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 Barro (1991), or Mankiw, Romer and Weil (1992), 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'.
I am Associate Professor in the Department of Economics at the University of Pretoria, South Africa.