23 Apr 2013 | Tony Leon | Original Publication: BDlive
THE old joke about economists having called nine of the past five
recessions wrong seemed especially true of the "dismal science" and
even its most illustrious practitioners in recent days.
Two of the wisest owls in the Harvard aviary were recently proved wrong
on a central assumption. Kenneth Rogoff and Carmen Reinhart were apparently
checkmated by a doctoral student at the University of Massachusetts, Amherst.
According to reports, Thomas Herndon, 28, said of his exposé of the basic flaws
in the influential Rogoff-Reinhart 2010 study: "I couldn’t believe my eyes
when I saw the basic spreadsheet error."
The paper in question is not of mere academic interest only. It has been
at the heart of the recent debate on how to repair the world economy and revive
it everywhere: in essence, do we spend and reflate our way out of recession or
do we pull in our horns and cut public expenditure, repair national balance
sheets and escape "the black hole of debt"?
Rogoff and Reinhart gave comfort and apparent empirical cover for rapid
fiscal austerity, the path preferred by so-called deficit hawks, such as the US
Republicans and the UK coalition government. Now, it appears that contra the
central finding of the Rogoff-Reinhart study, economic growth does not fall
sharply when national debt reaches 90% of gross domestic product, the
percentage they had cited as the tipping point at which the walls of a national
economy collapse. In other words, countries do not need necessarily to don the
austerity hair shirt to boost growth on the basis (in the words of another
economist, Adam Posen) that "not all debt accumulation is bad for
growth". And very often, low growth heightens indebtedness rather than the
reverse.
All this seems ancient and obvious history to those of the Keynesian
persuasion locally and abroad. But before its local adherents from the Congress
of South African Trade Unions and others in the left field apply even more
pressure for looser fiscal and monetary policies, another global economic event
last week, which received muted attention here, compels attention. This time it
wasn’t a dispute among economists, but a message from the markets, which an
aeon ago Trevor Manuel moaned were "amorphous". Formless or not, the
markets decided to end the decade-long gold bull run, dropping the price of our
key metal export so violently that early last week it sustained its sharpest
two-day fall since 1983. If not quite amorphous, then markets crystallise, in
the words of Financial Times maven John Authers, "in sharp and violent
moves" as shareholders know only too well. Low Chinese growth, Japanese
quantitative easing, and the Cyprus gold sell-off and less fear of inflation
all played their part. Overall, the markets have taken a gloomy view of the
prospects of global growth doing anything remarkable soon and have discounted
the price of commodities accordingly.
Where does that leave South Africa? With skittish post-Marikana
investors and a mineral regulatory regime "struggling with international
best practice principles", to quote mining lawyer Peter Leon, our space in
the fight for diminished investor enthusiasm was very tight. Now with a
plunging gold price, it has just tightened even further.
There is a fascinating article by William Finnegan in the March 25
edition of The New Yorker about Australia’s richest, and probably most
unpleasant, person, mining magnate Gina Rinehart. Buried in the account of her
rise to further riches, as a result of her father Lang Hancock’s iron-ore
empire, is a compelling insight into how Australia has enjoyed, despite the
great recession, 21 straight years of sustained economic growth and running up
big national debts to sustain its generous welfare provisions. It is also a
high-wage country, whose minimum wage in US dollars is twice the federal
minimum wage in the US. Yet its export growth and prosperity is significantly
dependent on its mineral resources. In a word, it offers three basic factors
that are glaringly absent here and in neighbouring jurisdictions: high
efficiency, low sovereign risk and excellent infrastructure. Addressing the
relative attractiveness and disadvantages of a developed versus frontier places
of doing business, Finnegan offers this comparison: "The idea, a threat
really, much repeated — that the mining multinationals will soon pick up and
leave (Australia) for Africa in search of cheaper labour — ignores basic factors
such as efficiency, infrastructure and sovereign risk."
He reminds readers and investors, that in January, Rio Tinto was forced
to write off a $3bn investment in coal in Mozambique, largely because of
infrastructure problems. It also cost the CEO his job.
Our policy makers and regulators can’t do much about the rise and later
debunking of academic economic debates. But they sure can, and must, fix the
risk sovereign factors which attach to our country.
• Leon is the
author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter:
@TonyLeonSA OR on Facebook: facebook.com/TonyLeonSA
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