Aiming for 6%
Harvard group already influential in policy process
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.