fiscal policy micropolicyview political economy

Nothing like a tax hike to get people asking tough questions [Business day column]

Immediate reaction to Finance Minister Nhlanhla Nene’s National Budget.

BE NOBODY’s darling. This is one of my favourite lines of poetry, penned by Alice Walker.

In his first budget speech, Finance Minister Nhlanhla Nene was not trying very hard to be anyone’s darling as he slammed a tax increase onto the middle and upper classes.

Do the tax reforms proposed in this year’s budget meet the principles that the minister set out in the medium-term budget policy statement in October last year?


The effect of personal income tax hikes across the board is not likely to be distortionary. It’s also not surprising as the economy is being managed into investment-led, and not consumption-led, growth. In this light, Nene’s programme has to be evaluated in terms of how it affects the viability of deeper structural reforms. And the action plans of departments with their hands on the microeconomic levers, such as trade and industry, economic development, labour and many others, have to attract as much, if not more scrutiny, as the national budget.

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inequality micropolicyview political economy public policy

Wealth Divide

Unedited version of my column in this week’s Business Report:

On my flight to India to attend the third BRICS competition conference held last week, I was struck by how our respective countries – Brazil, India, China, Russia and South Africa – have to grapple with the challenge of inequality.

The growth stories of Brazil, India and China in particular have captured investor imagination. However, the impressive rise of these economies has been accompanied by a rise in inequality. In Russia, the post-communism privatisation wave created oligarchs, who now face backlash and negative public sentiment. Though progressive policies have lifted many households out of poverty, large segments of Brazil’s population remains trapped in the favelas. The lower castes and the rural poor in India have not shared in the outsourced services boom that has powered that economy. China also suffers from a similar dynamic where large segments of the population have been excluded from export-led growth. South Africa remains one of the most unequal societies in the world, with racial and increasingly class tensions dominating economic policy discussions.

Inequality threatens the sustainability of economic growth because it generates tensions that may upset an already fragile political economy. Countries experiencing rapid but uneven growth face the risk of being stuck in a ‘middle income trap’; where popular protest rises, production is threatened and private investment slows down. Policymakers struggle to justify the market-oriented policies that led to the initial growth spurt to the poor and marginalised. Demands for more state-led and redistributive policies follow. Profits and executive salaries become easy targets for politicians striving to maintain their legitimacy. Investors became wary of the fraught political climate and seek market-friendly reassurances that policymakers find increasingly difficult to make in the face of popular discontent.

The immigration hall in Mumbai’s international airport provides a strange, inverted metaphor for inequality. The immigration hall divides into two wings, with long winding queues on both sides. But in the middle, there are two straight queues reserved for business and first class passengers.

Yet all is not as it seems. What one may imagine to be priority lines are serviced by two booths, whereas the winding masses have about ten booths on each wing. A small, slow-moving cluster of mostly westerners inches slowly towards the front of the room. I could be mistaken but I sense a mild air of amusement in the massive hall as the other passengers whizz past the befuddled group trapped between queue dividers. The authorities may have intended to provide a dedicated express service for the elite, but they simply have not backed up their intention with resources. My colleagues and I split into different queues. Suffice to say, the colleague who stuck to the business class ghetto missed her connecting flight to Delhi.

In the real world, skewed access to opportunity cripples individuals’ ability to function effectively. All our economic policies, including competition law enforcement and advocacy, have to contend with this challenge if they are to be relevant. Fortunately competition policy lends itself towards expanding opportunity because breaking up cartels, preventing anti-competitive mergers and challenging exclusionary behaviour are interventions that create the conditions for greater participation in the economy.

As Prime Minister Manmohan Singh of India emphasised in his speech at the BRICS competition conference, developing countries need to develop credible institutions for sustained and equitable growth. Competition authorities do so by maximising the beneficial effects of the market and ensuring that they deliver efficient outcomes.

In South Africa, competition legislation addresses inequality directly. The competition act aims to ensure that our markets are fair and efficient. Not only that, but the law goes on to state as its objectives the promotion of small businesses and also those owned by historically disadvantaged individuals. The preservation of employment is also a strong theme throughout the legislation. This is important as it has been shown that lack of access to job opportunities is one of the drivers of inequality in South Africa.

Various speakers at the BRICS conference commended the South African authorities for being sensitive to the challenge of inequality. Indeed, this can be seen in the way that the Commission selects cases, with priority given to sectors that poor households spend a high proportion of their income on, such as food. The focus on construction and input markets also means that sectors that affect industrial competitiveness, and thus manufacturing employment, can be rid of practises that increase barriers to entry and costs.

A prominent feature of Prime Minister’s Singh’s address touched on a certain type of inequality in the economy; that perpetuated by governments in the way they treat state-owned enterprises that compete against private companies. The preferential treatment of such entities is often seen as a way to facilitate development. However, the prime minister threw his intellectual support behind the concept of ‘competitive neutrality’ in the way that the state treats its assets in relation to other competitors.

Bemoaning a time when state-owned enterprises were sheltered from competition, the PM argued that the state should refrain from using its legislative and fiscal power to privilege such enterprises. Such preferences may lead to the exclusion and eventual exit of companies that are run on purely commercial lines, leading to loss of employment and dynamism in the market. The state-owned enterprises become like the business class line in Mumbai’s airport, slow-moving and stagnant despite their alleged privilege (or because of it).

As BRICS countries continue to face the challenges of economic growth and inequality, including those inequalities that emerge from state action itself, competition law and policy will play an important role in levelling the playing field.

Trudi Makhaya is an economist in the public service.

Image credit: Etienne Creux
economic policy IMF micropolicyview National Development Plan

IMF highlights insider/outsider dynamics and the need for structural reforms

The IMF has released its report on the South African economy. From a macro growth perspective, the report argues that it’s two steps forward (government spending, export growth) & two steps backward (weak consumption, muted private investment) for the economy. Various areas of concern are highlighted:

  • Lackluster economic performance compared to other emerging markets and commodity-based economies
  • Fiscal and current account deficits
  • Depreciating currency
  • Higher risk rating of the country’s debt
  • Labour and social tensions
  • Negative demand conditions in export markets
  • Low household savings rate
  • Risks of unsecured lending
And the advice includes:
  • Speedy implementation of the National Development Plan
  • Labour market reforms
  • Product market reforms
  • Improved business climate
  • Trade liberalisation
  • Increased co-ordination amongst (financial) regulators
The IMF also echoes the view that there is policy uncertainty in the country, as a result of political debate. It may be true that there is a climate of uncertainty with regard to government policy. However, the importance of political debate in a young democracy cannot be minimised. In fact, debate is crucial to any democracy. The real point is the need to balance debate with implementation and to avoid paralysis. 
I was musing to myself early this week that a US-style government shut-down driven by political contestation will remain unthinkable for a long time in our country. But then again, factionalism-induced paralysis may lead to our own unique kind of (invisble) shut-down. But let’s not condemn debate in and of itself.
The macroeconomic arguments in the report have already been ventilated in the press, but the microeconomic aspects are also worth reflection. The report appreciates the challenges of concentration and uncompetitive markets. The enhanced powers of the competition authorities (the power to conduct market inquries) are noted. There is the suggestion that greater competition in product markets should be twinned with greater competition in labour markets, and developed as part of a ‘social bargain’.
In short, the argument is that the modes of operation and agreements entered into by big business and big labour have locked the economy into a low growth scenario characterised by high prices, high wages and unemployment. So the deal would be struck thus: organised labour exercises wage restraint, big business submits to measures to increase competition and government provides better public services. The report makes some interesting suggestions on how to improve the competition commission’s capabilities, including, quite obviously, increasing its resources.* 
International competition is important, and the report argues for further reductions in tariffs. Interesting, in the wake of the recent determination to increase tariffs on certain lines of poultry products.
* Some of the analysis on the competition regime draw on a 2012 paper by Makhaya, Mkwananzi and Roberts (How should young institutions approach competition enforcement? Reflections on South Africa’s experience) published in the South African Journal of International Affairs.