[DEBATE] : (Fwd) Harvard team econ policy recommendations
hein at marais.as
Tue May 13 09:48:09 BST 2008
Does anyone know why these papers are now being "released" ? If memory
serves, a good deal of them are almost 2 years old and have been floating
about for some time.
From: debate-bounces at debate.kabissa.org
[mailto:debate-bounces at debate.kabissa.org] On Behalf Of Patrick Bond
Sent: May 9, 2008 9:01 AM
To: debate: SA discussion list
Subject: [DEBATE] : (Fwd) Harvard team econ policy recommendations
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
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
# 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
# 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
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,"
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
8 May 2008
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
* 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:
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
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
Tel: 012 315 5944
Tel: 012 315 5819
Cell: 083 644 5877
Issued by: National Treasury
8 May 2008
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