How rosy are our growth prospects?

'Government can create an environment for higher rates of investment, but long-term employment depends largely on higher rates of private investment', says the ANC election manifesto. 'Since the 1994 rainbow election', claims the official opposition, 'SA has failed to attract significant foreign investment, which has declined. SA ranks below comparable developing countries when it comes to competitiveness and economic freedom, and it remains defined by inequality.'

The Economist magazine shows SA as having one of the lowest economic growth rates among 25 competing emerging markets. Only Venezuela, Brazil and Mexico are doing worse than our current 1.6% annualised GDP growth rate.

But how bad is 1.6% growth? We should adjust for population growth to look at real growth in average incomes. Subtracting our World-Bank-reported 1995 population growth rate of 2.1% leaves negative incomes growth of -0.5%. The reported 2001 population growth rate is only 0.8%, perhaps reflecting dubious estimates of Aids-deaths so far, suggest slightly more positive 0.8% incomes growth, assuming that the estimates are correct.

Looking at only the very latest growth rate can mislead us. Consider, then, compound GDP growth rate over many years, as already corrected for population changes. Between 1980 and 2001, spanning the change in government, real incomes shrank an average -0.6% yearly. Just from 1990 to 2001 they marked time with barely negative yearly -0.1%. And during 1995 to 2001 they grew by average annual 0.9%. So well done, ANC, for reversing the long-term trend since the early seventies!

Still, 0.9% incomes growth is nothing to write home about. At this rate incomes double only every 80 years or so – that's no way to uplift the poor, create jobs and prosperity for all, or win elections. We should be emulating China's reported 20-year incomes growth rate of 8.2%, which doubles real incomes every nine years.

Reflecting on incomes, those alive and working tend to feel we do keep getting better off as the world turns. Each year we pay off more of the house and schooling, save a bit and tot up rising net worth or at least falling net debt! It's hard to discount this personal-growth effect, but we must. Average country incomes relate, instead, to you now versus someone of your present age two decades ago or two decades ahead, such as your father or son. One should also discount how technological progress here and elsewhere keeps providing better goodies for the same money obtained by selling a cow or a day's labour.

Thus in 1970 South Africans enjoyed an average income of $4,100 (as expressed by the World Bank in constant 1995 US dollars), but by 2001 this had fallen slightly to $4,068. South Africans 'stood still' while during the same period the Japanese prospered from $20,465 to $44,458. Closer to home, Botswanans overtook us, increasing their incomes from $538 to $4,130.

Even Russians emerging from communism and the Cold War improved their incomes since 1970 from $2,049 to $2,609. Last year they achieved 6.6% GDP growth, with President Putin now promising doubled GDP in the next decade. With Russia's static population, that will mean 7% annual GDP growth, which may remind us of GEAR's promised 6%-plus.

The ANC looks ahead with pre-election optimism. The party's recent ten-year review frets about poverty and unemployment causing social instability to arise from popular dissatisfaction among adversarial NGOs and social movements. A 'Shosholoza' boom scenario talks wistfully about 6.5% annual GDP growth halving unemployment to 18% by 2014. It envisages a strong state, effective health programmes and effective corporate governance. Increased social spending is to raise local demand in a virtuous economic cycle, as incomes inequality falls decisively

President Mbeki regularly reminds us that this vision is not based on 'market fundamentalist' or 'neo-liberal' thinking about getting government out of the way. Following the policy shifts adopted at ANC's 2002 Stellenbosch conference, an annual 4.7% increase in budgeted government spending started being implemented in 2003. This increases the state's share of GDP by 1% annually, rather as Britain's Chancellor Gordon Brown is doing. So far, Finance Minister Manuel is increasing the budget deficit rather than tax rates, for obvious short-term electoral reasons.

We should note that government's election manifesto objectives address creating work, fighting poverty and promoting equality. Not promoting overall economic growth first, or at high priority. Wealth will be redistributed through social spending to uplift poor millions, and taxes will upgrade and create 'essential infrastructure' like railways. Will such avowedly social-democratic spending promote growth? Maybe so – since apparently 'most economists' expect growth to improve in 2004 from this year's 'disastrous near-recession'.

Or maybe not. Two of many lessons from the global liberalisation experience may be relevant. The first is what Thatcherites call the Rule of Two. More formally from the 1988 New Palgrave Dictionary of Economics, it says private firms are everywhere and always roughly twice as productive as state-owned firms. So, for example, if Kumba really wishes to compete with Australian and Brazilian iron ore exporters, a private venture should acquire it and Spoornet's Orex line and Saldhana port.

The second is a 1998 finding of the US Joint Economic Committee that increasing government expenditures by 10% as a share of GDP reduces the annual growth rate by 1%. So, all else being equal, government should tax and spend less rather than more in order to promote growth. Efforts to disprove the fact that governments are bad at regulating and running businesses may just possibly fail, as everywhere elsewhere.

Such uncomfortable 'neo-liberal' considerations suggest the average South African can 'look forward' to lower growth – even shrinkage – in real per capita income. Government was right first time, GEAR did contain the right elements for growth, development and poverty-reduction but was unfortunately not implemented in its entirety. After the election it should consider revisiting the policy.

Author: Jim Harris is a freelance researcher and writer. 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 \16 March 2004