Why economic growth really matters

Finance Minister Pravin Gordhan reckons South Africa’s economy will grow 0,9% this year; the World Bank plumps for 0,8% and the IMF forecasts just 0,7%. Woeful by global standards. And seriously dangerous for a country whose population, half of whom are under 25, is growing at 1,4% a year.

Warren Buffett wrote about the relationship between economic and population growth rates in this year’s letter to shareholders. The number of Americans is rising at 0,8% a year – 0,5% from births minus deaths; the other 0,3% from net migration. So although the US economy is expanding at a seemingly modest 2% a year, it’s actually a net positive of 1,2% annually for each person who lives there.

Doesn’t sound like much, but as Buffett explains “in a single generation of, say, 25 years, that rate of growth leads to a gain of 34,4% in real GDP producing a staggering $19 000 increase in real GDP per capita for the next generation. Were that to be distributed equally the gain would be $76 000 annually for a family of four”.

A lovely example of the power of compounding when economic growth is on the right side of population expansion. But inverting the two, as is happening in SA, delivers a warning worth heeding.

Failing to grow the economy fast enough to give youngsters the hope they deserve, is unsustainable. Even for the political party that brought liberation.

By Alec Hogg for www.fin24.co.za

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