Why the government is not really interested in growth
The virtues of economic growth are not limited to economic ones such as declining poverty, rising employment, higher wages, improved tax revenues and so on. There is strong evidence that social virtues — longevity, environmental protection, peace and civility — are linked to prosperity as well. Getting the SA economy growing should be the government’s most important single priority. It is not, for two main reasons.
First, the link between economic growth and employment has been completely severed. In the 25 years before 1994 an additional 1% of economic growth was associated with a 1.3% increase in employment. Since 1994 an additional 1% of economic growth was associated with a 0.2% increase in employment. In other words, even if the economy grows it will not reliably create jobs.
If we can take successive presidents’ emphatic and hyperbolic employment goals at face value, it is doubtful whether economic growth can be relied on to achieve them, making economic growth itself a less pressing government priority.
This is very much as the government and its trade union partners intended. Trade unions’ business model is not, as one might expect, to grow employment and therefore union membership and dues. Instead, unions attract members by limiting competition from new workers for the jobs and perks of existing workers.
Having been given the freedom to write SA’s labour laws and regulations, trade unions simply did what was in their interest, giving us two classes of citizen — 36.1-million in relative comfort as against 20.9-million in relative distress. Economic growth is to be avoided, in other words, precisely because it might create employment and, therefore, uncertain conditions for those who are already employed.
Second, the link between economic growth and inequality has changed as well. Much has been made about SA’s supposedly extreme income inequality, usually citing the country’s Gini coefficient of about 0.66. Under the government’s policy of “inclusive growth”, no growth is preferred to unequal growth, which is to say poverty and unemployment will be tolerated because inequality will not.
However, over the past 25 years SA’s true Gini coefficient — taking taxes, social assistance and government services into account — has declined to a moderate 0.47 where an additional 1% of economic growth is distributed more evenly than it is concentrated.
Economic growth inevitably flows more than proportionately to those with accumulated financial, physical and, especially, human capital. Unfortunately, the government has destroyed the two primary mechanisms by which disadvantaged people acquire human capital, enter the economy and earn an income, namely quality education (due to union control over school, teacher and administrator performance) and on-the-job work experience (due to union incentives to limit overall employment).
Most economists expect growth to rise from 0.5% this year to 1.2% next year and 1.6% the following year, usually citing “base effects”, the idea that growth will rise because it is now low. But there is nothing inevitable about economic growth. If the government’s perverse incentives are a guide, the government has no interest in growing the economy.
• Sharp is a director at Prophet Analytics