IN HIS 2010 book, Fault Lines, former International Monetary Fund chief economist Raghuram Rajan provides one of the more interesting explanations of the US’s subprime mortgage crisis. For several generations, Rajan writes, political legitimacy in the US rested on rising incomes. Each generation expected to be better off than the last. Beginning in the mid-1970s, this stopped happening. Real income began stagnating for millions of people.
Over the following two decades, mass access to property came to substitute for rising income. If you owned your own home, after all, and if its value kept climbing, you might not notice that you were doing worse than your parents did.
This is where the problem arose. The US became addicted to a cocktail of rising property values and mass home ownership. It became a necessary deception.
When a bubble inevitably formed, no one had any interest in seeing it for what it was. Banks had come to rely on the money they made selling mortgages to people who couldn’t afford them.
And no politician could tell Americans that their prosperity was as an illusion. The whole system was mass-producing phantom wealth and there was nobody to call the bluff. When the bubble burst, it almost brought down the whole financial sector.
As a South African reading this story, one cannot help but think of our situation. If the legitimacy of the US political system rested on rising prosperity, this was nothing compared to what we faced in the late 1990s. Black South Africans had just been freed. They were promised that they would soon see the dividends of their freedom. And yet, during the first five years of democracy, the economy haemorrhaged jobs at a frightening rate: more than a million were lost. How did our political system cope with the fallout?
Well, what happened in the US did not happen here. No one cooked the books. No one invented opaque financial instruments to create phantom wealth. Household debt climbed, but not nearly to US levels. The banking sector was subjected to tight and honest regulation.
So what did the political system do to acquire legitimacy? In the end, something pretty straightforward. We diligently collected taxes from the well-off and redistributed directly to the poor. We built houses as fast as we could; today, one in five South Africans lives in a home the state has given away. And we ramped up welfare payments and invented a few new ones; more than one in three people now gets a state grant.
All of this we did in ways that the most cautious book-keeper would applaud. Government debt remained at reasonable levels. The welfare bill never climbed to much more than 3% of gross domestic product. No one borrowed excessively. No one indulged in magical thinking.
At one level, the comparison is obviously unfair. The differences between South Africa and the US are so manifold that one wouldn’t know where to begin. But the comparison is nonetheless instructive. In recent weeks, South Africa’s welfare state has been held up as a symptom of failure. But it is surely the opposite. It has been a sterling investment for all concerned. The African National Congress got four successive landslide election victories. And as for us middle-class people, we got social peace.
On this question, at least, history will surely be kind to Thabo Mbeki and Trevor Manuel. They were dealt a tough hand — rising unemployment in the early years of a new democracy. They confronted it soberly, rescuing the legitimacy of a new democracy without losing their heads or giving away the family silver or inventing silver where there was none.
But nothing lasts for forever. Two decades into the new order, the Mbeki-Manuel fix is perhaps cracking. Badly governed from the start, the mining sector is a mess. Our trade balance looks ill and there is no nascent exporter waiting in the wings to save it. Unemployment isn’t going to drop much below 25% soon. Social discontent is taking new forms and we can’t douse it with new welfare now the good times are gone.
Just as Mbeki and Manuel muddled their way to a decent plan in the 1990s, so we need to create something new now. But that requires an intelligent state, and, heaven knows, our state is less able than it was a decade ago. Then again, South Africa’s pessimists have never called it right. If our 10 finest minds had been told in 1994 that unemployment would soon rocket to nearly 30%, each would have said that our democracy was doomed and each would have been wrong.
Who knows? Perhaps present levels of welfare have instituted a new and tolerable way of being poor. Perhaps we will keep paying for it because we must. Perhaps, while the US was setting fire to its foundations, Mbeki and Manuel were building foundations destined to last a long time. That is hopeful. But it isn’t unreasonable.
• Steinberg teaches African studies at Oxford University.