Last week the national treasury formally released the findings of a two-year review of growth in the South African economy by a Harvard-led international panel of economists and their recommendations for the formulation of government’s economic plan.
A tentative date has been set in mid-June for government officials, the public and various stakeholders to participate in a workshop to facilitate wider debate on the recom-mendations. And debate there will be! The review has put forward some controversial recommendations regarding black economic empowerment (BEE), macro-economic strategy, public administration, trade, competition, industrial and labour policy.
There is a popular joke that goes: “What do you get when you put three economists in a room?” The answer: “Four different opinions.”
Economics is not an exact science, but instead a discipline that attempts to predict human behaviour within a constantly changing environment. The potential for policy recommendations to lead to unexpected and unintended outcomes is high and economists can always give you a range of possible outcomes and thus, several different opinions on what the future could turn out to be. Therefore, the detail on exactly how the Harvard recommendations will be implemented is critical.
Among the six categories of recommendations, the one dealing with macro-economic strategy will probably have the most far-reaching impact on the broader economy and, with the recent pain from aggressive interest rate hikes, the one in which the consumer might be most interested. Here the panel recommends developing macro-policy that lays the groundwork for an “export for jobs” strategy.
Because economic policies can lead to a range of different outcomes, it is important to consider that such a strategy, which favours one sector of the economy, can adversely affect other sectors.
Last week’s national treasury press release on the Harvard report notes that: “The current growth acceleration is accompanied by a widening current account deficit as imports are rising much faster than exports (despite higher mineral prices) …” To correct this imbalance, grow the economy and stimulate job growth, the panel recommends that the South African Reserve Bank (SARB) intervene in the currency market to target a weaker exchange rate.
Weakening the exchange rate results in mineral extractors receiving higher rand prices for their commodities. (Commodities make up about 70% of our exports.) The error in this thinking is that it assumes that the reason our exports have been sluggish is because the price is too low to motivate the mineral producers to sell more commodities when, in fact, the real problem is our inability to get the commodities out of the ground safely and efficiently largely because of underinvestment in infrastructure, uncertainty about regulations and production inefficiencies.
This is evident in the fact that in the past 10 years commodity prices have risen about 400%, in United States dollar terms, because supply simply can’t keep up with world demand. We will and can sell anything we want in this “super-cycle” commodity sellers market — it doesn’t matter what the rand is doing.
Furthermore, under an inflation-targeting regime (which the panel recommends we retain), a weak rand will inevitably lead to the SARB hiking interest rates to counter inflationary pressures caused by the higher cost of imports such as food, fuel and machinery — as we have so painfully experienced in recent months. A weak rand supports the export sector, but penalises the consumer and hinders construction and infrastructural development that have high import requirements.
Put bluntly, why should consumers be punished with ever-increasing fuel prices and mortgage repayments because our mineral extractors and the department of minerals and energy can’t get commodities out of the ground to take advantage of the commodity boom?
A weak exchange rate will certainly benefit the manufacturing export sector — about 30% of South Africa’s exports — but this strategy would unfairly penalise all consumers with higher fuel and mortgage costs. In the supporting papers to the Harvard panel review (there are 19 in total), it is shown that a focus on competition and trade policy can have a significant positive impact on industrial and trade development. It would be less risky and more sustainable to focus on improving production efficiencies and developing an environment that supports trade and business activity which competition and trade reform can facilitate.
The panel does not specify a target exchange rate for the SARB, it talks only about a “competitive currency”. This targeted exchange rate will be critical. As with the report’s other recommendations concerning BEE, public administration, labour market and industrial policy, the devil will be in the details.
Réjane Woodroffe is MetAM’s chief economist