Wednesday, May 14, 2008

Harvard economists ignore natural resource constraints

A panel of Harvard economists have advised the South African government on the bottlenecks in its economic growth path.  The results were published by the National Treasury and released in public domain and have been discussed in the press (see this press release by Treasury and an article by Hillary Joffe originally published in Business Day).

Apart from the fact that the report is quite critical about some of governments' own policies, it sets the stage for an informed debate.  Dani Rodrik, one of the key authors does acknowledge that this document is not intended to be prescriptive, but he does expect government to be serious in evaluating the recommendations.

The panel presented a comprehensive set of recommendations.  One of the key recommendations are to improve South Africa's export effort, and in the process create more jobs in the tradable sector. This can only be achieved with a set of labour market reforms, including a wage subsidy, more choice in engaging with SETAs and lifting of restrictions on high skilled immigration.  It is argued that more high skilled jobs will create more low-skilled jobs.

From a perspective of South Africa's persistent poverty problems, and natural resource dependence the report disappoints.  There is no evidence of any analysis on the binding constraints of poverty, the availability of natural resources and the capacity of the environment to absorb the impacts of growth, on the country, this despite abundant evidence of increasing resource scarcity.  Currently it is not only manufactured and human capital, but natural capital, such as water supply and the the growing impact of climate change, that in many instances act as the limiting factor to development.  

The mainstream economic growth model assumes that natural capital and the environment is in abundant supply, or that a combination of technological developments and the price mechanism will take care of natural resource and environmental shocks on the economy. These are  very strong assumptions to make and one that needs to evaluated in much more detail in the further discussion of these recommendations.


One worrying consequence of such a policy document and the interaction between the Harvard economists and the National Treasury is that policies and a future development path for the country is being conceived, yet seemingly oblivious to a very important aspect of (South Africa's) reality.  What is required is a thorough investigation of the natural resource and environmental implications of alternative growth paths such the one propagated by this document and by earlier plans such as ASGISA. It is time that the National Treasury starts engaging strategically and actively with South African natural resource economists as well to manage these underlying risks in our chosen development paths.

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