Open economist letter to Mr Jacob Zuma

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By Cees Bruggemans

By the time you become South Africa’s next President in the course of 2009 there will be many policy issues crowding in on you and your cabinet.

Many of these will enjoy precedence over economic policy. Indeed, we hear daily that you and your colleagues like to impress on the world that ‘nothing’ will change in that hallowed field of human endeavour during your coming terms of office.

Perhaps this is what the world wants to hear, given any potential downside to macro-economic policy in the course of a change of political teams, even generations.

Assuaging such concerns is important as our modern economy is dependent on its sophisticated links with the rest of the world. If people were to conclude that South Africa’s economic policy would become less effective, we would be treated accordingly and well ahead of time.

But instead of pleading for limiting the downside potential, as so many do, I would like to appeal for the upside potential that we so evidently do possess. It is just that business as usual will not allow us to achieve that undoubted potential.

Why should this matter?

After all, a modest growth performance of 3.5% annually, equaling our average these past sixty years, though terribly humdrum in comparison with so many of our modern day emerging peers, would get us to the future eventually.

One doubles the national income every 20 years at 3.5% growth. And with population growth greatly reduced, we would double per capita income every 25 years.

In historic terms, these would be great achievements, even if the global competition were to leave us standing.

There is a case to be made for such continuing mediocrity in that it probably can be achieved without rocking too many boats. As we have many powerful vested interests in our society today, leaving them with their uneasy relationships intact would be one very sensible political course to take. After all, we would still get to the future, even if it would just be slower than what others are traversing this same distance.

Many Asiatic societies, with ancient cultures, value social and political stability above all else. Revolutionaries have a way of kicking the legs from underneath safe chairs, in the process causing unpredictable detours, not always for the best.

So there is much to be said for not becoming too ambitious in proposing too much drastic change. If it ain’t broke, don’t fix it, is a good American tradition.

Besides, the real danger lies among those who with the best intentions in the world may want to tinker with policy, only to reap under- rather than overperformance.

No change agent will ever caution about the downside to any advice. I will err on this score as well. But that there are clear choices out there, between hewing an unchanged course compared to favouring a new one, is undoubtedly so.

Instead of emphasizing what can go wrong in other policy proposals that will undoubtedly come your way, I would merely like to focus on what I propose. I leave to others the demolition derbies that lie ahead as these frankly do not interest me.

My starting point is that we don’t want more national income for its own sake. Money is but a means to an end.

In the case of such an incomplete and hopelessly fragmented reality as South Africa’s, more national income and more production will create the opportunity to ultimately abolish poverty, as has already happened in other parts of the world.

Only such abolition will buy us greater social and political stability in the long run. And it would make us strong enough as a people to face the outside world on more equal terms, especially if we try to do so as part of the greater African continent.

It is a simple wish, not to be poor, to have a steady job, to be able to provide for one’s children and old age, and to have a little fun along the way rather than being stuck in a slaving existence without any such benefits easing our path through life.

Deng Xiaoping said it even more ambitiously, shifting the Chinese goalposts forever: “It is glorious to be rich”.

To be free of want, to be affluent and middle class, is today the great ambition of the world’s 6.8bn people. None of us are any different on this simple score.

Addressing poverty would of course also address other shortcomings in our society. Crime for instance. And Xenophobia. It would generate the means for addressing HIV/Aids and other afflictions much more ambitiously.

To accept a middle-of-the-road approach, in which we get to the future relatively slowly, we would still sacrifice at least one and possibly two generations to poverty, crime, lost opportunity and everything this implies.

Do you think people will remain patient on this score? Other parts of the world, thinking of India and China, suggest that such patience is wearing thin.

Ordinary people have tasted consumerism, want the good life for themselves and their children today, and want to be well provided for against the risks of an uncertain existence in their own lifetimes.

Their awareness has been greatly broadened by modern education, communication and example. Why should anyone in our modern world still accept a ‘safe’ mediocre course to the future? Never mind the uncertain experimenting with adventuresome policy approaches that could actually derail us, as it has done Argentina, Zimbabwe and other countries in their time.

A case exists for improving our growth performance well in excess of the long-term 3.5% we have had so far. It is a pressing case, and was so accepted by your predecessor, in the way he appointed task forces to study the problem and make recommendations.

Of course, anyone can study these things. Deciding a course of action and actually implementing it, achieving its full promise as advertised, is by far the greater challenge.

For think who has to buy in, who has to come along for the ride? Of course, if the outcome is a superior growth performance making available a superabundance of resources that much faster in time than currently promised, basically everyone in this country should be made to feel a winner.

So what is the main problem?

It isn’t vested interests so much as entrenched ideas having lost relevance.

In the current public discourse one hears very little emphasis still being put on making more progress on reducing the binding constraints on a higher growth performance. The old ambition of moving towards an average 6% growth performance seems to have gone into abeyance, to be replaced by fear about any downside.

Yet our domestic needs cry out for such an effort. In addition, our excessive dependency on the outside world by way of a 9% of GDP current account deficit (R200bn annually) carries within it considerable risk of future financial disruption and economic underperformance.

But how to transform our longer term growth performance?

I feel no need to reinvent the wheel. The government has at its disposal many excellent domestic discourses on this subject, even if there isn’t always agreement about ways and means.

Personally I prefer the fresh approach offered by an independent forum of international economists, with no axes to grind or vested interests or ideologies to defend. For the past four years this group on the invitation of the government has studied this country and its peculiar shortcomings in great depth.

Their comprehensive advice has been released publicly only in recent weeks and is worthwhile considering, even if politically perhaps counterintuitive in a country still mired in poverty and social backlogs.

In essence their advice boils down to the following:

• Increase the fiscal surplus well beyond its current level.

• Such action will increase the national savings pool, keep total demand more manageable and will greatly reduce the external deficit, reducing our excessive dependency for capital on the outside world and the risks this implies.

• Let the SARB continue to target inflation as it has been doing, but now at lower interest rate levels, made possible by a less overstrained economy due to the larger fiscal surpluses being run.

• In response to the lower interest rates, the Rand exchange rate should find a lower and also a more stable level against foreign exchange rates, anchored by the larger fiscal surpluses.

• Along with intelligent changes to our trade and industrial policies, as proposed, these actions should greatly improve our trade competitiveness.

• All these actions together should make it possible to enjoy much stronger export growth. As our exports tend to have a higher share of relatively less skilled labour (the abundant resource) compared to our domestic output, any acceleration in export activity would both ease our balance of payments constraint on higher growth AND ensure a much higher pace of job creation for especially less skilled labour than so far achieved.

• The resulting higher economic growth would create much bigger fiscal dividends in future years, available for public spending, far in excess of any fiscal discipline exercised in the short-term.

• Further advice is offered regarding labour market regulations, training initiatives, immigration restrictions and BEE, all of which should have the effect of enhancing our longer term growth performance.

What these world class proposals do most effectively is challenge archaic policies and entrenched thinking, much of it accumulated over a 150 year period of isolated industrial development and burdened by exceptionally limiting political realities.

Achieving democracy in 1994 was ultimately only a step, albeit a crucial one, in transforming more completely our entire policy framework, especially those aspects governing the economy.

Compared to the past, we haven’t done too badly these past 15 years in modernizing our policy approaches. Compared to the peer group competition, however, we have underperformed and run the risk of being left behind in the global stakes.

Finally there is the matter of the population’s patience running out if we don’t achieve the future faster, in the here and now rather than as a vague distant promise for the generations that come after us.

Having achieved full democracy, the country under your leadership should now complete the work begun under your predecessors and more comprehensively transform our economic and social policies, so that we may achieve a much higher rate of growth and social upliftment that we are fully capable of achieving.

Source: Cees Bruggemans, FNB, July 10, 2008.

 

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