Manuel: Time to redirect economic compass
By Trevor Manuel
Governments all over the world must, from time to time, revisit their policies, see what is working, review what is not, and plot a path forward aimed at preserving what is not broken, and changing what is.
South Africa has an opportunity to do just that, take stock and set our compass for the next five years. Economic policy should similarly be subjected to review.
This article is a contribution to the debate on the future direction of our economic policy. In particular, it deals with South Africa's macro-economic policy stance.
The ANC's Strategy and Tactics document adopted at the Polokwane Conference in 2007 reaffirms the ANC's commitment to macroeconomic stability. The ANC recognises that a stable macroeconomic outlook is a necessary condition for long-term growth, employment creation and redistribution.
However, while macroeconomic stability is a necessary condition for growth and development, it is not sufficient. There is a myriad of other economic policy areas that also affect progress in fostering inclusive growth.
Our biggest failure, and hence our biggest challenge going forward, is in the area of job creation.
We have failed to create large numbers of jobs for young people leaving school with a matric, the category for which unemployment is highest. Unless we remedy this problem, many of the other objectives that we hold dear are not likely to be met.
Recent work by the International Growth Advisory Panel, chaired by Professor Ricardo Haussmann, and the Growth and Development Commission, chaired by Professor Michael Spence, provides resources that can be drawn upon in setting out our policy stance for the next decade.
The findings of the Commission on Growth and Development are indicative of our challenges.
The methodology of the report by the Growth Commission examines what are called growth episodes. A growth episode occurs when the GDP of a country grows by more than 7 percent a year for more than 25 years.
Without such growth, no developing country has been able to reduce poverty significantly over just one generation.
Some stylised facts from the report are worth noting. There have only been 13 countries experiencing these growth episodes in the world. Twelve of the 13 grew by exploiting international trade.
In other words, they grew pursuing a conscious export-oriented strategy. All 13 countries took clear measures to raise their savings rate. These measures differed from country to country but included high interest rates, forced savings and prudent fiscal policies.
A hallmark of these growth episodes is a consistent application of macroeconomic policy over a long period of time.
While macroeconomic policy has had an impact on the performance of many aspects of the economy, from employment to investment, from interest rates to capital flows, there are essentially two instruments of policy - fiscal policy (how government manages its finances) and monetary policy (how money is supplied to the economy).
The world of microeconomic policy is infinitely more diverse, covering trade and industrial policy, education, social security, labour market policy, transport policies, competition policy and approaches to regulation for products where there is a natural monopoly or a state monopoly.
Our concern is with growth and development - that is, economic growth of the type that broadens opportunities for the poor.
Economic growth is not an end in itself and we all would agree that growth is a necessary but not sufficient condition to drive the kind of development we seek. Our debate is about the best mix of policies to get there.
In many areas of microeconomic policy, it is not our policy that is at fault but our poor implementation. Suffice to say that this poor implementation hobbles our economic and social progress and may, in itself, prompt a re-examination of policy.
Haussmann describes the relationship between macroeconomic and microeconomic policy as like that between various players in a symphony.
Macroeconomic policy is the percussion, the big and noisy sounds that, on their own, sound awful.
Microeconomic policy is the smaller, more intricate and delicate sounds, the parts that are actually most pleasant to listen to.
The role of macroeconomic policy in this symphony is to provide the timing, sequencing and tempo for the beautiful sounds of the orchestra to come through. Without such co-ordination, the little sounds of microeconomic policy would not make for very pleasant listening either.
One of the interesting issues emerging from this is how we are going to finance this investment that will lead to higher rates of growth.
South Africa has a low savings rate by international standards. With a rate of about 15 percent of GDP, we save less than almost every major emerging market economy.
In contrast, China has a savings rate close to 50 percent of national income, while South Korea, Taiwan and Malaysia all have (or had during their growth episodes) rates of around 25 percent to 30 percent of GDP.
In seeking to boost economic growth by raising investment to 25 percent to 30 percent, we have two simple options. Either we could take drastic measures to dampen domestic consumption or we could import foreign savings.
Our best option is therefore to import the capital required to increase investment in the domestic economy.
This, however, means that we are going to run a current account deficit that is likely to be both large and persistent. This may be an acceptable macroeconomic policy, but it is not without risk or cost.
If this is our starting point, then we are confronted with two important issues that require open and considered debate.
On the macroeconomic policy front, what is the appropriate balance between fiscal and monetary policy required to attract foreign capital and cushion the economy from turbulence?
On the microeconomic front, what type of economic policy do we run to ensure that investment flows towards sectors and industries that create jobs, especially low-skilled jobs?
Failure to develop suitable economic policies in response to these challenges will lead us all down an expensive cul-de-sac.
In the interests of opening a debate on these issues, I would like to make the following observations and posit a few of my own views.
The fiscal position, government's effort to increase savings, is important in two respects.
First, it provides us with some protection in the face of a high current account deficit and a turbulent international environment.
Secondly, the fiscal position takes some (perhaps too little) pressure off monetary policy, meaning that interest rates are lower than they would be without a fiscal surplus.
I would further argue that this balance is supportive of the growth we seek, the type that enhances employment, especially low-skilled employment.
On the value of the exchange rate, the research from the panel of international economists argues that the best way to create jobs is to develop our export industries and a more competitive real exchange rate is one of the ways to support higher exports.
If we want a weaker exchange rate, then we need lower interest rates. If we want interest rates to be lower than they would otherwise be, then we need more support from fiscal policy, especially during times of high commodity prices.
Recent experience shows us that when inflation rises, it is always the poor who bear a larger burden.
The rich have their savings invested in inflation-proof investments. Unorganised workers (who are always lower paid and more vulnerable) and people on fixed incomes cannot hedge against inflation.
Let us consider a scenario where our inflation rate is persistently higher than that of our major trading partners for a prolonged period of time. The effect of this would be that we become less and less competitive over time.
For historical reasons, due to transport costs, we are already less competitive than many of our trading partners.
This is true for non-commodity exports, an area that should contribute more in employment creation. The solution is either to force down production costs, or raise productivity.
The latter is the preferred approach but requires success on the microeconomic front. The economic policies pursued by the apartheid government resulted in high inflation. It cannot be argued that this was good for the poor.
Inflation targeting is the preferred route to fight inflation since it seeks to anchor expectations.
The alternative options, especially targeting a real exchange rate, are not suitable for South Africa given our low level of savings and the costs of having to acquire more foreign exchange reserves.
A thorough debate on economic policy, including that of macroeconomic policy, is welcomed. We do not pretend to have a monopoly on wisdom. Nevertheless, the policy suite we emerge with must be consistent and predictable.
Changing policies piecemeal will do significant damage to the gains that we have already made in creating a sound macroeconomic environment.
- Trevor Manuel is the Minister of Finance.