Macroeconomic policy for development and decent work: a south african research agenda

1. Macroeconomic policy for development and decent work: a south african research agenda DrGilad Isaacs Co-Director, Institute for Economic Justice University of the Witwatersrand, South Africa International Development Economics Associates Conference on Work and well-being in the 21stcentury 7 April 2019

2. Outline • Core conclusions and context • The objectives of macroeconomic policy • Structural transformation in South Africa? • Role of macroeconomic policy • Ten lessons and policy implications • A developmental macroeconomic framework • Conclusion

3. Core conclusions and context

4. Political / policy context • Strong emphasis on job creation, debate on the nature of that work. • Renewed engagement over the macroeconomic policy regime together with a resurgence of neoliberal macro-policy. Objective • Bring into focus the interactions between macropolicy, structural change, employment and decent work.

5. Core (provisional) conclusions • Outcomes: • Creation of decent jobs for the rapidly expanding working-age population of South Africa remainsdramatically insufficient. • Lack of absorption of workers into high-productivity sectors. Instead, the low-productivity sectors continue to provide sources of employment for existing and new workers in South Africa. • Underemployment, poor working conditions and low wages. • Macroeconomics and structural transformation: • These labour market outcomes are strongly linked to the type of economic growth witnessedin South Africa over the past two plus decades. • The insufficient/path of structural transformation of the South African economy has held back a sustained increase in gainful employment (and hence the demand for labour). • Current policy approaches: • South African authorities are acutely aware of the need to tackle the employment challenge but macro policy regime continues to retard this.

6. The objectives of macroeconomic policy

7. “Stabilisation” “One of the most striking facts about macropolicy is that we have progressed amazingly. … In my opinion, better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years. … The story of stabilization policy of the last quarter century is one of amazing success.” - Christina Romer, September 2007

8. Stability as a goal? • “Stability” a legitimate goal. • Usually translated into: • Fiscal consolidation: Low debt (below 40%- 55% of GDP) and deficit (less than 3% of GDP) • Low inflation (target of +- 5% or under) therefore high interest rates • Fully flexible exchange rate policy • Relatively open capital markets • Foreign exchange reserves that can meet at least three months of import coverage

9. Benefits of “stabilisation” policies • It is argued that sustaining these thresholds engenders ‘market confidence’ that is key to fostering investment, growth, employment and poverty reduction. • However, no demonstrated realisation of growth benefits.

10. South African macro policy • GEAR: • ‘Macroeconomic stability’: conventionally understood as “stable prices, stable interest rates, predictable economic costs such as tax policies and regulatory regimes and predictability about future tax and interest rates” (Naidoo 2006, p. 116) – was the lynchpin of this strategy (see Faulkner and Leowald 2008, p. 12) • Priorities: • government debt must be sharply reduced, • inflation suppressed, • trade and capital flows liberalised, • the tax “burden” curbed, • the real exchange rate maintained at competitive levels, • and greater labour market flexibility engendered. • Evolution (2000s): • Allowing for greater microeconomic intervention • Real increases in social spending • Public investment able to “crowd in” private investment • But maintaining macroeconomic market-centric framework

11. South African jobs policy • Contested • Simplistically: Treasury view vs. Industrial policy view • In practice: • Some successful industrial policy in higher productivity sectors • Strong focus on low-wage, low-productivity sectors • Failure to climb value chains • Focus on SMMEs • Policy incoherence • Public employment • Reguard action on existing sectors

12. Unemployment

13. Unemployment

14. Structural transformation?

15. Structural transformation? • Historic structure: • Minerals-energy-complex • Post-1994 shifts: • Rapid reinsertion into global markets, particularly financial markers. • Changes in ownerships • Shifts and continuities in sectoral composition incl. financialisation • However: • No fundamental shift in the underlying political economy.

16. 1. Reinsertion into the global economy Figure 1: Stock of foreign assets and liabilities (1956-2013) Source: SARB (2017) via Quantec, own calculations

17. 1. Reinsertion into the global economy Figure 2: Composition of stock of foreign liabilities (1956-2015) Source: SARB (2017) via Quantec, own calculations

18. 2. Changes in ownership • Deconglomeration • Increase in foreign ownership • Limited BEE (narrow ownership transfers) • Growth in institutional investors • Limited privatisation (corporatisation and commercialisation)

19. 2. Changes in ownership Table 1: Change in JSE ownership patterns (1985 – 2012) Source: McGregor (2004) and Who Owns Whom (2013)

20. 2. Changes in ownership Figure 1: Foreign ownership of JSE Top 40 firms (2015) Source: TimBukOne (2016)

21. 2. Changes in ownership Figure 3: Institutional investors’ assets and share ownership (1990-2014) Source: SARB (2015b), own calculations Note: Institutional investors shown here include: long- and short-term insurers, unit trusts, pension and provident funds (public and private), and the Public Investment Corporation (PIC)

22. 3. Sectoralcomposition and dynamics Changes (rooted in historical developments): • Growth in tertiary sector (and finance) • Financialisation • Deindustrialisation • Corporatisation and commercialisation of SOEs

23. 3. Sectoralcomposition and dynamics Table 2: Sectoral composition of gross value added (1970-2015) Source: SARB via TIPS (2016)

25. 3. Sectoralcomposition and dynamics • Financialisation • Extensive and intensive penetration of the imperatives of financial markets into ever more facets of economic, political and social life • Steering funds away from fixed investment: • Decreased lending to non-financial corporations (NFCs) by banks • Greater involvement by NFCs in financial market operations and speculation • Higher distribution to shareholders • Asset bubbles • Deindustrialisation • Related to the above • In 1980 the combined industrial sector in South Africa (defined as mining, manufacturing, utilities & construction) accounted for over 44% of GDP by 2015 this was down to 26% • Corporatisation and commercialisation of SOEs

26. 3. Sectoralcomposition and dynamics Continuities • Historical weak linkages around non mineral-link manufacturing sectors remain • The centrality of ex-conglomerate companies continues • Maintained in-sector dynamics: • Capital intensive • Monopolistic • Power concentrated among key producers within sectors and value chains

27. Role of macroeconomic policy

28. Key related elements of macro policy • Priority of stabilisation • External liberalisation • Financial market (re/de)regulation • Fiscal consolidation • Inflation targeting • Poor state-led industrial financing • Mixed support for industrial policy • “Market enabling” approach • Critically supporting existing large corporate sector (at odds with purported focus on SMME and diversified job creation) • Empowerment via ownership transfer (mediated through financial markets)

29. Ten LESSONS and policy implications

30. Recognitions of failures “Macroeconomic policies improved in a majority of developing countries in the 1990s, but the expected growth benefits failed to materialize, at least to the extent that many observers had forecast.” – World Bank’s Lessons from the 1900s (2005, p. 95) “In a development context, fiscal policy serves both as an instrument of macroeconomic stabilization and as an instrument to achieve growth and poverty reduction objectives. In many developing countries, however, fiscal policy focus[ed] largely on the goal of stabilization. Correspondingly, growth and poverty reduction objectives were under-emphasized.” – IMF-World Bank Development Committee, 2006 interim report Countries reduced their fiscal deficit to stabilize their economies “often by cutting public capital formation significantly, despite its potential negative impact on growth and poverty reduction.” “there is no simple relationship between debt and growth. In fact, our … analysis emphasizes that there are many factors that matter for a country’s growth and debt performance. Moreover, there is no single threshold for debt ratios that can delineate the ‘bad’ from the ‘good’.” – IMF

31. Alternative to stabilisation • In sum, the case for macroeconomic policies to be closely connected to the agenda of structural transformation and inclusive development means a lot more than a mere focus on macroeconomic stability in a narrow sense of attaining pre-set nominal targets. • Unfortunately, the conservative nature of conventional macroeconomics, reared in the institutional environment of advanced economies, have not adequately explored how macroeconomic policy managers can fulfil the dual mandate of acting as guardians of stability and as agents of inclusive development. (Islam and Chowdhury, 2014) • Growing literature on this topic.

32. Ten lessons and policy implications • Lesson 1: Demand matters. • The importance of aggregate demand even in the long run: “Increasingly clear that the productive capacity of the economy is not something separate from current demand and production levels… an economy that spends several years producing less than it is capable of, will be capable of producing less in the future… the costs of high unemployment may be greater than previously believed, and conversely that public spending in a recession can pay for itself by boosting incomes and taxes in future years.” (Mason, 2018) (e.g. Laurence Ball, Lawrence Summers and Brad DeLong). • Demand sustains output and ultimately employment • Lesson 2: Debt doesn’t kill • “there is no simple relationship between debt and growth. In fact, our … analysis emphasizes that there are many factors that matter for a country’s growth and debt performance. Moreover, there is no single threshold for debt ratios that can delineate the ‘bad’ from the ‘good’.” – IMF • Devastating impact of austerity

33. Ten lessons and policy implications • Lesson 3: Inequality is bad for growth. • Recent research led by the IMF (Dabla-Norris et al. 2015)finds a strong link between growth and distribution, drawing on a growing body of evidence on why inequality might be harmful for an economy (Aghionet al. 1999, Galor and Moav 2004, Bourguignon and Dessus 2009, Acemoglu 2011, Ostry and Berg 2011, Ostryet al. 2014) • Functional distribution of income: contraction in labour shares appears to have harmed global aggregate demand (see ILO 2013, 2014). • Personal distribution of income: richer deciles have a greater propensity to save (see, for example, Dynanet al. 2004, OECD 2012). • Demand and investment fall, human capital development is undermined. • Lesson 4: Taxes must do more. • a) If the government must play an important role in sustaining aggregate then it must raise sufficient tax to do so; b) Taxation policy is not just about efficiently raising taxes but also about things like distributions • Sufficient revenue necessary for appropriate levels of investment spending.

34. Ten lessons and policy implications • Lesson 5: Financial conditions, credit constraints and the structure of the financial sector matter. • Key features: • Critical role of debt in boom-bust cycle • Banks pushing credit • Debt overhang dampens economic activity • Type of credit dominant in the economy matters • Asset prices matter • Financial markets don’t tend to market efficiency on their own • Sustainable investment and consumption and maintaining stability rely on carefully managing the financial system. • Lesson 6: Targeting inflation through reducing money supply doesn’t make sense • a) moderate levels of inflation don’t do economic harm; b) inflation (in SADC) often isn’t the product of domestic demand-pull factors; and c) common methods to reduce the money supply are ineffective. • policy that aim to unnecessarily contain inflation at very low levels are unnecessary and if they are contractionary they should be avoided.

35. Ten lessons and policy implications • Lesson 7: High real interest rates can hurt • a) reduce investment in the economy by making borrowing more expensive, and b) attract short-term capital inflows (“hot money”). • high interest rates reduce investment in the economy and exacerbate exchange rate volatility. • Lesson 8: Volatile exchange rates harm • a) maintaining short-term stability of the nominal exchange rate; stability can reduce private-sector uncertainty and facilitate public-sector budget planning, b) achieving a real exchange rate in the medium term that can foster broad-based export competitiveness and structural diversification of the economy. • Inflation targeting regimes (and attempts to contain the money supply) combined with a commitment to open capital markets makes managing the exchange rate impossible. • Necessary to sustain appropriate investment patterns.

36. Ten lessons and policy implications • Lesson 9: Financial integration poses risks • Current patterns of financial integration lead to movements in domestic asset prices (e.g. the exchange rate and property markets) that are unrelated to the domestic “macroeconomic fundamentals” of developing countries. • Without managing these prices the ability to use monetary policy for job creation is limited. • Lesson 10: Central banks can do more • Central banks can do more than just control inflation via interest rates. • Ensuring credit is allocated in a manner that is job-supporting.

37. A developmental macroeconomic policy framework

38. 1. Revenue to finance investment • Raise revenue to finance essential economic and social infrastructure. • Austere borrowing targets to be relaxed. • Increase progressivity of taxation system, including raising taxes on high-income earners, wealth and income from wealth, and corporations. • Combat tax evasion and illicit financial flows. • “Crowd-in” private sector investment. • Direct private sector investment, e.g. through asset reserve requirements. • Increase development financing and loan guarantees

39. 2. Employment targeting • Inflation targeting regimes must be modified. • Complemented by an employment target • Desired levels of inflation should be looser • Controlling inflation through manipulating short-term interest rates is not effective and causes economic harm by dampening demand and investment • Controlling inflation must pay attention to the source of inflation (often external shocks and exchange rate depreciations). • Controlling inflation must be multi-dimensional, including expanding domestic capacity where demand-pull inflation may occur.

40. 3. Integrate tackling inflation into other policy • Make policies across government responsive to the real causes of inflation, e.g. rising food or oil prices due to exogenous shocks such as droughts or international oil price increases. • Price regulation • Buffer stocks • Temporary subsidies, e.g. transportation and electricity • Protect supply conditions, e.g. drought mitigation policies • Expand supply • Weaken monopolistic price-mark ups

41. 4. Manage financial integration • Influence domestic prices, particularly the exchange rate, through managing financial integration. Maintain as stable as possible an exchange rate without sharp depreciations. • A “manage floating” exchange rate. • Focus on limiting external shocks. • Maintain competitive exchange rate, e.g. through lowering interest rates. • “Trip wires” and “speed bumps”. • Taxes on transactions, controls on swap and forward cover transactions, unremunerated reserve requirements, and “minimum stay requirements”.

42. 5. Regulate the financial sector • Ensure the financial sector supports growth of employment-creating productive sectors. • Reduce the interest rate spread (2006: Average interest rate spread in 22 S-S Africa was 8.9% vs. 5.3% in Asia/Latin America and 2.9% in USA) – change risk management techniques and tackle banking sector concentration. • Direct credit to productive sectors in the economy. • Integrate informal lending and regulate better. • Credit guarantee schemes. • Expand to development finance institutions and loan guarantees .

43. conclusion

44. Conclusion • Macroeconomic policy has shaped the trajectory of the South Africa’s growth path. • The growth path fundamentally shapes the scope and nature of employment. • The macroeconomic discourse is shifting. • A variety of decent work enhancing macroeconomic policy options exist.