An Irish history lesson: How South Africa can move towards prosperity

[Nat Quinn]

Ireland is the fifth richest economy in the world, measured by GDP per capita. However, Ireland was not always this rich. It faced many setbacks which impoverished the country, not least the Irish potato famine, a period of mass starvation and disease in Ireland between 1845 to 1849, which saw one million die. More than a million fled the country. 

Before Ireland became an independent country in 1922, it was part of the British Empire. Irish people were considered as second-class citizens. When Ireland gained independence from Britain in 1922, Irish people saw that free market economies like the United States were going through the Great Depression, but communist economies like the Soviet Union were experiencing rapid industrial growth. It seemed to the new Irish administration that they would be better off by implementing protectionist policies. So, Ireland started to monopolise and nationalise its corporations. It also banned most foreign trade and investment in the country.

Ireland put high tariffs on all imported goods to discourage importing from other economies. The goal of this policy was to make Ireland a self-sufficient economy. It was a mistake because protectionism may work in the short term, but in the long run, it is a devastating blow to a nation’s economy.

Furthermore, protectionism can work – for a while – in countries with large populations and abundant natural resources, neither of which Ireland has. Protectionism simply did not work in Ireland and the country’s government soon realised that.

Why is this important for us to learn from?

Ireland, partly as a result of living under the British colonial jackboot, was for many years seen as the sick man of Europe.  But, with the right policies and leadership, backed by the Tallaght strategy, an economic policy implemented in the 1980s, Ireland was able to wrench itself eventually from the clutches of socialism and into a future of prosperity.

In South Africa there is a real risk that this country could make the same initial mistakes as Ireland. There is a real danger in 2024 that South Africans could very well vote in an EFF/ANC/ Patriotic Alliance coalition as people choose not to vote ANC but instead vote for those other parties.  This would push the ANC even more leftward and into some of the same initial Irish mistakes. This would just exacerbate poverty and make all South Africans across the board poorer.

While Ireland had its own unique path towards prosperity, including the good fortune of being able to join the European Union, there are some steps South Africa can take to move towards a more prosperous future.

Embracing a low-skill, low-wage, and job-intensive economy

Arthur Lewis, the only man of African descent to win a Nobel Prize in Economics and who might be considered the founding father of development economics in the 1940s and 1950s, has argued that labour can move out of the peasant farming sector, without affecting production there, and into low-productivity capitalist sectors, including industrial sectors such as clothing manufacturing, if wages in those sectors are in line with productivity.

As capitalist economies grow, Lewis argued, they will reach a turning point at which labour becomes scarce. Workers will then move into higher-productivity sectors and wages will rise.

Lewis’s model was reflected in the economic history of East and South-East Asian countries. The economies of South Korea, Hong Kong, and China developed through job creation in labour-intensive manufacturing sectors before these economies reached Lewis’s turning point and wages began to rise.

This is particularly pertinent to South Africa. In the rest of the continent, to our north, there are a billion-plus people who need cheap clothing, kettles, blankets, and other such goods.

The inner city of Johannesburg itself has a large informal retail sector which attracts cross-border shoppers, but the manufacturing of the goods bought is done in countries like China and Bangladesh, rather than locally. Local industries would create a significant number of jobs.

But this is not how the South African economy has evolved over the past 27 years. Instead, South Africa’s industrial sectors have become more and more capital- and skill-intensive. The demand for less-skilled labour in these sectors has collapsed.

Economists refer to the effect of economic growth on employment as the employment elasticity of growth.

An employment elasticity of 1 means that, when the economy or sector grows by, say, 2 percent, employment grows at the same rate, i.e. by 2 percent. If the employment elasticity is more than 1, then economic growth results in a faster rate of job creation. If the employment elasticity is less than 1, then employment rises more slowly than output.

Data suggests that in the South African manufacturing industry employment elasticity has not only been less than 1, it has been negative. Data from the South African Reserve Bank, based on surveys of firms, suggest that manufacturing output expanded at 1.9 percent per year, taking inflation into account, between 1995 and 2017. Over the same period employment in manufacturing contracted by 1.3 percent per year. This data suggests that the employment elasticity of growth in manufacturing was -0.7.

In other words, this is the cost for South Africa of trying to skip steps in its economic development. It allows unions to pressure the government into prioritising higher wages over job creation in an economy that has a lot of surplus labour.

South African government policies result in a paradoxical situation: Even when industrial output grows, jobs are not created. Instead, firms invest in more capital- and skill-intensive technologies. Accelerating economic growth does not raise the demand for labour in industrial sectors.

The other stuff

If the voting public can turf out the ANC or an ANC-led coalition, South Africa could do what Ireland did.  Government would have to take brave, decisive, and perhaps even unpopular steps initially: cut government spending and gradually lower taxes (so that South Africans could save and invest more) while taking down the enormous public wage bill. This will create a positive feedback loop within the economy that syncs well with industrial policy that prioritises a job-intensive economy.

If such policies are combined with investments in the human capital of the country through reforming the education system and opening up the energy market to private players, as well as fixing rail and the ports, South Africa can be placed on a long-term path to prosperity. Any nation can rebound from calamity and mismanagement if there are adults in the room and sound market-based policy that leads to investment and job creation is pursued.

An Irish history lesson: How South Africa can move towards prosperity – Daily Friend

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