POLICY HINDERS GROWTH

Last month a wave of violence gripped Gauteng as poor communities turned on African immigrants, assaulting, killing, raping, and robbing them. A week before, five leading South African economists had warned of faltering growth, spiralling inflation, and the likelihood of rising unemployment. They had also made it clear that most of the constraints upon faster growth stemmed from poor government policies.

On 8th May 2008, five economists addressed an Institute briefing on the topic ‘Why can’t we grow at 8%?’ (see pages 2 to 7). None thought such a growth rate attainable in present circumstances and all doubted whether even a growth rate of 4.5% could be maintained.

The economists also indicated that South Africa’s 5% growth rate in recent years had owed much to external factors, coupled with unsustainable stimuli provided by the state. Internationally, South Africa had benefited from the global commodity super-cycle, coupled with a global liquidity glut and a global surge in property prices.

Within the country, the government had succeeded in reducing the budget deficit and boosting expenditure on fixed investment. For the rest, it had brought inflation rates down to an artificial 25-year low, kept many administered prices (for electricity, for instance) too low, expanded social grants, and cut income tax for lower-income earners.

These factors, together with tariff cuts and a surge in cheap Chinese imports, had stimulated an unprecedented consumer boom. But the boom had been driven by unsustainable tail winds. In addition, it had fuelled both inflation and a massive current account deficit, both of which now hindered growth.

At the same time, critical constraints upon faster growth had not been addressed. The skills shortage had grown worse, fuelled by inadequate schooling, affirmative action, emigration, and HIV/AIDS. Infrastructure had neither been maintained nor expanded. Governance had become more inefficient as the skills deficit took its toll.  Red tape had grown, while becoming ever more unworkable.

Minimum wages and other labour market rigidities had priced millions of the unskilled out of jobs. State monopolies had been maintained, adding to inefficiency and business costs. Key productive sectors of the economy – mining and agriculture – had been hampered by transformation policies, while industrial policies had failed to boost manufacturing exports.

Redistribution via social grants had increased dependency while lowering the savings rate essential to more fixed investment. Crime affecting business people had been allowed to grow exponentially, adding to the brain drain.

The most striking feature of the economists’ analysis is how much attention they gave to  socio-political issues. Equally striking was the fact that all five found the government’s performance in these spheres the critical impediment to faster growth.

- Anthea Jeffery