Is government setting a low growth trap for South Africa?

Our current government has been in power for 18 years. We often hear citizens and politicians alike ask: what has been achieved in these years? There are many ways of approaching this question such as considering social services, unemployment rates and economic growth.

From the perspective of social services; government has provided a livelihood for many South Africans. This has been done through the provision of running water, electricity and sanitary facilities to impoverished households, social grants and even economic empowerment of previously disadvantaged groups. Of course, every government in the world does similar things and so the question becomes: could our government have worked more effectively and efficiently with our tax money? And: are long-term, structural, growth-generating concerns being addressed?

These questions are more complex and subjective. One might argue that they are not the concern of the majority of South African voters and therefore not the concern of politicians with short-term interests of being re-elected. After all, a man with no bread to eat does not fret over having a road to drive on or having comprehensive international rights and investment possibilities.

Theoretically, there is of course an ideal balance between right-now social expenditure and capital expenditure with a payoff over a longer term. This is where the subjectivity of how government expenditure should look like comes in. However, a popular and widely accepted practice for evaluating a government is to compare the economy it has control over to other (well performing) economies in a similar stage of development.

South Africa has recently been included in the BRICS countries of emerging markets. Whether or not this was appropriate is debateable, but one thing is certain: South Africa is in a similar stage of development as an emerging market. One should thus be able to compare these economies and learn from their similarities and differences; their successes and failures.

Looking at only economic growth over the short- to medium-term the BRICS countries are observed as having high growth rates. If average, year-on-year, quarterly growth rates for the period 2010, Q1 to 2012, Q2 were calculated these figures would look as follow*:

 

GDP growth rate

Brazil

4.26%

Russia

4.35%

India

7.52%

China

9.45%

South Africa

2.92%

 

* Obtained from: http://www.tradingeconomics.com/gdp-growth-rates-list-by-country?c=bric

These figures might be only single digits, but still China has one of the fastest growing economies in the world. Also, when it comes to economic growth even a 1% difference is massive. To add to that, the BRIC countries (BRICS excluding South Africa) are nations reliant on international trade and they have less developed financial systems so they were especially hard hit by the financial crisis and now by the Euro crisis whereas the impact on South Africa was much less. The time period used is consequentially favouring South Africa and still our growth was significantly slower.

The obvious question is: WHY?

The Executive Opinion Survey is annually updated and published by the World Economic Forum and includes the opinions of prominent local businessmen and -women for most countries around the world. South African executives identified the following 6 factors as being most problematic to doing business in the country (in order of importance):

  1. Inefficient government bureaucracy
  2. Inadequately educated workforce
  3. Restrictive labour regulations
  4. Corruption
  5. Crime and theft
  6. Inadequate supply of infrastructure

Are these factors under the influence and responsibility of government?

The Global Competitiveness Report (GCR) is a yearly report published by the World Economic Forum. The first report was released in 1979. The 2011–2012 report covers 142 countries. The report highlights some obvious strengths of our government as identified by the WEF such as the efficacy of our legal framework, the protection of physical and legal property rights, judicial independence and transparency of policymaking. However, last mentioned might be threatened by the proposed Secrecy Bill and generally government strong points seem to be outnumbered by weak points. Weak points are, after all, what needs to be focused on in order to improve government’s influence on economic growth. From the GCR, the weak points in central government become starkly clear in the table below. The rank of each BRICS country on the report is provided; the lower the figure, the better. For the entire report, South Africa obtained an overall rank of 50th.

Note that Brazil also seems to fair poorly on these criteria in the 2011-2012 report. This might help explain why Brazilian GDP grew only 0.5% year-on-year in the second quarter of 2012 – down from 8.8% just two years ago. Therefore South Africa is best compared to the other three BRIC countries.

  RSA Russia India China Brazil
Favouritism in decisions of government officials

114

117

91

38

65

Burden of government regulation

112

132

96

21

142

Business costs of crime and violence

136

100

69

55

126

Organised crime

112

119

82

88

120

Reliability of police services

95

132

77

55

66

Health and primary education

131

68

101

32

87

Government budget balance, % of GDP

-5.7%

-3.6%

-9%

-2.6%

-2.9%

 

These rankings clearly indicate poor governance in South Africa. Not surprisingly, Brazil and Russia, which are the slowest growers after South Africa, also obtain the lower rankings.

These are the facts. The South African government has many weak points.

Can poor national governance be blamed for setting a low growth trap? Or maybe something else such as the legacy of the previous apartheid government more than 18 years ago?

By Freakonomics4 (Peet Naudé)

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