A few months ago, there was a debate in the media about whether the South African economy would decline into recession.The former Minister of Finance and his director-general seemed to be in denial about the impending recession and the impact of the global economic crisis on the South African economy. They were predicting positive growth for 2009. They seemed to be protecting their legacy rather than taking a realistic view of the economy. Of course, most economists were predicting very strong growth for the economy before the crisis took hold. Now we are sure that the economy is in recession. There are predictions that the South African economy will contract by 2% this year.
I am part of a minority of economists who are willing to say that economic growth is not everything. I have consistently argued over the past few years that the type of economic growth occurring in South Africa, even when it was as high as 5%, was bad for the economy. I said that the debt-driven, consumption-led growth would leave South Africa poorer and more indebted.
Even if there was no global financial crisis, our economy would have quickly reached a point where the overindebtedness of the middle class, the increased leverage of certain businesses and the focus on short-term speculation in financial markets, rather than on productive investment, would have caused us to hit a brick wall.
It would not have mattered whether inflation was zero per cent and government’s budget surplus was 5% of gross domestic product. Aggregate demand in the economy would have collapsed because the financial sector would have been unable to continue feeding the consumption and speculation bubbles driving economic growth. I say economic growth is not everything. However, I do not think that the 2% decline on our economic outputs is unimportant. Even if the type of growth we had was the wrong type of growth, the economic contraction hurts us. We are seeing more jobs being lost. We are seeing manufacturing output contracting, and we risk losing real productive capacity in the economy.
The task of economic policy- makers is not simply to ensure that the economy returns to growth, but that we change our growth path. We have to think about the factors that drive growth in an economy. We have to consider not only whether there is growth, investment and employment, but also where that growth, investment and employment will happen. Further, we have to consider the distributive impact of economic growth. Economic growth that enriches a minority of the population and leaves the majority worse off is a recipe for future political and economic instability.
Mainstream economists think of the economy as being in equilibrium. Their mental image is of a pendulum swinging. If the economy is knocked out of equilibrium, it will automatically adjust and return to equilibrium. They believe that the role of the State in the eco- nomy is ‘disequilibrating’ and should be minimised. They view current events as a necessary correction before the economy proceeds back to a healthy equilibrium. They are obviously incorrect.
The economy was not healthy, and we do not want to travel down the same unhealthy road. I reject the notion of equilibrium. I believe that the South African economy is in a rut and that a huge effort by all of society is required to push the economy out of the rut and onto a new economic growth path.
Economic growth may be low for the first few years while we charter a new course, and we may possibly have to build the new road as we travel. However, the country can make choices about where we grow and how equitable and sustainable that growth will be. The role of the State in charting this new course is really important, but it has to do this in consultation with all stakeholders.