Over the past decade or so, economics has undergone something of a revolution: the long-held belief that free markets produce better outcomes for everyone has now been massively discredited.
Some of the world's most prominent economists are changing their minds about the effectiveness of markets. For example, Nobel Prize-winning economist Angus Deaton of Princeton University wrote in a recent article:
Emphasizing the virtues of free, competitive markets and exogenous technological change can distract attention from the importance of power to set prices and wages.
Regarding labor unions, he said:
I have long viewed unions as a nuisance impeding economic (and often personal) efficiency, and welcomed their slow demise. But today, big business has too much power over working conditions and wages…
2021 Nobel Prize winner David Card and his colleagues have demonstrated that minimum wages do not actually lead to unemployment. They can be a good economic policy to protect workers.
Much of this rethinking has come as a response to the liberalization of economic policies implemented since the early 1970s, particularly in finance and technology, that have led to growing inequality around the world, excessive corporate power, and unacceptable concentrations of wealth in the hands of a small elite.
Global reviews of economic policy recognize that generating inclusive growth requires careful regulation of markets, with the aim of reducing concentrations of economic power and ensuring positive outcomes for those with less power in market relations.
But policies to achieve these objectives cannot be formulated where there is a monopoly of political power, which leads to a monopoly on economic policymaking, inadequate consideration of policies, lip service to the idea of evidence-based policymaking, and ultimately poor outcomes.
That has certainly been the case in South Africa, but there may be some room for optimism following the recent election in which the African National Congress lost its majority. This has been followed by efforts to form a unity government, which is essentially an alliance between the African National Congress, which has ruled at the national level in South Africa since 1994, and its historic opposition party, the Democratic Alliance.
I am optimistic because I feel that a more diverse political space might bring in new voices and produce better economic policies to address South Africa's major challenges such as economic concentration, unemployment and inequality.
Growth that tackles poverty and inequality
For the past three decades, South Africa has followed a pattern of high inequality, excessive corporate power and concentration of wealth in the hands of a small elite.
Measures to reduce these high levels of inequality through social transfers have been effective, but their impact on overall levels of inequality has been limited.
The problem with this pattern of inequality is that it leads to lower levels of economic growth because too few people are entering the economy. Conversely, when the economy grows, the benefits of that growth go primarily to the upper classes and the wealthy. It's a vicious cycle.
Anyone familiar with South Africa's economic problems would agree that economic growth is necessary, but to address the country's high unemployment, poverty and extreme inequality, that growth will need to be skewed towards lower-income and marginalized communities.
A unity government may provide an opportunity to achieve this.
On the surface, a unity government is unlikely to agree and implement policies that will generate growth that disproportionately benefits low-income and disadvantaged groups, given the Democratic Alliance's long history of opposition to policies such as the minimum wage.
But the country can move toward the same goal for another reason: it opens up space for a competition of ideas.
Political scientist Adam Habib points out that South Africa needs political uncertainty and competition to ensure that economic growth is not biased in the interests of the political and economic elite.
As uncertainty and contention increase, political elites are more likely to respond to public concerns.
Governments that are responsive to their citizens are more likely to succeed — that's one of the findings by economist Daron Acemoglu and political scientist James Robinson in their study of why some countries succeed and others fail.
Why new politics will have a positive impact on economic policy
It is worth pointing out two extremely costly errors in policy: On 16 December 2017, then President Jacob Zuma announced free tertiary education in South Africa. This decision, against the advice of a commission of inquiry appointed by the president himself, was a costly error that is now irreversible.
Another example is when President Thabo Mbeki adopted a bizarre view on HIV/AIDS in the late 1990s and early 2000s, going against all scientific advice – a policy error that came at great social cost, delayed the introduction of life-saving antiretroviral drugs and was only reversed by courageous civil society action.
These two examples show the dangers of leaders taking unilateral policy actions. A more pluralistic political space puts political actors under greater pressure to make evidence-based decisions.
Globally, societies must address complex challenges such as climate change, migration, the development of artificial intelligence and inequality.
Over the next few years, the South African government will be faced with important policy choices in a complex international political arena. It will need to develop policies that carefully evaluate their choices, based on proper research and evidence.
This approach to policymaking can come from strong institutions outside the country, including good universities, a strong and capable civil society, a very competent legal system, trade unions with good policy capacity, and a capable business community.
Cautious optimism
Nothing is certain, but there is good reason to be a little more optimistic that our new pluralism can help us meet current and future challenges.
Whether this happens will depend on the government's performance and how foreign actors use the open political space.
And as the complexities of economic issues interact with political turmoil, we would be wise to heed the words of famous economist John Maynard Keynes:
Practitioners who believe themselves completely immune from any intellectual influence are usually slaves to the now deceased economists. The madmen in power listen to voices in the air and extract their madness from the scholarly writings of years ago.
