Getting Out Of Low Growth

Stuck in the morass of low and no growth August 2017

SA is now in the fourth year in which the economy is growing more slowly than the population. On a per capita basis one can say the economy has been in recession for four years – incomes are stagnating and are now marginally lower than in 2013. This is a new experience for democratic SA. Since 1994, economic growth has outstripped population growth considerably; decisively reversing the long trend of declining per capita incomes which began in the mid-seventies.

This achievement has now faded. At the time of writing this note, in the winter of 2017, growth for 2017 was expected to be only about 0.5%, whilst growth for 2018 was only expected to be about 1.2% - way below population growth of 1.61%.

No democracy can endure extended periods of declining or stagnating incomes – not even mature and well-developed ones like the UK and US. Vide Brexit and Trump.

So how to get out of this morass of slow and no growth? Winston Churchill famously said that to look forward you have to look backward. Perhaps we should look back ten years.

International Growth Advisory Panel

In 2007 the government commissioned a panel of local and international economists to do a “growth diagnostic” on South Africa and advise them on how to accelerate growth and development. 29 economists from 12 countries and 14 institutions across the world were assembled. They included eight South Africans from four South African institutions.

The group became popularly known as the “Harvard panel” because its leader, prof Ricardo Hausmann from Venezuela, was based at Harvard University (he is still there). In reality it was a joint South African and international panel, combining local and global knowledge.

Between 2007 and 2008 this panel published 19 papers analysing several aspects of SA’s economy, and made very practical suggestions on how to accelerate growth. The proposals were firmly grounded in the South African reality and context. Unfortunately their publication coincided with the Mbeki-to- Zuma changeover in the ANC. With its champions out in the cold, the report got lost. All kinds of other growth plans were tried, but as growth in recent years indicate, they did not meet with much success. The proof of the pudding is in the eating.

On re-reading the 19 reports of the Harvard Panel, it is clear that the diagnostic of ten years ago is still relevant and valid; as are the suggestions on what should be done. The only difference is that it is more urgent now. Back then the aim was to increase growth even more, (it was already comfortably ahead of population growth); now the need is to get out of low and no growth. By looking back at those 19 reports, we may find the way forward.

Easily accessible

In this spirit of searching for a way forward, I am placing short summaries of these papers on my website, together with a link to the original 19 reports. The summaries provide a succinct overview of the content, and those who want to read the full papers can do so. Feel free to distribute this as widely as you wish. Any questions, comments and reactions are more than welcome.

Hat tip to Pieter Roux who was intimately involved in the Panel’s work ten years ago and also compiled these summaries.

Overview of the research and recommendations

To address the issues identified in its diagnostic, the Panel made recommendations in five policy areas:

Macroeconomic Policy: The Panel made four recommendations on macroeconomic policy, having published six papers. The recommendations called for:

Fiscal policy to be counter-cyclical and to make a greater contribution to national savings;
The elimination of existing restrictions on capital outflows;
Maintaining the current inflation targeting regime, but
Adopting a strategy to pay more attention to the level and stability of the real exchange rate.

Trade and competition policy: The Panel made four recommendations, having produced three papers on trade and competition policy. They recommended:

A radically simplified tariff system with low or no tariffs on products that were also manufacturing inputs;
The review of the SA Customs Union arrangements;
South Africa should take the lead in encouraging African economic integration, but at the same time avoid unrealistic custom union agreements;
The adoption of a pro-active approach for competition policy, rather than a complaints-driven approach in order to reduce barriers to entry.

Labour Market Policies: The Panel made three recommendations on labour market policy, having produced two papers. The recommendations were:

A wage subsidy for all 18 year olds, with a no-questions-asked job termination requirement;
The relaxation of regulations on the creation of Sector Education Training Authorities, and for firms to be allowed to move to one or more SETAs of their choice;
Encouragement of high-skilled immigration.

Industrial Policy (including beneficiation policy): The Panel made five recommendations, having produced four papers covering industrial and beneficiation policy. It recommended:

A shift in focus of the activities of the Industrial Development Corporation (IDC) towards the financing of new activities, away from an asset management approach;
That the current Customised Sector Programmes be substituted or complemented by an open- architecture approach with self-organisation by the relevant actors;
A special central budget for structural transformation of the public sector in order to incentivise the public sector to discover, and respond to, missing public inputs;
Changes to the then current Motor Industry Development Programme by phasing out the Import Rebate Credit Certificates scheme and replacing it with a supplier-based promotion scheme consisting of two windows;
That beneficiation should not be used as the basis for selective intervention and industrial promotion.

Public administration and Black Economic Empowerment: The Panel made two recommendations on Public Administration, and three on BEE, based on three papers.

Recommendations on Public Administration:

A certification system for government entities providing economically-relevant services (e.g. visa procedures for immigrants, registration of firms and development of a safe medicinal drug industry, tax and customs collection services);
That municipalities with poor capacity be required to use central bodies to procure municipal services.

Recommendations on BEE:

A review of the BEE scorecard to include new elements to facilitate firm creation, employment creation, learnerships and training;
The development of a credible system to collect information on BEE;
A mechanism to evaluate progress and signal future directions of policy.

Finally, the Panel published a paper on the impact of crime on economic growth. It noted that the most severe impact of crime on growth was probably through the discouragement of small and emerging businesses in poorer areas. No specific recommendations were made for this paper.