A backward leap to command economics

Zwelinzima Vavi’s statements of Cosatu’s views on post-Thabo Mbeki economic policy, recently published in the Mail & Guardian, are of great importance.

We share his objectives of “decent work, greater equity and the eradication of poverty” (who wouldn’t?). We agree that the state’s capacity to deliver on these objectives is limited, although, owing to the country’s pervasive skills crisis, we are not optimistic this can be quickly fixed.
We also agree that economic diversification away from reliance on resource exports is an important objective. And we agree that resource “rents” need to be invested wisely.

But, unfortunately, our points of disagreement are many. We focus on those concerning trade and macro-economic policy.

Sadly, it is no surprise that South Africa’s current account deficit, accompanied by a growing trade account deficit, has led Cosatu to advocate a trade protection policy stance. This is driven by a mercantilist bias: trade surpluses are seen as beneficial and reflecting export prowess; trade deficits as bad and determined by foreign countries’ “unfair” trade practices.

Thus Cosatu demands trade policy actions and state intervention to support particular sectors of the economy. Implicitly trade is treated as a zero-sum game: countries are like companies that compete with one another; what is sold by China cannot also be sold by South Africa. But this view is completely misplaced in analysing international trade, where the potential for division of labour is not fully explored.

This “competitiveness approach” assigns an important role to the exchange rate: South Africa should devalue its currency to achieve the desired trade balance. Furthermore, Cosatu eschews inflation-targeting and wishes to introduce controls on capital inflows and the banking sector, especially through reserve requirements.

Weimar Germany, Latin America in the Eighties and Zimbabwe provide ample evidence of the dangers of printing money for growth. Hence Cosatu’s proposed strategy change would prove self-defeating, reducing economic growth and hurting the poorest in the country.

The current account deficit “problem” must be considered in relation to its indispensable companion: the capital account. Rising investment in South Africa is financed partly by increasing international capital inflows. Generally, if capital account imbalances (a surplus in our case) occur, the whole balance of payments will change, leading to higher current account imbalances. The exchange rate is the adjustment mechanism, not a policy variable. And it is unclear whether a trade deficit is indeed a problem or whether it reflects economic strength (the ability to attract capital inflows).

Furthermore, contrary to Cosatu’s claims, our growing import bill has not been “squandered” on consumption goods. Instead, empirical evidence shows that in the past 20 years more than half of South Africa’s imports have been capital and intermediate goods, regardless of the trade balance.

Indeed, South Africa can benefit from undistorted net capital inflows: if maintained they can be invested further, creating new jobs, lifting the living standard of the poorest and increasing savings. Higher savings would automatically reduce net capital inflows. Therefore, the country should not attempt artificially to reduce net capital inflows via policy means, particularly exchange rate manipulation and trade barriers.

Microeconomic flexibility is essential to enable smooth “structural adjustment” in the event of external shocks. Structural change is a permanent companion of economic development in South Africa, as it is elsewhere. It is costly—jobs are at stake, while new jobs are created. It is difficult to forecast the new opportunities, but easy to identify the losers.

The government should refrain from protecting certain industries from structural change; rather it should be interested in removing existing obstacles to structural change. The fewer barriers, the easier structural change can be mastered.

The South African economy’s structural constraints are well documented. Will government’s National Industrial Policy Framework (NIPF), so favoured by Cosatu, ameliorate or aggravate these? We strongly support the view expressed in the NIPF that government should address our low-productivity problem by fostering technological change and basic technologies and by enhancing education policy and training at all levels.

Next government should accelerate efforts to tackle bottlenecks in infrastructure: electricity, transport and communication. Low productivity in these key network industries, and the high (transport; communication) and rising (electricity) costs of using network infrastructure are not mainly capacity determined, but rather problems of organisation and competition.

Because of ownership patterns, investment must be state-led in the short term but, in the medium term, competition’s “creative destruction” will be indispensable. Without this, it is difficult to see how our manufacturing sector can sustainably plug into global supply chains based on just-in-time manufacturing.

Government’s accelerated and shared growth initiative (Asgisa) incorporates these recommendations, but needs to be accelerated itself. Correctly implemented, it should improve South African firms’ long-run competitiveness, reducing the current account deficit. In the short run, this may encourage further capital inflows, leading to an increase in the current-account deficit.

The alternative, using the NIPF mainly as a traditional industrial policy instrument (for example, subsidies to established firms) and intervening directly in the economy by establishing more state-owned companies and/or nationalisation (as Cosatu proposes), may work in the opposite direction, reducing the current account deficit in the short run, but causing lower international competitiveness in the long run.

This advice seems all the more important against the background of the current financial turmoil in the United States. This crisis does not imply that capital inflows are history. Rather it indicates that in future savers and investors will be even more careful when assessing investment opportunities. In our view the current account deficit is sustainable on economic grounds, but our political process and the economic policies espoused by Cosatu increase the risk of a painful reversal.

Overall Vavi’s statements reveal deep scepticism about the role of markets and the private sector. Cosatu apparently wishes to take us back to a “command-and-control” economy of the kind abandoned by formerly communist states. So “capital” must be “disciplined”; “financial capital” has “subverted our development goals” and must be “subordinated” to those goals; there must be “effective coordination throughout the state—and indeed society”.

Charitably read, this language conveys East Asian authoritarian tendencies; at worst it is Orwellian. This is at odds with Cosatu’s admirable track record of defending democracy at home and in the region.

Vavi’s views are based on the deliberations of a panel of “progressive” economists. If this programme were implemented in full, its results would be anything but progressive.

Peter Draper and Tsidiso Disenyana work in the Development through Trade Programme of the South African Institute of International Affairs. Andreas Freytag is chairperson of economic policy at Friedrich-Schiller University in Jena, Germany. This article is based on SAIIA’s latest report on the current account deficit; see www.saiia.org.za

Client Media Releases

There are property opportunities for entrepreneurs in a slow economy
Rosebank College alumnus establishes thriving tour operating business
First two MTN CakeCrush Competition winners announced
Sebata establishes Skills Development Centre