[DEBATE] : (Fwd) Harvard team econ policy recommendations

[Patrick Bond]

Manuel's policy gambit
May 9, 2008

By Quentin Wray

Johannesburg - Finance minister Trevor Manuel has put the national 
treasury back where it belongs: front and centre of the economic policy 
debate.

The treasury yesterday released for public comment a harsh analysis of 
South Africa's economic shortcomings and a raft of 21 policy 
recommendations to fix them.

Many of the recommendations (listed on page 5) by an international panel 
of top economists are bound to infuriate the ANC's left-leaning allies, 
which have dominated economic discourse since the party's leadership 
conference in Polokwane in December.

Among the report's findings is that while only 42 percent of working-age 
South Africans have jobs, in other countries at a similar stage of 
development this figure stands at more than 60 percent.

If South Africa were to have this employment level, 6 million more 
people, mostly young and African, would be off the streets and in work.

To remedy this, the panel, led by Harvard's Ricardo Hausmann and Dani 
Rodrik, wants:

# Government interventions that will weaken the rand and keep inflation 
and interest rates low.

# Import tariffs to be cut and simplified, and cartels smashed to reduce 
prices.

# Young workers to qualify for a wage subsidy but to have no job 
security during a probation period, so that employers can fire them 
without having to give a reason.

# Skilled whites to be encouraged to stay and immigration actively 
encouraged to boost the country's skills base, so that firms are able to 
absorb young, unskilled workers.

National treasury director-general Lesetja Kganyago said in an interview 
yesterday that members of President Thabo Mbeki's cabinet had seen the 
report, which was based on 19 research papers prepared over a two-year 
period, but that it had not been tabled before the cabinet for approval.

Only once the report and its recommendations had been roundly discussed 
by private sector economists, business, the labour movement and social 
groups would it then be taken through the government process. The 
treasury is planning a workshop next month.

Kganyago said the treasury wanted a robust debate.


"I do not see any reason why this should not spark a huge national 
debate on economic policy," he said.

This is a break from previous practice. Gear - the government's 
controversial strategy, which cemented the last decade of macroeconomic 
stability but was blamed by labour for worsening the plight of the 
unemployed - was pushed through without much debate at all

The accelerated and shared growth initiative for South Africa - which is 
based on the same growth diagnostic methodology as the panel's report 
but differs in key areas - was also presented as a fait accompli to the 
public.

Asked whether he anticipated a backlash from the Left, Kganyago said 
diplomatically that policy was "always controversial in South Africa" 
and that it was "too soon to tell how the recommendations would be 
received. Some tie in with what labour wants, others don't."

He said that the recommendations had to be digested whole; policy makers 
could not cherry pick the ones they liked and discard others.

"They are cleverly crafted."

He accepted that implementing the recommendations, should they become 
government policy, would be difficult.

"Policy is painful and you've got to take some tough decisions," 
Kganyago said.

However, rejecting them would not be easy, as alternative solutions to 
the problems would have to be found.

If these recommendations had been available two years ago and 
implemented then, the economy would be in a better position today, he said.

"But hindsight is always perfect," Kganyago said.

Colen Garrow, an economist at Brait, said that if certain of the panel's 
recommendations were to be implemented, the economy would become more 
attractive, "not only as a foreign direct investment destination, but 
also a destination for domestic investment".

But he warned that some of the initiatives were unlikely to find favour 
with organised labour, "especially the part that is critical of South 
Africa's rigid labour legislation, not to mention the part which 
promotes hiring and firing".

***

Release of research papers on growth in South Africa by the 
International Panel

8 May 2008

Background

In 2004, the government of South Africa committed itself to the halving 
of poverty and unemployment in the country by 2014, in line with the 
United Nations Millennium Development Goals. In the first decade of 
freedom, annual economic growth in South Africa averaged about 3% per 
annum, a level much higher than the 1% per annum achieved in the decade 
before 1994. However, this was still not enough to achieve the goals of 
reducing unemployment levels to below 15% and poverty levels to less 
than one-sixth of households, by 2014.

The South African government initiated a discussion on growth at the 
2005 Cabinet Lekgotla. In February of 2006, the Accelerated and Shared 
Growth Initiative for South Africa (AsgiSA) was formally launched by 
government under the leadership of Deputy President Ms Phumzile 
Mlambo-Ngcuka, with the objective of attaining a higher growth rate of 
at least 6% per annum by 2010. The underlying approach to AsgiSA was a 
growth diagnostic analysis which seeks to identify the 'binding 
constraints' on growth, which the government identified to be:

* volatility and level of the currency
* the cost, efficiency and capacity of the national logistics system
* shortage of suitably skilled labour amplified by the impact of 
apartheid spatial patterns on the cost of labour
* barriers to entry, limits to competition and limited new investment 
opportunities
* regulatory environment and the burden on small and medium businesses
* deficiencies in state organisation, capacity and leadership

The South African government's responses to the above binding 
constraints fell into six categories:

* infrastructure programmes
* sector investment (or industrial) strategies
* skills and education initiatives
* second economy interventions
* macro-economic issues
* public administration issues.

As part of the AsgiSA initiative, the government (via the National 
Treasury, in co-operation with the Presidency), engaged an international 
team of growth experts to research the above and other constraints on 
growth in the South African economy, and to provide a growth diagnostic 
in order to improve AsgiSA.

The panel was led by Professor Ricardo Hausmann from the Kennedy School 
of Government, Harvard University, and included a range of economists, 
based at universities in the United States of America and United Kingdom 
like Harvard, MIT, LSE, University of Michigan and University of London, 
as well as experts originally from Venezuela, Turkey, Argentina, UK, 
France, USA, India, Chile, Pakistan and South Africa. The team worked 
closely with South African-based academics as co-researchers or 
assistants in order to ensure that the best local expertise is drawn on, 
and that there is some transfer of skills. The attached Annexure A is a 
list of the team.

The panel began its work with a first visit in January 2006, followed by 
further visits during July 2006, January 2007 and July 2007. During 
these visits the panel held workshops with government officials, 
economists, trade unionists, business and other stakeholders in South 
Africa. During each visit the panel also met with members of Cabinet, 
including the President and Deputy President. It published its first set 
of nine research papers in July 2006, and a second and final set in 
September 2007. Altogether, 19 research papers and a consolidated report 
("Final Recommendations of the International Panel on AsgiSA") on the 
entire panel's recommendations were completed and submitted to the 
government. Annexure B is a list of the papers, which cover the areas of 
macroeconomic policy, industrial policy (including beneficiation and 
competition), trade policy, labour market policy, public administration 
and black economic empowerment.

It should be noted that the papers and final recommendations were 
written shortly before the current global slowdown, higher global and 
domestic inflation, and electricity shortages.

Binding constraints to growth

The panel argued that the fundamental problem in South Africa is that 
very few South Africans are working. Those who are working are estimated 
at 13 million, which represent only 42,6% of the working age population 
and 29% of the total population. This compares to 65% of the working age 
population in comparator countries and if employment reached the level 
of these comparator countries, it would need to rise by 52%, that is, 
employment for an additional 6,6 million South Africans. Furthermore the 
panel argued that the unemployed are predominately less educated (30,4% 
have less than matric, 28,2% matric, 11,7% post matric and 3,3% 
university educated), they are young (between the ages of 20 to 35), and 
black (33% African, 20% coloured, 18% Indian and 5% white). Achieving 
shared economic growth is therefore fundamentally about creating jobs 
for those currently not working.

The panel argues that it would be important to eliminate the binding 
constraints already identified in AsgiSA (skills, infrastructure, 
exchange rate volatility, state capacity, second economy and sector 
strategies), but recommends that we also grow the export sector. They 
argue that the consequence of sluggish performance in exports has been 
declining trends in employment in mining, agriculture and manufacturing. 
A consequence of this has been that employment in the tradable sector 
has decreased from 45% of total employment in the 1970s to 30% in 2004 
whilst employment in the private non-tradable sector has grown from 24 
to 36%. Employment growth in South Africa has therefore been 
concentrated in the non-tradable sector which happens to be more skill 
intensive as opposed to the tradable sector which is less skills 
intensive. The key therefore of absorbing the unemployed who are 
predominately less skilled is through creating "exports for jobs".

A further problem that it identified in the short term is whether the 
current acceleration in economic growth is sustainable and can be 
maintained. In particular, what is worrying is 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), public spending is growing faster than Growth Domestic Product 
(GDP( growth and is accompanied by rising inflation. Growth is being 
driven by growth in only three sectors; namely; construction, transport 
and communication and financial, real estate and business services. They 
therefore argued, after testing it econometrically, that the economy is 
growing above its potential which they estimated at about 3,5%.

Recommendations of the International Panel

The International Panel makes a total of 21 recommendations, taking into 
account its view that the current rate of growth of the economy is above 
what is sustainable and still remains below the desired six% announced 
by AsgiSA. The Panel points out that "a strategy for externally 
sustainable and shared growth involves the creation of jobs in the 
tradable sector, which in an open economy translates into exports for 
jobs". In the context of South Africa, it is clear that the sector that 
has grown less and that has suffered the biggest employment losses has 
been the tradable sector: this is expressed in the dismal long term 
growth in per capita real exports and in the massive job losses in that 
sector. The Panel notes that additional efforts will have to be made to 
relax the binding constraints that keep the speed limit of the economy 
below what AsgiSA would like to achieve. It breaks up its 
recommendations into five policy areas:

Macroeconomic Policy:

The Panel makes four recommendations on macroeconomic policy, having 
published six papers. The key focus is around macroeconomic constraints 
and risks to growth (current account, volatility of exchange rate, 
cyclicality of fiscal and monetary policy). The recommendations call for 
fiscal policy to be counter-cyclical and make a greater contribution to 
national savings, and suggest a larger fiscal surplus target for 2008 of 
at least one to two% of GDP. The Panel calls for the elimination of 
existing restrictions on capital outflows, maintaining the current 
inflation targeting regime but adopting a strategy to pay more attention 
to the level and stability of the real exchange rate.

Trade and competition policy:

The International Panel makes four recommendations, having produced 
three papers on trade and competition policy. They recommend a radically 
simplified tariff system with low or no tariffs on inputs. They also 
recommend the review of the South African Custom Union (SACU) 
arrangements, and the need for South Africa to take the lead in 
encouraging African economic integration, but at the same time avoid 
unrealistic custom union agreements. The Panel also recommends the 
adoption of a pro-active approach for competition policy, rather than a 
complaints-driven approach in order to reduce barriers to entry.

Labour Market Policies:

The Panel makes three recommendations on labour market policy, having 
produced two papers. The recommendations deal with a wage subsidy for 
all 18 year olds, with a no-questions-asked job termination requirement. 
It calls for relaxing regulations on the creation of Sector for 
Education and Training Authorities (SETAs), and for firms to be allowed 
to move to one or more SETAs of their choice. It also encourages 
high-skilled immigration.

Industrial Policy (including beneficiation policy):

The Panel makes five recommendations, having produced five papers 
covering industrial and beneficiation policy. It recommends a shift in 
focus of the activities of the Industrial Development Corporation (IDC) 
towards the financing of new activities, away from an asset management 
approach. It also recommends that the current Customised Sector 
Programmes be substituted or complemented by an open-architecture 
approach with self-organisation of relevant actors. It proposes a 
special central budget for structural transformation. It recommends 
changes to the existing Motor Industry Development Programme (MIDP) by 
phasing out the IRCC scheme and replacing it with a supplier-based 
promotion scheme consisting of two windows. The Panel also recommends 
that beneficiation should not be used as the basis for selective 
intervention and industrial promotion.

Public administration and Black Economic Empowerment:

The Panel makes two recommendations on Public Administration, and three 
on Black Economic Empowerment (BEE), based on four papers. The first 
recommendation relates to a certification system for government entities 
providing economically-relevant services (e.g. visa procedures for 
immigrants, registration of firms and development of a safe medicinal 
drug industry, tax and customs collection services). It also recommends 
that municipalities with poor capacity be required to use central bodies 
to procure for municipal services. The Panel recommends a review of the 
BEE scorecard to include new elements to facilitate firm creation, 
employment creation, learnerships and training. They also recommend the 
development of a credible system to collect information on BEE, and a 
mechanism to evaluate progress and signal future directions of policy.

The Panel has also published a paper on the impact of crime on economic 
growth. It noted that the most severe impact of crime on growth was 
probably through the discouragement of small and emerging businesses in 
poorer areas. No specific recommendations are made for this paper, but 
this paper has been referred to the research project on crime being 
conducted by Policy Co-ordination and Advisory Services (PCAS).

Process following the publication of growth papers:
The research papers do not necessarily reflect government's views, nor 
has government adopted or rejected any of the recommendations made by 
the Panel. Government also notes that there is no universal recipe or 
set of policies for a successful growth strategy. Whilst government has 
been debating, and will continue to debate the issues raised in the 
research, the process of responding to the papers and recommendations 
will benefit from a broader public debate. At their last meeting with 
members of Cabinet on 19 July 2007, the President requested that the 
papers should be made public to encourage a broader debate on shared 
growth. It is with this objective in mind that the papers are now being 
released for further dissemination by the public in general and the 
economic community in particular.

To facilitate the broader debate, government is planning a major 
workshop on the report, between the international panel, government 
officials, local academics and economists, policy researchers and 
various stakeholders. This workshop is planned for 17 or 18 June 2008 
(subject to confirmation). It is hoped that this workshop will also 
encourage local economists and academics to prepare response papers in 
order to stimulate the broader public debate. In this respect, economic 
departments at South African universities and research institutions will 
be encouraged to convene workshops later in the year on various aspects 
raised in the research papers, where such local papers can be presented.

The research papers on growth by the international panel and related 
information can be found on our website at http://www.treasury.gov.za

Enquiries:
Thoraya Pandy
Tel: 012 315 5944

Kershia Singh
Tel: 012 315 5819
Cell: 083 644 5877

Issued by: National Treasury
8 May 2008