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SA’s economic toolkit needs regulatory as well as developmental and interventionist measures

Dr Pali Lehohla

Dr Pali Lehohla

Published May 8, 2022

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IN THE mix of debates that consider the viability of Eskom as a state-owned enterprise should be the role of administered prices.

Administered prices are prices that in the consumer basket are determined and under the control of state institutions, such as some regulatory authority like the National Energy Regulator as in the case of Eskom.

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Centrally planned states like the erstwhile communist Soviet Union, which followed Marxist-Leninist philosophy, at the time relied on administered pricing mechanisms. However, administered prices are not confined to socialist countries alone, but are also prevalent in capitalist market economies like the US or in Europe. In these countries rent and food items fall under the rubric of administered prices.

Administered prices serve an important role of ensuring that they cushion society against shocks that may emanate from the market system. The Russia-Ukraine war has affected notably the price of oil and bread, two items that generally fall under the administered prices rubric in many a country.

Looking two decades back and specifically in 2004, as the then Statistician-General, I announced that I would henceforth isolate and present a consumer price index deriving from administered prices. This move would serve policy clarity on the extent to which these “no choice prices” enabled or retarded development.

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The items covered in the administered price index category were for example prices set for electricity, communications, transport, water, health and education. These items serve as inputs in economic activities and, in that regard, their importance in economic development is obvious.

As the Statistician-General, I took the decision in response from the Cabinet’s concern as well as from the Growth and Development Summit on the matter of administered prices. This was further highlighted by then president Thabo Mbeki as a constraint to micro-economic growth in his State of the Nation Address.

The Treasury had also prepared a seminal paper on administered prices. Essentially their conclusion was a lot more nuanced, but pointed to self-interest arising from incumbency of those making decisions on pricing.

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While this observation could be true, but a more fundamental difference in their assessment is in economic policies that countries choose to adopt and in that regard international experience sheds light on the matter. For instance, international experience from China is important as it has centuries of history on how the market got regulated.

According to Isabella Weber, in her book titled, How China Escaped Shock Therapy, and how in modernising China the then president, Deng Xiaoping, drew deep from the Qing Dynasty on a concept called the ever normal granary. Administered prices are prices that in the consumer basket are determined and under the control of state institutions, such as some regulatory authority like the National Energy Regulator as in the case of Eskom.

Embedded in this philosophy was the ability and commitment of the government to create guaranteed supply of grain no matter the conditions confronting the Chinese. Through market management, the ever normal granary occupied the central philosophy of Deng Xiaoping.

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This is what enabled China to succeed and be the power it is today by rejecting and escaping the International Monetary Fund noose of market fundamentalism, which saw Russia experience major declines in life expectancy, rising unemployment and inflation as the USSR unbundled. In its stead, in the unbundling programme of privatisation, emerged the Russian oligarchies.

The ever normal granary was also enjoyed by Malawi with its predominantly peasant-based maize production. But it was in the 2011/2012 season that Malawi sold its granary to South Sudan and Kenya. A 50 percent price shock in maize struck Malawi and famine was feared. What is the ever normal granary in South Africa?

Hendrik Johannes van der Bijl declared electricity and steel as the ever normal granary for South Africa’s industrialisation. But with Iscor, a South African parastatal steel company, long gone and Eskom on its knees – the ever normal granary for development evaporated and vanished in front of our eyes.

As the SA Reserve Bank reported to Parliament in 2021, “In the past decade, administered prices have increased enormously more than general inflation, the Reserve Bank told Parliament. Electricity prices are up 177 percent over the past 10 years, while municipal rates and taxes have increased by 118 percent. That compares to headline CPI (consumer price index) of 68 percent. But the stand-out price increase is in water, which now costs 213 percent more than at the beginning of 2010.”

The tools of management by the government are not just regulatory to level the field for market players, they should be developmental and interventionist if South Africa is to emerge out of this quagmire and economic abyss.

Dr Pali Lehohla is a Professor of Practice at the University of Johannesburg and is the former Statistician-General and former head of Statistics South Africa. Meet him @Palilj01 and at www.pie.org.za

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