E. May

Updated 26 May 2009
* Latest additions

* China: Reducing tax by 19.5% of GDP gets 8% growth! – 26 May 2009
Although bank lending surged this year, 40% of it went to government projects. Private companies aren’t getting enough access to financing as banks play it safe. Economic uncertainly underpins the need for a stable currency to sustain exports and imports. New measures may include additional spending on government projects or help for private companies. A rebound in electricity utilisation and strong car and retail sales are positive signs that fiscal stimulus and looser monetary policy are having an effect, but other economic indicators are less convincing. Fortunately the government has every intention of facing down rising labour unrest, and more than enough fiscal resources to implement desired measures. Last year’s tax cuts reduced the tax take by 7% of GDP and this year a further reduction by 12.5% of GDP is scheduled. So much in an already low-tax economy? Don’t forget that SA takes 30% tax from now-shrinking GDP but, ‘down the Laffer curve’, China gets more tax from very fast growth and helps growth by taxing less when growth falters. All else equal, those two tax cuts directly boost GDP growth by 2%. Xu Lin, director-general of the fiscal and financial affairs department at the national development and reform commission says this year China is definitely able to achieve the national goal of 8% GDP growth. Let’s copy Xu Lin and his department. (BD 19.5)

* Let’s do a China, Trevor! – 26 May 2009
Hilary Joffe asks crucial questions about Trevor Manuel’s new National Planning Commission. Will we get light-touch strategic planning or heavy-handed central planning? Will outcomes be monitored and evaluated or will it just be Soviet-style words? Why will departments do what’s expected of them now when so far few have? When will the awaited plan be implemented and completed? Will it contain a huge Mbeki-style laundry list? Or a small handful of core values? Or just one goal of fast growth, with a number such as China’s 8% and a direct method like huge tax reductions one after the other? (BD 19.5)

* Automotive exports to the rescue! – 26 May 2009
Last year’s motor industry exports almost matched their all-time high of 7.4% of GDP. Total 2007 automotive exports of R67.6bn in 2007 were up from 4.1% of GDP a decade previously to 13.7% of GDP. Astonishing in an economy long mainly dependent on mining and agricultural exports, which have been falling and falling. Maybe there’s something to this business of penalising local consumers to promote exports. After all, as Paul Krugman wrote in 1993, exports are not an objective in and of themselves; the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment. Let’s assume mining and agriculture and less-subsidised manufacturing exports will have their time again and not be forever stifled by misguided green considerations and land reform. Then what’s a little motor (and textiles & clothing) industry protection in the interests of financing the equipment imports they’ll all certainly be needing in due course. In line with less tax for more growth, we should of course focus on ‘little’ and reduce protections and subsidies at every opportunity. (Econ 9.5, BR 18.5)

* Zuma must put his foot down firmly right now! – 26 May 2009
Incalculable damage to SA’s reputation as an investor-friendly, sensibly regulated market – damage so deep as to be almost impossible to remedy. Nobody will ever again call South Africa’s communists patriots, with their wild talk of the parasitic bourgeoisie and salvaging state-owned enterprises from capitalist greed. Their last-minute bullying forced their pawns Cosatu and Icasa to halt the Vodacom listing. Supported by a ‘directly committed’ government, Judge JR Murphy dismissed the application and awarded costs against Cosatu. Communications department advocate Fanie Cilliers asked what was Cosatu’s legal interest to oppose a commercial transaction motivation and prevent Telkom distributing its own shares to its own shareholders. Whoever’s behind it should come forward in his own right and be identified (and vilified by all). Widespread global concern was expressed that the new government’s leftwing leanings or factions will harm SA’s business credibility. Other companies considering investing in SA are now likely to be spooked by Icasa’s extraordinary regulatory flip-flop that makes a mockery of business certainty. China’s ‘communists’ would no doubt call it treason and hang a bunch of perpetrators. (BD 18.5)

Prioritise and focus on growth, not change – 19 May 2009
South African president Jacob Zuma says incoming government ‘have deliberately given ourselves five priorities to focus on which will make us more effective in implementation. We will focus on education, health, land reform and rural development, the fight against crime as well as creating decent work. We are determined to leave an indelible mark in these five areas. I should be able to produce a team that will work very hard, and with the necessary speed. We mean business when we talk about faster change.’ Meanwhile faster growth is what Zimbabwean prime minister Morgan Tsvangirai talks about. He says his government wants to promote a “win-win” partnership with the private sector and the state’s role will be restricted to facilitating investment and allowing the private sector to operate without interference. He promises to lay down the red carpet for SA companies and other international investors willing to partner with his fragile unity government to revive an economy devastated by years of mismanagement. SA’s also been mismanaged but will it help to fix that in pursuit of Zuma’s five priorities and faster change? He too should focus on faster growth. (ANC Today 8.5. BD 11.5)

Union influence undermines competitiveness – 19 May 2009
With such a rigid labour market regime, SA can learn from the world’s most productive economy. A rising tide of union influence threatens competitiveness just when the US “motor” needs to become even more productive to end global recession. Senator Arlen Specter defected to the Democrats so Obama can pass his pet Employee Free Choice Act eliminating secret balloting on whether employees wish to unionise. Union-supported shareholders ousted Bank of America CEO Ken Lewis from his chairman post, weakening the Bank by dividing the two top executive roles, which encourages productivity-sapping ‘decision shopping’. Obama forced Chrysler into federal bankruptcy protection with the United Auto Workers Union getting ownership of half the firm’s equity and GM’s heading the same way. But why is state intervention to strengthen and privilege unions such bad news? Because aggregate US private-sector employment grew 10.4% during 2003-2008 in 11 states with below 5% of private employees under union monopoly control as of 2003. In 18 states with private-sector monopoly bargaining below the national average, but above 5%, employment grew by 6.1%. In 21 states with above average private-sector unionisation, aggregate employment grew just 3.5% – a third as much as in the lowest-union-density states. So if you really want faster job creation and lower unemployment, don’t let government take sides with unions against employers. (Carpe Diem 12.5, BT 10.5)

Investors shy away from unionised firms – 19 May 2009
In an NBER paper Princeton’s David Lee and Alexandre Mas estimate that during 1961-1991 new unionisation negatively affected equity values. Union victory was followed by substantial losses in market value averaging about 10%, equivalent to about $40,500 (R350 000) per unionised worker. That’s in the judgement of the same American investors who invest (or not) in highly unionised SA. Example – in a March 1999 National Labour Relations Board representation election, workers at large linen supplier National Linen Service Corp. voted over 2 to 1 to organise as a local chapter of the Union of Needletrades, Industrial, and Textile Employees (UNITE). The stock market response appeared to punish NLS in a severe, though perhaps not swift, fashion. Before the election, returns for NLS and the market tracked each other quite closely but right after the election NLS began to lag. By March 2001 the NLS share-price had fallen 25% while the broad market index had increased 50%. Union members may or may not want to weaken and destroy their own jobs and the invisible capitalist hand that feeds them, but that’s what they do. (CD 12.5)

Capitalism’s creative destruction is a necessary feature – 19 May 2009
In market setbacks some ask ‘does capitalism really deliver?’ The claim is harder to defend as firms battle and jobs vanish, but wiser heads respond: ‘I reject the premise that capitalism is currently failing to “deliver the goods.” One point of capitalism is to destroy companies like GM and Chrysler – to destroy unions like United Auto Workers that favour older and retired workers at the expense of younger workers and workers yet to come – to destroy the “smart guys” who create defective financial products – to punish us for electing a government that enmeshes itself with such jokers. Current unpleasantness is a feature, not a bug.’ Losses are just as important as profits. Heavy-handed legislation and union power may force firms to pay higher wages but employees must create the additional value before there’s any net gain. Otherwise a firm must charge higher prices that damages its competitive position. If you really want people to be wealthier they have to create additional wealth. (CD 12.5)

We need market-based reform solutions – 12 May 2009
In March 2009 the Pew Research Center asked Americans if we’re better off “in a free market economy even though there may be severe ups and downs from time to time.” 70% agreed and 20% disagreed, so free markets, limited government, and entrepreneurship are still a majoritarian taste there. American Enterprise Institute president Arthur C Brooks puts a modern twist on an old axiom – if you’re not socialist at 20 you’ve no heart; if you’re still socialist at 40 you either have no head or pay no taxes. So it’s of some concern that the percentage of American adults who have no federal income-tax liability will rise to 49% from 40% under Mr Obama’s tax plan. Social Democrats are working to create a society where the majority are net recipients of the “sharing economy”. Advocates of free enterprise must make the moral case for freedom and entrepreneurship and declare that it’s morally wrong to confiscate more income from the minority and lower the rewards for entrepreneurial success simply because the government can. Enterprise defenders ought to define equity or “fairness” as protecting merit and freedom of opportunity, not promoting equal outcomes regardless of effort. Compared to the USA, the SA economy is more regulated and taxpayers support a larger multiple of non-taxpayers and welfare recipients, but the remedy is the same. We need market-based reform solutions. (WSJ 30.4)

Deregulating the vehicle fuel market is overdue and welcome – 12 May 2009
Minerals and energy department gazetted a draft bill enabling motorists to pay for petrol and diesel with their credit cards. Government, maybe reluctantly accommodating 2010 football tourists, also claims it’s contributing to the fight against crime by reducing garage cash holdings. Although the department is seeking public approval, surely that’s a given since it adds to our choices. But as a Business Day editorial observes, while fuel prices are administered by the state, charges imposed by credit card companies could eat into petrol station margins and profits, killing off low-volume fuel outlets. So deregulating fuel prices would help, and changes to enable pump operators to throw in other services or let customers fill their own tanks. Normalising SA’s vehicle fuel market to look like most other countries is long overdue and bound to enhance consumer satisfaction and growth. (BD/Cit 8.5)

Let’s follow the Dinokeng Walk Together scenario, but faster – 12 May 2009
In government’s Dinokeng ‘Scenarios 2025: The Future We Chose?’, the Walk Together third scenario is the positive one. But it envisages a difficult decade of problem-solving before Building a Nation 2018-2020. Regrettably that may be realistic but wouldn’t it be grand to jump straight to the good solutions! Government focused on delivering core public goods. Business investing more and employment rising. Confident international investors buoyed by co-operative governance. Citizens and opposition parties lobbying for more accountability from politicians. Citizens, parliamentarians and courts changing the voting system to hold politicians directly accountable to voters. Together this amounts to a much smaller and more responsive limited government leaving the rest of us much more free to go about our business and leisure activities in pursuit of wealth and wellbeing. The scenario suggests years and years of diverse non-governmental action in response to a stubborn heel-digging government reluctant to hand autonomy and power back to people. A spiritually converted government wholeheartedly ‘on message’ would let it all happen much faster and win popular respect for facilitating faster growth and better lives. (BD 6.5)

Telkom’s Vodacom sale is welcome – 12 May 2009
Telkom and Vodafone each own 50% of Vodacom. Telkom plans to sell 15% to Vodafone and transfer its other 35% to Telkom shareholders. Independent Communications Authority Icasa decided its own approval isn’t needed for the deals, which have been approved by the Competition Commission and Telkom shareholders of which government is largest at 39.4%. Enter Cosatu president Zwelinzima Vavi, claiming to speak for Telkom workers. He says they’re concerned that Telkom’s share of Vodacom’s licence has been profitable, indeed more so than rates of return obtainable on the JSE. So the deals kill the ‘goose that laid the golden egg’ for Telkom and may not be replaced by an equivalent enterprise. But that’s the concern and business of Telkom directors. Vavi reveals his bias in favour of state ownership and makes a common category error. Telkom compensates workers in full via wages and other employee benefits. They’re not shareholders unless they choose to buy shares. Telkom rewards shareholder-owners with dividends and sometimes with capital growth. Workers should stick to their part of the knitting. (BDW 9.5)

Deregulate rather than protect livelihoods – 05 May 2009
‘The electorate has endorsed our call for an equitable, sustainable and inclusive growth path that will bring decent work and sustainable livelihoods’, says Jacob Zuma. ‘We cannot afford to dwell on the negatives. We were serious when we said we would improve the pace and quality of service delivery, that we will appoint competent people to government, and that we will be tough on non-performance. Working together, we will do much more to build a better life for all our people.’ Yet on May Day he told workers the ANC will introduce laws to protect them from exploitation by regulating contract work, subcontracting and outsourcing. Neva Makgetla says testing all policies against the creation of decent work raises two questions – how to support job creation and how to avoid imposing costs on employers that limit job creation. SA is in a deep hole with year-end ‘strict’ 21.9% and ‘wide’ 26.7% unemployment matching America’s 25% during the worst years of the Great Depression – what historian Andrew Roberts calls a world of human misery, blighted lives and wasted opportunities. We should deregulate mining, agriculture, light industry, infrastructure and the tertiary sector to enable more ‘sustainable decent’ work. We cannot afford to dwell on negatives like ‘protecting workers’ from so-called exploitation. (BD 29.4, ANC Today 1.5, BDW 2.5)

Make mining and exporting easier, not harder – 05 May 2009
Driven by a 30% jump in commodity precious stones and metals, monthly exports rose 18% to R52-billion in March. The rand strengthens as commodity prices rise and consumer-debtors’ weak domestic spending keeps imports in check. But ever since water was nationalised in 1998 a licensing bottleneck faces mining operations that impact on water resources. There’s a backlog of 1700 applications at water affairs department. Many miners violate the National Water Act by operating without a licence. One is water affairs minister Lindiwe Hendricks’ husband Andrew. After minerals were nationalised in 2004, his Vuna Mining was awarded (under continuing protest from Xstrata Mining) some of Xstrata’s former mining rights. ‘If everyone had to wait, there would be no coal for Eskom or export’, says Vuna MD Michael Harrington. ‘There’s just no capacity to do the job – everyone has gone along as if there is no Water Act’, says farmer-activist Koos Pretorius, who wants curbs on unregulated mining activity. Instead miners should carry on regardless and government should scrap water and minerals nationalisation and licensing. The more mining and minerals exports, the better for jobs and growth, prosperity and better lives. (BD 2.5, ST 3.5)

Tweak the disability grant system for ARV-recipients – 05 May 2009
5.6-million or more South Africans are currently infected with HIV. In all, over 2.5 million have died of AIDS-related illnesses and 1000 now die daily. The Actuarial Society estimates 5.4-million will have died by 2015, but such estimates hang on assumed uptake of anti-retroviral (ARV) drugs that can contain HIV for long periods. New US and British studies recommend raising the immune system CD4 cell-count for starting ARV therapy from the current national guideline of below 350. Patients will live longer if ARV treatment is begun when CD4 count is above 500 and of course maintained while it stays below. SA’s ARVs ‘roll-out’ is far from complete and budget problems sometimes deny existing, willing recipients their drugs. The social grant system adds a perverse incentive since doctors generally use the yardstick of a CD4 count below 200 to recommend a patient for the temporary disability grant of R1010 a month. Many HIV-positive citizens know this and risk their lives by defaulting on their ARV treatment to get the grant reinstated. ‘Let me be sick a little bit and I will get my food via a disability grant.’ Facing sky-high unemployment, isn’t that understandable response to how the grant system works better than ‘doing crime’? But rather adjust the grant system (and jobs environment) not to encourage ill-health! (BDW 2.5, ST 3.5)

Job contracts have two accountable parties – 05 May 2009
Health department and the Medical Association (Sama) agreed to replace all dismissal notices with final written warnings to striking doctors, who returned to the bargaining chamber. The department hadn’t implemented an increase for health workers promised last July. Sama earlier said doctors and specialists are underpaid by between 50 and 75 percent, in some cases with nurses earning more than doctors. Surprising? At the bargaining council, the nurses’ union represents the doctors because the doctors don’t have the required numbers to do it for themselves. What kind of sense does such labour law make? No wonder doctors aren’t happy. (Star 30.4)

Author: Dr Jim Harris prepares the weekly Regulation Updates from press reports. The updates may be republished without prior consent but with acknowledgement to the author. Views expressed in the updates are the author’s and are not necessarily shared by the members of the Free Market Foundation.