In his love letter to the nation this week, President Cyril Ramaphosa wrote about the recent progress his administration has made in loosening blockages to higher economic growth, a process referred to as structural reform.
Some of these key reforms have had gestation periods ranging from 10 years (the auction of the spectrum) to more than 15 years (the establishment of the National Ports Authority as a standalone subsidiary of Transnet). So the implementation of these reforms marks important milestones in the country’s structural reform journey.
And Ramaphosa made the point that the SA economy cannot function, let alone grow, “without efficient and competitive network industries”, including electricity, water, transport and telecommunications, which he described as “the arteries through which the oxygen of the economy runs”.
He is right. However, an important point is being missed in SA’s economic reform thrust: the law, specifically the fact that it undergirds economic activity. Hence the emphasis often on the rule of law. Badly drafted or poorly implemented laws can stifle economic activity and innovation, depriving a country of investment by the private sector, which in SA’s case accounts for three-quarters of economic activity.
The point about the importance of law in economic development has been eloquently made by Kaushik Basu, an economics professor at Cornell University in the US. The former chief economist of the World Bank says the law is often misunderstood as being about crime, retribution, justice and fairness. It is all of that. But often misunderstood is that the law can be critical in determining a country’s level of economic activity, or “the length of the queue for buying some essential commodity, or the level of unemployment”.
“A poorly implemented law, or for that matter a well-implemented one, can do devastating damage to an economy,” Basu writes in An Economist in the Real World: The Art of Policymaking in India, a reflection on his time as the Indian government’s chief economic adviser.
He cites the state of Bihar, one of the poorest in India, where improvements in law, order and governance helped drive a six-year economic growth sprint. After a decade and a half of 0.9%, Bihar notched up per capita income growth of 10.4% between 2006 and 2012.
“What caused this? In retrospect it is clear that the proximate cause was investment in health, education and infrastructure. But all this was made possible by the farsightedness of the chief minister of the state, Nitish Kumar, who took office in 2005 and devoted a large amount of effort to improving law, order and governance.”
It is therefore important for legislators “to examine the body of legislation that pertains to or impinges upon economic activities” and ensure that hurdles such laws impose on economic activity and innovation are not arbitrary or unnecessary. Restrictions to economic activity must be for compelling reasons.
The point is that however important the reform of the network industries that SA has implemented, they are doomed if they are not underpinned by well drafted laws or their effective and efficient implementation.
Related is the tendency, particularly in developing countries, for citizens, both human and corporate, to overlook the law. SA already has a huge problem in this regard, one that can be made worse by the payment of bribes to sidestep the law.
As Basu notes about India, “one can easily list laws that exist only in their violation”. He adds that to have a society where the law is effective, “we need to have simple, easy-to-follow, noncontradictory laws; and we have to also gradually nurture the norm of following the law, through education and through the leaders setting an example”.
Both — the laws that exist in their violation and the need to nurture the norm of following the law — apply to SA too. And that’s where the justice system, a nation’s goalkeeper when it comes to compliance with the law, comes in. That’s why recent reports that the country’s courts are falling apart should cause concern. The Office of the Chief Justice reportedly told parliament that many judicial officers have to operate without access to basic tools such as literature and the internet.
The lesson from Basu’s argument is that structural reform on its own will not deliver higher economic growth. Which is why policymakers and the legislature must scrutinise the country’s laws to ensure they do enable rather than impede the achievement of the economic outcomes the reform measures seek to deliver.
• Sikhakhane, a former spokesman for the finance minister, Treasury and SA Reserve Bank, is editor of The Conversation Africa. He writes in his personal capacity.
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