SA’s salvation can only come from economic growth
“Exploitation” lifted a billion Chinese out of poverty. It is far better for individuals and the country to have low-income jobs than no incomes at all.
FINANCE Minister Malusi Gigaba correctly pointed out in his recent medium-term budget speech that growth is the key to fixing South Africa’s ills. Growth is what raises the average income per person, creates jobs and increases tax revenues.
The compound effect of high economic growth can rapidly transform a country and the welfare of its people. China’s gross domestic product growth rate averaged 9.69 percent from 1989 to 2016, meaning that the economy is 13.3 times bigger now than it was 28 years ago.
Singapore averaged 8 percent real growth from 1960 to 1999, a 40-year period that saw its economy grow 21.7 times. Of late, we are getting poorer on a per capita basis as our economic growth rate lags our population growth rate. Assuming the government were serious about economic growth, what are the lessons that we can learn from around the world?
Free enterprise and capitalism are key to sustainable growth. Generally speaking the freer the system the faster the growth. While China and Vietnam are one party states and both still have sizeable state controlled companies, their growth has been driven by their private sectors. For the most part their private sectors are lightly regulated, and competition is fierce and bare knuckled – possibly the purest form of capitalism in the world today.
Lightly regulated labour markets and low minimum wages are part of the secret sauce of the competitiveness of countries like China and Vietnam. Allowing “exploitation” played a key role in lifting a billion Chinese out of poverty within a generation. It is far better for both the individuals and the country to have jobs with low incomes than no incomes at all.
Stability is more important than democracy for growth. It is noteworthy that several of the highest growth economies have been one party or authoritarian capitalist systems, notably Singapore, China, Vietnam and Dubai. A state must enjoy the confidence of its people and business sector for there to be a conducive environment for growth.
Rule of law
Good governance and the rule of law provides citizens, business owners and investors the confidence that their interests will be protected and increases their willingness to take risk. More projects are viable as the cost of capital is lower and business can project returns further into the future.
Infrastructure is a key driver of productivity and economic growth. Economic growth is achieved through increasing effi- ciency and productivity. If people and goods can move around faster and at lower cost, this results in an increase in productivity and hence growth.
Many businesses only become viable once they have access to good infrastructure. Infrastructure investment has been key to their stellar growth enjoyed by China and Dubai.
Human capital is a key differentiator. Human capital is a composite of education, experience and cultural values like work ethic, reliability, resourcefulness and entrepreneurialism. High growth countries have succeeded in increasing human capital through excelling in education and instilling cultural values – the best example is Singapore, while Herman Mashaba, Johannesburg’s mayor, shows potential as an inspiring leader.
A high savings rate funds a high investment rate and a rapidly growing economy. High growth countries are usually high savings countries. It is far more sustainable for a country to fund its own growth rather than relying primarily on external capital which can easily take flight.
Open outward facing economies which embrace technology and innovation. All developing markets today have the advan- tage that they can assimilate new technologies like mobile phones and the internet to boost their productivity and hence their growth.
Low to moderate taxes are a feature of high growth economies. Lower taxes make it easier for projects to meet the required return on investment and incentivise hard work. Money retained by the private sector generally earns a far higher return than money paid to the state. Economies work best when the state sector is small and efficient. Sophisticated financial markets play a key role in efficiently channelling and allocating resources between savers, investors and borrowers.
Key to growth
Tourism is key to growth and creating employment. While tourists are keen to experience increasingly novel locations, they are also very risk averse as far as personal safety is concerned. Tourism presents an obvious way to create large numbers of service jobs, foreign exchange earnings and growth.
So how does South Africa match up against the factors listed above? In some aspects well. Our financial markets, banks and accounting standards are world class. We have several world class companies. Our institutions and rule of law are still viewed as strong by emerging market standards. Cape Town’s beauty and attractions are world renowned, as are our game parks.
Our shortcomings are well known, and they stand in the way of South Africa achieving its potential. That looks unlikely to change until confidence in our government is restored, a conducive environment for the private sector is created and we, as a country, are outwardly focused and striving to compete.
Building our human capital is urgent – and free quality education for all (including tertiary) is certainly achievable if waste and theft were cut from government procurement and government salaries were on a par with private sector salaries (they are often far higher). Surely that would be far truer empowerment than the existing BEE programmes.
On the current trend the prognosis for South Africa is dire. As Gigaba said, our salvation lies in rapid economic growth – and soon.