Johannesburg — WHEN officials in the Presidency and the national treasury developed the strategy that became the accelerated and shared growth initiative (Asgi-SA), they were heavily influenced by the work of Harvard University economist Dani Rodrik and his colleagues, who used what they called a "growth diagnostics" approach to figuring out why some countries failed to thrive and what they could do to remedy that.

In a language that by now has become quite well known to those who follow South African economic policy, growth diagnostics meant identifying the most "binding constraints" on growth and devising policy responses that would target those distortions.

In a 2004 paper setting out the approach, Rodrik commented that the diagnostic approach had the advantage that it employed economists "in their proper capacity: as evaluators of tradeoffs instead of as advocates".

So Rodrik, presumably, will not be at all offended by a weekend comment from Congress of South African Trade Unions general secretary Zwelinzima Vavi: "We do not take instructions from the Harvard group," Vavi said, explaining that the recent alliance summit had not discussed the recommendations, published last week, of the Harvard-based panel the national treasury commissioned to do its own growth diagnostics on SA and evaluate Asgi-SA.

Perhaps Rodrik, one of the leading members of the 20-person panel, which was chaired by his Harvard colleague, Ricardo Hausmann , won't be too offended either that the government can't exactly be said to have taken instructions from the panel.

True, the Harvard economists have clearly had a significant influence over economic policymaking in a couple of key areas. And they are certainly perceived as being very influential. But what is striking is just how much of a critique of government policy is implicit in their conclusions. Not that these should be taken as gospel. Some of their findings can be challenged, and in some cases already have been by local academics using different data to reach different conclusions. Some of their recommendations may not be right for SA. But they are based on two years or more of rigorous research and analysis, as treasury director-general Lesetja Kganyago notes.

And as outsiders, the panel members could be more dispassionate, bringing fresh perspectives and asking difficult questions that might have been politically unpalatable if they came from insiders. Said Kganyago last week: "We are releasing it. Let us have public discourse."

It is in the diagnostics themselves that the panel is perhaps most powerful in emphasising just how tough are the challenges economic policy must still grapple with. Unlike Asgi-SA, it's not particularly concerned with poverty, but it does zero in on unemployment and the extent to which SA's unusually low labour force participation rate is a constraint on growth. Even more centrally, the panel's report serves to remind us that just because the economy has been growing at nearly 5% a year for the past four years doesn't necessarily mean it can carry on doing that, much less ratchet up to 6%, and that the growing current account deficit, above-target inflation and infrastructure bottlenecks are evidence SA is growing at above its potential. It has to act to relax those binding constraints to growth if it wants to grow faster.

The Harvard team is particularly set on the need to expand exports, given that SA's export performance has lagged far behind global averages. It tends to focus on manufacturing as a way to grow exports and jobs, an emphasis with which at least some local economists disagree. But we still do have to answer the big question of how we will grow exports and cut the current account deficit.

While the panel may have failed to convince in some areas, policymakers have clearly engaged with it in others.

One of the things Kganyago says he found most useful was that the panel kept coming back to macroeconomic policy issues. That was a surprise -- it was thought that the government was doing well on the macro issues of fiscal and monetary policy. But not so, as the panel saw it. It has pushed hard for countercyclical fiscal policy, recommending that "fiscal policy should make a greater contribution to national savings in order to bring down the growth of domestic demand" as well as to "permit the Reserve Bank to achieve the inflation target with a lower interest rate".

When SA first headed to a balanced budget, rather than a deficit, three years ago, it was a mistake caused by massive revenue overruns that had made nonsense of treasury projections of a deficit. But Finance Minister Trevor Manuel then shifted actively to budgeting for a surplus, on the grounds that the revenue boom couldn't last and the government needed to contribute to national savings and help curb the growing deficit on the current account of the balance of payments. The work of the Harvard team played an important role, helping to provide the intellectual justification for a fairly controversial shift.

But we haven't gone nearly far enough, as the panel sees it. It recommends a fiscal surplus of at least 1%-2% of gross domestic product (GDP). Manuel has budgeted for a surplus averaging 0,7% of GDP for the next three years, but on a structural basis, taking out cyclical factors, that's still an average deficit of 1,2%.

One result is that interest rates may have to go higher than they would be if fiscal policy did more to take the pressure off. "South Africans want to have their cake and eat it," says Kganyago. It's that kind of policy tradeoff the Harvard panel highlights, and some will disagree with its preferences, which are for tight fiscal policy but a rather more flexible approach to inflation targeting and a weaker rand -- a cheap rand looms large in Harvard's list of remedies for SA's economic ills. Although the Reserve Bank has built up foreign reserves, in line with the panel's recommendations, there's little support in the Bank or the treasury for the subtly interventionist approach to the currency that the panel favours.

But it's on these macroeconomic issues, which are the preserve of the Bank and the treasury, that the Harvard panel has had the most influence. Where other government departments are in charge, its influence has been far less and it's on the microeconomic policy issues that the divergence between what it says and what the government does is most marked.

On skills, for example, it argues that opening the doors wide to any and all highly educated immigrants would not only provide needed skills but also create more unskilled jobs. It urges, too, that the government take action to stop the emigration of skilled white people. On black empowerment, it recommends a more flexible approach that is less fixated on equity and ownership -- and does not go on forever. It rejects the government's focus on beneficiation, saying there's no reason the fact that we have mineral resources means we necessarily have any advantage in downstream industries.

The industrial policy approach the Harvard panel recommends has little in common with the industrial policy action plan the government released last year, with its focus on boosting specific sectors.

The microeconomic specifics need discussion, inside and outside government. But the macro questions the panel raises, about growth and how we can sustain it, are even more in need of attention, especially in a year of political transition such as this one. It's not a question of taking instructions, as Vavi says. But it should be one of evaluating the tradeoffs.

Joffe is senior associate editor.