Rich world lessons for South Africa
By Cees Bruggemans, Chief Economist of FNB.
All three major rich regions (Japan, America, Europe) have fundamentally stumbled in recent decades.
Has South Africa something to learn from their experiences or can we afford to ignore them?
Japan stumbled first.
Since WW2 Japan’s favoured economic model was government-led, export dependent and manufacturing focused.
By the 1990s, this Japanese model fell out of touch with the changing global economy as other Asian economies started catching up, challenging Japanese dominance in core industries.
Others had lower domestic cost bases, weaker currencies, larger economics of scale while getting access to the same technologies and marketing distribution channels.
Yet Japanese policymakers keep clinging to this old model. Such inflexibility has resulted in decades of relative stagnation (minimal growth).
In Europe, many countries over a number of decades build elaborate welfare states, along the way accumulating high national debts.
It took the recent sovereign and banking crises following a series of earlier financial shocks (Eastern Europe, Anglo-Saxon subprime securitisation) and a great recession for these countries to discover that fiscal space shouldn’t be taken for granted ever.
If a country wants a welfare system, it should pay its way from taxes and social security levies. The fiscal space (low national indebtedness) should be preserved as an emergency buffer, in case the Keynesian advice at a time of crisis needs to be followed (with government taking the lead as private agents withdraw and deleverage).
That’s not what happened in Europe. By the time recession hit, national debts in many countries were (excessively) high already and started to accelerate.
When the need for fiscal austerity became obvious in order to arrest the debt spirals, it came at the wrong moment as crisis-induced weakness required more (not less) fiscal stimulus.
But with the debt-reduction priority prevailing, it was found that democracies do not easily scale back acquired social ‘rights’.
Europeans today are attached to their national welfare systems even though it is burying them in debt. Being inflexible about it threatens Japanese-type debt burdens and the stagnation that follows in its wake.
In the US, the country is so devoted to its version of the free market that it won’t get political backing for needed infrastructure because of public aversion to state intervention in the economy.
Inflexibility on this score will undermine US growth in the long run, too.
In all three rich regions things should be done differently.
In Japan there is need to address excessive regulation keeping back competition and entrepreneurship. Producers should be encouraged rather than discouraged in their attempts of changing the economy.
Also, Japanese households should be encouraged to save less and consume more, allowing the country to acquire a better domestic balance while creating more domestic demand for producers.
In the US there should be a clever restructuring of mortgages to repair the housing market.
In Europe, more reform could be undertaken to reduce national trade barriers, within professions and among countries, with a better performing European-wide common market spurring faster growth.
How does South Africa shape against this background?
Recent South African government policy initiatives champion a government-led, export-promoting and manufacturing focus.
While Japan benefited from this approach in its early economic recovery years post-WW2, the world has moved on.
Japan has become more costly while many countries now try to use incentives, low cost labour and weak currency to boost their manufactured exports.
It is late in the global catch-up game, and a busy space for South Africa to try to gain some advantage.
Similarly, we are ambitious to build bigger social safety nets, whose extensions (pensions, health, education) increasingly look like a European welfare state.
Providing social services while paying for them through taxes and levies is one thing. Allowing borrowing and national debt to carry part of the initial burden would be folly as can now be daily observed in Europe.
The US suffers at present from excessive zeal regarding free markets at the expense of doing something about infrastructure and cleaning up its housing mess.
South Africa cannot be said to show excess zeal in favour of free markets. Instead, it shows a relative lack of zeal in strengthening its economy’s supply side, meaning more infrastructure, better education, better performing labour markets, but also more affordable housing.
But also like all three rich regions, South Africa exhibits a love for regulations whose overall effect may be more costly in growth foregone than perhaps fully appreciated.
Japan, Europe and America became rich by doing certain things well. They have stumbled and have started to stagnate by doing certain things wrong.
South Africa would do well to study these experiences closely, and not to repeat the mistakes. As things stand, we seem to be repeating the mistakes of all three of them, even if we have only barely begun doing so.
Source: Cees Bruggemans, FNB, November 9, 2011.
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