What Michael O’Dowd said about the SA economy 10 years ago

Turning to the state of the nation, what I have said in the last few years remains true. If we judge the present government of South Africa by realistic standards, comparing it with other governments rather than by theoretical and perfectionist standards according to which any real government will come short, there is a great deal to be said in its favour. I have before paid tribute to the government’s cautious style, to the absence of the ill-considered and grandiose programmes that have so often characterised new governments in many parts of the world. Those that complain that the government is slow moving should remember that one reaches a goal much sooner by getting the plan right in the first place, even if this involves a long planning period, than by first embarking on an impractical and damaging policy, then dismantling this policy, and then finally, after long delays and after having done positive damage at last getting it right, As Shakespeare says “Too fast arrives as tardy as too slow”, and nowhere is this more true than in government. If we are generally in favour of caution in government, we cannot complain if this applies also in the areas where we particularly want to see change, like that of privatisation. I have no doubt that much privatisation is needed in South Africa, both to create an efficient economy, capable of sustained growth, and to signal to the outside world that South Africa has wholeheartedly joined the world of the 21st Century. But privatisation too can be mismanaged by undue haste, and in some countries this has happened. Not that the objective was wrong but the exact manner in which it was done. It is pleasing to note that one of the first complete privatisations – that of Sun Air which took place during the year under review incidentally taking a step further the spectacular change which we have seen in the last few years in the internal aviation market, which has been transformed from a tight monopoly to a highly competitive comparatively free market. The other area in which the government deserves praise is its continuing devotion to fiscal rectitude. It is true that they have performed no miracles in cutting government expenditure but I know of no government which has. Neither Reagan nor Thatcher distinguished themselves in this area. What they have done, is to adhere to their programme, moderate but serious and genuine, for the reduction of the deficit, while keeping up a steady pressure on wasteful and extravagant government expenditure especially in the area of subsidies. This is indeed the road, the only road, to sustained growth, which in turn is the only way to reduce unemployment and eliminate extreme poverty – as was done in Japan and Germany after the Second World War. There are, of course, various vested interests who would benefit, at least in the short run, from inflation, and we hear from these from time to time trying to revive the discredited ideas of the past, that inflation is beneficial, and in particular, that it helps to reduce unemployment. In order to refute this contention, all we have to remember is that from 1950 to 1980 both West Germany and Japan practised strict fiscal rectitude while Britain followed Keynesian policies. During this time, West Germany moved from a position where the per capita income was about half that of Britain to one where it was about equal. Unemployment fell in Japan from a very high figure at the outset to virtual full employment while it rose in Britain. In Germany it remained uniformly low until it started to rise in the 1980s. One of the most conspicuous and painful consequences of fiscal discipline in our situation is high interest rates, and the government and the Reserve Bank deserve particular credit for maintaining high interest rates as long as these are necessary. What high interest rates tell us, is that we have an acute shortage of investment capital, so the price is high. High interest rates serve to increase the supply by encouraging saving and the importation of investment from abroad, while on the demand side, ensuring that by and large, capital is used only for the most highly productive purposes. Less productive purposes being unable to afford the high rates. Any artificial lowering of interest rates, that is, any lowering that is not the consequence of an increase in the supply of real capital, not of money, will lead to a reallocation of this scarce resource to less productive uses, so reducing real growth and job creation. The fact that interest rates are so high tells us that most of the other prerequisites for growth are in place. There is a great demand for capital. What we have to do is to increase the supply. There are only two sources of real capital. The one is investment from abroad and the other is domestic savings. We have to increase the supply of both. It is a deplorable fact, and I am criticising here not the government but rather the community of economists and the economic journalists, that in all the discussion we have of the ways of fostering growth we hear so little about saving. There is a great deal of discussion, some of it quite fanciful, about the secret of the success of the highly successful economies of the Far East, often picking on a particular policy peculiar to one of these economies which it does not share with the others, yet the one thing that they all have in common is an exceptionally high savings rate. It may be possible for a very small economy to grow rapidly entirely on imported capital. Though if it does so, this will carry the consequence that the entire economy will be foreign owned. I doubt however, whether an economy as large as that of South Africa could ever, under any conceivable set of policies, attract enough foreign investment to grow rapidly without a substantial increase in the rate of local saving. A reduction in government dis-saving is necessary and will help, but I do not believe that we can do without an increase in actual saving. It follows that what is still missing, in an otherwise sound set of monetary and fiscal policies, is a determined and pervasive pursuit of an increased savings rate. In particular, every aspect of the tax system needs to be scrutinized for its potential effect on saving. The other major issue before the country at present is labour relations. I would emphasise that the advocates of free markets are not opposed to trade unions. Free trade unions are an integral part of free markets. We are opposed, however, to the granting of unreasonable legal privileges to unions – as was done in Britain in the earlier part of this century, with the deplorable results that are now only too familiar. We are also opposed to the introduction of rigidities in the labour market through legislation, and to the imposition by legislation of the outcome of collective bargaining on those who have taken no part in the bargaining process – something that is as undemocratic and unfair as it is economically dangerous. Indeed it represents a new kind of minority rule. We are also, of course, opposed to any attempt by a minority of the population, in this case the members of the trade unions, to impose their will by force or the threat of force on the democratically elected government. Another exercise in minority rule. The chief victims of rigidities in the labour market are the unemployed and the people in the informal sector engaged in very low productivity work, with consequent low incomes. The people, in short, who aspire to new jobs in the formal sector. We cannot but note how successful in creating new jobs are the countries with flexible labour markets, from the United States of America to Malaysia, while the countries in Western Europe, with their rigidities, are quite unable to do so. Prior to reunification, West Germany, with practically full employment, could afford policies which involved the creation of no new jobs. But since reunification this is no longer so, given the massive unemployment in the former East Germany, and unified Germany is in the process of changing its practices and policies accordingly. The former labour policies of West Germany can no longer be held up as a model for anybody, and they are particularly inappropriate for a country like South Africa, where nearly half the population is still unaccommodated in the formal sector, and so, where the creation of new jobs has to be a top priority. Overall, I do not think there is any reason for undue pessimism. There is not going to be a sudden and complete victory of free market principles in South Africa, nor in general anywhere else in the world, but virtually the whole world is moving in the right direction, and the massive change in paradigm which has taken place throughout the world since 1980, is clearly irreversible for the foreseeable future. We too, are on the whole, moving in the right direction. There is plenty for the active advocates of the free market to do, and there is no reason why they should not do it. Author: The late Michael O’Dowd’s Chairman’s address to the 1997 Annual General Meeting of the Free Market Foundation is republished here because of its striking relevance to the current South Africa. The address may be republished without prior consent but with acknowledgement to the author. FMF Feature Article/ 20 November 2007