ECC: The politics and economics of SONA Reply

At this afternoon’s (Tuesday’s the 17th’s) Economist Coffee Club meeting (13:00 in E3, room G14) Prof Andre Duvenhage will be talking about the politics of last week’s State of the Nation Address. Now, there is no shortage of views about what happened, but it might be useful to share a few thoughts about  the economics before we go on to discuss the politics at the coffee club.

Econ coffee club

The Economists’ Coffee Club

A lot of things were mentioned in the SONA that have implications for the economy. The few comments that follow focus on the priorities mentioned by the President: “Our economy needs a major push forward”.

  • Resolving the energy challenge

This is indeed a challenge. To see how big, have a look at Hilton Tarrant’s analysis for MoneyWeb. He makes a strong case for loadshedding everyday to the end of May to do the maintenance that is required. The costs are steep, with stage 3 loadshedding estimated to cost R80 billion per month.

  • Upping the agricultural value chain.
  • Beneficiation through adding value to mineral resources.
  • More effective implementation of higher impact industrial policy action plan.

We could talk about everyone of these ideas, but suffice to say that they are skill intensive and capital intensive (and electricity intensive), which makes the fifth priority so important.

  • Encouraging private sector investment.

But then there are quite a few points in the SONA that does little for investor confidence: prohibitions of foreign ownership of land, capping the size of land holdings, the 50/50 land reform “framework”, expanding worker rights and minimum wages… Sure, you can say that this is just SONA talk, how much of this will actually be seen through, there are checks and balances. But the fact is, it creates uncertainty.

Even if we do, by some miracle, manage to not scare off all investors, I fear that the world has moved on. Dani Rodrik explains in a new NBER paper that: countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers. In South Africa, we have already experienced this. Ricardo Hausmann has a great Project Syndicate post on this too:

The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. An apt metaphor is a game of Scrabble: Goods and services are made by stringing together productive capabilities – inputs, technologies, and tasks – just as words are made by putting letters together. Countries that have a greater variety of capabilities can make more diverse and complex goods, just as a Scrabble player who has more letters can generate more and longer words.

If a country lacks a letter, it cannot make the words that use it. Moreover, the more letters a country has, the greater the number of uses it could find for any additional letter it acquired.

This leads to a “quiescence trap,” which lies at the heart of the Great Divergence. Countries with few “letters” lack incentives to accumulate more letters, because they cannot do much with any additional one: you would not want a TV remote control if you didn’t have a TV, and you would not want a TV broadcasting company if your potential customers lacked electricity.

This trap becomes deeper the longer the alphabet and the longer the words. The last two centuries have seen an explosion in technologies – letters – and in the complexity of goods and services that can be made with them. So the techies get techier, and the laggards fall further behind.

Does this sound familiar when you are exporting minerals and metal products? Can we seriously hope that this government’s industrial policy will deliver growth and jobs?

  • Moderating work place conflict is number 6 on the list (considering last year’s strike action).
  • Unlocking the potential of SMMEs, cooperatives, township and rural enterprises.

At this stage he is grasping at straws. Andrew Kerr and his co-authors have shown that serious economic growth and  job creation are driven by large firms. SMMEs and the like are survivalist activities, not drivers of growth.

  • Reform of state-owned companies, broad band roll out, water, sanitation and transport infrastructure.

All important stuff also mentioned in the last 20 SONAs and then greatly neglected.

  • Operation Phakisa which aims to grow the ocean economy – mainly the shipping and storage of energy products.

Cees Bruggemans has a bit of a rant in his REX column, but sums it up nicely:

What we don’t hear is a shift in emphasis. Wanting private enterprise to maximize productive value in mining, agriculture, manufacturing, services and government using the flow of tax proceeds to beneficiate our labour, and supply adequate infrastructure well planned, with the economy better endowed to enter international value chains, and reap the youth dividend that our young demographic profile offers.

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