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Answer to Question #45649 in Other Economics for Lisa

Question #45649
What do you think are the best mechanisms that stimulate economic growth in South Africa thus benefiting retailers?
Expert's answer
Key to a brighter future for South Africa is sustained growth, but that in itself is not enough. Growth without redistribution would almost certainly falter as social tensions rose. Two prime requirements of redistributive growth are rapid employment creation and narrowing the gap in the provision of public services across racial groups.

For higher growth, South Africa must revive the private sector while it maximizes employment growth and narrows income differentials between blacks and whites. It must also redress massive inequalities in access to public services and facilities, and in land ownership. The analysis used for the study suggests that such a growth path can be achieved if the right policies are in place and other conditions are met.

Sustained growth requires an ongoing improvement in the supply-side of the economy. This can be encouraged by improving export incentives and the skills of the labor force. A revival of demand within the economy can lead to only a limited amount of growth. However, kick-starting the economy through public expenditures could play an important role: well-targeted public investment will help redistribution while assisting economic recovery.

Private investment must increase from its currently depressed level if sustainable growth is to be attained. Higher private investment would stimulate demand, but its more important role is to increase supply. To raise private investment, policies need to be transparent, credible and stable. Excessive fiscal deficits are likely to send the wrong signals.

Redistribution can be achieved through a number of avenues. Public expenditure can be diverted towards investment in activities benefiting the disadvantaged, and a significant proportion of the backlog in social expenditures can be cleared in a few years without breaking important macroeconomic constraints. Unskilled and semi-skilled workers can be upgraded to higher levels, but this must be supported by improved basic education for blacks. A modest program of rural resettlement based on a willing buyer-willing seller exchange should create employment and be affordable. Encouraging the development of small enterprises should also be redistributive and consistent with higher growth. Redistribution through immediate pay increases to lower-paid workers and excessive public expenditure is unsustainable. The results of such policies are likely to include increased inflation and pressure on the balance of payments.

The suggested policy framework outlined in this paper focuses on the medium-to-long run. The main policies arising from the analysis include:
- Encouraging rapid growth in skilled labor, particularly by upgrading semi-skilled and unskilled workers.
- Encouraging a reorientation of manufacturing towards exports.
- Emphasizing job creation in small businesses and in agriculture.
- Restructuring government expenditure by raising investment in infrastructure and public services, targeting the poor and underprivileged, and restricting the growth of recurrent spending to meet budgetary targets.
- Maintaining prudent fiscal and monetary policies.

This policy strategy will only be successful if there is a major revival in private investment. If sufficient private investment is available, then sustained per capita growth becomes a reality. Direct foreign investment should be encouraged, and the regulatory framework should present no obstacles to new ventures. The visible implementation of redistributive policies through greater public investment should improve social stability. But it is equally important that investors should not be discouraged by an opaque and ever-changing policy framework.

Transparency, stability and credibility -- all these matter as much as policies. To stimulate growth, the single most important ingredient is investor confidence. This will only materialize if policymaking is transparent and there are no sudden and unexpected shifts in economic policies. South Africa's new government has a unique window of opportunity to introduce sustainable, consistent, and credible economic policies -- and thus encourage political stability.

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