More kiler than cure

Finweek English Edition - - Openers - TROYE LUND

AS THE ANC and its al­liance part­ners pre­pare to dis­sect South Africa’s eco­nomic poli­cies at a sum­mit next week, the SA In­sti­tute of In­ter­na­tional Af­fairs (SAIIA) has warned the push to pro­tect cer­tain in­dus­tries in or­der to cre­ate jobs and stim­u­late growth is more killer than cure. While Na­tional Trea­sury agrees with the re­search re­port’s con­clu­sions and fore­warn­ings, of­fi­cials in the Depart­ment of Trade & In­dus­try told Fin­week they don’t. In fact, the re­port not only goes to the heart of the ten­sion be­tween the two de­part­ments but also goes to the crux of the de­bate that will un­der­pin the di­vi­sions in the rul­ing party.

With the ANC due to release its elec­tion man­i­festo be­fore year-end, the ques­tion is how much should the State in­ter­vene in SA’s econ­omy? No­body dis­agrees with the di­ag­no­sis that SA needs to speed up struc­tural change and strengthen the econ­omy’s ca­pac­ity to mas­ter it – thereby bol­ster­ing growth and em­ploy­ment. The dis­agree­ment is over how a new ANC lead­er­ship that has been elected on a pro-poor ticket must achieve that.

SA has ob­vi­ously been ex­pe­ri­enc­ing vast deficits in its bal­ance of pay­ments in re­cent years, pos­ing chal­leng­ing ques­tions about its sus­tain­abil­ity. But the in­sti­tute’s re­port ar­gues the struc­ture of traded goods and cap­i­tal in­flows, as well as macroe­co­nomic in­di­ca­tors, sug­gest the deficit is sus­tain­able. The bot­tom line, say the re­port’s co-au­thors Peter Draper (Re­search Fel­low & Head: De­vel­op­ment Through Trade at SAIIA) and An­dreas Frey­tag (Chair of Eco­nomic Pol­icy at Friedrich-Schiller Uni­ver­sity in Jena, Ger­many), is that even in the cur­rent global fi­nan­cial cri­sis and threat­en­ing global re­ces­sion a cur­rent ac­count deficit isn’t nec­es­sar­ily a weak­ness.

SA’s cur­rent ac­count, says the re­port, could in fact be very pos­i­tive. That’s be­cause it at­tracts cap­i­tal in­flows that, if sus­tained, could be used to in­vest fur­ther, cre­at­ing new jobs and thereby lift­ing the liv­ing stan­dard of the poor­est and in­creas­ing sav­ings in the coun­try.

“This is a nor­mal pat­tern and shouldn’t nec­es­sar­ily raise con­cern. Both the struc­ture of traded goods and cap­i­tal in­flows, as well as macroe­co­nomic in­di­ca­tors, sug­gest that the deficit is sus­tain­able. SA may even be at the beginning of a ben­e­fi­cial debt cy­cle,” say the au­thors. They add: “In the past, and in many coun­tries, cur­rent ac­count im­bal­ances of­ten have led to pre­ma­ture and mis­guided pol­icy con­clu­sions, such as trade pol­icy mea­sures that nei­ther the­o­ret­i­cally nor em­pir­i­cally have pro­vided good re­sponses to a trade deficit.”

En­ter the Depart­ment of Trade & In­dus­try’s Na­tional In­dus­trial Pol­icy Frame­work (NIPF). It’s a doc­u­ment – roundly backed by the new labour-backed rul­ing party lead­er­ship – geared to pro­mote di­ver­si­fi­ca­tion of SA’s econ­omy, par­tic­u­larly through build­ing its man­u­fac­tur­ing in­dus­try and grow­ing as­so­ci­ated ex­ports. That fits in with one of the main find­ings of the so-called Har­vard Group that’s been ad­vis­ing Gov­ern­ment, to the ef­fect that SA needs to both grow and di­ver­sify its ex­port bas­ket to sus­tain its cur­rent ac­count deficit and ad­dress its un­em­ploy­ment cri­sis.

But the bone of con­tention, ar­gue the au­thors of the re­port, is that the NIPF is also di­rected at sup­port­ing cer­tain clearly iden­ti­fied in­dus­tries. It thereby takes it for granted that Gov­ern­ment has the knowl­edge to iden­tify those key in­dus­tries – the usual sus­pects: the mo­tor man­u­fac­tur­ing in­dus­try, metal pro­cess­ing, tourism, tex­tile/cloth­ing, agri­cul­ture, min­ing and busi­ness process out­sourc­ing.

The in­sti­tute’s re­port warns that the “pick­ing win­ners” pol­icy is “po­lit­i­cally tempt­ing but eco­nom­i­cally risky”. Aside from the ex­tremely dif­fi­cult task of de­cid­ing which in­dus­tries to back, Frey­tag ar­gues that pro­tect­ing or “sup­port­ing” spe­cific in­dus­tries leads to a num­ber of prob­lems. Those in­clude giv­ing the wrong in­cen­tives for the econ­omy to re­struc­ture it­self and cre­at­ing rent-seek­ing cul­tures where lobby groups de­ter­mine where Gov­ern­ment in­vests money.

SA has ob­vi­ously been ex­pe­ri­enc­ing vast deficits in its bal­ance of pay­ments in

re­cent years.

So what does the re­port rec­om­mend the new gov­ern­ment should do? Re­sist the push from the Left and the de­vel­op­men­tal State purists who want broader State in­ter­ven­tion, in­clud­ing a greater fo­cus on “pick­ing win­ners” and pro­tect­ing them. Then ad­dress the prob­lem of low pro­duc­tiv­ity by fos­ter­ing tech­no­log­i­cal change and ba­sic tech­nolo­gies and by en­hanc­ing all lev­els of ed­u­ca­tion. Next, Gov­ern­ment should tackle bot­tle­necks in in­fra­struc­ture: elec­tric­ity, trans­port and com­mu­ni­ca­tions. “The lack of net­works’ pro­duc­tiv­ity and the high costs of us­ing the net­work in­fra­struc­ture aren’t mainly a prob­lem of ca­pac­ity but rather of or­gan­i­sa­tion and com­pe­ti­tion. The Gov­ern­ment should take ef­forts to lib­er­alise, de-mo­nop­o­lise and fi­nally reg­u­late those (those ear­marked for pro­tec­tion) – and other – sec­tors ac­cord­ing to ex­pe­ri­ences in other coun­tries,” says Frey­tag.

Of course, that op­tion isn’t as po­lit­i­cally at­trac­tive for the new gov­ern­ment. Broad­en­ing in­ter­ven­tion and pro­tec­tion paints a pic­ture of a car­ing gov­ern­ment “ac­tively” do­ing more about un­wieldy poverty and un­em­ploy­ment.

While Draper says it’s still un­clear whether the new ANC gov­ern­ment will take on a more in­ter­ven­tion­ist hue in its elec­tion man­i­festo and post-elec­tion eco­nomic pol­icy pro­grammes, there’s lit­tle doubt it’s what the ANC pol­icy con­fer­ence last year was ask­ing for. And that, of course, is strongly sup­ported by Cosatu and the SA Com­mu­nist Party.

Pick­ing win­ners eco­nom­i­cally risky. Peter Draper

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