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RICH world think tank the Organisation for Economic Cooperation and Development (OECD last week presented its South Africa survey to Finance Minister Pravin Gordhan.
The OECD is an international economic organisation of 34 countries founded to stimulate economic progress and world trade, and is committed to democracy and the free market economy.
Think tanks are often criticised for their ivory tower style of thinking; critics claim that think tanks - or policy institutes, their preferred name - suffer from cognitive biases like groupthink, leading them to publish radical and unfeasible ideas.
This criticism has spurred the creation of competing institutes calling themselves names like “do tanks” or “think & do tanks”.
The OECD has revealed with the publishing of the above-mentioned report that it is firmly in the former category - in fact, I believe it is deserving of a new noun to coronate this report, which I dub “tank-think”.
Besides its inane appearance, tank-think (the new noun) does a good job of describing the phenomenon whereby opinions are formed and presented from behind the protective shield of the tank's armour, allowing the insiders to view the world through their narrow periscope and prescribe a course of action whose impact they are oblivious to and unaffected by.
For good measure, the report does indeed contain some sound recommendations such as lowering interest rates and managing the rand’s exchange rate.
However, these are tactics South Africa’s financial leadership are acutely aware of and eminently more competent than the OECD to make a value judgement on, based on their local knowledge of the implications such policies would have on the political economy.
It’s all very well staring at a graph and saying SA’s interest rates need to drop despite the impact on inflation, which is what the OECD recommended - but the government needs to weigh up the impact of lower interest rates against a 40% and rising unemployment rate.
This is another example of the periscope view of an economy: it is true that lowering interest rates will stimulate spending and reduce savings, which will no doubt stimulate growth.
Taking the whole economy into view, however, it is also obvious that the resultant rise in inflation will choke the 40% of the labour force currently sitting on the bench.
I would love for the OECD to argue that stimulating growth - while raising inflation - will create so many more jobs that the inflationary pressure will be insignificant.
This would be a tough argument to win, because employment-driven growth could in fact neutralise the impact of inflation.
The only way to defend against this argument would be to examine the growth strategy recommended by the OECD and establish whether it would really add long-term employment.
Alas, no such argument exists - the OECD suffers from such cognitive capture that it didn't even bother thinking about the practicalities of job creation, and swiftly moved on to more important issues like rolling hills and daffodils.
As a point of departure, I would like to illustrate the OECD’s ineptitude with one of their very own graphs, labelled “Electricity prices are still very low by international standards”.
Electricity prices are still very low by international standards?
Indeed from the perspective of the wonks at the OECD South Africa's power tariffs are quite low, sitting in the bottom five, snugly placed between Canada and the United States.
For those readers for whom this article serves as their first foray into the economic landscape of emerging markets, let me clarify - Canada, South Africa and the United States are not very similar, in fact they have strikingly different economies, populations and challenges.
How does the OECD suggest South Africa remedy this cheap electricity conundrum? Well, it has a neat list of suggestions which I have summarised below:
If after reading these two points you find yourself thinking that these recommendations make a lot of sense, well then I would like to welcome you to the field of emerging market economies.
While acknowledging the need for employment creation, the report sidesteps the practicalities and swiftly moves onto more important recommendations, such as immediately increasing electricity costs.
But obviously that is not enough; since South Africa needs housing for its poor, it must ensure these new social housing projects are environmentally friendly. In an attempt to dabble in the details, the OECD surmises that green construction will create oodles of new jobs.
To top off the list of recommendations, the nation needs to improve safety in urban areas so that people can commute on bicycles to further reduce carbon emissions.
Reading these recommendations, I recalled fond memories of cycling around Copenhagen.
For those of you who have never been to Denmark, I strongly recommend a visit; for those Danes who are staffers at the OECD analysing emerging markets, I strongly recommend that you occasionally leave.
To summarise what the OECD recommends: carbon intensive industries are bad; if you include all the costs of energy production in the price of electricity, prices will rise steeply and this will force industry to become green.
Jobs will be created through the construction of social eco-villages.
At the risk of introducing pragmatism into the debate, let us reflect on the chain of events recommended by the OECD were it to be implemented.
All energy subsidies would be removed and heavy carbon taxes lumped onto Eskom and heavy industries. Heavy industries would immediately collapse and electricity prices would triple.
Short-term unemployment would drop due to more construction jobs, but medium-term unemployment would double in the absence of labour-intensive heavy industries.
Obviously this could not possibly be the intention of the OECD, for it has assured us that in place of all the heavy industry job losses, the free market mechanisms will replace these lost jobs with environmentally sustainable ones.
No doubt, in the OECD's opinion, all those chaps relieved from their duties at aluminium smelters will find employment as nuclear physicists.
The graph below illustrates the world according to the OECD.
Notice how the energy prices follow a hockey stick pattern while through the magic of the OECD, economic growth continues to rise in lock step.
No doubt the OECD economists have dozens of emerging market case studies reflecting the strong correlation between unsubsidised energy costs and economic growth.
According to the OECD, its mandate is to contribute to sound economic expansion in member as well as non-member countries in the process of economic development.
It appears that the OECD has strayed from its mandate; it seems to be on a realism-starved membership drive - apparently it is more important for a country to be environmentally friendly than for it to be solvent.
Looking at the world through the green-tinted glasses of the OECD, Zimbabwe is better than China or the United States because it pollutes less.
In its response to the OECD, South Africa can in fact take its cue from both China and the US regarding OECD recommendations on sustainability- a crisp one-finger salute.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
The OECD is an international economic organisation of 34 countries founded to stimulate economic progress and world trade, and is committed to democracy and the free market economy.
Think tanks are often criticised for their ivory tower style of thinking; critics claim that think tanks - or policy institutes, their preferred name - suffer from cognitive biases like groupthink, leading them to publish radical and unfeasible ideas.
This criticism has spurred the creation of competing institutes calling themselves names like “do tanks” or “think & do tanks”.
The OECD has revealed with the publishing of the above-mentioned report that it is firmly in the former category - in fact, I believe it is deserving of a new noun to coronate this report, which I dub “tank-think”.
Besides its inane appearance, tank-think (the new noun) does a good job of describing the phenomenon whereby opinions are formed and presented from behind the protective shield of the tank's armour, allowing the insiders to view the world through their narrow periscope and prescribe a course of action whose impact they are oblivious to and unaffected by.
For good measure, the report does indeed contain some sound recommendations such as lowering interest rates and managing the rand’s exchange rate.
However, these are tactics South Africa’s financial leadership are acutely aware of and eminently more competent than the OECD to make a value judgement on, based on their local knowledge of the implications such policies would have on the political economy.
It’s all very well staring at a graph and saying SA’s interest rates need to drop despite the impact on inflation, which is what the OECD recommended - but the government needs to weigh up the impact of lower interest rates against a 40% and rising unemployment rate.
This is another example of the periscope view of an economy: it is true that lowering interest rates will stimulate spending and reduce savings, which will no doubt stimulate growth.
Taking the whole economy into view, however, it is also obvious that the resultant rise in inflation will choke the 40% of the labour force currently sitting on the bench.
I would love for the OECD to argue that stimulating growth - while raising inflation - will create so many more jobs that the inflationary pressure will be insignificant.
This would be a tough argument to win, because employment-driven growth could in fact neutralise the impact of inflation.
The only way to defend against this argument would be to examine the growth strategy recommended by the OECD and establish whether it would really add long-term employment.
Alas, no such argument exists - the OECD suffers from such cognitive capture that it didn't even bother thinking about the practicalities of job creation, and swiftly moved on to more important issues like rolling hills and daffodils.
As a point of departure, I would like to illustrate the OECD’s ineptitude with one of their very own graphs, labelled “Electricity prices are still very low by international standards”.
Electricity prices are still very low by international standards?
Indeed from the perspective of the wonks at the OECD South Africa's power tariffs are quite low, sitting in the bottom five, snugly placed between Canada and the United States.
For those readers for whom this article serves as their first foray into the economic landscape of emerging markets, let me clarify - Canada, South Africa and the United States are not very similar, in fact they have strikingly different economies, populations and challenges.
How does the OECD suggest South Africa remedy this cheap electricity conundrum? Well, it has a neat list of suggestions which I have summarised below:
- Use easy-to-implement instruments - we recommend a carbon tax;
- Reduce subsidies for energy consumption - but don’t forget to give the poor supply vouchers.
If after reading these two points you find yourself thinking that these recommendations make a lot of sense, well then I would like to welcome you to the field of emerging market economies.
While acknowledging the need for employment creation, the report sidesteps the practicalities and swiftly moves onto more important recommendations, such as immediately increasing electricity costs.
But obviously that is not enough; since South Africa needs housing for its poor, it must ensure these new social housing projects are environmentally friendly. In an attempt to dabble in the details, the OECD surmises that green construction will create oodles of new jobs.
To top off the list of recommendations, the nation needs to improve safety in urban areas so that people can commute on bicycles to further reduce carbon emissions.
Reading these recommendations, I recalled fond memories of cycling around Copenhagen.
For those of you who have never been to Denmark, I strongly recommend a visit; for those Danes who are staffers at the OECD analysing emerging markets, I strongly recommend that you occasionally leave.
To summarise what the OECD recommends: carbon intensive industries are bad; if you include all the costs of energy production in the price of electricity, prices will rise steeply and this will force industry to become green.
Jobs will be created through the construction of social eco-villages.
At the risk of introducing pragmatism into the debate, let us reflect on the chain of events recommended by the OECD were it to be implemented.
All energy subsidies would be removed and heavy carbon taxes lumped onto Eskom and heavy industries. Heavy industries would immediately collapse and electricity prices would triple.
Short-term unemployment would drop due to more construction jobs, but medium-term unemployment would double in the absence of labour-intensive heavy industries.
Obviously this could not possibly be the intention of the OECD, for it has assured us that in place of all the heavy industry job losses, the free market mechanisms will replace these lost jobs with environmentally sustainable ones.
No doubt, in the OECD's opinion, all those chaps relieved from their duties at aluminium smelters will find employment as nuclear physicists.
The graph below illustrates the world according to the OECD.
Notice how the energy prices follow a hockey stick pattern while through the magic of the OECD, economic growth continues to rise in lock step.
No doubt the OECD economists have dozens of emerging market case studies reflecting the strong correlation between unsubsidised energy costs and economic growth.
According to the OECD, its mandate is to contribute to sound economic expansion in member as well as non-member countries in the process of economic development.
It appears that the OECD has strayed from its mandate; it seems to be on a realism-starved membership drive - apparently it is more important for a country to be environmentally friendly than for it to be solvent.
Looking at the world through the green-tinted glasses of the OECD, Zimbabwe is better than China or the United States because it pollutes less.
In its response to the OECD, South Africa can in fact take its cue from both China and the US regarding OECD recommendations on sustainability- a crisp one-finger salute.
- Fin24
*Jarred Myers is a resources strategist and can be followed on Twitter on @JarredMyers. Opinions expressed are his own.
