The ‘invisible hand’ of economic growth

Economic transformation has become an important topic of debate in South Africa. Whatever the reasons might be for some of the political rhetoric behind it, there is an appreciation that the country has to develop a more inclusive economy.

However, speaking at the Western Cape Property Development Forum in Cape Town on Friday, Investec Wealth’s chief investment strategist, Prof Brian Kantor, argued that there is a precondition to any meaningful transformation of the economy – growth.

“Economic growth is transformational,” Kantor said. “Adam Smith called it the invisible hand: you do something for yourself, and if you succeed you are actually promoting a social interest.”

For growth to take place, however, the business environment has to be conducive.

“The recipe for economic growth is freedom for people to get on with their economic decisions and for their successes to be protected rather than expropriated,” said Kantor. “Protect property rights. Encourage development. Encourage risk taking.”

Kantor added that attempts to force transformation can only have the opposite effect.

“When you mess with the economy and mess with business you only make growth all the more difficult to achieve,” he said. “What works in South Africa is business. And business needs more encouragement, more incentive.”

He said that the success of this approach has been shown around the world over the last few decades.

“The past 20 to 30 years globally have seen the most remarkable poverty reduction programme ever experienced by following that recipe,” said Kantor. “But when you mess with the recipe you don’t get growth.”

Property rights

A critical part of this recipe, Kantor believes, is property rights.

“The rights to land as part of wealth are really such an important ingredient in encouraging development and economic growth,” he said. “If you don’t have rights to the wealth that you’ve created in one way or another, you are not going to do very much wealth creation, are you?”

One of the mistakes South Africa has made in this regard, Kantor argued, was how it has dealt with the title deeds to RDP houses.

“In South Africa we give people homes, valuable homes, but what happens next?” he asked “We don’t give them full title to that house. They are told to wait eight years before that property becomes properly legally theirs.”

What this leads to is that many of these properties change hands informally well below their true market value. Kantor said that many RDP homes are traded on within that eight year period, with the owners getting only a fraction of what the property is actually worth.

Yet if they were given an asset that they could leverage or even trade at its true value, they would be far better off.

“I would extend that principle to serviced plots,” Kantor argued. “Create serviced plots, give people title, and let them do with that plot what best suits them. Then the market will take over and you get better use of that land.”

Lower interest rates

Kantor also returned to an argument he has made consistently for many years, which is that South Africa needs lower interest rates.

“Lowering interest rates encourages spending which helps uplift the economy,” he said. “We haven’t had that encouragement in South Africa over the last few years.”

He added that the current political climate and president Jacob Zuma’s cabinet reshuffle have however made it more difficult for the South African Reserve Bank to start cutting rates.

“Zuma has held back the economy by holding back the opportunity to lower interest rates,” Kantor said. “That opportunity still exists, but given the way the Reserve Bank thinks about the world it has become more difficult for them.”

Partly this is due to the weakness of the rand, which continues to impact inflation. However, growth in the country, the currency’s fortunes, and therefore inflation are all tied together.

“If we achieved faster growth in South Africa, what would happen to the rand?” Kantor asked. “It would get stronger because the case for investing in South Africa depends on our growth outlook. If you improve the growth outlook, more capital comes in and less goes out. That brings lower inflation, and so promotes growth.”

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