President Donald Trump has now kicked us out of the G20, at least for the next year, while the United States chairs the group.
The US has left an opening for us to rejoin, but this will require “tough decisions” by SA, says US Secretary of State Marco Rubio.
SA’s place will be taken by Poland, a country whose success, Rubio wrote, “is proof that a focus on the future is better than one on grievances”
“The contrast with South Africa, host of this year’s G20, is stark,” Rubio said.
Rubio added: “South Africa’s economy has stagnated under a burdensome regulatory regime driven by racial grievance, and it falls firmly outside the group of the 20 largest industrialised economies.”
Rubio is correct – there is a stark contrast between the poor economic performance of SA and Poland’s stellar growth. SA’s policies are a bar to growth and we are far from being one of the world’s 20 largest economies. On the basis of GDP measured on a purchasing power parity basis in which a similar basket of goods is used to value output, SA ranks 33rd, whereas Poland is 19th.
SA’s economic performance has been particularly miserable since about 2008, whereas Poland has excelled in the years after its reforms gained traction after the fall of the Berlin Wall in 1989. The IMF expects Poland will lead Europe with growth of up to 3.5 percent this year, whereas the Eurozone will only grow by 1.3 percent, and SA by just 1.1 percent.
Poland is not a super-performer like China. But what Poland has displayed when compared with SA is a higher and steadier longer-term average growth rate due to unbroken sound policies. Since 1994, Poland’s annual average growth rate has been around 3.7 percent, compared to SA’s 3.3 percent. They are not far apart, but that difference, when compounded, has allowed Poland to massively outperform SA over 30 years.
Back in the early 1990s, the Polish and South African economies were not far off in size. In 1994 Poland’s GDP was just 13 percent larger than that of SA, if GDP is measured in constant US dollars on a purchasing power parity basis. If measured using current purchasing power parity prices, SA’s economy was marginally larger in 1994. At the end of last year Poland’s economy was more than 180 percent larger than that of SA.
Four times
In 1994, Poland’s GDP per capita was five percent below that of SA’s. But last year Poland’s GDP per capita was about four times that of SA’s. In the case of Poland, a considerably larger GDP is divided among almost the same population as in 1994. In 1994, Poland’s population was a little over 38 million, and today is slightly below this level.
By contrast SA’s population has risen from 44 million in 1994 to an estimated 64 million today, a rise of 45 percent. As our growth has been low, and our population growth rate is around 1.1 percent a year, SA per capita income on a real basis last year was only 34 percent higher than what it was in 1994. On the same basis of measuring per capita GDP, Poland’s rose by 240 percent over the same period.
After the fall of the Berlin Wall in 1989, Poland undertook radical free-market reforms. Under the “shock therapy” of the Balcerowicz Plan, named after the Finance Minister, Leszek Balcerowicz, Poland went through considerable hardship. The Polish economy had been in free-fall since the 1970s due to a default on foreign debt, shortages, hyperinflation, and the collapse of state-owned enterprises. The plan put Poland on a solid growth path.
There has been an element of luck for Poland, but then luck often comes to those who put themselves in good positions. A big boost to Poland’s economy came when it joined the European Union (EU) in 2004. This gave Poland access to large funding and tariff free access to the European single market, which meant it could be tied into European company supply chains.
After Poland joined the EU a large number of Poles went to work in the UK and other Western European countries. This substantially raised remittances from foreign earnings and further contributed to boosting growth.
Key has been Poland’s commitment to the consistency of its growth-oriented policies involving attracting foreign investment, controls over government spending, sound financial regulation, and low inflation. Its more gradual privatisation helped avoid the sort of chaos that occurred in Russia.
The basic lessons of the Polish experience are straightforward. Pursue sound economic policies, privatise in an orderly manner, attract investment and take full advantage of opportunities that come your way.
When it came into power the ANC initially embarked on a policy of hesitant liberalisation. Price controls on commodities and the agricultural control boards were all scrapped. There were also small steps toward privatisation such as that of partially selling off Telkom. Until about 2008 SA maintained a sound policy on state spending. That was abandoned under President Jacob Zuma, but in recent years the outlook on this has improved. SA’s saving grace is that the central bank has maintained tight control over inflation.
Our policy environment
Our luck is that we were given tariff-free access to the US market through the Africa Growth and Opportunity Act for a range of our exports. But because of our policy environment and high crime, few companies invested in SA to take advantage of this.
Investors were initially attracted to Poland because its labour rates were below those in the EU. When the ANC came to power it made it clear that it would not compete on the basis of a race to the bottom on wage rates. That has meant low foreign investment and high unemployment.
And rather than privatise, the ANC has been intent on maintaining control of state-owned enterprises, although most are broken. The breakdown of Eskom cost us around two percentage points in economic growth a year until power cuts were eased last year. And the breakdown on SA’s rail network and at ports has snarled our logistics system and cost the industry untold billions.
Under the ANC’s reform programme, Operation Vulindlela, greater space is being made for the private sector. Private producers can now generate unlimited amounts of power and Transnet is concessioning off an increasing number of rail corridors. But there is still no outright privatisation, which could unleash far greater growth and investment.
While Poland has been able to attract massive amounts of foreign investment, SA has attracted comparatively negligible amounts, and has missed out on a number of mining booms. BEE turns investors away.
The lessons of Poland’s successes are far from complicated – go for growth with consistent policies.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
If you like what you have just read, support the Daily Friend