Enabler, Disabler & Visionary
2014-05-05
In asking what awaits on a 5, 10, 20, 30 year view, it helps to separate out the main forces.
Inherited from the past is a robust constitutional and institutional frame, but also many legacy issues, none more so than distribution of opportunity, wealth and income.
If left to its own devices, the SA market economy is firmly anchored in its existing frame. Over a 100 year period, through five regime changes, some fairly radical, it has kept its basic foundations in tact.
Throughout, even when interrupted by many global crises and for us windfall episodes, this existing system has shown to be capable of 3.5% growth on average, doubling real national income every 20 years.
This existing frame could have grown faster over the intervening decades, even achieving 5%-5.5% annual average growth, if the population pools contributing the higher skilled labour had higher demographic fertility rates OR if even higher levels of quality immigration had been encouraged AND/OR a greater effort had been made to improve the human capital (education and skill levels) of under-represented population pools.
None of this happened to a sufficient degree, and so 3.5% GDP growth it has been. But what about the forecast period, be it 5 or 30 or 50 years?
The existing frame would probably be strong enough to keep generating the needed quality manpower, the needed capital savings, the innovation gains and make the needed investments in order to sustain 3.5% growth, even with changing demographic realities.
But it would probably not be able to overcome by its own volition the hurdles that keep it from faster growth attainment. For this would need to overcome the existing institutional constraints governing quality manpower supply, capital savings, innovation (productivity) gains or the pace of fixed investment.
Similarly, there is no reason to believe that if left to its own devices, the existing frame would start to consistently underperform its growth norm of 3.5%.
For we are historically organised in a very powerful way, with limited means for the system to change itself from within, except perhaps through exceptional technological breakthroughs or natural windfalls not now foreseen (but having been features at times in the past) or through remarkable shifts in sentiment moving the investment goalposts without anything else changing (with such flights of fancy certainly possible, but not especially likely on any evidence so far available).
This leaves the collective will to shift goalposts, especially in terms of the state but also by private enterprise in response to state actions and the way it changes the playing field.
So here we encounter the state, as our collective representative, as visionary, expressing what should be aspired and achieved, and as enabler laying the groundwork on which private enterprise can build.
In this process, however, we also encounter state and private enterprise as disablers, undoing what is potentially achievable.
If this sounds like high road, low road and no road, that is entirely unintended.
What matters is action undertaken towards specific outcomes that may shift the existing goal posts, if at all. So are we remaining stuck at 3.5% growth, will we advance towards 5% or even 7%, or might we fall back to 1%-2% (as was the case temporarily in the decade to 1994) or even start shrinking (as experienced by some other countries at times in the modern era)?
The answers focus on labour supply, innovation, investment.
Demographics and the institutional rigidity surrounding human capital formation (education and skill accumulation) are major forces not easily deflected or changed. Here the news is less positive than it could be.
The old pools of high human capital delivery are now stagnant, indeed shrunk by ageing and emigration and premature retirement. Immigration is certainly encouraged, provided it is politically correct, which means mainly Africa and China, much of it high on ambition but low on accumulated human capital. As to accelerating the flow of greater human capital from previously disadvantaged groups, education results have remained disappointingly poor.
What we are left with is a steadiness of new quality labour supply, even when changing in its composition, sustaining the status quo (3.5% growth).
The breakthroughs giving us faster human capital formation have yet to happen, but are not in view. Then again, the institutional arrangements currently still in place do not appear in danger of breaking down, provided revolutionary destruction can be prevented.
It might be possible to achieve faster innovation/productivity gains but it is not obvious how this will be achieved, except through very special changes in behaviour and organisation, none of which seem likely any time soon.
The greatest potential for positive change is probably in the area of investment, both public and private. Here the state needs greater skill capacity and private enterprise needs greater confidence and follow through with bigger balance sheet commitments.
Unfortunately, not enough appears to be undertaken on either score, with the state not acquiring greater human capital endowments allowing it to make bigger public investments, and for private enterprise to gain greater confidence in local potential, instead seeing such potential elsewhere and gravitating there instead.
So the push north of 3.5% growth remains in doubt, certainly in the short to medium term. Longer term one can always famously assume these things will be there, as much will still potentially change, but will it necessarily change for the better?
It is here that we encounter the State and Society as Disablers, undoing existing institutional arrangements in favour of rules of the game actually potentially lowering the pace of growth.
And this can be temporarily the case, as during the civil war conditions raging in the 1980s, or the far worse destruction wrecked in the north of the country during the Boer War around 1900. Or it could be much longer lasting as society recasts itself more decidedly, with large resulting population movements, and loss of skills and investment.
My sense of the times we are moving through is that private enterprise is engaged in a holding operation locally, with active diversification elsewhere in the world where (much) faster growth prevails, but with the State and Society engaged in major re-engineering efforts that mainly pursue redistribution aims rather than promoting stronger growth potential.
That points to undershooting growth potential below 3.5%, possibly for some while as the outline of what is being contemplated is ambitious (changing the social dispensation) and the time line uncertain but very long.
The global overlay further complicates this outlook.
Here we may still be experiencing slow recuperation from crisis, but the prognosis is for steady betterment, its implied improvement in commodity demand and prices also favouring us, tempering any domestic backsliding.
Also, the domestic dislocation and disruption and interference appears mild by historic standards, rather than being catastrophic, at least so far.
It all points to a mild growth potential undershooting domestically, prevented from attaining worse proportions by renewed global uplift in coming years.
In addition, there are potential new windfalls looming in the future (such as fracking unlocking energy riches), but also potentially new disasters (such as wild political detours through populism or far left economic meanderings).
This decade (2010s) seems to be shaping as a 0-3% growth undershoot. The next one (2020s) could be back to standard modern performance (3.5%) if there is no wild populist detour. Beyond that looms either 7, 5, 3.5 or 2%. In other words, the next generation has to decide what it wants and enact it.
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website www.bruggemans.co.za
Email economics@bruggemans.co.za
Twitter @ceesbruggemans
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