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South African economy: Growth vs welfare is not a zero-sum game

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By Tim Cohen
14 Mar 2021 0

Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn't include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.

This past week has been a sobering experience when it comes to economic growth: the South African economy declined by 7% in 2020, more than it has in a single year for a century, by some reckonings. This is of course no surprise; in some ways, it’s actually better than the dire forecasts at the start of last year. But seeing the number there, in black and white, it’s devastating when you imagine what it means for people’s lives.

First published in the Daily Maverick 168 weekly newspaper.

Growth must be a bigger focus.

But it does raise the question of how seriously we should take “growth”. Often, trade unions and left-wing academics claim we should not “obsess” about economic growth and should rather look to other measures to judge the progress of society. It’s a point half-well made.

The first and most obvious problem is that growth is a double-edged sword; it most certainly comes with what economists call “externalities”, benefits or more particularly costs, that are caused by a producer but that are not incurred or received by that producer. The costs are therefore borne “externally”, often by society as a whole. The most obvious of these are environmental factors.

The second problem is that just measuring growth is extraordinarily difficult, notwithstanding the great advances made in measurement techniques and technology. In GDP: A Brief but Affectionate History, economist Diane Coyle shows how arbitrary these calculations can be, alluding to, for example, the extraordinary day in 2010 when Ghana’s GDP jumped 60%. Even as a supporter in general of the concept, the closer you look at how GDP is calculated, the less convinced you become that it’s a reliable measure.

Coyle points to the third problem, which is that GDP might have been appropriate for the 20th century but is becoming less appropriate in the 21st-century economy, which is driven by innovation, services, and intangible goods. But … it’s what we have, and even though it might be questionable as an absolute measure, so long as you are measuring consistently, it has utility as a relative tool. In other words, even if the initial measurement was wrong, the movements up and down from there do tell you something.

The objection of left-wing critics about “growth obsession” is, however, not so much methodological as ideological. This is an arguable point, but I do think they are wrong. They tend to claim, in my experience, that politicians are overly focused on “growth” and insufficiently focused on welfare.

The problem is that however synthetic GDP might be, it is highly correlated with things like a Social Progress Index (SPI), which ignores wealth but focuses on basic human needs, wellbeing and opportunity. The SPI measures a wide range of indicators from access to food, shelter, health and education. It also measures vital freedoms of choice and non-discrimination. The index is based on the writings of economists Amartya Sen and Joseph Stiglitz, so it is hardly spawned by the Chicago School. There are some anomalies but, generally, the group of countries at the top of the SPI index and those at the top of the GDP measure are the same – and those at the bottom too.

Another criticism by SA’s left-wingers is that the state is so focused on growth it ignores welfare. But this criticism is misplaced too. The problem is that they are formulating the problem as a dichotomy, where “growth” and “welfare” are seen as an either-or choice. As the SPI shows us, they are not.

In fact, my impression is that far from being “obsessed” by GDP, our government and many others around the world are not focused on growth enough, precisely because they don’t recognise sufficiently the connection between economic growth and social welfare. Of course, there are short-term trade-offs that might be necessary, as we saw in our most recent Budget.

Statistician and economist Tim Harford wrote a long time ago in the Financial Times that the claimed disconnection between growth and its negatives might be a problem if politicians strove to maximise GDP, “but they don’t”. If they did, trade wars would be less frequent events. “Economic policymaking has flaws, but an obsession with GDP is not one of them,” he wrote. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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