Gordhan's Guru: The Gentleman and The Scholar
- Branko Brkic
- 28 Oct 2009 10:28 (South Africa)
A new guru appears to have entered the government compendium of resources, Professor Michael Spence. Who is he, what did he say and why did finance minister Pravin Gordhan make such a fuss about him?
Presenting the Medium Term Budget Policy Statement (MTBPS), minister Gordhan pointed to the Commission on Growth and Development which was chaired by Spence, and specifying the five major lessons the group drew from studying the 13 countries that expanded GDP above 7% a year for at least 25 years.
Spence, a Nobel laureate and Professor Emeritus at Stanford University, chaired the study, but it included many other participants - in fact even former finance minister Trevor Manuel.
This is an extract from Gordhan’s speech drawn from the study:
“They fully exploited the world economy... ‘They imported what the rest of the world knew, and exported what it wanted’;
“They maintained macroeconomic stability, by focusing on keeping inflation low and budget deficits moderate;
“They mustered high rates of saving and investment to finance economic growth;
“They let markets allocate resources, including in economic downturns, and provided appropriate training and skills development to enable people to move from declining to rising sectors; and
“They had committed, credible, and capable governments that held public agencies accountable and sought to achieve long-term targets that were publicly articulated.”
These five points might have been the bottom line of the report, but its findings were varied and subtle.
Yet the biggest take out from Gordhan’s extended reference to Spence is that he intends to be guided by practical, hard, international experience rather than ideological predilections. This will come as music to the ears of local businesspeople and international investors as they hope it constitutes his line in the sand.
However, Spence’s study is not only about finding a scientific rather than ideological route for economic growth; it is infused with a mixture of an ideology of a special type combined with a practical sense of the world.
For example, the findings of the report on government intervention in the economy are mixed; the report cites countries that have high levels of government intervention such as China and South Korea, and those which pursue an almost extreme form of laissez-faire economics, a la Hong Kong.
Yet, the report was very firm on the issue of allowing market economics to determine prices and pursuing globalisation – almost the exact opposite approach of SA’s trade and industry and labour ministries which are shunning international trade agreements, setting up trade barriers and trying to restrict labour market changes.
The report’s endorsement of market allocation of prices was justified because the system helped provide price signals, so that it quickly became clear what was in short supply and what was being overproduced. It also helped decentralised decision making and created an incentive to supply whatever was in demand.
Critically, the report says, governments did not resist (although they may have tried) the market forces that pulled people into the urban areas or destroyed some jobs while creating others.
In Malaysia, for example, agriculture’s share of employment fell from 40% in 1975 to about 15% in 2000. Only a quarter of Malaysia’s people lived in cities in 1957, the year of its independence. By contrast, in 2005 a whopping 63% did. This seems to verge on a broadly free market approach. But in other areas the lessons learned from the report seemed very practical. Take participating in the global economy for example: The report says high-growth countries benefited in two ways from global interaction: First, they imported ideas, technology, and skills from the rest of the world. Second, they exploited global demand, which provided a deep, elastic market for their goods.
Why did this work so well? It’s obvious, the commission found. It’s easier to learn something than it is to invent it. That is why advanced economies do not grow (and cannot grow) at rates of 7% or more, and why lagging economies can catch up.
The biggest challenge for Gordhan is the prescription of the Spence report about consciously selecting growth. In his own budget presentation, Gordhan predicts growth of only 1.5% for 2010, rising to 2.7% in 2011 and 3.2% in 2012.
This does not constitute setting your sights on high. By contrast the Spence report says policy makers of high growth countries understood that growth does not just happen. It must be consciously chosen as an overarching goal by a country’s leadership.
Policy makers in all the countries understood that successful development means a decades-long commitment. It means everybody must participate in an important bargain that citizens must forgo consumption today to enjoy higher standards of living tomorrow. Even at very high growth rates of 7% – 10%, it takes decades for a country to make the leap from low to relatively high incomes.
This bargain will be accepted only if the country’s policy makers communicate a credible vision of the future and a strategy for getting there. They must be trusted as stewards of the economy and their promises of future rewards must be believed, the commission found.
In short, by the standards of the Spence report, South Africa falls way, way short. But at least the ideas are now out there and have the official endorsement.
By Tim Cohen
Read more: Growth Commission
Photo: A. Michael Spence, Nobel Laureate, 2001; Philip H. Knight Professor, Emeritus, and former Dean of the Graduate School of Business, Stanford University, speaks during the Lunch Panel: A Discussion With Nobel Laureates in Economics at the 2008 Milken Institute Global Conference in Beverly Hills, California April 29, 2008. REUTERS/Phil McCarten (UNITED STATES)