Pol­icy un­cer­tainty is killing in­vest­ment in what mat­ters

South Africa’s gov­ern­ment must im­ple­ment poli­cies that at­tract pri­vate sec­tor in­vest­ment into re­search and de­vel­op­ment in or­der to grow the econ­omy.

Finweek English Edition - - Opinion - By Jo­han Fourie Jo­han Fourie

much has al­ready been said about South Africa’s in­ef­fi­cient pub­lic sec­tor. Not only has the pub­lic sec­tor wage bill bal­looned be­yond the realms of the sus­tain­able, but this has come at al­most zero pub­lic sec­tor pro­duc­tiv­ity growth.

In other words, we are pay­ing more for gov­ern­ment to do less. Add to that the poor per­for­mances of state-owned en­ter­prises like Eskom, the SABC and most no­to­ri­ously, South African Air­ways, and it seems that there is lit­tle more that the South African gov­ern­ment can do to hurt the prospects for eco­nomic growth.

But there is. A new NBER work­ing pa­per, pub­lished by Jose Maria Bar­rero, Ni­cholas Bloom and Ian Wright, uses new data on about 4 000 US firms to in­ves­ti­gate the sources of un­cer­tainty in the US econ­omy. They first dis­tin­guish be­tween short-term and long-term un­cer­tainty, iden­ti­fy­ing the fac­tors that cause each type of un­cer­tainty. They then ask how each type of un­cer­tainty af­fects firms’ be­hav­iour.

Short-term un­cer­tainty, they find, is caused by oil price vo­latil­ity. In con­trast, eco­nomic vari­ables like the oil price have less of an ef­fect on long-term un­cer­tainty where po­lit­i­cal risk, like pol­icy un­cer­tainty, has a much larger ef­fect. The im­por­tant find­ing is that short­term and long-term un­cer­tainty have dif­fer­ent con­se­quences for com­pany be­hav­iour. Short-term un­cer­tainty af­fects em­ploy­ment; long-term un­cer­tainty af­fects in­vest­ment in re­search and de­vel­op­ment (R&D).

If we as­sume this is true for SA too, how would it play out? Vo­latil­ity of sev­eral macroe­co­nomic vari­ables, like the oil price and ex­change rate, causes higher short­term un­cer­tainty. This would likely make firms un­will­ing to hire new work­ers, or make man­agers un­will­ing to of­fer higher wages. Th­ese are the con­se­quences eco­nomic com­men­ta­tors typ­i­cally cite when re­fer­ring to an un­sta­ble macroe­co­nomic en­vi­ron­ment.

But em­ploy­ment and wages are not the only vari­ables af­fected by un­cer­tainty. One of the key in­di­ca­tors of a thriv­ing econ­omy is busi­nesses’ will­ing­ness to in­vest in R&D. Take R&D as a per­cent­age of GDP, shown in the graph. There is large vari­a­tion in the share that coun­tries spend on R&D: Is­rael and South Korea, for ex­am­ple, spend more than 4% of their GDP on R&D. SA spends less than 0.8%. (This fig­ure al­most reached 0.9% from 2006 to 2008, a pe­riod that, not sur­pris­ingly, cor­re­lated with high growth rates.)

There is a strong pos­i­tive cor­re­la­tion be­tween coun­tries that grow fast and those that in­vest in R&D. SA, un­for­tu­nately, sig­nif­i­cantly lags be­hind those coun­tries on the tech­nol­ogy front. It is im­por­tant, though, to un­der­stand why this is the case. It is not only gov­ern­ment that in­vests in R&D; in fact, more than half of all R&D in­vest­ment in SA comes from the pri­vate sec­tor.

So what will en­cour­age busi­nesses to in­vest more in R&D? Well, ac­cord­ing to Bar­rero, Bloom and Wright, po­lit­i­cal risk and pol­icy un­cer­tainty are the big­gest de­ter­mi­nant of pri­vate sec­tor in­vest­ment in R&D. In a po­lit­i­cal en­vi­ron­ment with lit­tle pol­icy co­her­ence, busi­nesses are un­likely to make in­vest­ments where the re­turns can only be re­alised in the long run. Even if the pos­si­ble re­turns are sub­stan­tial, a ra­tio­nal in­vest­ment re­sponse to a murky pol­icy en­vi­ron­ment would be to sit back and see what hap­pens. Lower in­vest­ment in R&D means fall­ing fur­ther be­hind in­ter­na­tional com­peti­tors.

There are some in the South African gov­ern­ment who re­alise this. Min­is­ter of sci­ence and tech­nol­ogy Naledi Pan­dor has com­mit­ted to dou­bling R&D ex­pen­di­ture as a per­cent­age of GDP by 2020. This is com­mend­able but in the cur­rent bud­getary en­vi­ron­ment un­likely to get the sup­port from the min­is­ter of fi­nance. Other ini­tia­tives to get the pri­vate sec­tor in­vest­ing in R&D, like a re­fund­able tax credit that will ben­e­fit small busi­nesses, have not been im­ple­mented.

Th­ese prob­lems are not unique to SA. As the au­thors ar­gue: “Our find­ings are sig­nif­i­cant in the wake of re­cent events like Bri­tain’s vote to leave the Euro­pean Union and Don­ald Trump’s as­sump­tion of the US Pres­i­dency, which have gen­er­ated con­sid­er­able un­cer­tainty over fu­ture eco­nomic pol­icy around the world. As we have shown, such pol­icy un­cer­tainty is par­tic­u­larly linked with long-run un­cer­tainty and in turn with low rates of in­vest­ment and R&D that can have sig­nif­i­cant con­se­quences for the global eco­nomic out­look in years to come.”

R&D is the bedrock of fu­ture pros­per­ity. Po­lit­i­cal risk that leads to pol­icy un­cer­tainty hurts not only eco­nomic growth and em­ploy­ment cre­ation, but also de­ters firms from in­vest­ing in the one thing that can cre­ate pros­per­ity for all. If the rul­ing party is se­ri­ous about its slo­gan, it bet­ter start by en­act­ing a more co­her­ent eco­nomic pol­icy. ■ ed­i­to­rial@fin­week.co.za

is as­so­ciate pro­fes­sor in eco­nom­ics at Stel­len­bosch Univer­sity.

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