DAAN STEENKAMP: Why commodity windfalls don’t trickle down in SA

SA’s terms of trade are near multigenerational highs. The terms of trade measure the prices of the goods and services SA exports relative to the prices of goods and services we import. Higher terms of trade usually make a country wealthier by boosting what can be bought from the rest of the world with what is domestically produced.

But the recent IMF World Economic Outlook report shows that, unlike many commodity exporters, the wealth effects from higher commodity prices are negative in SA.

There are several reasons commodity windfalls have not trickled down in SA. One is that conventional terms of trade measures probably overstate the actual gains from higher prices. As the graph based on the Reserve Bank’s terms of trade indices shows, gold has played an important role in the long-term increase in SA’s terms of trade. But if gold is excluded from the calculation, our terms of trade are down compared with the 1960s. Gold exports are also much less important now, with volumes declining significantly over the past two decades.

Alternative measures suggest that SA’s terms-of-trade boom might have been much more modest than standard measures suggest. The IMF’s commodity terms-of-trade measure suggests that SA’s terms of trade are back to 2000 levels and did not jump nearly as much as for Australia or Canada.

If one instead measures terms of trade based on the level of export and import prices (with prices expressed based on actual price levels instead of indices), SA’s terms of trade are up about 15% since 2000, compared with more than 50% based on the Reserve Bank’s measure.

SA has also not benefited as much from the commodity boom as other net commodity exporters because our commodity-related industries are not well connected to the rest of the economy or the rest of the world. Countries where the commodity sector is more interconnected tend to see stronger effects of commodity price changes on the economy.

SA is not well integrated into global value chains compared with major economies. This limits the extent to which SA firms benefit from faster growth in major emerging markets. IMF estimates show that Indian and Chinese firms experience, respectively, 25 and 20 times bigger revenue growth impacts from faster G20 emerging market growth surprises than SA firms.

The IMF estimates show that the links between domestic industries in SA are also weaker across all industries than is typical in major economies. Likewise, our estimates show that the primary sector in SA uses fewer domestically manufactured inputs than sectors such as construction and telecommunication.

Despite extensive state support, SA is “beneficiating” less and less of its mining products, with decreased transformation of mined resources into higher value-added manufactured products.

Regarding what SA exports, the Harvard Growth Lab and the Observatory of Economic Complexity measures show that the sophistication of our products has been declining over time due to increasing reliance on raw commodity exports. Fast-growing emerging markets such as China and India have achieved the opposite.

SA has furthermore benefited less from higher commodity prices due to high domestic inflation. IMF estimates imply that SA prices and wages rise faster than commodity prices, reducing the economy’s competitiveness. The IMF argues that this leads to a decline in the inflation-adjusted value of receipts from net exports. Negative wealth effects have thus tended to overwhelm the income effects from higher commodity prices. Unlike most of the net exporters of commodities the IMF considers in its study, the correlation between SA consumption and commodities terms of trade is negative for this reason.

In other commodity-exporting economies such as Australia, export volumes have risen to meet higher global commodity demand. Despite the highest commodity prices in more than two generations, SA’s export volumes did not increase to take advantage of this income windfall.

Higher commodity prices did contribute to tax revenues, but the prepandemic benefits from the boom were limited as the mining industry was struggling. Much has been made of tax overcollection over recent months because of high commodity prices, but company tax revenues from mining are down two-thirds compared with their 2022 peak.

The major reason for this is that the government has reduced the extent to which the economy can take advantage of higher commodity prices. SA has thus contracted government-induced “Dutch disease”. The term is typically used to describe the Dutch experience following the discovery of oil and gas in the North Sea in the 1960s, when higher terms of trade from higher commodity prices increased wages across the economy. Whereas Dutch disease is typically associated with productivity improvements in the commodity sector that create inflation in other sectors, the government has given the SA economy Dutch disease through policy choices that raise the price level and slow productivity growth.

As we showed in earlier research, government-related prices and wages have grown well above the upper bound of the inflation target. Increasingly interventionist policies discourage business and investment, while poor service delivery and policy uncertainty not only raise the cost of doing business but also prevent the mining and manufacturing sectors from expanding production when commodity prices rise. When policy tries to manage every aspect of business, the economy loses its capacity to adapt and grow.

SA’s reform programme is focused on treating the symptoms of our illness, not its underlying causes. The government must stop micromanaging business and allow markets to reward innovation and efficiency. Healing the state involves restoring a capable, merit-based public administration to strengthen the institutions that allow open markets to work.