Steven Friedman
WORM’S EYE VIEW
This week’s Human Rights Commission hearings could influence our economic growth prospects as much as last month’s budget.
We can have no growth without investment – but the way we handle politics and government may do as much as economic policies, if not more, to shape whether people invest.
The budget was filled with proposals aimed at stimulating investment: tax cuts, deficit reduction, inflation targeting and relaxing exchange control. The logic seems obvious: if firms and people have more money at their disposal, if the price of capital is lower and there are less restrictions on investment, they are more likely to sink money into activities which grow the economy.
But, while these measures may make it easier for people to save and invest, they do not guarantee that they will. Firms can use the money to increase dividends to shareholders or invest elsewhere, not to expand or build factories here; people can use the money to consume, not save. Their decision may depend largely on politics and the effectiveness of the government.
Minister of Finance Trevor Manuel’s budget speech showed far more sophistication than much of the economic policy mainstream.
Conventional thinking may be represented by the complaints of a radio talk show panellist whose only concern was that the capital gains tax which Manuel introduced would scare away investment. A mighty United States hedge fund owner was already, he said, reconsidering his decision to invest here because of the tax.
This analysis, which is probably far more representative of current thinking than Manuel’s speech, seems to owe more to pagan theology than economic analysis.
There is little to distinguish the desire to propitiate the fund owner from the “cargo cult” of South Sea islanders who believed that, if they performed a set of rituals, foreigners would arrive in aeroplanes to drop riches on them. Both cases assume that prosperity depends on obeying the demands of a remote power we cannot control which is easily displeased.
And the devotees of both cults misunderstand what makes economies grow. Barring exceptional circumstances, which do not apply now – such as America’s decision to shower bounty on post-war Western Europe to thwart communism – there are few, if any, cases of economies taking off because foreigners invested in them. Usually, local investment spurs growth; foreign investors become attracted to the opportunities this creates and they begin to invest, widening and sustaining the take-off.
And, even if we did need foreigners alone to grow our economy, from where do they get the information on which they base investment decisions? From local business.
Both points mean that creating enough local confidence to ensure that those who have assets are prepared to invest them – and increasing the assets of those who do have confidence – are the keys to growth. The first requires effective politics, the second workable government.
Nor does it make sense to claim that any tax – or any inconvenience to those who own assets – scares off investors. If it did, investment would be lowest in the “developed” economies, which are often more regulated and taxed than “developing” ones.
Taxes and regulations are a cost to investors – but if they receive larger benefits in return, they will still invest. How many investors would complain if they were asked to pay a tax which would sharply reduce crime or improve the communication systems businesses need to operate?
Again, politics and government are the key. The suspicion that taxes will not be used effectively may be largely a matter of perception. If investors believe a left- of-centre – or black-run – government is likely to “waste” the money, even the slightest imposition will be rejected. And the degree to which the government really is effective will obviously affect sentiment.
Many of these points were recognised in Manuel’s speech. He attacked those whose fashionable ideas about the international economy mask the importance of domestic savings and investment. And he seemed as concerned about creating a local climate for growth as he was about wooing foreigners. He offered a concession aimed at getting locals to save and invest, although he could be criticised for not doing a great deal more to encourage both.
Nevertheless, his package is hardly guaranteed to stimulate investment on the scale we need. One reason has to do with governance, the other with politics. The one may be created by the finance ministry, the other lies outside its power.
On the first score, Manuel’s zeal for budget deficit cuts is not based on the simple-minded view that if we get the government out of the economy, cargo will rain on us from the sky. His speech continues to recognise the importance of effective government. Rather, he insists that government departments have enough money to do what they need to do as long as they become far smarter about doing it.
In theory, that may be right. If government departments had scores of skilled public administrators, they may find effective ways of doing far better with what they have. But, in practice, they do not. The public service is largely staffed by officials who are either not used to the challenges the government now faces or who are inexperienced in management. To expect a civil service with those constraints to do more with less is, therefore, wildly optimistic. More gradual deficit reduction which reduced the pressure on officials, making effective government more likely, may have produced greater gains.
On the second, the budget can, at best, create a climate likely to lead to investment. But only politics can turn the possibility into a reality.
That requires, firstly, building the confidence of domestic business. This is hardly easy; for some time to come most owners will be white and much of the problem stems from our racial divisions (hence the importance of the HRC hearings). They will not disappear – but a country which negotiated an end to an apparently insoluble racial conflict should not find bargaining an understanding of the economy beyond it.
Secondly, co-operation between the government and business alone will not ensure growth because the labour movement’s co-operation is essential to investment. So it, too, needs to be part of creating a workable growth path.
Thirdly, much needs to be done to enhance the confidence of citizens so that they will invest their assets – their labour and their energies, if not their money – in growth. Besides development strategies aimed at building the productive assets of the poor, this also requires a strengthening of democratic politics so that people feel part of the new order.
Budgets may take investment horses to water; only politics and better government can make them drink.