Thoughts on Growth, Ease of Doing Business and Student Protests

Growth is good for the poor
— David Dollar & Aart Kraay 2002

I believe in growth. I believe that growth reduces inequality, creates stability and is the foundation of prosperity. I also believe that a free market system, where entrepreneurs are able to start and develop businesses is the best way to generate growth and reap the associated benefits such as lower unemployment.  In short, I believe in Capitalism. 

Since the global financial crisis it has become increasingly in vogue to be offended by the “C-word” and to mistakenly combine the failings of a poorly regulated and incorrectly incentivised financial services industry with an entirely natural and intuitive economic system that has decreased childhood mortality, ended slavery and put a man on the moon.

My views are un-cool (Che certainly wouldn’t approve) and so I’ve been subjected to a number of rambling and incoherent re-education theories on “Post Capitalism” and other economic alternatives. As Paul Collier points out, it seems that under it all many people believe that low-income, stagnant, egalitarian countries with good social services are a practical utopia. The reality is that these arguments are coming from people sitting comfortably in Sandton or London, rather than the backwaters of Cuba. Anyone that wishes to propose an alternative theory to the free market economy first needs to find a way to explain the deaths of tens of millions of people that resulted from famines caused by communism and other delinquent socialist experiments.

When I've done volunteer work in impoverished communities I been blown away by the amount of entrepreneurship. It seems that informal trading and grass roots capitalism is what people turn to to get out of adversity. This reinforces my view that capitalism is the best way to generate prosperity at a macro level. 

Unfortunately, it’s also popular to link growth, wealth and prosperity with inequality. This is a profound mistake. Research has demonstrated very clearly that the incomes of the very poorest people rise as people around them get wealthier. Some academics even go to great lengths to come to the wrong conclusion. In his book, Capital in the 21st Century, French economist Thomas Piketty eloquently shows over 696 pages that inequality decreases when the rate of growth is higher than the rate of return on capital (aka how much money you make by investing). As a socialist, Piketty concluded that the best way to bring this about was to tax the living daylights out of anyone with money to terminally reduce the rate of return on capital below the rate of growth. In my humble opinion, it makes much more sense to reduce inequality by focusing on creating as much sustainable growth as possible. To that end, lets look at some drivers of growth.

This week the World Bank released its global “Ease of Doing Business Rankings”. The rankings measure how easy it is to start and operate a business in 190 countries. The 10 factors that are considered are:

·       Starting a business (South Africa ranked #131 out of 190 countries)

·       Dealing with construction permits (#99)

·       Getting electricity (#111)

·       Registering property (#105)

·       Getting credit (#62)

·       Protecting minority investors (#22)

·       Paying taxes (#51)

·       Trading across borders (#139)

·       Enforcing contracts (#113)

·       Resolving insolvency (#50)

Overall South Africa ranked 74th out of 190 countries, down 2 places on last year. Mauritius is the highest-ranking African country at #49 and Kenya (#92) was the only African country to make the top 10 most improved list. Maddeningly, New Zealand is the #1 ranked country and it seems that they aren’t just good at putting systems in place to build amazing rugby teams. I personally find it most frustrating that it is easier to start a business in Kazakhstan, El Salvador or Iran than it is in South Africa.

Small countries that are undergoing catch-up growth distort the sample set, so its not quite that easy to show the countries that are easy to do business in growth faster. I was however able to show that African countries that have improved in the rankings since 2010 are forecast to grow faster in 2017, which means that improving our ease of doing business is definitely something that South Africa should be working on.

The greater a country in sub-Saharan Africa's improvement in the global ease of doing business rankings, the more likely it is to grow faster in 2017 - Louwdown analysis of World Bank Data

The greater a country in sub-Saharan Africa's improvement in the global ease of doing business rankings, the more likely it is to grow faster in 2017 - Louwdown analysis of World Bank Data

When India performed poorly in the rankings this week (#130), Prime Minister Narendra Modi demanded that all chief secretaries of government analyse the report in detail and produce recommendations for improvements in their departments within a month. This was at about the same time that the heads of South Africa’s elite crime fighting unit, the Hawks, and the South African Revenue Service took SARS employee Vlok Symmington hostage and tried to get him to concoct an affidavit against Finance Minister Pravin Gordhan. My apologies… “allegedly” took Symmington hostage.

I don’t think that students in South Africa are actually protesting about free education. I think that protest are really about poor growth, dismal prospects after university and the realisation that someone who invests money in their own education may not be able to recover that investment in our stagnant economy. India is expected to growth by 7.8% in 2017 and China, which has been on a massive anti-corruption campaign, is expected to grow by 6.2%. South Africa is hardly expected to grow at all. Maybe we should stop (allegedly) taking people hostage and help our students by paying attention to what has worked well for our BRICS compatriots.

Student protests at parliament - source eNCA on Twitter

Student protests at parliament - source eNCA on Twitter

 

(Sources: Journal of Economic Growth, The Bottom Billion, The Black Book of Communism, Capital in the 21st Century, The Wold Bank, Louwdown analysis of World Bank Data, The Times of India, Mail & Guardian, Forbes, OECD)

DR ANDREW LOUW CFA