Read CloistersCloisters
our online


Return to main site

Cloisters - Christmas Special 2006

New Economics


by Margaret Legum

Even if government had much larger revenues, they would encounter the claim that government cannot spend efficiently. State spending has been anathema for old economists for over three decades – for good and bad reasons. Government institutions were often large, unresponsive, bureaucratic; their employees ‘job’s worths’, innovation discouraged at any level. Their responsibility was to parliaments, not to the public directly.

An Example – South Africa

SA Flag In South Africa, on top of that, our public service has flowed out of a bureaucracy that – with few exceptions - had little service ethic except to a narrow white public; that was mired in corruption; whose only ethic was to obey orders without question; and who expected sheltered employment for life. It has had to be replaced from a population three-quarters of whom were deliberately ill-educated, non-skilled and taught to understand their inferiority as employees. These are good reasons to eschew state expenditure, and their shortcomings must be remedied.

There are also bad reasons. Governments have been viewed as illegitimate competitors for resources with the private sector. That is a self-serving viewpoint, arising from the private sector’s interest in having everything open to profit-seeking; and justifiable only if the private sector could do everything better than the public sector, including creating jobs. But it clearly cannot do anything from which it will not make a profit. And that includes expanding employment, especially when markets are scarce.

So the public sector is beginning to resume its place in development. How could government spend more revenue without becoming cumbersome, and avoiding corruption and inefficiency? There are a number of ways, some old, some new. The very first call upon new revenue must be large-scale investment in the availability of training in the skills of leadership, management, project design, financial control, service roll-out, monitoring, record-keeping and all the other institutional skills needed in any large organization. They are basic, but difficult to find in competition with the private sector.

A Role for Government?

A dearth of these skills undermines many excellent government policies on development. That remedied, what could government do to pass revenues through its coffers without necessarily spending them directly?

First, large institutions in the public sector, such as hospitals and schools, could be mutualised – similar to the old mutual societies in which people held savings. They would be funded by government, but managed by the local community which used them. People living in the catchment area of a facility would elect a professional management committee, which would manage the facility. Local business and civil society would be represented. It would be responsive to its electorate, and its procedures open to scrutiny. That avoids distant, opaque, bureaucratic management.

Second, local government would aim not primarily to deliver service cheaply, but to see that it is delivered in a way that develops local economic linkages, and raises the level of local economic activity. Money leaks straight out of poor communities. What people earn – usually outside the area – is paid to retail outlets also outside the area.

Local Multiplier

The Local Multiplier is an index which measures how much money circulates in a local area which in turn gives an indication of the benefit to the local economy from economic activity. The LM3 index, developed by NEF, takes into consideration only the first three stages in local economic activity. At each stage some money is used locally and some is used out-with the community – the higher the proportion used locally the higher the LM3 index and the greater the benefit to the local community. See: The Money Trail.pdf for a comprehensive exploration of this.



Local Money Circulation

Some Examples ...

Local authorities can find ways to help money circulate many times before it leaves, as it does in the big Central Business Districts. Thus procurement policies, as well as recruitment, would deliberately support local producers and small entrepreneurs – rather than going for immediate cash savings by importing in bulk. Local markets for local produce spring up. The New Economics Foundation in London has developed an instrument to monitor the local multiplier effect of different procurement policies. (see and, in particular, )

One way to encourage local trading is to use a currency other than the rand (or pound, or dollar, or ...). Talents is the name of the currency promoted by the SA New Economics network (consult Economic activity is enhanced when people work for their neighbours for talents, if they do not have access to enough rands. That system is now country-wide, but not yet widely used in poor communities. [For information on LETS in the UK try these links:,, and for further information take a look at or]

A Western Cape Municipality is building on a successful pilot that employed local people to build two local facilities. They are paid partly in cash and partly by wiping out arrears in rents and services, that would never have been paid anyway. The result is two community buildings that would have cost R1.5 million if put out to tender, and for which the municipality paid R385,000. The scheme benefits the Council, the people and the local economy.

Community Investment Trusts are being considered as a way for government to give communities the duty to administer funds that are due to them – under strictly democratic and audited circumstances. This process uses mainstream revenues for local regeneration. But it avoids top-down provision, instead engaging the communities’ own informed ingenuity, and giving them the right to buy in the skills they do not yet possess. Under those Trusts, community savings institutions and micro-financing can keep local savings local.

Outsourcing implementation to the private sector – public-private partnerships – has had much attention, the danger being over-emphasis on the role of profit. Therefore social enterprise – government partnerships with the non-profit sector – is often more appropriate (see e.g. Community skills, local knowledge and positive attitudes can make NGOs appropriate partners for spending government money. Again, mainstream government funding for implementation outside government.

But ... don’t forget Globalization

We should have no illusions, however. Local economic development, however well funded and implemented, battles against the backwash of global competitive forces. Trade policies that encourage the cheapest to prevail everywhere will sap national and local economies, and make it impossible for the small local business to get on with its job.

Government must promote our economy – as indeed should all governments – by tariffs compensating for practices elsewhere that kill our own enterprise. Those practices include subsidies of all kinds, sweatshop labour conditions and currency value manipulation. Civilised development is possible only if we require uncivilized practices to cross equivalent tariff barriers.