Mechanics tasked with fixing economy have wrong tools

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!