Economic growth requires a functioning ecosystem: Flip Buys

Key points:Economic growth, not redistribution, is the key to ending poverty.Ten conditions, from good governance to culture, drive prosperity.Wealth creation relies on entrepreneurs, capital, and an educated workforce..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Flip Buys.Over the past three decades, economic growth has helped millions of people escape poverty. Influential publications such as The Economist have even anticipated the possibility of the “end of poverty”. History shows unequivocally that there is only one way to solve poverty, and that is through economic growth. Nobel laureate Milton Friedman put it succinctly: “There is no alternative way of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system ...” Historically, no socialist government that has sought to address poverty through “pro-poverty” policies, has succeeded in lifting more people out of poverty than a growing free-market economy. Socialists believe that poverty is always caused by someone else and it must always be solved by someone else – the state and the “rich”. They do not ask: “What did we do wrong, and what should we do now that is right?” They ask: “Who did this to us and what should we do to them now?”In contrast, the African American thinker, Thomas Sowell, says: “There’s no explanation needed for poverty. The species began in poverty and stayed in poverty for thousands of years. So, what you really need to know is what are the things that enable some countries, and some groups within countries, to be prosperous”..Read more:.Mailbox: Digitising governance – A path to transparency and prosperity for SA.The focus should therefore be placed on the causes of prosperity, rather than the causes of poverty. Sowell rightly holds the view that: “What do the poor most need? They need to stop being poor. And how can that be done on a mass scale, except by an economy that creates vastly more wealth? Yet the political left has long had a remarkable lack of interest in how wealth is created. As far as they are concerned, wealth exists somehow, and the only interesting question is how to redistribute it.”The ANC has already announced so many economic plans; yet, the outcome has simply been even more poverty and higher unemployment. The reason is that politicians and the state cannot create wealth, and do not know how to do so. Sustainable economic growth requires a comprehensive and well-functioning ecosystem in which all components must work together, like a multitude of gears in a machine, to grow an economy at such a pace that poverty will practically disappear. Economic growth modelThe purpose of any economy is to increase the per capita income of the citizenry so that everyone’s standard of living improves. Thus, the economy exists for people and it is not people who exist for the economy. An increase in per capita income is possible only if per capita production is higher than consumption. There are at least ten conditions for economic growth that must form part of an economic ecosystem, most of which are not directly economic in nature. The first condition is a good government. In a country such as South Africa politics determines the economy, and not the other way around as is the case in highly developed states. Such a government must deliver reliable services that can serve as platforms for economic growth. Furthermore, political leaders must ensure policy certainty that creates investor confidence and protects and respects the cultural and personal freedoms of the citizenry. A incompetent and corrupt government impoverishes the citizenry while the rulers live in luxury.The second condition is proper infrastructure such as electricity, water, roads, ports, airports and good fibre optic networks.Security is the third condition and is imperative for growing prosperity. In turn, prosperity is just as important for security. Fourth comes the rule of law because any economy depends on an orderly and law-abiding society that respects the rule of law and property rights. The criminal justice system should function like a well-oiled machine, otherwise the rights of innocent people and their economic prosperity suffer as a result. The fifth requirement for economic growth involves the entire pipeline of quality education and training, from preschool education through to university. This includes schools, vocational training and continuing education for adults. There is a direct relationship between a person’s level of education and their income. For this reason, it is necessary to give everyone the opportunity to realise their full potential. Education remains the investment with the highest return, Milton Friedman argued.LabourLabour is number sixth.The well-being of a country depends on the well-being of its workforce. A country requires a highly trained, productive and well-paid workforce to function in a prosperous way. This gives the country a competitive economic advantage and encourages businesspeople to invest even more in the country. As Friedman put it: “When the government pays its employees higher wages, those higher wages are at the expense of the taxpayer. But when workers get higher wages through the free market, when they get raises by firms competing with one another for the best workers, by workers competing with one another for the best jobs, those higher wages are at nobody's expense. They can only come from higher productivity, greater capital investment, more widely diffused skills. The whole pie is bigger – there's more for the worker, but there's also more for the employer, the investor, the consumer, and even the tax collector. CapitalNo economy can grow without capital because capital is the fuel that drives a country’s economic engine. That is why capital institutions such as banks, investment funds and other financial institutions are the seventh requirement needed. Not only do they provide capital, they also yield a return for investors such as the members of pension funds. At the same time, they help to finance the economy and raise people’s living standards and build their wealth.The eighth condition is the availability of the most important essential services as people cannot live without them. This includes, among others, good and affordable medical facilities, elderly care, social support and community development. Without these services quality of life is negatively affected.The ninth requirement concerns the economy itself. The ingredients of a successful economy include sound policy, little government intervention, a culture of entrepreneurship, healthy competition, low inflation, tax value, high levels of saving and investment, certainty for producers that the fruits of their labour will not be taken from them, and the sustainable use of resources. Culture is the tenth requirement. The Harvard economic historian David Landes states in The Wealth and Poverty of Nations, which deals with five centuries of global economic history, that culture is the most important reason for differences in the wealth or poverty of countries and communities. Politics and the economy are downstream from culture. For this reason, it is necessary to cultivate an economic culture in which the population understands how a free economy works and what it requires.Wealth creation system The futurologist Alvin Toffler stated in his book, Revolutionary Wealth: “No wealth system exists in isolation. A wealth system is only a powerful component of a still larger macrosystem whose other components – social, cultural, religious, political – are in constant feedback with it and with one another. Together they form a civilization or way of life roughly compatible with the wealth system”.To be successful a country’s political ideals must be supported by an economic entrepreneurial spirit. This kind of economic leadership was aptly articulated by the Austrian economist Josef Schumpeter who emphasised the role of entrepreneurs: The entrepreneurial kind of leadership has none of the glamour which characterizes other kinds of leadership. It consists in fulfilling a very special task which only in rare cases appeals to the imagination of the public. He renders a service the full appreciation of which takes a specialist’s knowledge of the case. It is not so easily understood by the public at large as a politician’s successful speech or a general’s victory in the field.”.Read more:.Why job creation is the wrong policy: Ivo Vegter.It is good and necessary for a nation and a country to celebrate their political, military and cultural leaders. It is equally necessary to give recognition to their economic leaders at the same time because they play a major and decisive role in improving people’s lives. With the right leadership, right economic policy and a functioning economic ecosystem South Africa’s economy can grow fast enough to ensure a decent life for its people. The government no longer has excuses, history offers recipes for success, while failure is there for everyone to learn from.

Economic growth requires a functioning ecosystem: Flip Buys

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