Stark differences within the government over economic development strategy are mirrored in two working papers by international economists published online by the Centre for International Development at Harvard this week.
One paper argues that tougher competition to curb persistently high mark-ups in the local manufacturing sector and improve productivity could sharply enhance growth and job creation prospects. But another study, by development guru Dani Rodrik, takes a very different tack, arguing for state intervention to manage the level of the rand, and to support nascent manufacturing businesses.
The papers broadly reflect the divergence of opinion between the national treasury, where officials are wary of the industrial policy approach proposed by Rodrik, and the department of trade and industry, which embraces his ideas.
The research was commissioned by the treasury as part of the South Africa growth initiative, an effort to focus the attention of international economists on South Africa’s slack growth record and dire employment situation.
In the second paper, which was also commissioned by the treasury, Phillipe Agion, Matias Braun and Johannes Federke have compared the mark-ups and profitability of JSE-listed manufacturers to those of firms in comparable countries around the world.
Both, they find, are significantly higher in South Africa, and show no sign of declining. ”The profitability margin … is more than twice as large in South Africa than it is in other countries … higher past mark-ups are associated with lower productivity growth rates and lower current unemployment,” they argue.
Their economic modelling suggests that a 10% reduction in mark-ups would boost productivity growth by 2% to 2,5% and bring about a considerable increase in employment. The findings indicate that too many South African manufacturers are still able to exercise ”pricing power”, that is, to dominate a market in which buyers are short on alternative options. As a result, listed industrial firms are able to maintain fat profit margins and therefore face little pressure to innovate or improve their production processes.
It seems that the unwinding of the giant conglomerates of the 1980s and the advent of competition law since the mid-1990s has had little impact on this situation, with the trend ”stable and non-declining”. Agion, Braun and Federke call for measures to increase competition and boost growth and employment.
That is a view that is likely to go down well at the treasury and Reserve Bank, where frustrations over the limited success of competition policy — administered by the department of trade and industry — have long been a source of interdepartmental grumbling.
Rodrik’s paper, on the other hand, lends explicit support to the department’s industrial policy approach and elements of the accelerated and shared growth initiative (Asgisa), even as it undercuts some of the conventional wisdom underpinning current policy on skills and minerals beneficiation.
Rodrik models the relationships between labour costs, manufacturing exports, job creation and economic growth, comparing South Africa and Malaysia. At the heart of his findings is a contention that high labour costs are only ”the proximate cause” of high unemployment levels. The deeper problem, he argues, is that — apart from minerals — South Africa’s manufactured exports sector has steadily declined since the 1990s while the service sector has grown steadily.
”The weakness in particular of export-oriented manufacturing has deprived South Africa from growth opportunities as well as from job creation at the relatively low-skill [level],” he writes, adding that his econoÂÂmetric modelling identifies declining manufacturing profits as the most important contributor to the ”lack of vitality” in the sector. Focusing on low-skill, export-oriented manufacturing will lead to shared growth rather than trickle-down benefits, he says.
Rodrik suggests that the conventional wisdom that a shortage of skills is a major brake on economic development is incorrect. A structural change in the economy away from services to emphasise manufacturing would balance the demand for skills. In that scenario, he says, ”skills can no longer be viewed as a serious constraint on growth”.
Pointing to Malaysia, where the heavily-subsidised Proton car was a failure, but the electronics sector has taken off, Rodrik argues that a learning process for the economy, accompanied by sophisticated state intervention, is crucial. Asked whether he thought South Africa’s small and thinly stretched trade and industry department could manage this job Rodrik said: ”Fiscal policy is difficult too … and yet we don’t conclude that governments should stay out of these areas. We focus instead on how to do them better. Industrial policy is the same. Not doing it is not really an option for South Africa … The only serious option is between doing it more or less bad[ly].” He also insisted that there is a place for direct state intervention in the level of the rand, a departure from current government policy.
”I don’t think there should be an explicit targeting of the exchange rate,” Rodrik says, ”but the level of the exchange rate [and its implications for exports and employment in tradables] should be in the objective function of the reserve bank.”