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.

Colloquium on the National Development Plan

On the 11^th of November the National Planning Commission (NPC) published the National Development Plan (NDP). After months of planning and consultation, the NPC Jam and numerous presentations across the country, they put forward a vision for South Africa in 2030.

Last week the School of Economics at NWU hosted the first Peet Strydom colloquium and the topic of discussion was perspectives on the NDP. The panel included Prof Strydom (an extraordinary Professor in the School) as well as Proff Philippe Burger, Raymond Parsons, Theo Venter and the discussion was moderated by Cees Bruggemans. The discussants presented macro, micro and political economy views on the NDP. Academic economists from the NWU, UJ, UP, UNISA and Monash South Africa were in attendance along with participants from the Reserve Bank, Planning Commission and the private sector.

The panel agreed that the NDP is centrist document on how to make a mixed economy work better and liked the absence of ideology and spirit of endowment, rather than entitlement. The challenges outlined by the NPC are the familiar ones of reducing unemployment, poverty and inequality and first and foremost this requires economic growth. Prof Strydom stressed that increasing economic growth rates from 3% to 5% per annum and more, requires that policymakers, business and labour do many different things right. The different elements of the plan that were discussed included export-led growth, education and training, infrastructure, the role of small business and the relationship between business and labour.

Prof Burger noted that although export-led growth will have to be part of the solution it is no panacea. The markets that we export to are not doing well and South Africa cannot compete as a low-cost manufacturer. Average hourly wages in South Africa are up to five times higher than in India and three times higher than in Mexico and Malaysia. There is a need to increase the productivity of low-skilled labour and this raises issues of education, training and innovation. It also links up with the need for infrastructure investment. Prof Strydom argued that South Africa has experienced the destruction of infrastructure capital and there is a clear need to improve the quality of railways infrastructure, electricity provision and water management. He was not, however, in favour of the wide spread use of user charges and argued that government needs to supply the infrastructure at growth points. Linked to the cost competitiveness of business the panellists spoke about a need for a re-think of the centralised bargaining model. In was noted that the NDP has interesting proposals on short-term employment contracts, rules regarding dismissals and foreign skills. The fact that the NDP makes no mention of the informal sector or second economy was also discussed. It was argued that the informal sector can be a job creator, but the challenge lies in turning survivalist activities into for-profit SMMEs. There is, however, limited South African research available on the barriers to entry, need for skills development and the roles of regulation and competition.

On the political economy-side of the panel Prof Parsons emphasised along with “doing many different things right”, a vision for 2030 implies a decades-long process involving some pain: forgoing consumption now for a better life later, businesses will have to prepare for more competition and labourers for wage moderation. For this to succeed, requires a credible vision, a strategy for getting there and policymakers that are trusted. Such criteria raises questions about the political sustainability of the NDP: Can minister Manual survive politically to see it through, is there institutional capacity, what can be the roles of the private sector, labour and civil society?

At the end of the colloquium the discussion centred around the issue of political will. The NDP is another in a long line of plans and strategies: the RDP, GEAR, the Jobs Summit, the Growth and Development summit, ASGISA, the work of the Harvard group an and the growth commission, but there may not be time left for another summit or plan. A lack of coherence or coordination of policies and ambivalent signals from government (think mining nationalisation and the Wallmart court case) can be particularly detrimental. We now require a reconciliation of the New Growth Path and the National Development Plan and the building of a social compact to face our challenges head-on.

All this being said, the NDP is a discussion document that will be talked about much more in months to come!