South African growth, the Treasury, and the Professor ...
Is economic growth important? Of course it is! For instance, using the 70/g rule we can predict that an economy growing at 2% per year doubles its income per capita every 35 years. Growth matters for economic (and all sorts of) welfare.
Bearing the above in mind, recently the Treasury has released its fourteen points for `inclusive growth' and even more recently a Professor of political science has given an interview about the `plan'. I read the five-page press release by the Treasury and also the interview by the Professor. Interestingly enough, I could not find a single reference to Solow (1956), or Romer (1990), or Mankiw, Romer and Weil (1992), or Barro (1991), or Easterly and Levine (1997), or Hall and Jones (1999). As an academic I confess I find those omissions worrying for, at least, two reasons:
Well, now that we know what the growth determinants are we can collect data on those eight (textbook) growth determinants. With data on those growth determinants we can then try to start understanding why South Africa does not grow (very) fast.
Let's look at the data then. I downloaded data on the growth determinants mostly from the World Bank website. Income per capita is higher than in 1980 (not by much though) and the overall trend is positive. However, income per worker, or productivity, is much lower than in 1980. Gross fixed capital formation, or investment, is lower than in 1980 and the trend is negative. Fertility rates have been decreasing over time. The rule of law index from the World Justice Project ranks South Africa 36/102 in 2015 (Chile ranks 26/102). Moreover, the index of economic freedom from the Heritage Foundation classifies South Africa as "moderately free" (rank 72), well below the UK (rank 13) and below Botswana (rank 36) in 2015.
In addition, government consumption is higher than in 1980 and the trend is positive. Trade openness is slightly higher than in 1980 and the trend is positive. Data on education and health are notoriously fragmented. Nevertheless, there is data on TB and HIV+ mortality per 100,000 and the trend is, sadly, positive. Inflation is lower than in 1980. Finance, or the liquid liabilities, present a negative trend.
Taking the above at face value, and bearing in mind that economic policy needs more than just some descriptive data plots to support itself, what can we say about the growth determinants in South Africa? Concentrating on what are not going so well, let me answer the question with some (research) questions. Why do we save and invest so little in South Africa? Why, out of 102 countries, we rank only 36 in rule of law? Or, why we only rank 72 in economic freedom? About government consumption: is the government engaging in nonproductive consumption? or instead spending productively on health and education and consequently improving welfare and also productivity? The variable for finance indicates that South Africans do not have much access to simple financial instruments such as bank and savings accounts. Why is that so?
In a nutshell, just by looking at the data one can speculate that we do not grow much because we do not invest much in productive activities, or because rule of law, although not catastrophically low, is less than ideal, or because we have less economic freedom than Botswana. Or perhaps because the government is consuming unproductively, or because we have too many people still dying of TB and AIDS. Or because prospective entrepreneurs do not have enough finance to invest in productive activities. Or simply because the infrastructure is not up to scratch. Hall and Jones (1999) synthesize the process of output production well when they state `and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure.'
After identifying what the growth determinants are and how they fare in South Africa, we can then think about policies. I am not a policy maker (although I like to believe that I teach some future ones), but economics is not rocket science and it must make sense to anyone, so one could ask: can't the government modernise its bureaucratic procedures so that entrepreneurs (small and big, nationals and foreigners) can invest more in productive activities? Rule of law and economic freedom are about how governments behave as well. What practices can the government adopt to improve South Africa's position in those rankings and consequently incentivise growth? Policy makers should perhaps start by looking at how those international organisations construct their indices of rule of law and economic freedom and from there devise better institutions. Are there policies, or incentives, that can be implemented so that our banks start providing South Africans with savings accounts and also fulfill their primary function, that is, provision of finance for investment in productive activities? Lastly, about infrastructure: the Eskom (and SAA) debacles comes to mind: what can be done so that Eskom does not make the same mistakes again? Yet again, to design sound policies we need more than just the data plots below and the cheap speculation that I engaged in the previous two paragraphs. We need solid data and economic analysis, nevertheless, having the growth determinants in mind might help to put things, at least, in perspective.
All in all, identifying the growth determinants and looking at the data is a valid preliminary exercise that helps us understand why our economy does not display Chinese growth rates. Sadly, the above simple exercise I did is much more than the Treasury and the Professor did. The examples of Bernanke and Yellen, top academics who became top policy makers, illustrate the importance of solid economics and sound policy well. I hope this post can encourage students, economists at the Treasury and the Professor to look more often at the data (and also at the papers) of growth determinants so that problems can be identified, intriguing research questions posed and better policies implemented. And Bob Dylan is always handy: `But I'll know my song well before I start singin'.
And, yet again, on what kills economic growth ...
Not long ago an economics Associate Professor based in South Africa argued for expropriation of property in South Africa.
The Nobel laureate Douglass North argues that (good) institutions are the main determinant of economic growth. And Acemoglu, Johnson and Robinson in their papers argue that an increase in the risk of expropriation (a proxy for institutional quality) is associated with lower growth rates.
And again, education matters!
More on what kills economic growth ...
Former Brazilian president, Lula da Silva, has been sentenced, by judge Moro, to nine years in prison. Apparently (and I keep using the word 'apparently' because in the age of fake news, nobody knows what is and what is not) the former president and his government were corrupt. Coincidentally enough, Brazil has displayed negative growth rates. Perhaps it is just a negative correlation between corruption and growth, but some (the economists William Easterly from NYU, Paolo Mauro from the IMF and all Brazilians losing their jobs) will argue that corruption kills growth.
On a more positive note, the role of the Brazilian judiciary in constraining the executive, or the role of institutions on governance, is an interesting institutional development taking place in Brazil.
What is killing economic growth in South Africa?
Well, according to the (previous) public protector the state has been captured. Cryptic? Okay, William Easterly from NYU suggests in one of his books that governments can kill growth by, amongst other things, running high public deficits and providing poor public services. Not enough? He also suggests that corruption is not a good idea for growth. Perhaps Easterly has a valid point (as well as the previous public protector). Do you want to know more? Then either attend my lectures, or read Easterly's book.
More on 'Manoel, what are you doing in South Africa?'
From a development economist's perspective this question should be redundant, but let me elaborate on the need for education.
First, the (current) public protector has recently suggested that the constitution of South Africa should be changed, that is, she argues that the mandate of the South African Reserve Bank should be changed so that the Bank can implement policies which will (hopefully) generate economic growth in South Africa. Very honourable, no doubt. But, not terribly sound economics, is it? Of course not!
There is a vast literature suggesting that inflation is bad for growth (to be fair, there is some literature suggesting that 'a bit' of inflation is good for growth, but the public protector does not mention that. More importantly, the inflationary experiences of Germany, Hungary, Israel, South America and Zimbabwe, to mention a few, speak for themselves). Why is inflation bad for growth? Because inflation distorts the price system, erodes the value of the currency and increases macroeconomic uncertainty. A bit cryptic? Okay, because governments that switch on the printing machine (after capturing the central bank) are governments that are losing control of their own finances and the printing machine gives governments access to resources - money - and inflation erodes not only the currency, but also the debt. Well, then we go full circle, right? Of course! South Africa is not growing, and that has an effect on public finances (there are less people investing, less people working, less people paying taxes, and more people on welfare) and switching on the printing machine is always an `easy' solution for a `government that has lost control.' If you want to know more, either attend my lectures, or get yourself a half-decent Macroeconomics textbook and start reading. Education matters, don't you think?
Secondly, recently the deputy finance minister has also argued that inflation targeting is not necessarily good for developing countries. Yes, you read it right, the deputy finance minister thinks that the policy implemented by the (supposedly independent) Reserve Bank is perhaps not good for South Africa (in case he is including South Africa in the 'developing countries' bunch). Why is that so? I don't know, the deputy finance minister apparently never cited any paper on the subject and consequently never elaborated much on the economics behind his reasoning.
Education matters, don't you think?
'Decolonisation' of the curriculum in South African universities (or is it curriculum `transformation'?)
Recently South African universities (one of which pays my salary, but does not host this site) have been debating on how to change the curriculum (some call it curriculum 'transformation', others 'decolonisation').
At first blush I was wondering about the lingo: `transformation' or `decolonisation'? As an aside, I was wondering (yet again) whether a PR company (perhaps based in London) is behind the confusing lingo? Just wondering ... More to the point, and given that we are talking about academic institutions, South African universities could perhaps coordinate amongst themselves and use the same word for whatever they want to do with the curriculum so that we all know that we are on the same page.
Then I was thinking about Philipp Lenard and his 'German physics' (Lenard attempted to 'dejewish' physics and implement his own brand of 'German physics' in the 1930s). Unfortunately Lenard, and the Nazis, succeeded and a lot of damage was done to physics and education in Germany. I was also thinking about all those students demonstrating against 'jewish physics' in the 1930s in Germany (perhaps, just like Lenard, they wanted to 'dejewish' the curriculum) ...
Then I was thinking (yet again, I know I am getting a bit repetitive) about `HIV/AIDS denialism' and all the human cost attached to it (unfortunately the 'denialists' managed to delay in a few years the implementation of ARVs in South Africa). Apparently the `denialists' wanted to `delink' HIV from AIDS ...
Then I was thinking (I promise to stop soon) about Uranus (the planet) and the structure of DNA (things which existed before we got to know about them, and you can call them natural phenomena, facts, regularities or natural laws), and diesel engines (things that we had to invent, and you can call them a set of instructions or techniques). Let me explain: an invention (diesel engines) usually gets a patent (additions to prescriptive knowledge), the discovery of Uranus does not (additions to propositional knowledge). Ah, almost forgot to mention the link between them: discoveries add to propositional knowledge which in turn determines prescriptive knowledge (inventions, or what an economy can do). Recall that economic growth is determined by technology and technologies are knowledge. Full circle? Sure.
The bottom line is that having committees of `experts' deciding what knowledge is, or is not, is not in any way new in history. What remains to be seen is what the damage, or gain, a `decolonised' or `transformed' curriculum will have to South African propositional and prescriptive knowledge, or ultimately to progress.
Education does matter!
Manoel goes to conferences abroad, and the question is ...
Every year I give papers at conferences, mostly in Europe and the US, and some of my colleagues (mostly development economists) ask me (usually after a few pints) the following: `Manoel, what are you doing in South Africa?' My reply is always the same: I am doing what all development economists should be doing, that is, learning and spreading knowledge in Africa!
I am Associate Professor in the Department of Economics at the University of Pretoria, South Africa.