Michael O’Dowd on the SA economy – August 2000

In considering the general state of the South African economy, it is essential that we should recognise that South Africa is a middle level performer. While it is not one of the high flyers, what used, absurdly, to be called miracles, it is even further from the basket cases, and this tells us that while some things are being done wrongly or at least not as well as they might be, others are being done right. We must never become so preoccupied with complaining of what is not right that we forget to appreciate what is.

We again have to note with great appreciation that the government has continued to adhere to fiscal discipline and to sound fiscal and monetary policy, and in particular has continued to resist pressure towards the destructive and potentially disastrous policy of lowering interest rates below those dictated by economic fundamentals. While we are short of capital, capital must be seen to be expensive.

Again we have to express disappointment at the slow progress of privatisation. I have noted before that the government has on the whole been well advised to innovate slowly and cautiously and that it has, in consequence avoided the costly errors which have so often been made in the past by new governments. If the slow pace of privatisation reflects a determination to do it in the best possible way this could be justified, but we would like to be able to feel sure that this is indeed the case.

The most disturbing feature of recent trends in government practice for which there is nothing to be said, is a continuing and an even increasing tendency for legislation to create areas of official discretion, where what is required is law, and to create anomalous administrative tribunals which do not observe the principles of natural justice. One of the worst examples is the Undesirable Business Practices Act.

This kind of legislation which carries on without modification, the practices of the Nationalist government, is contrary to all principles of good law, is bad for the economy, is creating policy-induced uncertainty, and makes the country unattractive to foreign investors. It is not sufficient to say that the officials and tribunals can be trusted. Foreigners do not know that. They look at what is on the statute book, and we must remember that in seeking foreign capital, we are in open competition with every other economy in the world.

My last point follows also from this fact. Our high interest rates tell us that we are short of capital, that scarcity of capital is one of the immediate bottlenecks retarding our growth rate. To reduce interest rates by creating money does not ease this problem, it makes it worse. What is scarce is not money but real resources. High interest rates guide what real capital there is into uses which yield a high return, that is, which create much wealth. To lower interest rates simply reduces the efficiency with which scarce capital is invested.

To overcome the scarcity of capital, we need either more foreign investment or more real domestic savings. If we cannot or will not make our economy one of the most attractive in the world to foreign investors, we will not attract large quantities of foreign capital. The alternative is to increase our rate of domestic savings, which is low. Even to begin to tackle this task, we have to clear away a mass of misconceptions which have been built up for half a century in the name of Keynes and to recover the old realisation that thrift is a major social virtue. We will not make serious progress in addressing this problem until not only in government but also throughout society the question is constantly and seriously asked in relation to virtually every policy. “Is it good or bad for saving?”

Author: The Late Michael O’Dowd was the Chairman of the Free Market Foundation and a director of Anglo American. This Policy Bulletin, an excerpt from his address to members at the Annual General Meeting of the Foundation, is published to provide a retrospect of the state of the South African economy at the time.

FMF Policy Bulletin/ 6 December 2011

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