Go gentle into raging policy storm

15 May 2016 - 02:00 By Jabulani Sikhakhane

As South Africa seeks a way out of its stagnation, policymakers should be careful of a big bang approach to economic reform. They should rather focus on small changes that are most likely to deliver the biggest impact in terms of increased private sector investment, job creation and economic growth. Such an approach, which was best described by former Chinese leader Deng Xiaoping as crossing the river by feeling the stones, is even more relevant given the state of South African politics, specifically that of the ANC, as well as the brazenness with which those who are hellbent on looting the state have been acting recently. Any change to the status quo will be resisted by the looters if they perceive it as a threat to their looting agenda.An incremental approach leaves vested interests untouched while policymakers identify key blockages to growth. But it's not just any blockages; it is specifically those whose removal will most likely deliver the highest economic growth and a minimum amount of resistance from vested interests, including trade unions, private sector firms, or corrupt politicians and civil servants.story_article_left1One of the advocates of such an incremental approach is Dani Rodrik, a Harvard professor of international political economy.In a recent article, "The elusive promise of structural reform", published by the Milken Institute Review, Rodrik reiterates his caution against too ambitious an agenda for economic reform.Using Greece as a case study, Rodrik says that every country whose economy is stagnating is being told to undertake structural reform, which he describes as "a grab bag of policies" meant to enhance productivity and improve the functioning of the supply side of the economy.These policies are targeted at impediments to the efficient functioning of labour, goods and services markets. They include making it easier for firms to fire unwanted employees, breaking business and union monopoly power, privatising state assets, reducing regulation and red tape, and removing licensing fees and other costs that deter market entry. They also seek to improve the efficiency of the courts, enforce property rights, and enhance contract enforcement.Rodrik says Latin America's experience in the '80s suggests structural reform delivers growth only over the longer term at best. More often than not, it has negative consequences in the short term. This, Rodrik writes, is consistent with economic theory that teaches that growth-promoting reforms work "by raising the potential income of the economy in the long run".To back his argument for incremental reform, Rodrik uses India's growth acceleration in the '80s as a case study.He defines growth acceleration as an increase in per capita growth of two percentage points or more, sustained for at least eight years, and 3.5% annually thereafter. India's growth rate doubled from 1.7% between 1950 and 1980. It then jumped 3.8% from 1980 to 2000. This growth preceded India's opening up of its economy, which began in earnest in 1991, a decade after the growth acceleration started.block_quotes_start Reformers seek to pack as many changes as possible and as quickly as feasible block_quotes_endRodrik and fellow economist Arvind Subramanian argued in a paper published in 2004 that the trigger of India's economic growth was "an attitudinal shift" on the part of the national government in 1980.The governing Congress Party's rhetoric had been all about socialism and pro-poor policies. "When Indira Gandhi returned to power in 1980, she realigned herself politically with the private sector and dropped her previous rhetoric. The national government's attitude towards business went from being outright hostile to supportive," Rodrik writes in the Milken Institute Review article.The moral of the Indian story is that small changes can make a big difference in economies that suffer multiple distortions. He points to China's growth acceleration after 1978 as another example of growth triggered not by economy-wide reforms or major liberalisation.China's growth was a consequence of specific reforms that allowed farmers to sell at uncontrolled market prices any produce in excess of their allocated state quotas. China replicated this incremental approach in urban industrial development, trade, foreign investment and finance.story_article_right2Mauritius is another example, where the trigger was the establishment of a largely unregulated export processing zone that led to a boom in garment exports.Mauritius achieved success in garment exports even as the rest of the economy remained heavily controlled and protected.The big bang approach is favoured by policymakers because it exploits a window of opportunity created by an economic crisis. Fearing that this window will close when normalcy returns, reformers seek to pack as many changes as possible and as quickly as feasible.Big bang reform comes with costs, including slower economic recovery. These are tolerated because of the promise of sizable benefits down the line.In South Africa's case, an incremental reform agenda seems appropriate given the obstacles, including corrupt politicians and civil servants whose interests would be threatened by big bang reform. Tiptoeing across the river of economic reform by feeling for the stones seems a more sensible option.mabheki65@gmail.comSikhakhane is deputy editor of The Conversation Africa..

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