Why some countries grow faster than others

If South Africa truly seeks to achieve growth of 5% or more a year, should we be listening to advice from the likes of Germany, the UK and Sweden, or perhaps listen to the likes of Nigeria and Ghana, which are among the fastest growing countries in the world?

I suggest we listen to the latter, at least insofar as growth-oriented policy making is concerned. Why? Because they are adopting pro-growth policies, while Germany, the UK and Sweden are wrestling with the legacy of regulatory overburden and rampant entitlement.

You will hear all kinds of reasons not to heed advice from the likes of Nigeria and Ghana, such as their high growth rates are off a low base. This is nonsense. Let’s take China, then, which is expected to achieve a “disappointing” 8,2% growth this year, according to Morgan Stanley. The “coming off a low base” argument suddenly evaporates when you talk of China, or India.

The point is any country, large or small, can achieve high growth if its policies are calibrated acccordingly.

High growth countries, including Ghana and Nigeria, succeed because they are tuned for high performance. Sure, they screwed up royally in the post-independence spasm, but they’re getting it more or less right now.

The regulatory burden is light, and investment is welcome. Ghana has virtually no exchange controls, for a start, and a business locating in one of its “free zones” pays no duty on imports, and no income tax for 10 years. After that, income tax is levied at 8%. South Africa doesn’t even come close in terms of tax rates, labour and regulatory costs and investment incentives.

Nigeria, too, has abolished exchange controls and set up duty-free zones offering duty-free imports, a prohibition on strikes and lockouts, a one-week business registration and set-up process, and full repatriation of capital and dividends.

This, then, is what we are up against. Kenya and Cameroon offer 10 year tax holidays in their export processing zones, Egypt offers a lifelong exemption on tax, Mauritius levies a flat 15% corporate tax and exempts dividends from tax entirely. There’s a sumptuous buffet of investment offerings right across the continent. South Africa’s Industrial Development Zones offer limited six year tax holidays, great infrastructure, but exemption from labour laws is off the menu.

Export processing zones, Chinese-style, can achieve miracles. They basically get government out of the way and allow businesses to do what they do best.

SA has a huge advantage in terms of a developed infrastructure, which should be its biggest selling point, but this advantage is squandered via less visible costs such as regulatory compliance.

With this in mind, should SA be countenancing laws that will make it more costly to do business, on top of the already staggering legal cargo imposed on businesses over the last two decades?

In 2005 the Free Market Foundation put out a rather excellent study called Habits of Highly Effective Countries. It’s a long read, so we have highlighted some of the key points below. The study may be eight years old, but is even more relevant today.

How bad laws get made

The research attempts to answer how so many bad laws, with costly and unintended consequences, get made in the first place. It’s a good question.

The Foundation’s executive director Leon Louw writes:

Policy makers need a simple question answered: which policies coincide with which consequences? They seldom get good answers. They are bombarded with biased advice from vested interest lobbies, self-serving bureaucrats, academic ideologues and sensation-mongering media. Policies are generally implemented without objective or reliable information on whether intended consequences are likely to materialise, what risk there is of perverse unintended consequences, and which policies have been tried successfully or otherwise elsewhere. Policy makers should have information that enables them to emulate proven successes, anticipating pitfalls and avoiding failure. The exorbitant cost of reinventing the regulatory wheel should not be imposed on them and, more importantly, their country.

Policy makers would like to know not only which policies coincide with which outcomes, but also which policies cause which outcomes. Careful analysis can establish causality with high levels of probability, though seldom with certainty.

For successful policies to be adopted, policy makers and their advisors need the policy maker’s question answered for every policy goal. They need to know, for example, why some countries are rich and others poor; what explains high levels of crime and corruption; which factors enable citizens to live longer healthier lives; why illiteracy is often rampant where education budgets are biggest; why Africa has been the only regressing continent for a generation; why the average South African was poorer in 2004 than in 1970; what makes some third world countries prosperous when they are surrounded by seas of destitution….

Policy makers are subjected to challenging realities: they serve disparate constituencies, deal with influential vested interests, make decisions under pressure, implement policies with unpredictable consequences, act as custodians for the country’s biggest organisation (its government) and promote party political interests. They are bombarded by a surfeit of facts, theories, ideologies, opinions and rival objectives competing for scarce resources.

No free lunch

The policy maker’s dilemma is not only the lack of hard evidence about intended and unintended consequences, but also that policies promoting one objective often undermine others. As the research puts it, all benefits have costs. Policies are often propagated by promising exaggerated benefits, and underestimating, ignoring or simply being unaware of the costs in terms of lost income, unemployment or investment flight from the country.

Louw adds that a singular characteristic of high growth countries is that they use sophisticated techniques for evaluating and improving the quality of laws and policies.

How does one avoid these unwanted effects of policy making? Louw lays it out as follows:

  • To avoid promoter bias, cost-benefit or regulatory impact assessments (CBA/RIAs) should never be done by or under the influence of a department or agency promoting a measure, but by a truly independent government agency or outsourced consultant, preferably answerable directly to the Presidency or Parliament.
  • To be of real value to policy makers, and minimise their risk of being seduced into ill-advised policies, assessments must accord with a strictly prescribed and consistent formula.
  • Provision should be made for efficacy monitoring.

How laws backfire

The truth is that policies often (more often than not) increase the cost of something. When things cost more, including labour, people buy less. Would-be employers may substitute technology for labour, or invest abroad, thus exacerbating unemployment and curtailing competitiveness.

Here’s a few examples of unintended consequences arising from law making:

  • Consumer protection laws may achieve protection at the expense of a reduced range of choices (fewer products and services) and less innovation, both impacting disproportionately on the poor.
  • Asset forfeiture laws, justified in the holy crusade against crime, increase the prospect of real or suspected corruption, injustice or abuse.
  • Maintaining a stable currency (the purported job of the Reserve Bank) may result in cheaper imports but costlier, less competitive exports. More recently, the cry from industry is for a weaker currency to give a lift to SA’s export competitiveness. The result? Rising fuel and import costs, which further reduces the profitability and competitiveness of local industry. The free market answer to this is to do away with or curtail the Reserve Bank’s ability to set interest rates and allow the market to set these interest and currency rates instead.
  • Aid is supposed to elevate living standards in poor countries, yet the evidence suggests the opposite. William Easterly of New York University found that countries receiving less aid outperformed those receiving more. Structural Adjustment Programmes (SAPs) implemented by the International Monetary Fund and aid directed at poor countries have been a tragic failure, says Easterly, who advises countries to adopt the ways of winning countries rather than rely on hand-outs.
  • Mental health laws create – wait for it – more mental ill-health. These laws incentivise mental health practitioners to dream up ever more fantastical “diagnoses” to the point that psychiatry is facing a ferocious backlash over its lack of scientific rigour. We should be asking how these laws make it onto the statute books in the first place.

But South Africa is in the unique position of being able to source advice from the best in the world. Hence, our policies should be world class. Not so fast, says Louw. “What matters, as far as economic growth is concerned, is not the characteristics of rich countries, but of high growth countries.”

We send fact-finding missions to rich countries such as Sweden, the US and Germany and often import their policies verbatim. These are countries now incapable of growing more than 1% a year. We should instead be asking what fires growth in India, Malaysia and China. Or perhaps Ghana and Nigeria.

Why Africa has hit the growth path

Paradoxically, many African countries are now among the fastest growing in the world: Ghana 7,8%, Nigeria 7%, and so on. What is happening, according to research by the World Economic Forum, is that Africa is adopting more growth-friendly policies in the form of protection for investors, respect for private property and rule of law.

What about the contention that Africa is struggling to shake off its colonial past? Consider the following:

  • Some of the world’s most prosperous countries were once colonies (US, Canada, Australia, New Zealand, Hong Kong).
  • African countries grow, like other countries, at rates predicted by their economic policies – which suggests colonisation is of little relevance except to the extent they were bequeathed crude democracies shorn of liberal democratic checks and balances.
  • There are few countries that have never been occupied or colonised. The evidence suggests that the extent to which there is a colonial legacy is a self-inflicted matter of choice, says Louw.

The conclusion is clear: poor countries stay poor because of poor policies. That means, political or military interference in the court system, tolerance of bribery and corruption, high taxes and imposts on trade and investment, and arbitrary application of the law.

It’s time we started to ask searching questions of our policy makers whenever a new law is proposed. What are the benefits and costs? Who says so? Who did the research? What are their interests in doing so?

It is easy to sit back and criticise after the fact. South Africans are great at this. Rather we should challenge these laws the first time they are floated by our politicians, and interrogate the drafters and find out who pulls their strings.