It is a list that reads like a rebuke against a decade’s economic management: liberalise trade policy, relax immigration laws, be flexible on empowerment and stay away from dubious industrial policy schemes like minerals beneficiation.
The recommendations will make uncomfortable reading, both on the ANC’s left flank and within Thabo Mbeki’s Cabinet.
It is the ”real economy” responsibilities of the Department of Trade and Industry to which the Harvard panel gives the most rigorous treatment, but the treasury doesn’t escape censure.
The macroeconomy
In contrast to the standard complaint of Cosatu and the SACP, that Trevor Manuel keeps too tight a hand on the government’s cash spigot, Jeff Frankel and Federico Sturzenegger of Harvard’s Kennedy school of government argue that the treasury’s fiscal stance has been too ”procyclical”. That is, increased spending at a time of booming economic growth tends to fuel inflation, and increase an already yawning current account deficit. That puts pressure on the Reserve Bank to hike interest rates, which tends to strengthen the rand, and hurt exports.
”If fiscal policy eased up on the spending accelerator, then monetary policy would have less need to apply the brakes of high interest rates and a high rand.” This change in policy mix, they argue, would shift output in the economy towards tradable goods — thereby boosting employment and exports.
But it is the Trade and Industry Department that will probably find the panel’s conclusions most galling.
Trade
The department would agree with the panel’s Robert Lawrence that import tariffs on key economic inputs, like steel, should be reduced, and has begun gradual cuts in some import duties, but it has raised other barriers — including the quotas on Chinese textiles — which complicate the picture.
And the rest of Lawrence’s suggestions run directly counter to the department’s increasingly defensive stance in trade negotiations, as reported on our Business pages.
Competition
South Africa’s global competitiveness is hampered by a lack of competition in the domestic market, according to the panel’s Philippe Aghion, Matias Braun, Johannes Fedderke. Cartel arrangements and monopolies push up prices and profits sharply, and limit productivity growth. Not only should tariffs be cut to expose these cosy arrangements to the chill of global markets, the government should take a much more activist line in prosecuting companies that violate anti-trust laws. They also suggest measures to prevent empowerment from limiting competition.
BEE
Empowerment policy is routinely described by government officials as tending to promote growth. Yes and no, says the panel.
”While firms are actively responding to BEE requirements they are also doing so within a static structural context, where firms keep looking to established networks for solutions,” writes the Kennedy school’s Matthew Andrews.
On the other hand, in firms that are building new connections through procurement, real payoffs are evident. Substantial changes to the rules are required, he says. More BEE points must be on offer for deals with new market entrants, groups claiming to be ”broad based” must be made to account much better, and government must set a sunset clause.
”It is important —, to stop and reverse the emigration of high-skilled whites. This will be helped by the rising compensation for the highly skilled, which will worsen income distribution, but there is substantial anecdotal evidence that BEE rules may be sending a negative message to both young white university graduates and those in senior management,” says Harvard’s Rodrik Hausman.
Immigration
A key component of the panel’s plan to address this problem is drastically liberalised immigration rules, essentially allowing highly skilled people to enter the country at will. This is a more radical version of the mechanism proposed by Mangosuthu Buthelezi when he was home affairs minister, and then scrapped by Mbeki.
Beneficiation
The idea that South Africa can climb the development ladder by processing its own minerals is almost as much an article of faith within the presidency and the Department of Minerals as are the growth promoting powers of BEE. Laws and industrial policy incentives are in the works to compel mining companies to support beneficiation, most prominently in the form of efforts to create a local diamond-cutting and jewellery industry. It is an idea the panel gives short shrift. ”— we would argue that beneficiation is a bad policy paradigm and should be dropped from South Africa’s development strategy”.