Achieving the elusive 6 per cent growth rate

19 September 2018
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In 2005, former President Mbeki committed his government to an economic growth target of 6 per cent, but only after 2010. For the interim five years a more modest target of 4.5 per cent was envisaged. These targets were achievable, and even more, depending on the policies government adopted regarding all facets of the SA economy.

Given the current parlous state of the economy, it is almost ludicrous to be talking about such a level of economic growth. And, yet, some African countries are achieving even higher rates. World Bank GDP figures for African countries that had better average percentage growth rates than South Africa’s 2.9 for the period 2000 to 2017 were: Botswana 4.6, Kenya 5.0, Mauritius 4.2, Namibia 4.8, Rwanda 7.8, Tanzania 6.7, Uganda 6.7, and Zambia 6.9. Significantly, all those countries have higher economic freedom rankings than South Africa as reported in the Economic Freedom of the World Report.

There is no point in wallowing in misery. There is even less reason to adopt policies that make matters worse. A much better approach would be to set targets to bring about greater (real) economic freedom and outcomes and stick to them as Mauritius did. Mauritius took sensible decisions based on consultation with all important interest groups. When they achieved democracy, the majority did not take the sugar plantations away from the small French minority. They helped them to achieve sugar agreements with France, and later the EU, which resulted in the sugar producers receiving above world prices for their sugar with positive consequences for the economy. Export processing benefits were introduced to attract manufacturing.

The process of economic reform was further accelerated in 2006 when the government set out to take the country into the top ten on the Ease of Doing Business rankings. In a landmark budget speech, the Minister of Finance announced that the income tax rate would be reduced from 25% to 15% over 4 years and policies were set up to make the country an attractive destination for foreign investors, skilled workers and wealthy foreign nationals who wished to establish homes in the country. The country’s world economic freedom ranking improved from 27th in 2005 to 7th in 2010, where it has remained. Mauritius has shown what can be done through sensible policies, toleration and removal of uncertainty.

A sound currency, balanced budget, low taxes, low government consumption spending, free trade, a sound and respected legal system, low crime rates, strong property rights, freedom of contract (including between employee and employer), and low levels of business and market regulation, are all necessary ingredients of an entrepreneur-friendly economy. An economy with these attributes grows rapidly and is generally economically free, enjoying all the benefits of such freedoms.

Research shows that economically free countries enjoy high growth, high per capita incomes and greater life expectancy. The poorest citizens of the freest 20 per cent of such countries have incomes that exceed the average of all but the top 40 per cent. High adult literacy, low infant mortality, less corruption, greater political rights and civil liberties and greater human development are to be found in the freest countries. Surely everyone will find the consequences of economic freedom so worthwhile that they will be in favour of having the SA government pursue ever greater levels of freedom, especially when one of those benefits happens to be higher economic growth.

SA needs an economic environment that provides entrepreneurs, including small firms, with the stability and certainty in which investment, risk-taking and economic calculation can be made with an acceptable degree of certainty. That means they must not be subjected to unnecessary legislative and regulatory shocks.

Disturbingly, the essential role performed by entrepreneurs appears to receive very little attention in the government’s economic growth plans. Many pieces of legislation are adopted that cannot fail to hamper development of new and existing firms. High growth will not be achieved if this trend continues.

Substantial areas of economic activity are dominated by government-owned industries, protected from competition by laws and regulations preventing or limiting entry by competitors. Such monopoly state industries prevent the entry of more efficient firms into the industry, retard growth of the industry, and condemn consumers to poor service and excessive prices. When the industry concerned is part of the commanding heights of the economy, the rippling damage to the economy can be incalculable.

South Africa could do with an economic growth rate that doubles GDP every ten years to rapidly eliminate poverty. That means 7.2 per cent per annum, the rate maintained by South Korea for two decades. Extremely high growth rates for lengthy periods can be achieved, but only if government creates an environment in which firms, from the smallest to the largest, have the freedom to innovate and grow. A key to South Korea’s success was that government expenditure, at all levels of government, remained at 20 per cent or less of GDP throughout its high-growth period.

All the indications are that SA could achieve that elusive 6 per cent growth rate by pursuing policies that would make SA a great deal freer than it is now. In 2010, SA had the 46th freest economy in the world. By 2015, it had dropped to 95th on the economic freedom rankings. The consequences have been tragically visible and costly, especially in the number of the unemployed – an appalling 9.46 million according to Stats SA. The fundamental cure: Economic growth created by a vibrant and unhampered private sector. If government policies all start moving in the right direction and stop sending out mixed signals to investors and potential investors, there are great possibilities for explosive economic growth.

Eustace Davie is a Director at the Free Market Foundation

 

Comments on Achieving the elusive 6 per cent growth rate





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19 Sep 2018, 18:43 Rory Short One of SA's problems is a conflation, in politicians' minds, between an antagonistic racism, which lies just under the surface, and economics.