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Oct 15, 2008

Promote greater competition, economist urges policymakers

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Africa|Industrial|Systems|Africa|Solutions|Systems|Power
Africa|Industrial|Systems|Africa|Solutions|Systems|Power
africa-company|industrial|systems-company|africa|solutions|systems|power
© Reuse this A strong industrial policy, robust fiscal policy, and sound inflation targeting, were the three instruments that could ensure South Africa achieved lower inflation, a lower unemployment rate and “a far more prosperous country”, said Investment Solutions economist Chris Hart.

Speaking at the South African Chamber of Commerce and Industry’s yearly convention in Johannesburg, Hart emphasised that industrial policy should be set in such a way that barriers to entry are lowered and playing fields are levelled.

By driving competition in this way, more people could be absorbed into the economy.

“So you achieve two things by opening up industries to competition, [because] the only way you survive is by improving productivity, that helps to suppress inflation, but you also reduce unemployment”.

Hart said that one of the problems in South Africa during the period of sanctions was that companies outgrew the economy. “So you had over-concentration of industries. And you have got big dominant players, and they have got pricing power in an industry. So if they experience a cost, well then customers can just pay for inefficiencies,” he added.

“Bread collusion, for instance, occurs when there are structural problems with the industry. And I’ve got no problems with sanctions being applied to people who collude, but collusion is only possible when there are few players,” he said.

He stated that if there were numerous competing players in an industry, prices could not simply be increased unilaterally, and there was, in fact, a “price inertia” when it came to pricing. The value pool created among industries would be shared among more people.

With regard to fiscal policy, Hart said that boosting the savings rate, which he felt could be lifted to as much as 20%, could ‘help immediately’.

“Instead of raising rates to try and boost the savings rate, you can actually use tax policy to boost your savings rate. [However] they started raising rates in 2006, because the savings rate was too low, and the credit growth was too high. I think you could have achieved a better result with fiscal policy - to boost the savings rate as a national emergency. And that meant you wouldn’t have put the currency at such risk by hiking rates, and helping to propel it weaken, which then fuelled the inflation rate,” Hart said.

He warned that the country should stay committed to its inflation targeting policy. “Our assets are completely mispriced... if we abandon our inflation targeting policy, we will have to de-rate the market and the bond market completely. That makes capital a lot more expensive to raise,” he cautioned.

“So those are the big things to watch – do we blow the budget? And, is our long-term inflation targeting policy going to remain? Those are the two key things that we need to watch out for,” he said in his 2009 economic outlook presentation..

Looking at the South African economy in the context of the global market crisis, Hart said that although South Africa had stable banking systems, the real economy would most certainly be affected. However, emerging markets were proving to be a kind of safe haven amid the turmoil.


Edited by: Liezel Hill
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