Last week Lesetja Kganyago, the South African Reserve Bank Governor, announced that they are cutting the repo (lending) rate by 0.25% to help the stressed South African economy. That’s seems too little to give the economy a real boost. But what he said next could give the economy a substantial boost. Mr Kganyago said that government should do its bit by delivering long-promised structural reforms. Only with structural reforms can the potential economic growth be lifted from its current dismal 1.05% to the targeted 3%. There is one obvious question: how is potential economic growth calculated?
The potential economic growth is an estimation at what rate the economy should be able to grow over a long term. Naturally the GDP growth rate can vary. Sometimes it is higher than the potential economic growth rate, although this creates stress factors such as higher inflation. That is not a worry for South Africa though, since we are battling to get the growth rate anywhere near our potential.
This leads us back the most basic question: how is the potential growth rate calculated? The potential growth rate of a country is the population growth plus the productivity growth rate. In South Africa’s case, the population growth rate is 1.2% and the median productivity rate is -0.15%. Therefore, the South African potential growth rate is 1.05%, far below the 3% president Ramaphosa promised and the 4% that the IMF suggest is needed to escape the middle-income trap. While it would be foolish to suggest that the answer to the poor economic prospects is to grow the population (although the Zambian president suggested this), it would be right to look at improving the productivity growth. To do that, as the SARB governor said, we need structural reforms.
Productivity growth is made up of the following: capital stock, human capital and technology.
Take capital stock. South Africa is notoriously incapable of using our natural resources efficiently. We largely missed out on the resource boom between 2003 and 2007, and have not increased our output by much since. In fact, most mines have been forced to retrench workers and close mines over the last 10 years, because it has become so unprofitable to mine here. That is mostly due to increasing electricity and labor cost, hostile government administrators and a muddy system of mining rights allocation. But mining has not been the only sector that is underperforming. Our harbors are expensive and inefficient, therefore operating way below their capabilities. The South African Bureau of Standards (SABS) take too long to approve any new product. It is therefore easier to import new goods than it is to produce them here.
The situation is even worse for human capital. Trade unions are demanding above inflation increases across the board. Our schooling system produces some of the worst results of the OECD. We are constantly ranked worst or in the bottom 5, across many measures. Therefore, our labor force is under-skilled and under-qualified. Employment equity prevents merit-based employment.
The only factor holding up our productivity is technology. Companies have been embracing automation and deploying robots rather than humans. BMW’s new production plant in Pretoria is 95% automated. Banks use of internet banking and mobile banking puts them ahead of their European counterparts. And our mobile operators are constantly coming up with new innovative products and channels of distribution, like the recently announced JV between MTN and Sanlam, to distribute life and funeral insurance products.
So what structural reforms are need in South Africa. The obvious ones are in
the education sector, where the level of education needs to be lifted
dramatically. Teachers should be trained, monitored and compensated according
to their performance. Pupils need to be provided the necessary assistance to
achieve top scores. In some cases (especially for the poor households) this
might include better pre-school facilities, free meals at school and earlier
introduction to e-learning. Employment equity laws should be scrapped in favor
of pure merit-based employment. BEE codes should not constantly be changed.
Business licenses should be given out quicker. And the awards of mining rights
must be transparent, quick and not subject to political interference. There are
many more reforms needed. But these would be a good start.
If we manage to increase the potential GDP, it would lead to an automatic increase in GDP. And with a higher GDP, everybody is better off. New companies will look to employ new workers who are then able to send their children to better schools. Tax collections would increase, giving the government more money to spend on the poor, sick and elderly. The upsides are endless, but the politicians just need to do more walking and less talking.