Achieving the elusive 6 per cent growth rate

President Mbeki has committed 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 is envisaged. These targets are achievable, and even more, depending on the policies government adopts regarding all facets of the SA economy.

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 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.

Even though high growth is achievable and will provide the entire population with considerable benefits, serious barriers to such growth will not be removed without difficulty. What appears to be economically desirable does not currently appear to be politically achievable. Firstly, because members of the tripartite alliance do not appear to agree on the best route to high economic growth, and secondly, because there is a danger that if they do agree they may not choose the path to growth that empirical economic evidence dictates.

SA needs an economic environment that provides entrepreneurs 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 possible 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.

In the absence of laws protecting monopoly state industries and obstructive laws and regulations hampering the efficient operation of firms, entrepreneurs would seek out ever-better ways to serve consumers, constantly improving value-for-money options in the provision of goods and services. Government would do its voters as consumers a great service if it were to remove these barriers to entrepreneurship, which also happen to represent significant barriers to economic growth.

South Africa could do with an economic growth rate that doubles GDP every ten years to eliminate poverty within an acceptable period. That means 7.2 per cent per annum, the rate maintained by South Korea for two decades. So countries can achieve extremely high growth rates for lengthy periods, but only if their governments are prepared to create environments in which entrepreneurship can thrive across the whole spectrum of economic activity, from the smallest to the largest endeavours. One of the important factors in 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 can achieve that elusive 6 per cent growth rate by pursuing policies that will make SA more economically free than it is now, or at least ensure that it does not become less free. According to the 2005 Economic Freedom of the World Annual Report SA is joint 38th in the economic freedom rankings of the world’s countries. However, on per capita income SA lags other countries with similar levels of economic freedom by a wide margin. What does that mean? Does it mean, as some maintain, that SA is not benefiting from its ‘liberal’ economic policies? There is a more plausible explanation. If government policies all start moving in the right direction, not sending out mixed signals to investors and potential investors, there are great possibilities for explosive economic growth. Remove a few of the roadblocks to growth, stop all anti-growth initiatives and SA growth will be at least at President Mbeki’s 6 per cent level.

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 18 October 2005