IF ONLY the path to economic prosperity was as clearly marked as Christine Lagarde would have us believe. Speaking at various engagements during the International Monetary Fund’s (IMF’s) annual meeting in Washington last week, Lagarde issued dire warnings about the state of the global economy but proffered investment in infrastructure as a salve to the economy’s woes.
To be fair to the IMF MD, investing in infrastructure wasn’t the only advice she gave to the ailing economies of the eurozone. Along with her thinly veiled hint that Germany should spend its hard-won budget surplus on infrastructure or risk the 17-nation union falling into a recession, Lagarde also called for more accommodative monetary policy, structural reform and attention to the control of government debt. The trouble is that in reality, infrastructure spending is the only one of these options that hasn’t already been exhausted.
Looking at her comments without the muddying waters of context, investment in infrastructure is a no-brainer: in the short run, an increase in government spending will boost both jobs and growth, while in the long run improved infrastructure will raise productivity and economic potential. However, once you expand your point of reference to include the fact that, despite politicians’ best efforts at austerity and central banks’ best efforts at accommodative monetary policy, the economies of the eurozone are still operating far below their potential, then investing in infrastructure seems something of a white elephant.
This is why I am sceptical about the usefulness of infrastructure spending as a means to boost economic growth during times of hardship. Yes, it will probably boost growth in the short run, but in my mind there is no guarantee that the improvements in productivity and long-run economic potential will offset the cost. This is especially true if existing infrastructure is underutilised. That is not to say that all investment in infrastructure is a bad thing, but that building more roads when existing roads are operating far below capacity is a false economy.
This is not the first time Lagarde has pushed investment in infrastructure as a means to promote growth. Speaking in Maputo earlier this year, she lamented the cost of "infrastructure gaps" in Africa, and urged governments to invest mindfully to ensure inclusive and sustainable growth in the region.
With hard facts such as that the per-capita output of electricity in sub-Saharan Africa has remained virtually flat over the past three decades, and that only 16% of all roads in the region are paved (compared with 58% in South Asia), it’s hard not agree with her. If the governments of sub-Saharan Africa had made substantial investments in reliable electricity, far-reaching transport networks and adequate sanitation 20 years ago, can you imagine where their economies would be now?
If we are serious about economic growth, we need to take a long, hard look at what we’ve got and what we are good at before spending billions of rand on projects that quite frankly have a good chance of ending up as white elephants.
Of course, they didn’t. Or to be fair, they did, but not enough, and often not in the right place. A large part of that has to do with the lack of a clear vision of what exactly they wanted their economies to look like in two decades. Michael Power, a strategist at Investec Asset Management, lamented to me some time back that one of the biggest problems with economic growth in SA is that the government doesn’t seem to have a clear vision of what it wants an economy of 50 million people to be. "Are we a manufacturing hub? Are we a commodities behemoth? Are we an agricultural nation?" He sounded increasingly exasperated as he listed the various paths of economic development the government has taken a stab at over the past 20-odd years.
There is no question that Africa and Europe are at vastly different points in their economic development. But what separates them most is that while almost every nation in Africa was founded on mining, agriculture or tourism, only a few have managed to grow their economies beyond those sectors. This is where Lagarde and I agree. Investment in infrastructure is the difference between the complex and productive economies of Western Europe, and the underdeveloped but striving economies of Africa. The trick is making sure investment is in the right places.
One only has to look at the handful of countries that had a clear economic vision and stuck to it — think Ethiopia, Botswana, Mauritius, Ghana — to see the effect that careful planning and a commitment to a single economic goal can have. They are far from perfect, but they’re throwing everything they have at chasing economic growth. Sadly, SA is not among them.
One of the problems is that in SA there is a tendency to prioritise vanity projects and infrastructure for the consumer. This is particularly obvious in the transport sector, where shiny new airports, the extremely costly Gautrain, and bus lanes seem to have been given preference over the pursuit of reliable and cost-effective rail cargo. I’m not saying projects such as the Gautrain don’t have an economic benefit, but rather that if the goal is maximum economic growth, the money probably would have been better spent elsewhere. I don’t even want to comment on the great infrastructure projects that were the Soccer World Cup stadiums.
If we are serious about economic growth, we need to take a long, hard look at what we’ve got and what we are good at before spending billions of rand on projects that quite frankly have a good chance of ending up as white elephants. We used to be pretty good at mining, but regulatory uncertainty, labour unrest and declining resources have made that an increasingly unfeasible option. We have a strong services industry, but a limited pool of the types of skills that are needed to grow it substantially. What we do have is a lot of unskilled labour, perfect for manufacturing.
If we are to develop an export-driven manufacturing base we need to make this labour cheaper as well as make our ports and transport networks in general more efficient and competitive. Right now we have some of the most expensive ports in the world and, as Power so succinctly put it, "for a population of 50-million our currency is just too expensive". Or, less euphemistically, our labour is just too darn expensive. Addressing these two issues alone would go a long way towards spurring economic growth, but without additional and costly infrastructure spending that would take years to pay off.