A post on growth slowdowns and growth plans

I wrote this post for the School's blog but also want to post it here:

With economic growth slowing down, economists everywhere are offering advice on what can and should be done. There is advice on how the ECB can stave off crisis and restore confidence, blogs argue that the Fed should be doing more and there are views on how China should respond to a global slowdown.

In South Africa we are never short of plans and strategies and recent the Democratic Alliance added their Plan for Growth and Jobs to the proposals of government’s New Growth Path and National Development Plan.

And in the academic background the Institutions versus Geography debate rages.

To provide another perspective on this story it may be useful to distinguish between the drivers of growth over the next 6 to 12 months and those of catch-up growth and deep development.

To my mind, there is little sense in talking about drivers of growth over the next few years. RMB economist Ettienne le Roux shows that the real growth rates expected in the EU are -0.5% in 2013, 1% growth in 2014 and 1.5% in 2015. The private sector, governments and banks need to deleverage. The slowdown in Europe will have an important contagion effect through channels like trade, investment and labour mobility. Developed economies look set to “muddle through”.

The prospects for the other 50% of the world are better. They are under-leveraged, have smaller deficits to GDP and more open credit channels, which provides for policy flexibility. Average growth rates of 5-6% per annum are forecast.

The South African economy grew by only 5.8% in total from the third quarter of 2008 up to the first quarter of 2012. The drivers of growth have been households, government consumption spending and investment by State-owned Enterprises. Exports, private fixed investment and government fixed investment have been slow to catch up or contribute to growth. Most of the work created since 2008 has been in the public sector.

Given the global outlook and the limited fiscal and monetary policy room available, one can hardly expect South African policymakers to drive growth over the next few years.

It is when one considers the drivers of catch-up growth and deep development that the story becomes interesting. There are probably as many views on what matters for growth as there are economists. “Everyone knows” that human capital, innovation and infrastructure are important. Some say these drivers are fostered by openness, agglomeration or a developmental state.

Years ago Rudolf Gouws presented two summary slides at a BER policy conference and today we can still plot most of our plans and strategies against these drivers of growth. The DA’s plan, for example, emphasises, education and training, a Youth Wage Subsidy, Job Zones, reducing the cost of doing business and encouraging entrepreneurs, and building infrastructure that crowds-in investment.

These are all sensible ideas, but unlikely to deliver a knock-out blow to a growth ceiling or to structural unemployment – least so in the next electoral cycle. One private sector economist opined: "Eight per cent is achievable, but not with this plan. They are making the right noises and politicking very well, but it’s not offering anything inherently different…”

Which brings me to the point of this post: there is nothing else. No single plan or idea will be able to deliver catch-up growth of 6% or 8% per annum. Growth is a many splendored thing. We have to get education, infrastructure and innovation right. We need institutions that nurture investment and protect the vulnerable. Most importantly, we need to get away from the idea that if we were to do only that one thing: weaken the rand, support SMMEs, invest in railways, improve competition develop tourism, curb corruption, or whatever, then we would be on our way. In fact, we need to do all that and more.

And that makes it so difficult. Politicians, bureaucrats, the public, all love a big shiny project that will change everything. Whereas we need to do many different things right and we need to start now.