News Article : Where will growth come from? Part 2
|Category:|| Economy & Global : Local Economy|
|Author:||Jac Laubscher: Sanlam Economic Advisor|
|Posted:||18 Nov 2015|
A possible growth strategy in the current global environment
The world with which South Africa will be faced in coming decades will be complex and demanding and the price of failure will be high
In a recent commentary (Where will growth come from? dated 15 October 2015) I wrote the following:
“There are numerous soft issues holding back growth, culminating in sustained high growth clearly not being a policy priority for the South African government. Its focus is on redistributing the fruits of what growth is achieved rather than maximising it, and transforming the economic landscape according to political priorities without regard to the implications thereof for growth.”
Recent statements by South Africa’s political leaders, in particular the idea that the interests of a particular section of South Africa’s population can be pursued independently from those of the rest, confirm this observation.
When it comes to growth policy in particular, it can only be formulated for the economy as a whole, recognising the interdependence of all stakeholders.
The issues that need to be addressed in searching for an answer to the question, “where will growth come from?” are too complex to allow for a parochial approach.
To quote from the white paper published after the symposium on “Restarting the Global Economy - Harnessing the Forces of Economic Growth” held in Bellagio in Italy from 5 to 7 May 2015 under the auspices of the Growth Dialogue, “In most democracies the social consensus needed to enact effective economic policies requires a sense of benefit-sharing.”
The white paper provides us with a useful starting point in identifying the issues at the heart of a possible growth strategy in the current global environment.
These include the following:
- We are likely to be faced with lower global growth (mostly accounted for by a dip in labour productivity) for an extended period going forward, with some European countries set to join Japan in losing decades of economic progress.
At the heart of weak growth will be weak global aggregate demand, constrained by still increasing aggregate debt levels pushing out the unavoidable balance sheet adjustment to reduce debt to a sustainable level.
Inadequate investment in capital stock in spite of extremely low borrowing costs and the ample availability of capital is therefore likely to continue for some time to come.
As a consequence, an export-led growth strategy that served so many countries, in particular in Asia, so well in the past, will be less of an option.
Only limited benefits will flow from a competitive depreciation of the currency, even to being clearly undervalued, because of weak export growth and value chain effects.
- Technological change will continue to present policymakers with huge challenges.
Getting the balance right between reaping the benefits of new technologies and limiting their disruptive influence, in particular in the labour market where “routine” jobs are rapidly being eliminated by technology, will require a rebalancing of education and the learning of skills in the race between technological development and employment.
Digital, capital-intensive technologies will cause production to move closer to markets and not to labour as in the past 30 years.
Related policy should be proactive in anticipating the link between technological development and labour markets.
It is unfortunate that pro-poor technological innovations are underutilised by many governments due to public inefficiency, corruption, vested interests, or simple neglect.
On the positive side, the digitisation of labour markets will increase labour force participation and create many opportunities for part-time work, while enabling better matching of talents with opportunities.
The outlook for transformative technologies is very bright, with technological diffusion taking place at a rapid pace due to the possibility of technologies being extended at zero or very low marginal cost.
- The role played by demographic shifts in economic development should not be underestimated.
Although South Africa has a relatively young population and low labour force participation rate, its most important trading partners (Europe and China) are facing the challenges of population ageing and a declining labour force that will restrict their growth potential.
Migration from countries with high rates of youth unemployment is an ongoing trend, bringing some relief to the countries of origin.
However, South Africa is ironically a recipient of this type of migration in spite of its own youth unemployment crisis. Rapid urbanisation is an unstoppable trend across the globe.
If managed properly, cities can play a positive role in economic development: they enable the achievement of scale economies, they offer easier access to labour to prospective employers, they ease greater connectivity and help create a fertile environment for creative activity, and they offer considerable agglomeration benefits.
The focus of growth and development policy should therefore shift from rural development to a comprehensive urbanisation policy.
- Emerging-market economies are faced with fiscal trade-offs, which is constraining infrastructure investment.
According to the white paper, “Poorly performing governments are often characterized by spending that is dominated by public sector employment and debt service, and by a failure to invest in their country’s infrastructure."
"Governments in many parts of the world diminish confidence with poor spending choices, weak implementation, and policy detours.”
- To correct fiscal imbalances countries need to:
1) encourage economic growth,
2) split debt between what is growth enhancing and what not,
3) introduce fiscal limits or rules, and
4) avoid favouring consumption over growth-enhancing investment.
- We live in a time of increasing income inequality and wealth concentration driven by technological change, globalisation (even if it is offering diminishing returns) and an unequal distribution of human capital.
Access to economic opportunities are highly unequal.
It is increasingly recognised that high inequality is acting as a constraint on growth and should be addressed by improving the capabilities of the bottom 40% of the distribution, e.g. by improving education outcomes, rather than mere redistribution.
The world with which South Africa will be faced in coming decades will therefore be complex and demanding and the price of failure will be high.
It has been fashionable since the financial crisis to accuse the private sector of short-termism in their business plans and decisions, but is this not also true of public policy choices?
Michael Spence, Danny Leipziger, James Manyika, and Ravi Kanbur: Restarting the Global Economy. Harnessing the Forces of Economic Growth. A Growth Dialogue White Paper. Bellagio, Italy. 5 - 7 May 2015.