Download Untangling the Gordian knot

Reflections on Chapter 3 on the
National Development Plan
1
Economic Gordian Knot
Uncompetitive
product
markets
Poor skills
profile
Low investment,
low growth, low
employment and
high inequality
Uncompetitive
labour markets
Low savings
2
Economic Gordian Knot
• Product markets are uncompetitive due to history
of isolation and siege mentality of the apartheid
economy.
– This leads to high profit margins but low investment
and innovation. It also stifles new firm entry.
• Uncompetitive labour markets keep new entrants
out, with workers and capital sharing in the high
profits.
– This leads to low employment and skews the
economy towards skills intensive, high productivity
sectors.
• Low savings mean that we are reliant on foreign
capital inflows, which reinforce the oligopolistic
nature of the economy.
– Capital chases high returns and also leads to high
dividend outflows.
• Low skills profile and pattern of growth pushes up
skills premiums, leading to labour market mismatch
and high wage inequality.
3
What to do about it is not obvious
• If we liberalise labour markets, we may
well get even higher profits but no
increase in investment or employment
• Liberalising product markets is hard and if
we did, we may get lower profits and even
lower savings (investment)
• Fixing the skills system is difficult and long
term
• Raising savings too quickly will lead to
lower consumption and a fall in
employment and growth in the short term
• Growing exports may reduce reliance on
foreign capital inflows but it may also just
accelerate them, leading to overheating
4
Why so little progress so far
Redistribute
assets (e.g.
Housing)
Broaden reach of
quality education
Greater impact
Harder to do
Redistribute
money
Create work for unskilled people
5
Targets and milestones
• Reduce gini coefficient to 0.6
• Raise proportion of national income going to bottom
40% to 10% of GDP
• Increase employment from 13 million to 24 million
– Unemployment from 25% in 2011 to 14% in 2020 to 6% in
2030 (with rising labour force participation)
• Average GDP growth of about 5.4% a year to 2030
• Increased gross fixed capital formation to 30% of GDP
by 2030
– Of this, public infrastructure spending to 10% of GDP
• Reduce proportion of people in poverty (R419 per
person per month in 2009 rands) to zero
• Are these realistic?
6
Overall philosophy of the Economy
and Employment chapter
• Progress on broad front of activities
– State capacity, skills, spatial planning, health etc
– Focus on areas of comparative advantage to generate resources to
upgrade capabilities for tomorrow’s economy
• Capabilities cover skills, economic infrastructure and institutions
– Areas of comparative advantage
• Mining, financial services, mid-skill manufacturing, agriculture ands agroprocessing, higher education, IT enabled services
–
–
–
–
Raise investment – public and private
Raise net exports
Enhance competition
Reform labour market
• Theory of change
– Productivity growth in the tradable sector will generate jobs in smaller
and more domestically oriented sectors (where about 90% of jobs are
likely to be created)
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Possible solutions
•
•
Any solution has to be a long term solution,
applied over time with results seen in decades not
years
Options include
– Raise exports, but also raise government savings to
prevent overheating or currency appreciation
– Within a floating exchange rate regime, intervene
more aggressively to prevent excessive
overvaluation
– Import many more skilled workers, reducing the
premium for skilled workers, reducing inequality
and enabling the skills intensive sectors to grow
faster
– Regulate monopoly upstream industries, though
doing this sensibly is difficult and risky
– Deregulate telecoms, ICT and parts of the energy
sectors
– Run a budget surplus, but give large guarantees to
the SOEs for capital investment
– Subsidise labour or labour intensive industries and
provide greater labour market flexibility in labour
intensive industries
8
Policies that will not work
•
Fixing the exchange rate will not work because our
uncompetitive product and labour markets will mean that
prices will rise to render us uncompetitive, ala Greece
–
•
•
•
•
•
We have too low a savings rate to intervene too heavily in the
currency
Curbing capital inflows might be necessary under extreme
circumstances, but has not worked in Brazil – it has actually
led to more pro-cyclicality in the exchange rate
Curbing capital outflows – we do curb capital outflows. To
do more would quickly result in less capital inflows, leading
to a balance of payments crisis
General tariff increases or export taxes to encourage
beneficiation will raise the cost structure of the economy,
appreciating the real exchange rate, ultimately reducing
exports
Nationalisation will result in both capital outflows, which
we cannot afford, and lower investment in the economy in
general
Wholesale labour market liberalisation is likely to result in
social instability that would outweigh any competitiveness
or employment gain
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