South Korea, Taiwan must be our models

I believe GDP growth will likely be lower than forecast

WHEN the thirdquarter GDP numbers were released by Stats SA on Tuesday, analysts said the economy had just missed a recession. This is because the economy had expanded by 0.7% following a contraction of 1.3% the previous quarter.

The lower-than-expected GDP growth represents a risk to the National Treasury’s assumption that the annual growth rate for this year will be 1.5%. Anticipating lower GDP growth, the Reserve Bank recently revised down its GDP growth forecast to 1.4% in 2015 and 1.5% in 2016.

I believe GDP growth will likely be lower than forecast.

So how do we turn the economy around with these feeble growth projections? When answering this, the economies that come to mind are Taiwan and South Korea.

South Korea is one of Asia’s most developed countries and one of the most equal economies in the world. It also has one of the highest percentages of young adults with a tertiary degree.

While South Korea and Taiwan were both quite poor in the ’60s, their social indicators ranked them with countries that had several times their income levels. These indicators include the extent of dualism, urbanisation, importance of an indigenous middle class, social mobility, literacy, ethnic and cultural homogeneity, fertility, national integration and a sense of national unity.

If I look at educational indicators (primary school enrolment ratio, secondary enrolment ratio and the literacy rate), both Taiwan and South Korea were significantly higher than their per-capita income peers. Both also had a more equal distribution of income and wealth. This was due in part to land reform.

These conditions account for a large part of the two countries’ economic performance since the ’60s. Their governments undertook a set of measures that not only removed some policy-induced distortions but co-ordinated and subsidised private investment. These included credit subsidies, tax incentives, administrative guidance and public investment. This active government role helped remove the co-ordination failure that had blocked industrial growth.

As entrepreneurs responded, the investments turned out to be profitable not only in financial terms but in social terms.

Government intervention was implemented effectively, without leading to rentseeking behaviour, because initial conditions had endowed both governments with an extraordinary degree of insulation from pressure groups, and with leadership capability over them.

Among these initial conditions, a relatively equal distribution of income and wealth was critical.

As investment rose as a share of GDP, so did imports of capital goods as neither country had a comparative advantage in such goods. Thanks to appropriate macroeconomic and exchange rate policies, export supply was adequate to meet the increased import demand, and rose alongside imports.

The increase in exports was more a consequence of the increase in investment demand, rather than the other way round.

We cannot expect strong GDP growth if the conditions for growth are not in place. We have to start with education, the type that will help us make use of our natural resources. We cannot continue exporting raw materials only to get them back, at a higher cost, as finished goods.

South Korea and Taiwan are not perfect, but there are lessons to be learnt from their economic takeoff.

Leoka is an economist