy a deep trust between social partners (government, business, labour and civil society) that all who live and function within the country’s borders are working toward the same goal, while contributing their share of funds to the country’s welfare (Karkov, 2012). In this regard, the current South African government has a mammoth task ahead. It requires rooting out state looters, establishing limited, but successful, SOEs and restoring trust between its social partners. It should be noted that reaching a consensus about the structure of a national social welfare policy framework is going to be vital for the state to move forward with its stated ideal. Fiscally speaking, underpinning the successful development of any welfare state, is economic performance. Without growth outpacing the birth rate, South Africa won’t be able to garner the fiscal ability to support the required welfare programmes. Government’s duty in achieving this is to create ripe market conditions for the private sector to flourish. If business succeeds, it will expand, and with that comes increased employment and more tax revenue to fund welfare programmes. High taxes and a relatively large tax base are also characteristics shared by some successful welfare states (Greve, 2007). The state should, however, continue to keep a close eye on market operations, as failures could occur where mandates or regulations may be required to guard against it. These should be implemented with caution as to not stifle companies’ performance. As part of the roadmap to developing a social welfare state in South Africa, the programmes accompanying a social welfare state must be implemented in stages as and when the economy allows for it. It’s a parallel process where the expansion of the economy allows for more funds to implement another welfare net. In turn, these programmes may up labour participation and increase productivity further, boosting growth, and making yet more money available to support and provide services to the poor. It’s vital to not over-extend the fiscus with social welfare programmes, i.e., implementing too many plans at once without sufficient funds available to support them. Further attention must be given to the strategy, through which certain programmes are prioritised in the order they must be launched as the economy moves towards a desired growth rate. In order to achieve the greatest positive impact given the available financial input, implementing plans must be prioritised in a staged process. The democratic dispensation has taken meaningful steps towards developing a social welfare state in South Africa since 1994. The existing programmes are a lifeline for millions living in poverty. Plans are afoot to expand these programmes, while adding new ones to provide further support. The country’s fiscal constraints to support the necessary measures may, however, prove a difficult hurdle to overcome should government fail to address its own shortcomings. First and foremost, it’s the state’s responsibility to fulfil its role effectively, as befitting an ideal welfare state, before other partners will follow suit. Without this cooperation, the economy may never gain traction, leaving the idea of South Africa operating as a comprehensive social welfare state to revolutionary literature. Source: Inclusive Society Institute Conclusion The welfare state has undergone various changes, especially with the entry of the private sector into key areas of the social welfare system that were previously off-limits. The sentiment was that there should not be profit-taking from social aspects like education, health and so on. The concept has also been under scrutiny and attack due to the rising costs associated with its expansion and the onset of the mid-1970s economic crisis. And even though Piketty (2019) summarised the universal achievement of the welfare system in Western Europe as “the best social-security system in the world together with the least unequal, social market economic system in the world”, the aging population in those countries, which decreases the number of people in the labour force, plus the increase in health care costs in particular, has added to the negative sentiment. Recent world events have swung the pendulum once more, however. Post the 2008 Great Financial Crisis and in 2020/21, with the onset of the Covid-19 pandemic, the welfare state has shown its true worth, helping millions when they couldn’t help themselves. John Stuart Mill and John Maynard Keynes wisely prophesied that humankind can increasingly look forward to a horizon of growing leisure: “The reorientation of life away from the merely useful toward the beautiful and the true”. Or, as according to Skidelsky: “The good life undergirded by a high degree of happiness” (Skidelsky, 2020). It pays to be mindful, however, that Keynes also said in 1936 that if democracies fail to tackle mass unemployment and inequality, people would turn to dictatorship. It happened then, and it is starting to happen now. In South Africa, we do not have the luxury of starting with the contention that welfare services must be affordable, before embarking upon its provision. Poverty and inequality are way too high and must be mitigated and reduced. The key issue is that more jobs must be urgently created, and a social accord reached between the key social partners. Swanepoel agrees that the tax base needs to be increased, so that the state has sufficient resources to implement welfare programmes and to spend on other societal priorities. He further notes that in Sweden, more than 70% of working-age citizens contribute towards the tax base, whereas the comparative figure for South Africa is around 11%, which is way too low (Swanepoel, 2022). A well-functioning state machinery, allied to an expansive welfare state will enhance overall well-being in society, as well as social cohesion, thus lessening our growing list of social problems. The riots and looting in July 2021, in mainly KwaZulu-Natal and Gauteng, are signs of what might happen if people go hungry in large numbers and have no jobs. Such circumstances – and the withdrawal of the special Covid-19 grant prior to July 2021 – impact negatively on their dignity and sense of self-worth, all of which were contributing factors in creating a climate conducive to chaos and destruction that was exploited by unscrupulous elements. It is the contention of this paper that the South African state be regarded as containing considerable or extensive features of a welfare state, but not of a fully-fledged one, à la the social democratic welfare state. Given the negative connotations associated with the term “welfare”, maybe “social democratic state” should suffice. It exhibits features of the intermediate and residual welfare state, as expounded by Esping-Andersen, but not in the neat fashion of those models. The social welfare regime is undergirded by a strong anti-poverty focus, as shown in the public expenditure figures. The other key drawback is that the South African state is weak and flailing, with many commentators preferring the word “failing”. This is a key consideration in the ability of the state to deliver on its commitments to citizens. The Bureau of Market Research’s (BMR) June 2022 Happiness Index shows that South Africans are now less happy than before, and confidence is at an all-time low. This is in marked contrast to the Scandinavian welfare states, which register consistently as the happiest nations on earth, according to Gallup’s annual World Happiness Report. We are most certainly wedged between Scylla and Charybdis in South Africa currently. The interplay between the state and market must produce the well-being of citizens, allied to sustaining employment and promoting growth. By being timid, rather than bold and innovative, we are not going to slay the beasts of unemployment, poverty, inequality and other social ills. Annotation The capability approach is a theoretical framework that entails two normative claims: first, the claim that the freedom to achieve well-being is of primary moral importance and, second, that well-being should be understood in terms of people’s capabilities and functioning. Capabilities are the doings and beings that people can achieve if they so choose – their opportunity to do or be such things as being well-nourished, getting married, being educated, and travelling; functioning are capabilities that have been realised. Capabilities have also been referred to as real or substantive freedoms as they denote the freedoms that have been cleared of any potential obstacles, in contrast to mere formal rights and freedoms (Robeyns & Morten, 2021). Dani Rodrik, an economist at Harvard University, who's devoted his career to the interplay between globalisation and economic development, has documented a trend called "premature deindustrialisation". With such a trend, countries start to lose their manufacturing jobs without getting rich first. Developing countries have moved away from manufacturing and ventured into services long before their more developed counterparts did, and at fractions of the income per capita. This led to a phenomenon wherein the growth of an economy's manufacturing sector begins to slow down prematurely in its path towards development. Some economies might even witness a premature movement of resources to the services sector, thus leading to underdevelopment of the manufacturing sector. Premature deindustrialisation – i.e., a decline in the share of manufacturing in the economy and typically a shift towards services – is regarded in literature (especially a‐la‐Kaldor) as being likely to have negative effects on economic growth. Joseph Stiglitz defines globalisation as the process of economic integration of countries through the increasing flow of goods, services, capital and labour. This process is not new and has started at the end of the 19th century with the 1st wave of globalisation. Economic "globalisation" is therefore a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services and capital across borders. The term sometimes also refers to the movement of people (labour) and knowledge (technology) across international borders. There are also broader cultural, political and environmental dimensions of globalisation (IMF, 2008). According to British economist, Prof Alan S. Blinder, Keynesian economics is a theory of total spending in the economy – called aggregate demand – and its effects on output and inflation. The man behind the theory, John Maynard Keynes, spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment. That is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands. The main plank of Keynes’s theory is the assertion that aggregate demand – measured as the sum of spending by households, businesses and the government – is the most important driving force in an economy. Keynes further asserted that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists justify government intervention through public policies that aim to achieve full employment and price stability (Jahan, Mahmud & Papageorgiou, 2014). With the General Theory, as it became known, Keynes sought to develop a theory that could explain the determination of aggregate output and, as a consequence, employment. He posited that the determining factor is aggregate demand. Amongst the revolutionary concepts initiated by Keynes was the idea of a demand-determined equilibrium wherein unemployment is possible; the ineffectiveness of price flexibility to cure unemployment; a unique theory of money based on "liquidity preference"; the introduction of radical uncertainty and expectations; the marginal efficiency of investment schedule breaking Say's Law (and thus reversing the savings-investment causation); the possibility of using government fiscal; and monetary policy to help eliminate recessions and control economic booms. Indeed, with this book, he almost single-handedly constructed the fundamental relationships and ideas behind what became known as "macroeconomics" (Phelps, 1990). Neoliberalism is a thorough reinvention of the classical liberal tradition expanded to encompass the whole of human existence as a political animal and a knowing being. In this tradition, the market stands as the ultimate arbiter of truth. The pinnacle of achievement is to become an entrepreneur of the plastic self. In addition, there is no such thing as society and freedom is recoded to mean anything the market allows. Neoliberals privilege the strong state as opposed to the conventional wisdom that they are for a minimalist state under all conditions. All attempts to demote the state to night-watchman (Adam Smith) status end up augmenting the power and size of the state with respect to the market. It is generally conceded to have been initially stabilised by the members of the Mont Pelerin Society, a group founded in 1947 and that is still in existence today. Over the last four decades, the group has expanded to encompass a vast thought-collective ranging from high-profile economists like Friedrich von Hayek and Milton Friedman to politicians like Margaret Thatcher and Ronald Reagan; from the Murdoch media empire to Astroturf movements like the Tea Party (Mirowski, 2014). In 1601, England experienced a severe economic depression with large-scale unemployment and widespread famine. The Poor Laws were proclaimed as a system of poverty relief in England and Wales (VCU, 2011). The Original Position is a central feature of John Rawls’s social contract account of justice, “justice as fairness,” set forth in A Theory of Justice (TJ). The Original Position is designed to be a fair and impartial point of view that is to be adopted in our reasoning about fundamental principles of justice. In taking up this point of view, we are to imagine ourselves in the position of free and equal persons who jointly agree upon and commit themselves to principles of social and political justice (Robeyns & Morten, 2021). The Rehn-Meidner Model was named after two trade union economists, Gösta Rehn and Rudolf Meidner, and launched in 1951. The basic idea was that all industries, irrespective of their profitability, pay the same wages for similar work. Less efficient companies would then eventually go out of business; efficient companies would make huge profits and expand; and the government would through its labour exchanges transfer workers from the former to the latter. Social Policy is concerned with the ways societies across the world meet human needs for security, education, work, health and well-being. Social Policy addresses how states and societies respond to global challenges of social, demographic and economic change, and of poverty, migration and globalisation (Platt, 2022). Social Rights are human rights and have all of the latter’s characteristics. Social Rights are moral, legal or societal rules and an understanding of what is necessary to fulfil people’s social needs and to promote social inclusion and social solidarity. Social Rights are concerned with how people live and work together and the basic necessities of life. They are based on the ideas of equality and guaranteed access to essential social and economic goods, services and opportunities (Council of Europe, 2022). Socio-Economic Rights are those rights that give people access to certain basic needs necessary for human beings to lead a dignified life. The South African Constitution of 1996 includes social security as one of the socio-economic rights enshrined in the Bill of Rights. Section 27(1)(c) of the Constitution reads: “Everyone has the right to have access to social security, including, if they are unable to support themselves and their dependents, appropriate social security.” This was codified in the ground-breaking Grootboom case and the decision that, “the measures instituted must consider the plight and conditions of people in desperate circumstances and those who are living in conditions of poverty (SAHRC, 2001). The Social Wage reduces the cost of living and is a measure of how much better off individuals are with the provision of publicly funded welfare services (education, health, social housing and so on) than they would be without these 'in kind' benefits (i.e., if they had to pay the full cost of these services) (SPII, 2018). The Stockholm School, or Stockholmsskolan, is a school of economic thought that refers to a loosely organised group of Swedish economists that worked together, in Stockholm, Sweden, primarily in the 1930s. Due to translation issues (they published primarily in Swedish), their recognition internationally was initially limited to the extent that they received no credit for theories they developed. 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Closing Remarks to the 53rd National Conference of the ANC by President Jacob Zuma [Online] Available at: https://www.anc1912.org.za/53rd-national-conference-closing-remarks-by-president-jacob-zuma/ [Accessed: 21 October 2022] - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals. Email: info@inclusivesociety.org.za Phone: +27 (0) 21 201 1589 Web: www.inclusivesociety.org.za

The CEO of the Inclusive Society Institute (ISI), Daryl Swanepoel, met with a delegation from the US State Department in Cape Town on Friday, 18 November 2022. The team visited South Africa in an effort to solidify and strengthen the Biden administration’s strategic outlook to help set a stronger foundation for the bilateral partnership between South Africa and the United States. The US team comprised the Principal Deputy Director of the Bureau of Strategic Planning, Matan Chorev, and the Senior Advisor for Africa, Cecily Brewer. The aim was help shape and sharpen the US’s approach to key broader multilateral foreign policy priorities. A wide range of issues were raised during the meeting, key amongst which included the role of multilateral fora and their role and operation in Africa. Swanepoel also raised the need for triangular engagement between Africa, the West and the East as they converge on the African continent. He also urged the US to continue to strengthen economic cooperation. The African Growth and Opportunity Act (AGOA) was a key instrument, which, he urged the US to, amidst rumors that is was to be renewed excluding South Africa, to renew with South Africa being retained as a beneficiary. Both sides agreed that the engagement was very useful, and that dialogue channels be maintained and expanded.

The Inclusive Society Institute (ISI) presented its findings related to the Institute’s research on the feasibility of a Basic Income Grant (BIG)( to the Deputy Minister of Finance, on Wednesday, 17 November 2022. The presentation was made by Dr Roelof Botha, the Institute’s lead researcher on the project. The findings of the Institute confirm that the introduction of a targeted Basic Income Grant is indeed feasible and in fact, will marginally grow Gross Domestic Product (GDP). The proposed grant will be made to all unemployed South African citizens. The research modelling includes both the BIG costing and the potential financing mechanism. The ISI will release its report in January 2023, whereafter it will embark on a promotion campaign aimed at securing the introduction of this overdue social intervention, which is aimed at securing a greater degree of social justice and cohesion.

A group of civil society organisations that are lobbying for electoral reform met the media on Wednesday, 9 November 2022, to voice their concerns with regard to the current parliamentary processes related to amending the Electoral Act. The Constitutional Court declared the existing act unconstitutional in that it did not provide for independent candidates to participate in national and provincial elections. Civil society is of the view that the amendment bill being processed by parliament is in itself unconstitutional, in that the constitutional principle of equality is not being adhered to. There are two separate sets of rules for independents and parties. The Inclusive Society Institute’s CEO, Daryl Swanepoel, spelt the Institute’s three main concerns out to the media: § Whilst political parties could aggregate their votes from across all nine provinces, independent candidates cannot; § Whilst political parties only require 1000 supporting signatures to gain access to the ballot, independents required 15,000 and more; and § Votes for parties and votes for independents do not carry equal weight.

Daryl Swanepoel, the Chief Executive Officer of the Inclusive Society Institute (ISI), attended a reception hosted by the Consul General of the Federal Republic of Germany, Ms Tanja Werheit, in honour of a visiting delegation from the Bavarian State Parliament. The reception was held on the evening of 3 November 2022 at the official residence of the Consul General in Cape Town. The Bavarian delegation was led by the President of the Bavarian State Parliament, Hon. Ilse Aigner. The ISI has as one of its objectives the promotion and development of rules-based international cooperation. In this regard it is working with a number of institutions and academics in Germany to advance and strengthen the bi-lateral relationship between South Africa and the Federal Republic of Germany, as well as to foster a better understanding between the two sides as to the need for reform of the global multilateral organisations.

Statistic South Africa hosted a stakeholder information sharing workshop on Monday, 31 October 2022, on the upcoming Income and Expenditure Survey (IES) 2022/23 which will be in the field from November 2022 to November 2023. The IES is a household-base sample survey that collects information on all acquisitions, consumption, spending, and income earned of households living in South Africa. The Inclusive Society Institute, who participated in the workshop, supports the survey, especially since the last such survey was conducted in 2015. The institute is of the opinion that it is long overdue in that the economic landscape has changed considerably since then and, given the constrained economic environment the country finds itself in, it is now urgent to get a more comprehensive view on issues such as inequality, levels of debt, growth potential, etcetera, all of which could be empirically examined through such updated information.

On 29 October 2022, the Chief Executive Officer of the Inclusive Society Institute, Mr Daryl Swanepoel, attended a reception hosted by the Consul General of Türkiye, HE Mr Sĩnan Yeşĩldağ, which was held to commemorate the 99th foundation anniversary of the Republic of Türkiye. The reception was held at the residence of the Consul General in Constantia, Cape Town. The Inclusive Society Institute wishes the people of Türkiye all the best for a prosperous future. Türkiye has done well in its development trajectory and has a built a solid foundation on which to excel even further. South Africa enjoys a friendly and constructive relationship with Türkiye, with growing economic and people to people ties. The Institute is committed to further strengthening those ties, and to work together with its Turkish associates in strengthening global democracy, human rights and peace and security.

The Istanbul Security Forum (ISF) will be held for the first time in January 2023. It aims address the concept of “security” in regional, global and thematic context, by employing the combined wisdom of experts from Türkiye and across the globe. The Advisory Board of the ISF met on Monday, 24 October 2024, to help chart its path and to plan for the upcoming January 2023 event. The ISI was represented by its Chief Executive Officer, Mr Daryl Swanepoel.

On Tuesday 18 October, the Inclusive Society Institute continued to roll out its new civil education programme at Westerford High School in Newlands, Cape Town. The workshop, titled “Taking the Constitution to the People: Know your Rights and Responsibilities”, is aimed at young adults at the end of their schooling. It seeks to stimulate awareness of Constitutional principles and values. Beyond bringing awareness among the scholars of their rights, the workshop aims to evoke perception about where they can become involved in the civic and public affairs. How they can apply the Constitution in their day-to-day lives and why it is important that they take civic responsibility for their environment, community and the state at large. The session at Westerford High, which was also attended by partners from the OR Tambo School of Leadership, was very well received and plans are already in the pipeline for another session in the new year.