THE economy is expected to have grown less than 2% last year, and substantially less than 3% this year. But anyone looking to monetary or fiscal policy for rescue had best think again.
We’ve been reminded of this lately in a couple of ways. First, the Reserve Bank’s monetary policy committee raised interest rates while telling us that it had lowered its economic growth forecasts, and that it was concerned about the growth outlook.
The committee had to face the usual growth-versus-inflation trade-off and, in the end, its concern about the latter won out. The point is that interest rates can’t do much for economic growth in this environment.
Interest rates are at 40-year lows and, even after the increase, the benchmark repo rate is still negative in real terms. If households or companies were willing to borrow more, monetary policy might have a role to play in boosting the growth rate. But they aren’t, and for reasons that have little or nothing to do with the cost of money.
Households are carrying too much debt to want to borrow and spend much more. Companies are too concerned about households not spending and/or about weak global commodity prices to want to invest much more.
And if there are definite limits to what monetary policy can do to stimulate private-sector demand in this environment, there are distinct limits, too, to how much fiscal policy can or should be used to drive demand from the public sector. We’re being reminded of this ahead of the budget on February 26. The fiscal deficit is already projected at more than 4% for the latest year, so is already stimulatory for the economy. In addition, the deficit could end up higher if analysts are right that revenue collection will fall short.
Again, South Africa’s credit ratings depend on policy staying credible, and rising government debt is already being watched by the rating agencies. So there’s little room for more stimulus. Fiscal and monetary policy helped South Africa to weather the global recession. Then the global credit boom, and an improvement in South Africa’s terms of trade, helped to keep the economy afloat. Now that’s reversing, but the conventional macroeconomic policy tools are not available to help.
Like the rest of the world, then, we have to look to microeconomics — to the structural reforms needed to raise the underlying rate at which the economy can grow sustainably. The Bank estimates that rate to be no more than 3%-3.5%. The issue, then, is what reforms are needed to get the sustainable, potential growth rate higher.
There are lots of to-do lists in policy documents from the New Growth Path to the Industrial Policy Action Plan to the National Development Plan. And the World Bank has its three-point to-do list for export competitiveness.
But a Reserve Bank working paper released last year takes a bolder approach, putting numbers to what it could do for growth if South Africa took aggressive action on five policy options. And the bottom line is that we could raise the potential growth rate to 8% if we did everything the authors — David Faulkner, Chris Loewald and Konstantin Makrelov — argue we should do. Two of them used to work for the Treasury, Faulkner is now at HSBC, while Loewald and Makrelov are at the Bank. So these are views within the policy space rather than outside it, which shows at least that there is debate within.
Ensuring the economy can finance itself and that it has the skills it needs are the basis for everything else in the model. Econometric modelling shows that if South Africa were to triple growth in savings so that the savings rate reached 35% by 2025, this would raise potential growth to 7.4% and would facilitate the kind of rapid investment growth typical of fast-growing economies.
Reducing the skills constraint raises potential growth to 6.7%. It would require reforms to education and training as well as more skilled immigrants: for each skilled job created, the economy also creates one semi-skilled job and half a low-skilled job.
Making economic growth more labour intensive is a third measure, not only to address unemployment but also because more people in jobs means higher economic growth. Shifting to a much more labour-intensive growth path could raise growth to 6%, but this would require more flexible labour laws, especially for small firms.
Opening up the market to greater competition, especially in network sectors dominated by parastatals, could raise the growth rate to just less than 7% and boost investment hugely.
Again, it would require some controversial measures. Likewise the proposal to reduce transport, logistics and communications costs by 30%, which could accelerate potential economic growth to about 7%.
The paper takes the extreme view, asking what we would have to do if we want to grow much faster. The answer is that some unpopular and difficult measures would be needed. We can debate what those should be. But the easy ones aren’t options any more.
• Joffe is deputy editor.