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Growth Shortcuts
Dr Cees Bruggemans, Chief Economist First National Bank
15 November 2005
Sustainable growth needs four pillars: property rights (for without incentive no-one will undertake anything); scientific rationalism (for without it nature doesn't divulge its secrets, making technological progress very difficult, if not impossible, going by history before 1600 and still the case today in backward parts of the world); efficient capital markets (to allocate savings effectively); and good infrastructure (allowing fast exchange of information and goods).
If one has these four pillars and is mature and at the technology frontier (like for instance the US economy), sustained per capita growth of 2% annually is feasible. If one also has these pillars, but is still underdeveloped, catch-up will allow faster per capita growth for a generation or more until achieving maturity.
The good news is that South Africa does have these four pillars on account of its modern history, as well as still being an underdeveloped country. Therefore, a generation of above-average catch-up per capita growth should be feasible.
The bad news is that the condition of some of our four pillars is somewhat worrisome, in turn potentially undermining our accelerated catch-up performance.
We are living off old infrastructure and appear unable to bring to bear the necessary organizational talent. Thus, infrastructure maintenance and expansion are endangered.
Education is delivering poorly, with only 1-in-3 babies eventually passing matric and only 1-in-15 babies going on to tertiary education.
Our capital markets are in good nick.
Our scientific rationalism remains strong, even when there were some attempts over the years to write off some of these disciplines as 'Western' and 'euro-centric' and therefore not necessarily appropriate in an African setting.
As to property rights, the rule of law still prevails, but fear has been in the air for some time, regarding land, rent-seeking and corruption generally.
So which way are these trends going to blow?
We probably need to be least concerned about our capital markets. These are in excellent shape and well-regulated on a par with the best in the world, and probably underestimated because of our history as global gadfly for some decades.
One remaining hurdle (exchange control abolition) remains. Such reform would finally allow us to increase financial depth on a global scale. The moment of this happening may be close, with SARB Governor Mboweni making another plea last week for wholesale liberation soonest.
Endangering scientific rationalism remains a risk, but the apparent solution has been to ignore people who make claims that this is a peculiar Western concept whose relevance to Africa needs to be reconsidered. This in itself is a fine example of the scientific method in action (empirically establishing what works, what's relevant, and what is dangerous fantasy).
In any case, our technological know-how is mostly obtained abroad and embedded in imported capital goods. As long as we continue as good adaptors of foreign inventions, we have little to fear from people who like to backslide on academic discipline.
That leaves infrastructure, education and property rights to worry about.
SARB Governor Mboweni went out of his way last week in a Stellenbosch speech to say a few very important things. Regarding infrastructure, there should be much less preoccupation with process, much more focus on implementation. Get on with it. Like Nike, Just Do It.
As to a lack of organizational skills and talent, the Governor was most outspoken about government regulations prescribing under what circumstances contracts can be allocated. Instead, good talent apparently remains sidelined, not qualifying as preferred.
If these sentiments were ever to become implemented (and one picks up signs elsewhere as well, for instance in the labour market – another old watering hole of the Governor in another life), a much more flexible economy may come into being. This is something that reminds of Greenspan, something Governor Mboweni likes to remind his audiences.
So let's not despair about infrastructure yet, even with trains now regularly torched, road congestion steadily building up and municipalities quietly (or not so quietly) imploding over our heads. We yet may surprise ourselves with our flexibility once problems reach a critical stage and common sense is finally mobilized.
But don't get hopes up about the Gautrain being scrapped. Going by informed body language, cabinet seems to be united on wanting it, why only they know. At least the tax revenue overruns are now so big we can afford to finance two Gautrains EVERY YEAR. One only hopes that this doesn't give any more people any more ideas.
As to education, it won't be simple to reform education from within, getting the ratios up as to how many babies eventually matriculate and qualify for tertiary education. It may well be that many parents remain largely ignorant of what actually happens to their children while they are being 'educated'. A better informed parent could lead to better performing schools, not unlike the new principle that the passenger train service can only improve once passengers have decided on the radical option of torching anything that isn't running as scheduled.
Well-managed schools with good retention and matric results would have absolutely nothing to fear. The majority of schools, however, might want to become more focused in getting things done. That would be no bad thing and would do wonders for our labour market and economic growth rate, and of course the lifetime prospects of the children in question.
That leaves property rights.
On a population of 45 million, and 12 million households, over half of whom still rural and half of whom not really participating in the modern sector of the economy, the temptation to go back to a rural certainty must be big.
Yet the reality awaiting is the sweatshops of urban industrialization and the service economy, whether or not wanted or ideologically approved.
Land reform favouring the landless is a great idea, and achieved in many places around the world long before us, except that at least 10 million more South Africans will still drift to the cities over the next twenty years.
Perhaps land reform should mean first and foremost the distribution of available state land and ensuring that all urban dwellers can participate in house ownership.
Instead, redistribution of private land is a much more tempting target, also with historic iniquities in mind.
Along with corruption and rent-seeking at the highest levels, it is these signals that undermine the concept of property rights as an incentive to budding entrepreneurs to do their thing in this country, rather than take their business elsewhere. It also encourages foreigners to substantially increase their risk premiums when doing business here.
The best that could happen is that the right Presidential candidate comes to the fore in 2007 (and 2017 and 2027, for it will take that long to fully mature the economy), that more haste is made in redistributing state land and that home ownership is greatly accelerated in the urban areas. We shouldn't have any slums as a factual reality rather than a stated policy of intent.
With these few, relatively simple suggestions one can wipe away many concerns currently making many people deeply anxious about the future that awaits us all.
Doesn't mean to say that such common sense will necessarily prevail, but it should never be said that we didn't try, or worse that we didn't know the solutions to our problems, having to depend on foreign visitors and foreign Presidential advisors to tell us differently.
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