Growing the economy – it’s not that hard, stupid

21 Oct 2024

Parties in the national coalition agree they need to grow the economy, but debates on how they’ll address the structural issues have been muted. Colin Coleman’s recent proposals highlight how politics might hamper radical reform.

While the partners that make up our national coalition disagree on many things, on one issue they appear to be completely united: they will be judged on whether the economy grows during their term in office.

Yet the debates around how to grow our economy seem curiously muted, almost stuck in the same place they have been for many years. That said, some in the policy sphere, including former Goldman Sachs southern Africa CEO Colin Coleman, are trying to shake the debate out of the dangerous middle ground.

It is virtually uncontested that the biggest longer-term problem we face as a nation is creating jobs for the roughly 12 million people who want to work but have no opportunity to do so.

At the same time, the amount of income per person, our GDP-per-capita, has declined significantly from 2014 onwards (this process really started with the global financial crisis in 2008).

In short, the trend is obvious; on average, individual South Africans are poorer now than they were 10 years ago.

It is generally accepted that to reverse this, economic growth of at least 3% is needed (but in reality, we would need much stronger growth).

This is why comments by Discovery CEO Adrian Gore three weeks ago during the launch of the second phase of the government-business partnership that our economy could grow at 3% by next year were so important.

It would mean that for the first time in a long time, for many people, they would see their own personal income start to grow again, hopefully in a sustainable way.

Gore’s prediction came from the Bureau for Economic Research, which based this on the fact that load shedding is now over (the SA Reserve Bank has consistently suggested load shedding alone cost 2% of GDP every year), possible improvements at our ports through Transnet, and several other factors.

While it is clear that business and government are probably working together more closely than at any other time in our history as a nation state, there is still a curious lack of real debate on what needs to happen now.

It is obviously not enough just to fix load shedding and Transnet. Our unemployment problem is both structural (the number of people without jobs has been growing since the 1970s with just one period in which this reduced, during the commodities boom in Thabo Mbeki’s first term) and geographic (Eswatini, Mozambique, Zimbabwe, Botswana and Namibia all have unemployment figures similar to ours).

And yet, while the coalition partners appear to agree that “good governance” will help the economy, no one has publicly suggested any kind of real change.

Instead, it seems that the debate around growing the economy has almost gone silent.

Coleman’s cures

This is why Coleman’s suggestions appear almost radical.

But it is not so much that they are truly radical, but rather that they come from someone who has spent much of his career in the belly of global capitalism (to be clear, in this debate, this is a good thing).

He makes four core suggestions: to keep fixing technical governance problems (basically to keep Operation Vulindlela going); to move government to zero-based budgeting (justifying budgets from scratch); create space for government to financially incentivise economic investments, exports and productivity; and, finally, to ensure that the world’s biggest companies invest in South Africa.

Read more: Growing the South African economy is make or break for the GNU

While the first and the last may be non-controversial, changing the way government manages money could lead to huge debates.

Essentially, Coleman appears to be saying that both the way the government receives money (through tax) and the way it spends it (through the Budget) need to change.

He is obviously correct to say that billions of rands are wasted each year by the government and could be reprioritised towards the highest “fiscal and social multipliers” (do we really need a Ministry of Small Business Development with a minister who describes it as still “in the building or foundational phase” 10 years after it was created?).

He is also right that the middle classes benefit from rebates that could be used to provide better healthcare for poorer people.

Unfortunately, the two major partners in the current coalition may have their own reasons for ensuring no radical changes are made.

The DA will surely argue against any measure that would see their constituency pay more tax (Coleman admits “it is neither advisable to grow the fiscal envelope, nor possible to increase VAT, corporate or personal income tax brackets to expand revenue”).

And the ANC would probably see the leaders of some of its constituencies arguing against changes to the amount of money that government departments get.

It would seem impossible to imagine Ramaphosa standing up in Parliament and announcing (along with Finance Minister Enoch Godongwana) that many departments will either get less money than they did last year or be abolished completely.

And yet Coleman is obviously correct.

National government (and the provinces) still spend billions of rands and get very little for it. Public sector workers are unproductive, government investment in infrastructure is stymied, and the VIP Protection Unit receives a budget of R2-billion, which officers use to beat people up.

It would not be rational to continue as we are.

And yet even if the ANC and the DA were to agree on some kind of radical change to how the government manages its money (both on the income through taxation and the outflow on social spending), the arguments after that would be incredibly intense.

Worse than that, they would be inherently political. It could well end up with each coalition partner fighting for their own turf.

For example, the PAC might well argue that the budget for land restitution should be increased, and make that the price of any kind of real change.

As a result, the end result might be government spending that is even less rational than it is now.

Industrial policy

Coleman’s other suggestions might also get caught up in this kind of politics.

For example, he is right to point out that many other governments (and at present the US) fund industrial development. But plans by the ANC government to “create black industrialists” appear to have failed in the past.

Both the selection of which industries to fund, and who to fund would be intensely political.

That means that perhaps the final suggestion, to ensure that the world’s biggest companies invest here, is perhaps less contentious.

But that doesn’t mean it would be easy.

Amazon found recently that while both a national government and a provincial government may welcome your headquarters, you may still have to fight court battles over the use of the land.

Understanding the processes and steps that lead to countries developing is not rocket science. They are now relatively well understood by economists.

Two of them recently won the Nobel Prize for Economics, through their work in Why Nations Fail and The Narrow Corridor on precisely this point.

To follow these steps, Coleman’s advice would be entirely rational.

But economics is often the essence of politics. This is why we may be doomed to repeat our irrational course – despite the stated aims of all of the parties in the national coalition. DM

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Business Maverick

Coleman’s cures

Industrial policy