Johannesburg - A report released yesterday on global trade and development calls for higher wages for workers and proposes that central banks should lend directly to sectors that support “development objectives”.
The document, prepared by the UN Conference on Trade and Development (Unctad), says: “There are strong arguments in favour of central bank and government intervention to influence the allocation of credit, especially in developing countries.”
The findings, presented by senior Unctad economist Diana Barrowclough, were welcomed ahead of the Johannesburg launch, by Trade and Industry Minister Rob Davies via video. Davies said that the report addressed “major challenges South Africa is trying to confront”.
In line with the need for “structural transformation in the way economies work”, Unctad urged that banks be “encouraged or obliged” to provide long-term loans, while relying on short-term deposits – with support from the central bank. This proposal runs counter to banking reforms introduced by Basel 3, which have forced South African banks to scramble for longer-term funds.
Econometrix chief economist Azar Jammine said that it would be dangerous for banks to “borrow at the short end and lend long”. But he agreed that banks needed to rethink their lending policies. He referred to their reluctance to lend to small and medium-sized enterprises and argued that risks associated with this type of lending were no greater than lending to large corporations.
Unctad’s package of proposed measures is based on the premise that growth in global trade will remain low and economies will increasingly have to rely on domestic consumption.
Unctad calculated that world import volumes rose only 1.6 percent last year from 5.3 percent in 2011, while export volumes grew 1.8 percent, down from 5.2 percent. The low levels of growth are in contrast to earlier years when both exports and imports expanded by more than 13 percent.
Given this backdrop, the report argues that governments should adjust policies that previously focused on exports and concentrate on stimulating domestic demand.
China has already started a “rebalancing” initiative after decades of export- and investment-led economic growth. Unlike South Africa and many other economies where consumption accounts for about 60 percent of gross domestic product, in China it is far lower.
Some of the Unctad policy prescriptions, like higher wages for workers, appear to be tailored to China’s needs and are inappropriate in South Africa. Unctad says: “Average real wages should grow at least at a similar rate to productivity.” China gained a comparative advantage in global trade partly due to the low cost of labour. South Africa has comparatively high labour costs.
The Reserve Bank quarterly bulletin released this week notes: “Since the first quarter of 2008, increases in real remuneration per worker in the formal non-agricultural sector occurred at a faster pace than productivity growth.”
Also more relevant to China than South Africa is the suggestion that policy emphasis should be switched from exports to local consumption.
Jammine described this as a “recipe for disaster” for many countries, making them more reliant on portfolio inflows. He noted: “China has $3 trillion (R30 trillion) in foreign reserves while South Africa has only $45 billion.”
The amount is equal to less than 20 weeks’ worth of imports of goods and services plus income payments to the rest of the world.
Discussing the proposals yesterday, Barrowclough touched on this problem. She warned against “beggar thy neighbour policies” and said the proposals “would only work if everybody does it”.
She said if only some countries followed the domestic stimulation route they would find themselves with balance of payments problems. In other words, countries that continued to focus on exports would have trade surpluses, at the expense of those that did not.
In response to a question, Barrowclough also came out strongly against trade protectionism, which she classified as a “beggar thy neighbour policy”. She stressed the need to promote regional trade and integration in Africa. - Business Report