Me­chan­ics tasked with fix­ing econ­omy have wrong tools

Business Day - - FRONT PAGE - TIM CO­HEN

In the midst of all the hub­bub about VBS Bank and SA s new fi­nance min­is­ter, some­thing re­ally dra­matic has been missed: SA is now in its long­est down­ward busi­ness cy­cle phase for more than 73 years. Why?

The IMF has joined the Re­serve Bank and the Trea­sury in down­grad­ing SA’s eco­nomic growth from 1.5% for the cur­rent year to 0.8%. The change is dra­matic, ef­fec­tively halv­ing the growth prospects. In no other coun­try was eco­nomic growth cut so dra­mat­i­cally. How did they get it so wrong?

I think I have an an­swer — or at least an inkling of an an­swer. But it’s worth di­vert­ing a bit to il­lus­trate why there is a mis­cal­cu­la­tion that is wor­ry­ing.

In re­vis­ing its growth tar­gets down­wards, the IMF is sim­ply fol­low­ing the re­vi­sions by a host of lo­cal banks, in­sti­tu­tions and the Trea­sury af­ter half of the ac­tual growth num­bers have come in. But the wor­ry­ing thing is how con­sis­tent these mis­read­ings have been — and par­tic­u­larly how much more in­con­sis­tent they are than al­most any other de­vel­oped econ­omy. What eco­nomic model are they us­ing and why is it throw­ing up such bad num­bers?

To ex­am­ine this, I went back into the bud­get doc­u­ments. Ev­ery year in the past decade bar one - 2010 the growth es­ti­mate at bud­get time was too large. Some­times the miss was small, but more of­ten the miss was huge, like in 2016, 2017 and this year, where it came in at half the es­ti­mate.

This mounts up. Over the past decade, cu­mu­la­tive growth was 13.4%. Had it been what the Trea­sury ex­pected, it would have been 21.4%. I sus­pect peo­ple tend to look at these num­bers and shrug be­cause the changes look so small. But small changes in the GDP growth num­ber turn into mas­sive dif­fer­ences to the state of pub­lic fi­nances, and peo­ple’s lives.

That 13.4% in­crease re­sulted in real growth in the size of the econ­omy from about R2-tril­lion in 2009 to R4.6-tril­lion to­day. But had the econ­omy grown as the Trea­sury ex­pected, it would be worth about R6.2-tril­lion to­day. In­stead of gov­ern­ment debt be­ing 50% of GDP, it would be more like 30%.

An­other fea­ture of the gov­ern­ment’s es­ti­mates is that it has con­sis­tently pro­jected a grad­u­ally ris­ing growth the fol­low­ing year and the year af­ter that. So in 2017, for ex­am­ple, growth was es­ti­mated to be 2% at bud­get time. In fact, it came in 1%. But in 2017, the Trea­sury was es­ti­mat­ing growth in 2018 at 4.3%, and in 2019 at 4.9%. WTF, I think, is the mod­ern ter­mi­nol­ogy.

All gov­ern­ments tend to hope for things to get a lit­tle bet­ter, but these num­bers are wor­ry­ingly wrong. What are they miss­ing? The IMF says: “A grad­ual and growth­friendly fis­cal con­sol­i­da­tion will be needed to strengthen pub­lic fi­nances, fo­cus­ing on wage sav­ings and com­ple­mented by mea­sures to boost ef­fi­ciency of other cur­rent spend­ing, in­clud­ing through bet­ter tar­get­ing of ed­u­ca­tion sub­si­dies and the ra­tio­nal­i­sa­tion of trans­fers to pub­lic en­ti­ties.”

What I think it means in plain lan­guage is that the gov­ern­ment just doesn’t un­der­stand how this econ­omy works, or even how any econ­omy works.

SOME­THING RE­ALLY DRA­MATIC HAS BEEN MISSED: SA IS NOW IN ITS LONG­EST DOWN­WARD BUSI­NESS CY­CLE PHASE FOR MORE THAN 73 YEARS

My cur­rent bug­bear that il­lus­trates this prob­lem is the Com­pe­ti­tion Amend­ment Bill. The philosophy be­hind the bill is that the rea­son the econ­omy is un­der­per­form­ing is not the fault of the cur­rent gov­ern­ment. Per­ish that thought. The fault, as with every­thing, lies en­tirely with

— sur­prise! — the apartheid gov­ern­ment. To fix that prob­lem, the ob­sta­cles put in place by those ter­ri­ble peo­ple must be swept away. And the main ob­sta­cle is a ter­ri­bly con­cen­trated econ­omy that makes it im­pos­si­ble for small busi­nesses and black South Africans to en­ter it.

So the leg­is­la­tion pro­poses sweep­ing investigations of great swathes of the econ­omy, and the Com­pe­ti­tion Com­mis­sion is given enor­mous pow­ers to or­der busi­nesses to be bro­ken up, given away and cut into bits.

Of course, like all other economies, SA has a prob­lem with car­tels and mo­nop­o­lies, and that needs reg­u­la­tion. But this leg­is­la­tion is not premised on free­ing the econ­omy; it’s premised on re­con­sti­tut­ing it.

You can see that be­cause the cal­cu­la­tions that claim SA is overly con­cen­trated are just rub­bish. SA’s econ­omy is no more con­cen­trated than those of its ma­jor com­peti­tors, and in many cases much less so. And you know the num­bers are rub­bish be­cause the Com­pe­ti­tion Com­mis­sion re­fuses to re­lease them.

The idea is that ap­pa­ratchiks with imperfect in­for­ma­tion and imperfect vi­sion, serv­ing a po­lit­i­cal con­stituency, are go­ing to come up with the right way to struc­ture the econ­omy. And these will be the same ap­pa­ratchiks who gen­er­ated the long­est down­ward busi­ness cy­cle since 1945!

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