/ 28 March 2023

Economic growth isn’t all it’s cracked up to be

Reserve Bank
Borrowers hoping for some reprieve this year could be left disappointed, with markets now expecting interest rates to remain unchanged in 2024.

It is tough to imagine South Africa’s economy becoming even more of a laggard than it already is. And yet, last week, one forecast suggested that may well be the country’s fate.

After a series of meetings between the treasury and the International Monetary Fund (IMF) earlier this month, staff from the latter institution concluded that South Africa’s growth would sharply deteriorate to just 0.1% — almost no movement — in 2023. Growth, according to the IMF, would be hamstrung by the usual suspect: load-shedding. 

Excluding 2020, the last time the economy recorded comparably meagre growth was in 2019, when GDP expanded 0.3%. Most, I suppose, weren’t expecting a wealth of positive economic news this year. After all, the South African Reserve Bank did warn that severe load-shedding would shave as much as two percentage points off growth in 2023. 

The IMF’s forecast does, however, add another layer of pessimism to the country’s outlook. 

As someone who is prone to cynicism, my attention is so often drawn to what we don’t have. Right now, and for some time, what South Africa’s economy has lacked is growth. But the IMF’s dire forecast has forced me to resist another attack of economic pessimism — as John Keynes put it — and instead question whether there is still any virtue in growth.

Growth became something of a lodestar for economic policymakers during the 20th century. There is one good reason for this fixation, namely the association between economic growth and prosperity. 

A 2001 paper prepared by the IMF and the World Bank characterised economic growth as “the engine of poverty reduction”. The paper, released during the so-called Washington Consensus period — which some see as having run from the 1980s to 2008 — emphasised macroeconomic stability as the cornerstone for growth.

After a series of meetings between the treasury and the International Monetary Fund (IMF) earlier this month, staff from the latter institution concluded that South Africa’s growth would sharply deteriorate to just 0.1% in 2023.

During the latter part of the Washington Consensus years, South Africa experienced some of its best growth. Between 1999 and 2008, the country’s GDP growth averaged 4% per year, according to research led by Ricardo Hausmann, the founder of Harvard’s Growth Lab. This was enough to support average income gains of 2.6%. The unemployment rate began to steadily decline after 2003, hitting 22% in 2008, a low that the country has not seen since.

In 2008, the world’s economy hit a wall, thanks to the global financial crisis, and growth stagnated. South Africa’s GDP growth slowed to just 1.7% a year in the decade before 2019, which allowed average incomes to rise by only 0.15% a year. The country’s unemployment rate began its climb towards the record levels we’ve seen in recent years.

The prolonged period of sluggish economic growth has had an insidious effect. That much is plain to see. Some analysts have suggested that South Africa’s economic stagnation, in the context of a growing population, has seen it hurtling towards becoming a failed state. 

But another lesson of the Washington Consensus years was that growth wasn’t all it was cracked up to be. Though the period that led up to the 2008 financial crisis is associated with generally robust growth — as well as some big changes to the shape of the global economy — it also coincided with stubborn levels of inequality.

In the early 2000s, there was growing debate about the extent to which the growth experienced by countries during globalisation had actually benefited the world’s poor. 

A number of papers commissioned by the World Bank advanced the idea that growth was a rising tide that lifts all boats. One paper, titled Growth is Good for the Poor, found that the incomes of the poor were very tightly linked to overall incomes and thus growth benefits this group as much as it does anyone else. That paper also suggested that liberal economic policies, like fiscal discipline, are pro-growth.

The paper was released in response to the argument that the potential benefits of economic growth for the poor were undermined by the sharp increases in inequality that accompany growth. In a 2000 letter to the editor of The Economist, Justin Forsyth, who was working for Oxfam at the time, wrote that there was “plenty of evidence that current patterns of growth and globalisation are widening income disparities and thus acting as a brake on poverty reduction”.

After more than a decade of muted growth, it is pretty difficult to tell whether inequality would have eased or worsened in South Africa as a result of economic expansion. What we do know is that, despite having experienced some growth, the poorest’s share in the economy has generally deteriorated since the 1990s. According to the 2022 World Inequality Report, since 1990, the bottom 50% in South Africa have owned no wealth at all.

So, if growth doesn’t guarantee the equality all economies should be striving for, why are our economic policies so preoccupied with achieving this metric? This question is at the centre of a view that, perhaps, the global economy has, as economic anthropologist Jason Hickel suggests, outgrown growth.

The argument against engaging in the seemingly Sisyphean battle for growth has gained popularity just as we are coming to terms with the cost of rapid expansion — climate change.

According to Hickel, our dogged insistence on economic growth has made avoiding climate breakdown more difficult than it needs to be. “It’s like choosing to fight a life-or-death battle while going uphill, blindfolded, with both hands tied behind your back. We are voluntarily sabotaging our chances at success,” he wrote in 2020.

Perhaps the same can be said about our pursuit of equality in the wake of our fixation on growth. We have, after all, become willing to make big sacrifices — going so far as foregoing growth itself — because of the wispy promise that growth will eventually come if we stay on course with structural reforms and fiscal consolidation.

In his 1930 essay, Economic Possibilities for our Grandchildren, Keynes imagines a world in which we have transcended our insatiable desire for expansion. In that world, we would have gained freedom from pressing economic cares “to live wisely and agreeably and well”, Keynes hypothesised. If this is not what growth is for, what is the point?