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Why the fuss about economic growth?

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Why the fuss about economic growth?

5th March 2010

By: Seeraj Mohamed

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Statistics South Africa (StatsSA) reported on February 23 that real gross domestic product (GDP) “at market prices increased by 3,2% quarter-on- quarter, seasonally adjusted and annualised” for the last quarter of 2009.

The quarter-on-quarter seasonally adjusted and annualised increase in GDP for the third quarter of 2009 was 0,9%.

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This second quarter of GDP growth has convinced many commentators that South Africa is well on its way to recovery from the recession. Rashad Cassim, director- general at StatsSA, proclaimed: “For me, this number gives more comfort that the course of overall output is altering gradually, out of recession.” South African Reserve Bank Governor Gill Marcus told Parliament’s Finance Committee that South Africa was coming out of the recession “relatively rapidly”.

A recession is defined as two or more consecutive quarters of negative GDP growth. The end of a recession is when GDP growth turns positive. Unfortunately, GDP growth is not a good reflection of economic performance. However, it still remains the key indicator used by the media and government to assess the health of an eco-nomy. The end of the recession does not spell the end of South Africa’s economic problems, particularly our unemployment crisis.

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Our major development goals are to decrease poverty, inequality and unemployment. Formal-sector employment is a key element required for reducing unemployment and poverty. Positive GDP growth, even relatively high GDP growth, does not necessarily lead to employment and poverty reduction. The GDP growth experienced in South Africa from 2003 to 2007 was accompanied by increasing inequality. It is time for the media and policymakers to consider other variables, such as employment and poverty reduction, when talking about the health of an economy.

Many commentators would tell you that economic growth is important because, when the size of the population grows, economic growth is required to ensure that the population can continue to consume at the same level as before. They would add that economic growth that is faster than population growth would mean that the average person has more and can consume more. However, the idea of using GDP growth as an indicator of economic performance requires too many incorrect assumptions to be useful.

In order for GDP growth to fulfil the role of indicating an economy’s health, one has to assume that the increased output is shared equally among all members of the population. This assumption would not be realistic even in a society with very low levels of inequality. In a country such as South Africa, where there is an extraordinarily high level of inequality, this assumption is irresponsible.

One would further have to assume that GDP growth always leads to more employment and investment. The experience around the globe and in South Africa over the past few years is one of ‘jobless economic growth’. Growth based on asset price bubbles and increased levels of debt leverage did not lead to productive investment or job creation. It ultimately led to a financial crisis that caused huge job losses. Therefore, assuming that growth always leads to investment and job creation is another irresponsible assumption.

A further assumption would be that growth is balanced across the different sectors of an economy. Again, we have just lived through a period during which economic growth was associated with huge increases in the size of the financial sector and a declining contribution to GDP by manufacturing sectors. Economic growth is hardly ever spread equally across all economic sectors.

Further, economic growth that relies on high levels of exploitation of workers and causes social problems, and growth, accompanied by large levels of environmental damage, will hurt an eco- nomy.

I am not against GDP growth. I am saying that using a single variable, such as GDP growth, to assess the health of an economy is unsound economics. Further, I am arguing that all the media attention on whether an economy is in recession or not distracts us from other serious, fairly obvious economic problems affecting society.

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