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ECONOMICS 101: CAN THE ECONOMY GROW AT OVER 5%?  AND HOW WILL IT AFFECT US?

Article © CA(SA)DotNews by DotNews

Pretty much for the last decade there has been debate over how to take the economy from a low growth to a high growth economy. In President Zuma’s first term, growth averaged 1.8% per annum. Why is it important to achieve high growth?There are those who argue that population growth is 1.2% and thus we have shown a real growth of 0.6% (1.8% economic growth less population growth) over the past five years. The major problems are unemployment (officially near 25% but in reality if you include discouraged job seekers, closer to 40%) and our rising inequality which is close to the highest in the world.Thus we need economic growth higher than 5% to reduce unemployment and inequality.How to achieve the growth?There are two main models for this – rapid growth of small business or sustained state intervention. There could also be a hybrid of the two as is happening in China.

Most of us believe in the growth of small business. However, state intervention has been successful in Asia.

And in South Africa?  

The government is openly committed to state intervention and it will continue on this path. This has had mixed results – there has been substantial government infrastructure spend but if we look at entities like the SABC, Eskom and SAA, the picture is less certain.

Can the government successfully put the country on a high growth path?

Analysts have identified three key factors which determine how effective state intervention is. These are known as the 3Cs:

  1. Capability. Does the state sector have the required skills? Generally, the whole economy is lacking key skills and government is no exception. On the Treasury side, the skills are there and the sector is highly respected. On the negative side many state enterprises limp from crisis to crisis.
  2. Credibility.  Will government-led investment bring a similar response from local business and international investors? Here the outlook is highly uncertain. Not only is there mistrust between government and business but also relationships between government and key unions are not good.
  3. Committed. Is the state fully committed to growth? Yes it is but for this to work 1 and 2 will need to improve.

In the final mix, it is not likely this will be successful without business, the unions and the state coming to a consensus.

So, with no consensus, this will mean much the same as we have now. This is not a disaster as we should in the next year or so go back to 3% economic growth (this translates into 1.8% real growth). In other words the country continues to muddle through, service delivery protests carry on (as they do in China and Brazil and this doesn’t stop economic growth) and our lives stay reasonably prosperous.

 

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