More kiler than cure
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
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