Cut trade barriers, unclog the labour market and boost competition: the national treasury wants more aggressive liberalisation of the economy to boost growth, rather than protective tariffs, quotas and industrial incentives.
This approach has put team finance at loggerheads with other government departments, notably trade and industry, which is trying to craft a new regime of supportive measures for the manufacturing sector, and labour, which opposes any relaxation of employment rules.
The primary purpose of the medium-term budget policy statement is to set broad parameters for February’s more detailed announcement. However, it is also an opportunity to affirm policy positions, and, in the context of the increasingly clamorous debate on economic policies in Cabinet, the treasury has used it to take a firm stand on ways to speed up economic development.
This week’s budget statement gives several explicit indications of the direction the Treasury prefers, but it does so largely in references to the study by the “Harvard panel” of international economists, which the government commissioned to examine constraints to economic growth under the aegis of its growth initiative, Asgisa.
Meanwhile, the increasingly protectionist tone on trade policy emerging from unions and the department of trade and industry gets little play in the budget statement: “The work of the panel indicates that exports, particularly of manufactured goods, are constrained by a relatively protected economy that keeps prices of inputs and capital goods high.” In other words, steep import tariffs and a lack of local competition make industrial machinery and the basic components of manufactured goods — from steel to textiles — pricier than they would be in a more open environment, constraining the competitiveness of the export sector.
“To meet this challenge and to improve South Africa’s export performance, attention needs to be paid to trade policy reform, encouraging innovation, improving transport logistics, reducing the regulatory burden and deepening competition. The panel emphasised that international trade is one of the most effective means of directly improving economic growth rates,” the statement continues.
Asked to what extent this position was at odds with the trade and industry department’s apparent retreat from previously liberal policies, senior treasury officials would only say that the debate was not over.
“It is still contested ground, but it is self-evident that growth and trade are related, and you can’t increase trade without opening the economy,” said one top official.
The statement also sets out the treasury’s position on competition and the labour market, calling attention to the relationship between productivity, economic growth and employment.
Citing another paper released by the Harvard group, the treasury points out that the relative ease of setting up business in South Africa should augur well for productivity, but that these benefits are offset by high margins in the manufacturing sector and the domination of whole sectors by a few firms, all of “which weighs on productivity and employment by limiting competition and investment”.
“Other regulatory factors are also important for productivity, including constraints arising from labour regulations that affect the adoption of new technologies and work practices, and the shortage of skills in the workforce,” said the treasury.
Others in the Harvard group — notably Dani Rodrik, whose work on east-Asian economic development is enormously influential within government — have taken contrasting positions, calling for state support for emerging industries that could mop up large quantities of relatively unskilled labour.
Because the Harvard studies form part of Asgisa — and, as such, emerge from within a process championed by Deputy President Phumzile Mlambo-Ngcuka — references to the panel’s work provide a degree of political cover for the treasury.
The trade department has been given the job of developing Asgisa’s sectoral strategies, and of developing a regime of industrial incentives ranging from subsidies and export credits to tax breaks for targeted industries.
The treasury, however, has been fighting tooth and nail against industry-specific tax incentives, which it believes are too easily abused and potentially distort the economy. Officials are also concerned that there has been inadequate monitoring of the impact of costly support programmes, such as the Motor Industry Development Plan.
Ismail Momoniat, Deputy Director General in charge of taxation policy at the treasury, says any new tax incentives need to be considered in the context of a coherent industrial policy, rather than in response to ad hoc demands. “We will assess tax incentives from an industrial policy and investment and performance perspective rather than be subjected to ad hoc sector requests.”
It is crucial, he said, to improve the transparency and performance measurement of industrial incentives in general, “we have to know whether they are achieving what they are meant to”.
Trevor Manuel himself was coy about new tax proposals, which usually get an airing in February’s budget presentation. “Mum’s the word,” he told journalists ahead of his speech.