South Africa's New Growth Plan - A (non-Nobel) Outsider's Evaluation

Recently the South African ANC government headed by President Jacob Zuma published a New Growth Plan which is to guide policymakers and businesses in terms of the future growth path of the economy. The Economic Development Minister, Ebrahim Patel, got nobel Laureate Joseph Stiglitz to write a review which was widely published in South Africa endorsing the government’s New Growth Plan. Of course getting an endorsement from a Nobel Laureate is always a good strategy to build credibility for what is clearly a new and somewhat controversial direction for South Africa, but Nobel approvals aside, in my humble opinion there are some clear pluses to the plan and some definite minuses and problems with it as well. I deal with the pluses and minuses as I see them below, but where I was most disappointed was with the macroeconomic policy proposals. A copy of the plan is available at
http://www.moneyweb.co.za/mw/action/media/downloadFile?media_fileid=9594

The major pluses as I see them are: i) clearly expressing the government’s strategy in one coherent document with justifications for the choice of “growth-drivers” so that everything is there in detail for all to see – hopefully that will lead to some consensus on certain parts of the Plan and maybe other parts being dropped or re-worked; ii) the acknowledgement that it is the private sector that is the major job creator in the economy, although recognizing the state’s role as a “growth enabler”; iii) the combining of macro and micro policies into one policy document; iv) the inclusion of “stakeholders” in the process for implementing the Plan; v) the concern for rural development, particularly in the previously self-governing “Bantustans”; vi) the emphasis on environmentally sustainable growth; and vii) the idea of establishing a sovereign wealth fund in the mining sector. The first plus is self evident, as is the second, the third is just the economic approach, but perhaps a couple of the latter points require some elucidation.

One of the hallmarks of Germany’s success as an economy is rooted in their “corporatist” approach to economic management – this involves inviting all stakeholders in a business or industry to partake in important decisions, whether it is wage increases (obviously done at the industry level when Unions have significant bargaining power), shift work hours, expansion of operations or product line. Business, unions, state governments or federal government often met to make sure that everyone was “on the same page”, so to speak. This is important as it allowed proper flow of information and led to an avoidance of strikes and better management shop floor relations. If what the government has in mind is more of a “stakeholder” decision-making process in industrial development then it is clearly to be welcomed. After the strikes that hit South African industry in the middle of 2010 and the threat of lower investment from major multinational sources of FDI, if this represents a move to a more “corporatist” economic structure then it is to be welcomed.

The concern for development of the rural areas in South Africa is clearly also stressed in the plan. With the proper policies in place, in fact these areas have the most catching up to do and therefore the greatest potential for economic growth. Allowing private businesses to flourish in these areas requires the agrarian economy to become more streamlined but also the infrastructure needs to be in place to allow non-agrarian businesses to take off. In this day and age this requires good and reliable energy supplies as well as broadband internet connection. This is where competition with government specifying what is required might yield the best results. Financing is also usually a major constraint on the private sector in rural areas so the idea of a state owned bank to stimulate lending in rural communities is interesting and I believe worthwhile considering. But I hope that the government also looks at the idea of what in the US is called a “credit union” or in the UK a “building society”. These are non-state-owned and not-for-profit financial institution models, and might work better in some rural communities than a state-owned bank.

So what about the problems that I see with the report? The biggest problem that I can see here is the lack of analysis of exchange rate regime options. The report clearly advocates managing the exchange rate, but I don’t see any evaluation of what would work best for the country, nor a clear rationale for the “soft peg” option of keeping the currency undervalued in the report. I am guessing that the Chinese model of a managed low and competitive currency is the major inspiration for the new formulation of macro policy, and it is clear that many other elements of the report are subservient to this – in other words lower interest rates are achieved through a more lax monetary policy, and a stricter fiscal policy compensates for this, but to prevent inflation there has to be wage and/or price controls in place (which includes “collective bargaining” and caps on executive pay inflation). But would a policy that works well for China work well in the South African context? And what of the severe criticism that China is facing for its foreign exchange policy? Would South Africa really want to play “currency wars” with other countries? [See http://www.pretorianews.co.za/patel-s-plan-to-weaken-rand-is-no-answer-1.1001210 for a South African article reviewing this issue].

Let’s take a step back from this issue for a moment and look at another aspect of the current “problem” with the high value of the rand. As a reasonably frequent visitor to South Africa, I recognize that the exchange rate has appreciated in real terms, but this is nearly all due to capital inflows into the “emerging markets” because of the more rapid recovery from the economic downturn here, combined with the flow of capital into the mining and minerals sector of the economy as commodity prices recover. This will not continue forever, and in fact many economic commentators are expecting these flows to slow and maybe reverse in 2011 ( - see the latest edition of The Economist). In this case the currency may depreciate quite rapidly. So if the exchange rate is perceived to be a problem right now, it may cease to a problem in a year’s time. What is more important though is deciding on what the most appropriate exchange rate regime is for South Africa in the longer term ( - and I am available for a much cheaper rate than a Nobel economist would charge to analyze this!) The main point is that if the exchange rate is to be the anchor for macroeconomic policy, there needs to be a discussion on what the policy should be and how the policy is to be implemented. If you are going to use an anchor, you should make sure you’re using the right anchor, and in the right way!

What about other problems in the plan? The emphasis on “labour-based production methods” is rather strange in this day and age. We live in a world where capital enhances labour productivity and therefore leads to higher wages. Why would a country want to encourage methods that specifically use labour-based methods? I understand the need to reduce unemployment rates, but this is best done by having a booming economy with major injections of capital as China and many other countries in South East Asia have discovered, rather than “labour-based production methods”.

Another problem is that the manufacturing sector strategy is not well-thought out in my view – phrases such as “supporting activities that can generate employment on a large scale and meet basic needs at lower cost in the short to medium term, while sustaining development of more knowledge-intensive industries for long-run growth” when referring to manufacturing industries, do not make a lot of sense to me. The manufacturing sector’s objective is not to create jobs – it is to create products that consumers and other businesses want so as to make a profit. Jobs are the welcome by-product of this objective.

Lastly, I would like to make two suggestions that I hope might help in the micro part of the report. In terms of industrial product development, the establishment and fostering of University-industry linkages has been shown to be very advantageous in many countries (UK, US and Canada, for example). If South Africa is serious about its future then it needs to attract research talent from around the world and make sure that industry can benefit from the research that Universities do. Lastly, I believe that reducing the high cost of access to broadband in South Africa really needs to be an absolute priority if the country’s citizens and businesses are to be able to take advantage of global technological opportunities, and not get left behind, as many African countries will be.