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South Africa: Country Cannot Grow Faster Than 3,5 Percent - U.S. Group
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Business Day (Johannesburg)
9 May 2008
Posted to the web 9 May 2008
Mariam Isa
Johannesburg
SA's rapid pace of economic growth over the past three years was well above a sustainable level of about 3,5%, a team of international experts said yesterday.
The "potential" annual growth rate identified by the Harvard-led group advising the government is well below the Reserve Bank's estimate of 4,5% -- which has nevertheless been surpassed since 2004.
SA's pace of growth -- which has amounted to about 5% over each of the past three years -- was unsustainable as it was driven by domestic demand, the panel said in final recommendations released by the treasury.
To achieve an official goal of boosting growth to a sustainable annual rate of 6% by the start of the next decade, SA should focus on creating jobs that boosted exports, it said.
"To maintain overall growth and employment, the country will need to rapidly increase its exports," read the summary from the panel's chairman, Ricardo Hausmann of Harvard.
It said the biggest constraint to growth was that only 42,6% of SA's working-age population were employed, compared with 65% in comparable countries.
Growth is expected to slow to well below 4% this year, and the summary was prepared before the latest bout of global financial turmoil, rising inflation, and chronic power outages.
The panel urged the government to stick to its conservative fiscal policies and inflation targeting -- which has come under fire as soaring prices for food and fuel force the Reserve Bank to keep raising interest rates.
But the panel also suggested the Bank control the rand's level and volatility, which has been cited by the government as a big impediment to growth. This would involve "the use of statements on the exchange rate when it deviates from what the Bank considers compatible with external and internal balance," Hausmann said.
It should also be "willing to intervene to back up its statements with intervention on foreign exchange markets and announce its change of policy to maximise the impact".
The panel did not recommend a specific level for the rand, which has depreciated 13% against major currencies this year.
In the past two decades, global markets have repeatedly foiled attempts by central banks to intervene on exchange rates, and the Bank has emphasised it will not consider this policy.
Published research from the group, commissioned by the t reasury in 2006, has already suggested SA embark on foreign exchange intervention.
It has also broached the idea of an official budget surplus to boost SA's savings in times of plenty -- which the t reasury has acted upon.
"We recommend a larger fiscal surplus target for 2008. Given current conditions, it should be at least 1-2 percentage points of gross domestic product (GDP)," the panel said.
SA has forecast its budget surplus will amount to 0,8% of GDP in the fiscal year to March 2009, declining to 0,6% in 2009-10 and 0,7% the year after.
Treasury deputy director-general Ismail Momoniat acknowledged fiscal policy had been influenced by the panel, but not completely. "We take note of what they say but we must look at the facts on the ground. What we are trying to get is a broader debate. We hope through the engagement we can get a better consensus about policies to accelerate the growth rate of the economy."
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The t reasury plans a workshop with panel members, government officials and local academics and "stakeholders" next month to respond to the panel's 21 proposals. "It's going to take a bit of time before government can have a comprehensive response," Momoniat said.
The panel includes economists from US universities, the London School of Economics and the universities of Stellenbosch and Cape Town.
The South African Institute of Race Relations said growth of 6%-8% could not be achieved without big policy changes.
What happens when domestic demand is no more ?
if the economy keeps growing it wont be because the more money people have the more they go out buying things.
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