Get South Africa Growing

By Brian Kantor

In Get South Africa Growing Brian Kantor advances spirited economic arguments for freer markets and less government intervention in the economy. Kantor adds significantly to an understanding of how our economy works and offers a succinct review of all the drivers that determine a modern economy's performance as well as the key institutions of a modern economy. Kantor's sound economic insights, enriched by his familiarity with current affairs and developments in the local political milieu and financial markets, make this a key and important contribution to the continuing debate which rages around our failing economy. Get South Africa Growing presents solutions which policy makers ignore at their – and our – peril.

• Language: English
• Publisher: Jonathan Ball
• Release date: May 10, 2017
• ISBN: 9781868427642

Brian Kantor

BRIAN KANTOR is a pre-eminent economist. He was the Head of the School of Economics of the University of Cape Town from 1986 to 1990 and Dean of the Faculty of Commerce from 1997 to 2001. He is Investment Strategist and Economist at Investec Wealth and Investment and Professor Emeritus at UCT, and he regularly writes on the South African and global economy.

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Get South Africa Growing

Brian Kantor

JONATHAN BALL PUBLISHERS

Johannesburg & Cape Town

Foreword

South Africans are failing tragically to seize the economic opportunity that is open to them. The opportunity wasted is the power to eliminate poverty and all the misery that accompanies it. Growth of 5 per cent a year in gross domestic product (GDP), in total output and in incomes, would utterly transform the lives of the poor of South Africa, and would help everyone who depends on the economy. Growth of 5 per cent per annum, a very realistic target, would allow all South Africans to participate in a rapidly growing rather than a stagnating economy. Other countries have achieved economic miracles and we could do the same, that is, realise consistently good growth in incomes and output that, when sustained over a generation or two, could eliminate poverty and hunger, and allow us to provide adequate shelter, modern education and first-rate medical services for all our people. South Africa could follow the example of countries such as Singapore, Chile, China, Japan and South Korea and overcome the poverty that stunts the lives of so many of our people. But it will not happen unless we change our ways of thinking about the economy and adapt our economic policies to encourage rather than frustrate growth.

South Africa could do much better if we relied more on the strengths of our people to manage their own affairs and much less on the government to interfere with and direct them. In other words, South Africans need a much stronger dose of economic freedom – more freedom to be productive and enterprising, to earn more and spend and borrow more and to respond, as they could and would wish, to the incentives and rewards that a free economic system offers. Other economies have succeeded much better in recent times, from even less favourable beginnings, by giving their people greater freedom to get on with their economic lives, and by protecting their gains. They have followed the path to riches first opened up in the West in the 18th and 19th centuries and more recently emulated in many Asian countries, where dramatic improvements in the average standard of living are being recorded.

We could be doing much more of what these countries have done, but we are not doing so vigorously or enthusiastically enough. Rather, we are following models of development and practice that have time and time again let people down. These are systems that concentrate economic power, typically in the hands of the state, rather than spreading the rights to make economic decisions more widely. This leads to a concentration of economic power that is very easily corrupted, as it is being corrupted in South Africa. These are policies that give a key role to the employees of government development agencies to guide and control the economy, rather than devolving the power to make economic decisions to the marketplace.

These top-down economic plans benefit a relative few with strong connections to the powerful. They become more ‘crony’ than competitive capitalism when private firms become involved in the process. They lead to more jobs and rewards being provided through patronage of the powerful than through merit demonstrated in competitive markets. They are policies that confuse the connection citizens should recognise between extra efforts and larger rewards, between taking risks and achieving higher returns when it all works out well. The connection between the value of higher skills and the deservedly higher incomes that reflect the contribution made to the economy by its more skilled participants may also be lost by many people, making it harder to defend what is essential to the purpose of market-driven economic development: unequal rewards for unequal efforts.

A society in transition, where a vanquished elite are being replaced with a new elite, naturally hungry for power and the wealth and incomes that can come with power, offers unusual opportunities to get rich in ways that more settled systems make difficult. South Africa is one such society, in which transformation – largely for the better when compared to the past – has not been sufficient to lift many more from poverty, and in which many of the poor depend on government welfare rather than rewards earned in the marketplace. Redistribution (not necessarily to the poor but rather to the politically influential) at the expense of growth has become too common. Treating and measuring the achievements of South Africans as members of groups identified by skin colour, rather than as individuals, remains a persistent and destructive feature of our society.

This book is an exercise in persuasion, in persuading fellow South Africans that there could be a much better way of organising our economy, one that would bring much better results in the form of a growing power for the great majority of South Africans to live a much better life. It will indicate a way to enable a much stronger economy so that our people can enjoy a much-improved standard of living, allowing them to make more and better choices about the food they eat, the clothes and accommodation they consume, and the educational and medical services they are offered and are able to afford. It will help to show how the vast majority of South Africans can access the material benefits enjoyed by the citizens of the developed world and higher-income South Africans. I hope to persuade South Africans to have more faith in their own abilities, and so to have more respect for market forces in which to exercise them and enjoy the benefits, and to be much more critical of the promises the government makes.

The book is intended to encourage much more scepticism about the claims of politicians and their officials, who offer more rather than less government intervention in our economic lives, and to recognise that these politicians and officials are well rewarded to identify so-called market failures that they can claim to prevent. A much better approach would be to recognise the everyday, commonplace successes of the marketplace which, because it works so well to deliver goods, services and incomes, attracts little attention and not enough appreciation.

It seems to me that the essential failure of what has become our national view of the economic process is that there is not enough respect for the power of market forces, and not nearly enough appreciation for the economic power released when individuals and the organisations they rely upon and cooperate in – especially the business firm – are left free to compete with each other for the right to allocate scarce resources. We should have more respect for the rights of individuals to make their own decisions and bear the consequences of them. And we should not allow adults who have the power to elect their government to be treated as if they were children in need of close supervision. Providers of goods and services should treat people much more as valued customers than as supplicants for government favours.

Those who work for governments are as human as the rest of us. What makes a difference to the behaviour of economic actors is the incentives on offer. The profit motive provides a powerful incentive to serve others well because the competition may do better in attracting custom; it is not charity but self-interest at work. Competition provides the essential discipline for understandably self-interested behaviour. Altruism as an alternative guiding force does not work because it is not much in our nature. And those given economic power that is unrestrained by competition do not easily behave altruistically, but rather behave self-interestedly and in ways that may not serve their intended beneficiaries.

The problem with government is that there is so little competition for the essential services it provides, for example, issuing licences to run a business or own and drive a car or carry a passport or ID document. This allows officials in a comfortable, less competitive, more secure and even better paid environment to serve their own interests, rather than to serve the public interest by providing excellent or even merely competent service. And there is not much the public can do about it except to grin and bear it – or to seek a lesser role for these government agencies, as this book proposes.

With greater inherent respect for market solutions, the burden of proof then becomes a different one – of proving government can harm rather than help when preventing capitalist acts between consenting adults, as it so often does, and as the Harvard philosopher Robert Nozick first put it.¹ There will always be some benefits or beneficiaries of regulating market actions; the issue is the cost to the broader society of providing such benefits for individuals judged wrongly as being unable to look after themselves.

This book will try and build trust in economic freedom by examining and explaining what goes on in our economy and how and why it could be much better organised for the benefit of nearly all of us. It is written by an economist but not for other economists. It is economics, hopefully interesting and insightful economics, for those who wish to understand the South African economy and who share a frustration with its performance.

Chapter outline

In the first chapter, I address the current very unsatisfactory state of the South African economy seen as a whole – the macro environment – and what might be done to improve it. I accept that the global economy has made it more difficult for our economy to grow faster in recent years and I consider what more favourable cyclical forces might spark faster growth. But, I would argue that our problems are not with our stars but with ourselves, and while the challenge to government is to live within the taxpayer’s means, it is a call for not just more competent government but also less government.

In Chapter 2, I make the argument for market forces properly understood – why they are fair to the participants in markets while delivering the goods, services and incomes that people want more of. I make the case for the market meritocracy and why much greater reliance on the free play of market forces is called for in South Africa. As support for this contention, I refer to the proven ability of these market forces, of individuals given essential freedom and encouragement to pursue their economic interests and protection of their gains, to lift billions of people out of absolute poverty in recent years. The global economy bears witness to an unprecedentedly successful poverty-relief programme that deserves greater recognition and appreciation than it has received, and greater emulation by other economies playing catch-up. The chapter attempts to do this.

Chapter 3 attempts to answer a burning question: given its well-demonstrated achievements, why do these market forces, and the business enterprises that are their prime instrument, not receive more approval? Why are they so often regarded with hostility rather than respect? Why are they regarded as opposed to the economic interests of the many they serve, thought capable of dishonesty unless proved otherwise, rather than the other way around – recognised as beneficent forces for economic progress, unless in exceptional cases proved otherwise? In doing so I challenge those with these attitudes to perhaps reconsider their motives and to change them – so that markets in this country can more easily get on with their important task of delivering goods, services, incomes and jobs in abundance.

Chapter 4 provides further exhortation to South Africans and arguments to back up this essential view of the world and how it works. It attempts to explain how we as a society would do much better to focus on the growth in incomes and wealth rather than their redistribution. The danger to the growth opportunity is redistribution – redistribution not necessarily to the poor who are deserving of assistance, but to the better-off with a strong sense of opportunity. Opportunities that can advance the economic welfare of a privileged minority but are taken at the expense of a better functioning economy and are often to the disadvantage of the objectively poor and disadvantaged. More redistribution – taking from the more successful to give to the economically less successful – inevitably follows economic growth. It has always done so, as the history of other economies reveals. But it is vital to get the sequence right and not to let redistribution – of which we already do significant amounts – get too much in the way of faster growth by undermining the incentives of enterprising and efficient individuals to contribute their skills and assets to the economy. Discouraging rather than encouraging such individuals means that they could easily decide to supply their services to other economies rather than ours.

Chapters 5 and 6 look more closely at the labour market and at policies for regulating the South African economy and encouraging competition. Chapter 7 examines competition policy in more detail and looks at why activist policies are not good for business and so the economy. My scepticism about the beneficence of such policies will be apparent, as will hopefully the reasons for my critique. I hope that public opinion will share such views and help inhibit the ever-flowing tide of more onerous regulation and more active competition policy, which discourages rather than encourages economic efficiency in a world of continuous innovation that effectively threatens what are temporary powers to control markets.

Chapter 8 shares insights about the all-important role played by privately owned corporations and the stock exchanges that help them raise capital and monitor their use of capital. I analyse the sources and uses of savings in South Africa and why our corporations have succeeded, on both sides of the saving–investment nexus, for their owners, who are mostly members of pension and retirement funds and collective investment schemes. I celebrate the opportunities that South Africans, the pension funds that act as their agents for acquiring wealth, and the companies that they own on their behalf have been given in recent years to diversify their wealth across other jurisdictions. I explain why being able to reduce South Africa-specific risks to the wealth of South Africans has been very helpful to the economy. This has encouraged risk-taking in South Africa rather than elsewhere. This chapter also discusses the costs and benefits of black economic empowerment (BEE).

To conclude, Chapter 9 supports the thrust of my argument by turning to measures of South African economic performance. It considers how South Africa ranks relative to our competitors in the global economy. The measures of our standing in the world are mostly very discouraging – and encouraging of reforms that would add freedom and competitiveness and enhance both incomes and standing, as well as respect for our economy as a place to do business.

The text is supplemented by shorter essays, entitled ‘Point of View’, previously published on my www.zaeconomist blog and elsewhere, that substantiate and concentrate the argument without repeating too much. If you like, they offer a short reinforcement of the message.

1. Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), p 163.

1

Will South Africa escape economic stagnation?

How has the South African economy been doing? The short answer is not well, or rather, to put the point more gently, not nearly well enough, judging by the growth in production and incomes after inflation. While global cyclical forces have been unhelpful to economic growth in recent years, we can hope for a cyclical upswing, but we should change and improve the character of the economy immediately to raise our growth potential permanently. The opportunity to truly transform our economy for the better is there for South Africa to take. It will, however, take a very different state of economic mind, which this book proposes.

The most commonly used measure of economic performance is Gross Domestic Product (GDP), which represents the value of all the goods and services produced and all incomes earned, equivalent to all spent on that output. South Africa’s GDP has grown by only about 3 per cent per annum (p.a.) on average since 1995. As I show below, the best growth years were between 2004 and 2007, when the economy grew at an acceptable average rate of 5 per cent p.a. However, the performance of the economy has deteriorated since that time. The economy went into reverse in 2009, during the global financial crisis, and has grown very slowly since 2011. Recent growth trends have not been at all friendly to South African aspirations (see Figure 1.1).

The recent very troubling slowdown in GDP growth – to well below the longer-term average – is partly cyclical, attributable to circumstances that can be regarded as largely beyond South Africa’s influence. But the explanation for the highly unsatisfactory longer-term average rates of growth is not simply to do with global economic conditions but with the systemic failures of government policy.

Faster growth may well have to be initiated by more favourable cyclical trends, for example higher dollar prices for our exported minerals and metals. Higher commodity prices would be much welcomed, as would lower interest rates, which are essential to encourage households to spend and borrow more, but it will take an improved structure for the economy, a much more growth-encouraging set of policies, to permanently raise the long-term average rate of growth enough to make serious inroads into poverty.

In Figure 1.2, I compare South African growth with those countries categorised by the World Bank as low- and middle-income economies and high-income economies. The comparison is not flattering to South Africa. As may be seen, South African growth from 1995 to 2015 (average 3.1 per cent p.a.) has been consistently below that of the average low- and middle-income countries (average 5.5 per cent p.a.) and barely faster than that realised in the larger high-income universe (average 2.8 per cent p.a.). Other comparable middle-income countries include Armenia, Brazil, Bolivia, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico and Peru.

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Figure 1.1: Annual and average GDP growth, 1995–2015

Source: South African Reserve Bank, Quarterly Bulletin, Table S111

Of particular interest is the fact that, while well below the growth achieved in low- and middle-income countries, the South African growth path tracks that of global growth very closely. Clearly, the global business cycle has an influence on South African growth rates. As may be seen, the recession that followed the global financial crisis of 2008–2009, and the slow recovery afterwards, has been very damaging to the South African economy, as it has been to other low- and middle-income countries, especially those that depend on exports of minerals and metals, as does South Africa. The recovery in commodity prices will help South Africa get back on the growth path followed by high-income countries such as Australia, Denmark and Singapore. The aim should be much higher than that, given the opportunity to catch up with the growth achieved by many low- and middle-income economies.

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Figure 1.2: Comparison of GDP growth rates, 1995–2015

Source: World Bank

The cycle in the prices of metals and minerals

Global commodity price trends were very helpful to the South African economy before the global financial crisis. The well-above-average growth rate of about 5 per cent p.a. recorded between 2004 and 2007 was favoured by rising commodity prices. The cycle of metal prices, which are denominated in US dollars, turned sharply and unhelpfully lower for South Africa and other mining- or commodity-dependent economies after 2011, as shown in Figure 1.3. It may also be seen that the weak rand has shielded South African mining companies from this weakness in recent years by protecting their rand revenues and cash flows, though not from poor labour relations, disruptions to energy supplies and considerable uncertainty about the legal framework for mining companies.

One recent saving grace for South Africa in 2015, a year of pronounced rand weakness, was that the price of oil declined as precipitately as did the prices of other metals and minerals. Oil makes up a large percentage of our imports and the oil price has a very direct impact on the Consumer Price Index (CPI) and its rate of change, inflation. In 2016, the oil price rose again by more than enough, despite a much stronger rand by year-end, to burden the economy with higher fuel costs. It should be appreciated that up to half the price of a litre of petrol or diesel goes to the Receiver of Revenue and not to the oil refiners or petrol stations. And, unfortunately, the Ministry of Finance regards raising taxes on energy users as a convenient source of revenue, even though differential taxation of this kind, especially of something as important as energy and transport costs, distorts the signals that market-related costs and prices should be giving to producers and consumers.

The value of South African exports still depends very materially on the mining and agricultural sectors; about 60 per cent of exports are metals and minerals. These trends in the global prices of South African exports and imports are best captured by the ratio of the export price index to the index of import prices in rands, known as the foreign terms of trade (TOT), measured in a common currency. These trends are shown in Figure 1.5.

It is very helpful to an economy when the prices of what you are selling to the world – the average prices of exports – rise faster than the prices of what you are buying. As may be seen, the TOT improved dramatically through the boom years (2004–2007). They deteriorated after 2010 but have staged a small recovery in recent years. More of such an improvement in the terms of trade would be helpful to South Africa’s growth outlook.

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Figure 1.3: Global commodity prices, 2005–2017 (2005 = 100), daily data to 14 February 2017

Source: Commodity Research Bureau (CRB)

The South African economy has become highly dependent on the demand for and supply of services.

It is interesting to note how much the underlying structure of the South African economy has changed over the years (see Figure 1.6). Economic activity in this country is now dominated by the supply of services rather than goods. The so-called tertiary sectors of the economy that directly service households account for 68 per cent of all value added in the economy, measured as a share of GDP in current prices. This share was less than 50 per cent in 1980, and the role of services in the economy is still gradually increasing, having risen from about a 63 per cent share of all output in 1995.

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Figure 1.4: The price of oil (Brent Crude) per barrel, 2005–2017, in rands and US dollars, daily data to 14 February 2017

Source: Commodity Research Bureau (CRB)

The tertiary sector is made up of wholesale and retail traders, catering and accommodation services, transport, communications and storage activities, financial and real estate services, and community, social and personal services, including services supplied by government. The primary sector – mining and agriculture – now accounts for about 10 per cent of the economy. This share has not changed much over the last 20 years, though in 1980 the primary sector – predominantly gold mining at the time – accounted for 20 per cent of the economy, calculated in money-of-the-day prices. The secondary sector of the economy, made up of manufacturers, construction and utilities (electricity, water and gas), now accounts for about 21 per cent of value added, down from 27 per cent in 1995.

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Figure 1.5: South African foreign terms of trade (TOT), 1996–2014 – export prices/import prices

Source: South African Reserve Bank, Quarterly Bulletin, Table S111

The share given up by manufacturing has been gained by the increasing role played by services. The South African economy is mostly driven by the supply of and demand for services of various kinds, as are all developed economies. Thus, the economic policies that matter most for the economy are those that affect the market for services, and especially the services of labour.

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Figure 1.6: Share of the economy (ratio to GDP), 1970–2015

Source: South African Reserve Bank, Quarterly Bulletin, Table S110

Tourism: an economic success story underwritten by market forces

South Africa’s fastest-growing and most promising economic sector is that of tourism. The undervalued rand is an extra reason for visiting South Africa and for South Africans to holiday at home. Among the very cheapest Big Macs, when priced in US dollars, are