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"Government is not the proximate cause of growth"

Much has been written on the topic of continuity in economic policy in South Africa in the past year.

Arguments on the issue have focused mostly on the perceived possibility of policy discontinuity in the wake of the change in the leadership of the ruling party, the ANC, which will result in a similar change in leadership in government after the upcoming general elections.

One often gets the impression from some commentators that they would categorise any change in policy as discontinuous, in other words for them policy continuity is equivalent to an unchanged position.

I would argue that this is a rather lopsided way of approaching the issue of policy continuity.

Change is perfectly compatible with continuity as long as the reasons for change, the rationale for the direction it is pursuing and the form it is taking are grounded in past experience under the old policy regime, as well as new insights that have gained acceptance after being vigorously tested.

Questions of policy continuity normally go hand in hand with a change in government, resulting in a new ruling party with a completely different ideology taking over the reigns of government.

Bearing in mind the general expectation that the upcoming election will not result in a change in the ruling party in South Africa, it is unusual for there to be so much anxiety regarding policy continuity.

Perhaps the underlying reason for this anxiety is to be found in the observation that the ruling party is effectively a coalition government consisting of three coalition partners, but with the twist that the electoral support of only one of the coalition partners gets tested at the polls.

This makes it extremely difficult to judge the relative strength of the coalition members in influencing the outcome of the bargaining that is an integral part of the formation of a coalition government.

With the members of the coalition having clear ideological differences, it leaves the question of the ultimate direction that policy will take open to speculation.

Leaving politics aside, it is interesting to note what the Commission on Growth and Development had to say about the issue of policy continuity and change in its report published in May 2008. I quote:

"Today's bad policies are often yesterday's good policies, applied for too long. Governing a growing economy is not a static challenge. It is more akin to a long voyage undertaken with incomplete and sometimes inaccurate charts. "

"It is prudent for governments to pursue an experimental approach to the implementation of economic policy. The principle is expressed well by Deng Xiaoping's oft-quoted dictum to "cross the river by feeling for the stones". Governments should sometimes proceed step by step, avoiding sudden shifts in policy where the potential risks outweigh the benefits. This will limit the potential damage of any policy misstep, making it easier for the government and the economy to right itself. Likewise, each footfall should represent a small trial or experiment, a 'feeling about' for the best way forward."

"It seems to us that the correct response to uncertainty is not paralysis but experiment. Governments should not do nothing out of a fear of failure. They should test policies, and be quick to learn from failure. If they suffer a misstep, they should try something else, not plunge ahead or retreat to the shore. These experiments should, however, be cautious. Each step should be weighed to generate the greatest amount of information about the economy for the least cost, should the policy prove to be a misstep. When they choose policies, governments should ask themselves, what is the worst that could happen? Small experiments are usually less damaging, should they fail, than big ones. Risk management is an important aspect of policy formation in developing countries."

The conclusion is therefore that policy should not be static, although sudden dramatic lurches in new directions should be avoided.

Policy should indeed evolve over time, and continuity is more about rational policy change than no change at all.

An experimental approach to policy formulation will require ongoing assessment of the effectiveness of various existing policies, maintaining those that have been successful, and changing those that have not worked, a sentiment which has been expressed repeatedly by members of the South African  'government-in-waiting'.

Therefore, the crux of the matter is to be found in assessing which policies have worked and which not, an exercise that should be conducted objectively and without ideological bias.

A specific policy should only be judged against its stated objective, and it should not be burdened with the failure of supporting policies that were unsuccessful.

The effectiveness of what was intended to be a coherent set of policies can easily be undermined if implementation is uneven. It also needs to be borne in mind that each policy instrument can only be used to achieve a single objective.

Assessing South Africa's policies of the past decade in this way leads me to the following conclusions:

• South Africa's macro-economic policies have been singularly successful in achieving the objective of macro-economic stability, which is the bedrock of economic growth and development. With regard to monetary policy, the inflation-targeting regime has greatly enhanced the credibility of the Reserve Bank, and has provided a rigorous framework in dealing with the inflation shock in 2007-2008 emanating from the sharp increase in food and energy prices. Concerning fiscal policy, the multi-year budgeting process, along with various other measures, has greatly enhanced long-term planning and predictability, inter alia enabling the orderly expansion of the social safety net. The anti-cyclical approach adopted in recent years, including the introduction of the structural budget balance, has served to create the necessary capacity to counter the unfolding recessionary conditions in the wake of the global financial crisis.
• Micro-economic policies have unfortunately not been equally successful. It is not surprising that the constraints on economic growth identified in the Accelerated and Shared Growth Initiative (ASGISA) mostly entail deficiencies in this area. Failures include the persistently poor labour absorption capacity of the economy, insufficient progress in diversifying exports, and the lack of a proper strategy to grow the small and medium enterprise sector.
• Some of the biggest failures have been in policies that are essential to the ability of the economy to enhance living standards and reduce inequalities, although they are strictly not of an economic nature. Worthy of special mention are education, health, and law enforcement, as well as infrastructure development. Success in these areas is essential to creating an equal opportunity society. 

It is unfortunate that criticism of past policies seems to be most vocal with regard to the most successful aspect of policy, viz. macro-economic policy. These policies cannot be held responsible for the still high level of unemployment and growing inequality.

It will be grossly unfair to lay the blame for the inability of the economy to create sufficient job opportunities and eradicate poverty on these policies and judge them to be a failure.

When measured against their objectives, they certainly do not require a fundamental revision. The focus should rather be on the failures in other policy areas to capitalise on the sound foundation laid by macro-economic policy.

At the other extreme there seems to be little disagreement with regard to the third set of policies mentioned above, with failure being widely acknowledged and the focus being on improved implementation rather than on new policies.

The policy area that requires most scrutiny and which can benefit most from a rigorous debate is micro-economic policy. It is also the policy area that offers the most justification for the experimental approach advocated by the Growth Commission.

In view of government's stated intention to move along this path, with the emphasis on a revitalised industrial policy, the following comments from the Commission are noteworthy:

"Governments in the high-growth economies were not free-market purists. They tried a variety of policies to help diversify exports or sustain competitiveness.

These included industrial policies to promote investment in new sectors, and managed exchange rates, shepherded by selected capital controls and reserve accumulation. These policies are highly controversial.

Within the Commission and the broader policy community, there is a wide range of opinion about their benefits and risks. We have tried to set out the rationale for these policies and to identify the potential problems they create.

An awareness of both seems important and useful. If they try these expedients, governments should be clear about what they are trying to achieve and be quick to reverse course if the intended results do not materialize.

The policies should also be transitory, unless there are compelling externalities or market failures that require their retention. Any profit-seeking activity that needs permanent subsidies or price distortions to survive does not deserve to do so."

In conclusion, one cannot deny that the economic policies pursued by South Africa in recent years have not achieved all desirable goals.

The lingering related problems of unemployment, poverty, and inequality bear ample testimony to this. However, this does not imply that past policies have been patently wrong and should be thrown out.

In assessing how effective the present set of policies has been, the starting point should be to question the efficiency of policy implementation.

If the intended policy set has been implemented only haphazardly, which I would argue has been the case, the question remains what the results would have been had they indeed been fully and comprehensively implemented.

This applies in particular to the set of policies that is generally known as GEAR, and which still forms the backbone of current policy.
 
However, we need to be open to the possibility that the current set of policies, while being necessary, is not sufficient or necessarily complete.

Some experimentation to fill the gaps therefore seems in order. But it would serve us well to remember these words of the Commission for Growth and Development: "Government is not the proximate cause of growth."

That role falls to the private sector, to investment and entrepreneurship responding to price signals and market forces. But stable, honest, and effective government is critical in the long run.

The remit of the government, for example, includes maintaining price stability and fiscal responsibility, both of which influence the risks and returns faced by private investors.

Jac Laubscher is the Sanlam Group Economist