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| Alternative Information & Development Centre (AIDC) a progressive activist think tank that focuses on the multi-dimensional crisis. AIDC sees the necessity of integrating both the ecological and economic dimensions of the crisis into its programmes. It does this from the perspective of developing alternatives that ensure planetary sustainability and social, economic and environmental justice. |
| South Africa’s new growth path – globalisation on a sound footing | by Joseph E. Stiglitz | | Print | |
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If there is any lesson that has emerged from the Great Recession, it is this: markets on their own may be neither stable nor efficient.It’s something South Africa has seen for years, but America is only just glimpsing: markets on their own may not create jobs, and especially good jobs, to keep up with the new entrants into the labour market. America’s unemployment rate—with one out of six workers who would like a full‐time job unable to get one—may seem paltry compared to South Africa, but even this level of unemployment is giving rise to huge social stress. Fortunately, South Africa is showing that, with its New Growth Path, it has learned the Great Recession’s lesson – in a way that America still has not. Markets, on their own, may not even direct scarce capital to where it would most productively be used. The United States needed investments in technology to keep it competitive; and instead it got housing in the wrong places, and beyond borrowers’ ability to pay. Now, the US has an anomalous combination of massive homelessness and large numbers of vacant homes. Markets are still the most powerful engines of growth. But at times, markets fail, sometimes badly and for long periods of time. Today, prospects of the markets in the US recovering on their own are bleak, with a gathering consensus that the US is entering a modified form of a Japanese‐style malaise. In South Africa, markets too have failed to function as they should, and for a long time: unemployment has remained persistently high, at a level that should be unacceptable. These outcomes are not inevitable, though getting economies to perform well is not easy. When a strategy has been tried that fails, and fails repeatedly, it is time to try another. Fortunately, over the years, there have been some instances of successes. Unfortunately, especially for South Africa, there have been many instances of failures. But we can learn both from the failures and the successes. Even a strategy that may have worked for a time, in solving one set of problems, may be ill‐suited for another time, where another set of problems is paramount. South Africa’s strategy successfully navigated the challenge of moving the country out of the apartheid regime and creating confidence in the new government’s economic management. Both the US and South Africa have tried strategies that have failed to create full employment. In both, it is time to try an alternative. South Africa’s New Growth Path is to be applauded for providing such an alternative. The plan lays out the challenges. It correctly puts employment (in the vocabulary of the International Labour Organization, “decent work”) at its centre. It seeks to build a long‐term foundation for a vibrant society, in contrast to the short‐termism of unregulated markets, made so evident in the recent crisis. Markets are at the heart of a healthy economy. But even in advanced industrial countries, markets on their own don’t build a country’s future. The great US strengths are American research universities (none of which is based on the principle of profit) and innovation. The most important innovations have been based on government‐funded research—the Internet and the advances in biotech being only the two most obvious examples. For an emerging economy like South Africa, it is even more imperative for government, working with markets, to shape the country’s future. A focus on building capabilities is essential. At the economy‐wide level this is about policy choices on infrastructure, education and R&D, which provide the basis on which firms and individuals make decisions. At the firm level this is about a vision in which local entrepreneurs can invest, and practical support for training, upgrading equipment and adopting technologies. Financial markets on their own often don’t provide adequate funding for SMEs. This is always true, but especially in the current circumstances. In the US, the Small Business Administration has played a vital role, with a remarkable record of success—including the funding that led to an entire new industry, Fed Ex. Brazil’s government has shown that such lending programs can work in emerging markets. Any country’s most important asset is its people. Leaving productive people idle through unemployment is a waste of a valuable asset. But the consequences of persistent unemployment go further. People develop capabilities through work; they lose those capabilities when they are unemployed for extended periods. High levels of unemployment eviscerate communities and contribute to family insecurity. The loss of well‐being from unemployment far exceeds the loss in income—a fact emphasized this year by the Commission on the Measurement of Economic Performance and Social Progress. Unfortunately, achieving full employment is difficult, especially after a period in which there have been high levels of unemployment. (Economists refer to this phenomenon as “hysteresis.”) There are, however, two policies that can make a big difference. The first is an appropriate exchange rate. High exchange rates make it difficult for countries to export or to compete with cheap imports. Lower exchange rates help the economy develop a diversified, productive base. It makes little sense to base an economy on a value of the currency that simply reflects the short‐term view of speculators about the local bond market, or to subject producers to the vagaries of exchange rates, which may result from the changing sentiments of speculators. That’s why most of the more successful emerging economies have taken exchange rate management seriously. Resource rich countries face a particular problem, because the sale of natural resources can lead to high exchange rates. This is a major factor contributing to the so‐called natural resource curse, the phenomenon recognized worldwide whereby such countries perform far more poorly than one would expect, given their riches. Relying on sales of a mineral resource endowment in exchange for consumer goods imports is not a stable foundation for long‐term growth. Too often, the result is rich countries with poor people. But such outcomes are also avoidable. These are man‐made failures—failures of policy. Monetary policy has multiple dimensions, with multiple effects. What had become the mantra of Central Bankers all over the world—that keeping inflation low and stable was necessary and (almost) sufficient for robust growth—has been shown by the crisis to be a flawed doctrine. The excessive focus on inflation detracts attention from other, equally important objectives: In the US, too little attention was paid to financial fragility; in many emerging markets, too little attention is paid to growth. High interest rates can stifle growth in two ways: making credit more expensive, and thus stifling investment; and increasing the exchange rate. Monetary authorities can’t, of course, ignore inflation. But a single‐minded focus on inflation, without sensitivity to the source of inflation, will produce neither growth nor stability. In fact, it can produce high levels of unemployment. The high interest rates that sometimes result put domestic producers on unfair footing. At the same time, it is important for fiscal policy to support stable long‐term investment. This means being counter‐cyclical—getting people back to work in times of recession and building up savings in good years, especially the windfalls that come in commodity booms. There are many other dimensions to a successful growth strategy that are reflected in The New Growth Path. Some involve direct government actions—investing in economic infrastructure that will earn future returns and tax revenue—but many entail simply setting the rules of the game. Industrial and competition policies that reward effort, innovation and entrepreneurship and ensure effective competition are critical. It is easy for market power, once established, to perpetuate itself, stifling dynamism. In an emerging economy like South Africa, not only must abuses of market power be prevented, but access to opportunity must also be ensured. Development finance and appropriate industrial policies are part of a package for vigorous competition and a competitive economy. The crisis has demonstrated how interconnected the global economy is. The world is interconnected in many ways—including through sharing the same atmosphere, and thus sharing the same risk of climate change. Every country must come to grips with this issue, as The New Growth Path attempts to do. As one of the world’s most significant emitters of CO2—a reflection of past decisions around the structure of industrial development—South Africa cannot afford to wait until decisions are taken globally to penalise polluters. More positively, the green economy presents huge opportunities for South Africa to re‐orient its economy in ways that reinforce sustainable and broad‐based development. While the crisis has spotlighted the risks of globalisation, it also presents huge opportunities. In South Africa, there is a particular responsibility and opportunity through promoting African economic integration, both in policies and investments. Integration, and economic change more broadly, brings winners and losers, and even if winners’ gains far exceed losers’ losses, the situation is untenable for the losers. Economic policies that ensure that the economy is operating at higher levels of employment mean that there will be far fewer losers. And adequate systems of social protection, good education and labour market policies will enhance their ability to cope with changes. I hope that the world today has moved beyond false oppositions of states and markets to recognise that success requires a balance between and better integration of the market and the state. Such a system can work better, in the interests of all citizens, leading to markets that are more efficient and accountable, markets that spurn short‐termism and reward creativity. The South African Growth Path sets out such a vision. Inevitably, there will be differences in views: interests and perceptions of what constitutes good policy vary. Some will want to keep with the policies of the past, suggesting that if the country just sticks with them a little longer or tweaks them a little bit, success is just around the corner. Others will want a still more radical departure from the past. Hopefully, out of a vigorous debate there will emerge a consensus around some of the critical policies proposed in The New Growth Path—policies that have the most promise of leading the country on the path of sustainable, equitable, and democratic development for which it has long been striving. Joseph E. Stiglitz is University Professor at Columbia University, a Nobel Laureate in Economics, and a member of the Economic Advisory Panel of the South African Minister of Economic Development. His latest book is Freefall: Free Markets and the Sinking of the Global Economy.
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