Aiming for 6%

Har­vard group al­ready in­flu­en­tial in pol­icy process

Finweek English Edition - - Economic trends & analysis - GRETA STEYN

PRES­I­DENT THABO MBEKI has ap­pointed a host of lo­cal and in­ter­na­tional economists to help the coun­try with its plan to achieve an­nual eco­nomic growth of 6%/year by 2010. The economists met Gov­ern­ment of­fi­cials and Mbeki over a num­ber of days for work­shops last month. Is it all just one big talk shop or will some­thing con­crete come from their work?

Scep­tics would say that get­ting a large num­ber of economists to agree on a co­her­ent plan is never go­ing to hap­pen. Of course, there’s also the fact that we need economists with “only one hand” – as their habit of say­ing “on the other hand” ob­scures their mes­sage.

How­ever, the scep­tics are wrong about the process only be­ing a big talk shop. Gov­ern­ment’s sur­prise de­ci­sion to pen­cil in a bud­get sur­plus for the next fis­cal year is be­ing as­cribed to the in­flu­ence of the Har­vard economists. Th­ese are in­ter­na­tion­ally ac­claimed aca­demics who have been work­ing for the Cen­tre for In­ter­na­tional De­vel­op­ment (CID) at Har­vard Univer­sity’s SA project.

The Har­vard economists have been crit­i­cal con­cern­ing the “pro-cycli­cal” na­ture of SA’s fis­cal pol­icy. That means they be­lieve SA’s fis­cal pol­icy ag­gra­vates the busi­ness cy­cle – with the dan­ger that booms can turn into busts. In other words, it pro­vides tax re­lief at the wrong times.

A pa­per writ­ten by Jef­frey Frankel, Ben Smit and Fred­erico Sturzeneg­ger on the CID web­site rec­om­mends that SA’s fis­cal pol­icy re­mains “pas­sively” counter-cycli­cal – mean­ing Gov­ern­ment should have a rel­a­tively stable spend­ing pat­tern while us­ing tax pol­icy to cool the econ­omy down or stim­u­late it if needed.

The real test for their rec­om­men­da­tions will come in next month’s Bud­get. It re­mains to be seen whether Fi­nance Min­is­ter Trevor Manuel will stick with the sur­plus of 0,5% in 2007/2008. He may an­nounce ad­di­tional spend­ing or tax changes that could turn the small sur­plus into a deficit. Po­lit­i­cally, a sur­plus is em­bar­rass­ing in a coun­try with SA’s press­ing so­cial needs, and Manuel may be mind­ful of that. But if there are no tax cuts for in­di­vid­u­als over and above com­pen­sa­tion for fis­cal drag, the Har­vard economists are prob­a­bly the rea­son why.

On the mone­tary pol­icy and ex­change rate front there seems to be some dis­agree­ment among of­fi­cials and economists, though that’s been played down by economists who say that dis­cus­sions are still in their be­gin­ning phase.

At one of the work­shops this month, one of

The scep­tics are wrong about the process only

be­ing a big talk shop.

the Har­vard aca­demics made a pre­sen­ta­tion on the ex­change rate and on a pos­si­ble strat­egy for the ex­change rate. As part of his ar­gu­ment he said that in­fla­tion tar­get­ing in SA was im­ple­mented in too “nar­row and rigid” a way.

What that means is the SA Re­serve Bank should be less fo­cused on keep­ing the rand strong so that its in­fla­tion tar­gets can be met in the strict sense. They rea­son that the Bank should pay more at­ten­tion to eco­nomic growth by al­low­ing the rand to weaken with­out over­re­act­ing on the in­ter­est rate front.

In­dus­trial De­vel­op­ment Cor­po­ra­tion chief econ­o­mist Lumk­ile Mondi, who at­tended the work­shop, con­firmed that the Har­vard economists ex­pressed the opin­ion that in­fla­tion tar­get­ing should be­come more flexible.

Mondi and oth­ers who at­tended the work­shops said there was real con­cern among the Har­vard economists about the weak per­for­mance of SA’s man­u­fac­tured ex­ports. The sug­ges­tion was made that the rand should be al­lowed to de­pre­ci­ate to make SA’s trade­ables more com­pet­i­tive.

The pa­per by Frankel, Smit and Sturzeneg­ger states that SA’s cen­tral bank should “man­age” the float­ing ex­change rate by in­ter­ven­ing to sta­bilise it. The Bank has re­jected any ref­er­ences to its “in­ter­ven­ing” in the mar­ket.

The pa­per also crit­i­cises the de­ci­sion to raise in­ter­est rates last year. It says: “In­fla­tion tar­get­ing is fine, but any in­creases in in­fla­tion at­trib­ut­able to in­creases in dol­lar prices of im­ports, or neg­a­tive sup­ply shocks, should not prompt mone­tary tight­en­ing to pre­vent prices from ris­ing.” It notes that rand de­pre­ci­a­tion has prompted the Bank to raise the repo rate, say­ing: “We be­lieve this is not the op­ti­mal pol­icy re­sponse.”

It’s un­likely that the Bank will re­main silent if there’s a move to get it to push the rand weaker while keep­ing in­ter­est rates un­changed. Gov­er­nor Tito Mboweni has spo­ken out against that pol­icy re­peat­edly.

Be­hind the scenes, a spat be­tween the Bank’s economists and the Har­vard group looks likely.

Wor­ried about man­u­fac­tur­ing.

Lumk­ile Mondi

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