We need a transformative and entrepreneurial State for growth

1 March 2020

Imitation is not a bad thing in technological terms

In any study of how certain economies experience meaningful rapid econom­ic growth, led by innovating firms or sectors, it seems mandatory to look at what Ruchir Sharma called breakout nations.

Other scholars, notably Keun Lee of Seoul National University, term a coun­try’s ability to jump-start its economy from developing to developed “Schumpe­terian catch-up”, after Joseph Schumpet­er, considered the father of innovation.

With the many economic challenges we have faced for decades, it is not only important but mandatory to understand why some newly industrialised econo­mies are successful at growing inclusive economies.

This past week, various premiers were busy with their state of the prov­ince addresses (Sopas) while the nation was focused on Finance Minister Tito Mboweni’s budget speech hopeful, of course, that he will obviate our descent into the economic precipice.

Many economic commentators predict­ed an increase in VAT. When Mboweni did not oblige, there was national relief.

I posit that we ought to set our eyes not merely on whether or not VAT is being increased, but on whether our country, a developing country for decades now, is positioning itself to avoid the middle-in­come trap. The middle-income trap, in Schumpeterian terms, is a state in which countries fail to grow consistently and thus outgrow their challenges.

In our case, this failure implies the per­petuation of the challenge, for example, of mass unemployment, now sitting at 29% if we exclude those who have given up looking for work. With more than 10-mil­lion people who ought to be contributing to the economy sitting idle, we must ob­sess about avoiding the perpetuation of low growth and permanent unemploy­ment, especially for our youth.

The fact that Mboweni forecast eco­nomic growth at 0.9% for this year when population growth is 1.4% a year means South Africa’s economic output is lower than the population growth. Put differ­ently, South Africans are getting poor­er. So the point is not whether or not the South African economy has major chal­lenges, but what practically can be done – and has been done elsewhere to fast-track growth.

The obsession among our political lead­ers (in the ANC and the DA) is on: what do we need to do to position ourselves to attract foreign direct investment which will, in turn, create jobs? The question is wrong.

Dr Mariana Mazzucato, in Mission-ori­ented Finance for Innovation, explains how almost all major innovations by private firms – from the discovery of the internet to aviation, nuclear power, pharmaceuticals, robotics, green tech­nology and computer science – were supported by the mission-specific use of public finance.

Mazzucato, in The Entrepreneuri­al State, shows that venture capital ar­rived only 20 years after key public in­vestments were made in biotechnology, nanotechnology and so-called Silicon Valley technologies. In other words, the so-called smart boys of Silicon Val­ley (Google, Facebook, HP, Oracle, Cis­co and so on) depended on state invest­ment in research before they made “dis­coveries” or “successes” that catapulted them to the top.

From the state of the nation address, the budget speech and various Sopas, the one leader who seemed to understand this is Gauteng premier David Makhura.

Lee, in his book Schumpeterian Anal­ysis of Economic Catch-up: Knowledge, Path-Creation, and the Middle-Income Trap, explains why certain countries do eventually catch up to industrialised countries in their development while others don’t. Many newly industrialised economies, or latecomer economies, use technological imitation to kick-start local economies. In the townships, we refer to some of these as fong kongs.

Of the Asian Tigers, it was first Japan then Korea and Taiwan but also lately China that, according to John Mathews of Macquarie University, pursued a “highly sophisticated strategy of resource leverage and knowledge appropriation that have enabled them to catch up with industrial leaders [in the cases of Korea and Taiwan] or to be well-embarked on the process, in China’s case”. Plainly, im­itation, otherwise called “learning”, is not a bad thing in technological terms.

From Lee we learn that there are three main paths followed in this economic catch-up process. These are economies that embark on “stage skipping” – mean­ing they do not exactly follow the same path followed by industrialised nations in their development in that they study stag­es followed and deliberately skip some stages to accelerate growth.

Looking at how South Korea kick-start­ed its car manufacturing, it skipped man­ufacturing carburetor-type vehicles for fuel injection.

According to Lee, the second route is “path-creating” and lastly “path-follow­ing” – which suppose that speed is of ut­most importance given that these coun­tries don’t have the burden of research as opposed to forerunners.

The point is to study industry and understand where it is in relation to where developed countries are and, importantly, what government (policy) needs to do to help these industries to leapfrog. Makhura identifies 10 high-growth sectors. In my view, he needed to prioritise. Ten is a lot. The impact can only be limited.

If you read Mboweni’s speech, we are groping in the dark. There is tax relief but there is no strategy for growth. Makhura’s speech is mandatory reading for those interested in how to inject life into an economy growing slower than its population.

 

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