Analysis of the Economic Growth Performances

In this second note in a five-part series*, Ron Sandrey, tralac Associate, discusses economic growth and trade performances in South Africa and the East Asian Tiger economies

Economic growth is generally considered to be the measure of the success of a country over time. It is of course not the full picture, as several measures such as social equality are becoming increasingly recognised as being more important than the so-called ‘Washington consensus’ development agencies such as the World Bank and the International Monetary Fund (IMF) had perhaps thought.[1] However, that be as it may, it is much easier to undertake redistribution within an economy when that economy is growing. Growth is important.

We will start with GDP per capita, the gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. We used constant 2010 U.S. dollars with the analysis starting in 1967 and from 1970 at five yearly intervals to 2015, and looked at firstly the multiple of change in 2015 from 1967 and secondly the change from 1990 to 2015.

The growth in China is scarcely believable: from $183 per capita in 1967 to $6,416 in 2015, where the 2015 figure is 35 times the 1967 figure. This is the law of compounding, and during much of this period China has had growth at annual rates of around 10%. There is a rough rule of thumb known as ‘the law of 73’, whereby if you divide your growth rate by 73 you find how long it takes to double the original base. So, with 10%, it takes just a little over seven years to double. But if that rates stays at 10%, in another seven years it has doubled again and you are now four times the original base. And so on, with the fundamental point being that in the first few years doubling from a low base is still a low base, but over time once you reach a higher level and then doubling from that level again is significant. Moreover, while Chinese growth may have slackened to a more modest say 7%, it takes a longer ten years or so to double again, but by that time you have reached a very respectable relative income level. Putting Africa in perspective, in 1970 China’s per capita GDP in PPP values was below all of the 37 African countries reported. By 2015, outside of SACU only Equatorial Guinea, Gabon, Maldives, Mauritius and the Seychelles were above China.

Languishing in these Asian GDP per capita stakes are South Africa and Japan, where in 2015 both are only 1.2 times their respective purchasing power per capita in real terms of that in 1967. Japan had increased faster than South Africa through to 1990, but at that time it hit a ‘growth wall’ and its so-called lost decade of the 1990s. By 1990 Japan, as the first Asian ‘cab of the rank’ in the Asian growth miracle had plateaued[2] and left it to others to continue the miracle. South Africa’s performance (or lack thereof) has been consistent across both periods, with modest increases of 1.3 times over the whole period and a slightly lower 1.2 times in the more recent times, times that largely cover the emergence of South Africa from its troubled period.

GDP per capita based on purchasing power parity (PPP) GDP is gross domestic product converted to international dollars using purchasing power parity rates. This measure gives a more accurate picture on how well off people in a country generally are. Basically, most goods and services cost more in a developed country, and the PPP tries to reflect this. As always, China dominates this measure, where it’s GDP per capita in 2015 was 14.5 times that of 1961. Lagging the field are Japan, who had already “been there and done that’ on the development pathway, and South Africa. In 1990 Korea, Malaysia and Thailand started at GDP’s per capita similar to South Africa’s, but by 2015 both Korea and Malaysia were at least double South Africa and even Thailand was ahead and Indonesia only marginally behind. Meanwhile, the new express trains of Cambodia, Laos and Vietnam are closing rapidly.

Driving the GDP per capita are two factors. The first is the actual GDP, while the second is the population growth. We isolate these two factors to assess their respective importance. We took GDP expressed in current dollars at five yearly intervals, and showed the changes from 1967 and 1990 respectively. The latter period is the more interesting information, as it shows basically the period from South Africa’s re-emergence into the International economy. Its performance has not been good. For our group of economies its GDP growth since 1990 has only been above that of Japan (with its lost decade) and significantly below the Asian Tigers. And, according to the data, that includes the performance of even the Philippines.

Population growth

Next we examine population growth to show its relationships with per capita GDP. A recent tralac examination (Ibrahim et al., 2016) of the economic growth in members of the East African Community (EAC) found that for both Uganda and Kenya the 2015 populations were 4.5 times greater than what they were in 1967, and Tanzania, Burundi and Rwanda are close behind. Some of the Asian nations are not that far behind, but China has less than doubled its population. The increases for our countries in Asia were above are almost all above the developed countries such as the EU members, and to emphasise the increase in Africa in general we found that there are virtually no so-called ‘real’ countries in the sense that they have significant populations to begin with that are above these EAC increases. Of those ‘real countries’ that do, the top two are in western African (Côte d’Ivoire and Niger at 4.9 and 4.8 respectively) and the neighbours or near-neighbors of the EAC of Yemen (4.6), Sudan and Zambia (both at 4.3) and the Democratic Republic of Congo (DRC) at 4.2. Clearly Africa and the wider region is the growth focus of world population. A high population growth means that in order to increase GDP per capita your GDP growth must be above the population growth, and this can be a big ask over time if your GDP growth falters.

While South Africa’s population growth is high it does not jump out as a contributing factor to the poor economic performance when assessed against some of the Asian economies, as South Africa is almost in the lower half of our Asian selection.

What is driving this economic growth?

We introduced a brief snap-shot of the economic profile in two periods for our countries under examination. The first segment shows the respective GDPs and highlights a wide range of economic power. The second segment shows agriculture as a % of GDP. In the third segment we show Industry as a % share of GDP, and this is perhaps the key indicator of the Asian miracle. Here we find that Vietnam, Thailand and Korea remain constant; Philippines, Japan, Indonesia, China and South Africa are down marginally;[3] Malaysia is down significantly; while India and the Tiger Cubs of Laos and Cambodia are all up. On the right hand side we look at the contribution of services, but we are conscious that services are often looked at as the residual, and they can cover a wide range of, well services from high tech to basic low tech jobs. It is only high tech services that will drive growth in an economy.

The South African trade performance relative to East Asian countries

Trade as a percentage of GDP is a measure of both the openness of an economy and, generally, its development. We have to caution though that this data needs careful interpretation, as it is literally only trade as a percentage of GDP. China’s GDP to growth grew very rapidly from around 1980, and thus even though the well-known rise in Chinese exports took place from that time the data does not show as dramatic a rise in the relationship between trade and GDP as some of the other countries shown here. Perhaps the decline in the Chinese ratio over the last ten years indicates rather the rise of GDP and a change in Chinese policies towards more internal expansion than a decline in trade. This raises the question of causality: is trade driving the GDP growth, or is GDP growth driving trade? It is likely to be somewhat of a simultaneous relationship where trade and GDP work in concert with probably trade leading the growth. China is not an exception, as it is largely following the Asian growth model at a later stage; and the ratio recently has been lowered because of China’s phenomenal success in GDP growth. Thus the very success of Chinese export-oriented manufacturing is increasing GDP at a rate that somewhat blunts the importance of trade in promoting this GDP growth. South Africa’s ratio has been consistently stable, and while starting in 1960 as the second highest this share has remained around that level and now is around the mid-point of those shown.

In particular the data shows that the later Asian Tigers of Cambodia, Thailand and Vietnam depict a dramatic increase in trade as a percentage of GDP. That data is not available for the earlier period for both Cambodia and Vietnam, but what is shown demonstrates that these two countries recovered dramatically from very troubled earlier periods of the early 1990s, the period when South Africa was effectively entering the global trade family after its period of isolation. In the late 1980s the three economies of South Africa, Vietnam and Laos all had identical levels of trade as a % share of GDP, but from that point there is a dramatic divergence, with only South Africa staying stable as the other two increased dramatically. Data for Laos was not available for the earlier years, but in later years it has been consistently above South Africa, albeit only marginally at times

The Philippines emphasises that not all Asian Tiger have managed to build on a promising start (there is an Africa nation in Asia). Comparing South Africa with Thailand and Malaysia we find that South Africa falls short of being equal to an Asian economy, but of course recognise that this measure is by no means the end of the story. It is but is one, albeit an important, indicator.

Finally we looked at South Africa against the global giant of China. There are two distinctive periods, and they split neatly into the first part through to 1995 and the second part from then onwards. In 1980 China started at 10% and South Africa at 60%. China rose as it started its global opening at that time, while South Africa’s sanction period continued a downward trend through to our early 1990s focus point. From that point China’s trade to GDP ratio actually started to decline as perhaps the stellar GDP increases outran even the equally stellar trade increases before steadily climbing until about a decade ago when we hypothesise that China started to look more inward and focus on domestic consumption over trade. Conversely South Africa shows a steady increase through the later period, and we could perhaps muse that the global downturn had its ramifications here.

What does all that tell us? It shows that trade seems to have taken off in the newly emerging Asian countries. It tell us that South Africa is lagging many of these Asian countries in this index, but it also shows that after running closely with China in the last 25 years South Africa is moving ahead of China. But why? The ratio is a combination of trade and GDP, and there are several simultaneous relationships driving both to the extent that it is difficult to casually assess the causalities inherent in the two measures with a casual examination.

* This Discussion is part of a series prepared by Ron Sandrey examining specific issues raised in a new tralac Working Paper of the same title, available to download here: While South Africa slept: why is it not like an Asian economy?

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Ibrahim, H., Iroto, I., Ambasa, E., Maina, Z. and R. Sandrey, “An analysis of Kenya’s economic and trade performance that highlights a comparison with East Asian ‘Tiger’ Economies”, tralac Trade Brief, 16 November 2016

Levine, R. and D. Renelt, 1993. ‘A sensitivity analysis of cross-country growth regressions’, The American Economic Review, Volume 82, Issue 4 (Sept, pages 942-963).

World Bank, 1993. The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. Prepared by a team led by John Page and comprising Nancy Birdsall, Ed Campos, W. Max Corden, Chang-Shik Kim, Howard Pack, Richard Sabot, Joseph Stiglitz, and Marilou Uy.