11

Growth and Growth and development: path development: path

dependencedependence

Notes on South Africa’s Response to Notes on South Africa’s Response to the Great Recessionthe Great Recession

Andrew DonaldsonNational Treasury

August 2009

22

As global economy slows, so too As global economy slows, so too does South Africa… does South Africa…

World GDP growth and SA growth

Source: IMF WEO Apr 2009, including forecast for South Africa.

4.7

2.22.8

3.64.9 4.5

5.1 5.2

3.2

-1.3

1.9

-2

0

2

4

6

8

10

per c

ent g

rowt

h (y-o

-y)

World Emerging and developing countries South Africa

Global slowdown dampens export demand from US, Europe and JapanEmerging markets affected by lower commodity prices, reduced export demand, risk aversion.

33

South Africa’s fiscal outlookSouth Africa’s fiscal outlook

Economic growth in retreat – SA savings rate too low to sustain rapid growth– Redistribution through fiscus needs to be complemented by

improved household saving and investment Global economic context is highly uncertain, outlook for

growth will depend on effective international coordination South Africa’s macroeconomic framework aims to cushion

the adjustment and sustain growth and development– Strong fiscal position: shift from surplus to deficit

– Inflation set to fall, target remains in place

– Phased approach to exchange control liberalisation

– Sound banking and financial sector regulation

– Financial support for capital spending programmes of major infrastructure utilities

2009 Budget framework emphasises continuing spending on infrastructure, public services and programmes aimed at cushioning the poor against slower growth

44

Budget balances – 2000/01-Budget balances – 2000/01-2011/122011/12

55

Key spending trendsKey spending trends

10,000

20,000

30,000

40,000

50,000

60,000

70,000

R m

illio

n (

1995

/96

pri

ces)

Education Health Social security and welfare Built environment (including roads)Criminal justice sector

66

Growth in gross fixed capital Growth in gross fixed capital formationformation

50.0

150.0

250.0

350.0

450.0

550.0

2000 2001 2002 2003 2004 2005 2006 2007

General Government Public Corporations

Private Sector Total

Index

77

Infrastructure finance – ten-year Infrastructure finance – ten-year outlook outlook

Infrastructure investment requirements continue over medium to long term– Pace of growth will be more moderate

Eskom capital programme will need public and private sector co-financing– Role of development finance institutions under review

Municipal water supply and treatment plants– Mix of project management & financing needs

Transport investment tied to urbanisation and industrial development– Likely to dominate post-2010 city planning

Communications liberalisation under way Education, health and social infrastructure

– Public-private partnership opportunities No more sports stadiums…

88

Creating jobs – sectoral Creating jobs – sectoral trends…trends…

Formal sector employment by industry2 million jobs created since

2001… many at risk,

especially in non-traded

goods sectors.

Need to create an additional

2 million jobs…

How to create conditions

for private sector to make

more jobs?

How can public sector

contribute cost-

effectively?

50

75

100

125

150

175

200

225

250

275

2001

2002

2003

2004

2005

2006

2007

2008

2009

Inde

x (2

001=

100)

Construction

Trade

Finance

Manufacturing

Mining

99

South Africa’s response to South Africa’s response to global crisisglobal crisis

Good luck doesn’t last forever:– Industrial and trade competitiveness has to be fostered

Broadening of income support and social security underpins more broad-based development

Good time to strengthen regional economic linkages

Re-assertion of the role of development finance institutions

Sectoral and industrial policy: targeted industry support measures

Re-shaping of the balance between public and private services: education, health, enterprise development…

Inclusive development: opportunities for strengthening social security and labour market institutions

Acceleration of EPWP job creation; short-term training lay-offs

1010

Public spending choices…

1. Size of deficit

2. Type of spending

Fiscal policy choices critical to Fiscal policy choices critical to growth and macroeconomic growth and macroeconomic

sustainabilitysustainability1. Higher deficit over the long-term =

more borrowing = less future

economic growth (as debt repaid)

2. Spending must have larger economic

impact as costs rise.

3. Borrowing to pay wages, interest on

debt is unsustainable as growth

forecast deteriorates.

Spending on investment:

Higher growth ▲ in ST & LT

= higher future tax revenue

= inflation & LT interest rates lower

= real depreciation (more competitive) =

employment ▲ in exporting industries

Spending on consumption:

Growth ▲ in ST but not LT (and lower)

= inflation & LT rates higher

= real appreciation (less comp) =

employment ▲ in domestic sectors

1111

Counter-cyclical fiscal stimulus supports Counter-cyclical fiscal stimulus supports economy through growth-enhancing economy through growth-enhancing

spending decisionsspending decisions• Borrowing of the public sector expands rapidly• Strong growth in expenditure, including capital• Capital expenditure (6.6 per cent average real growth over MTEF) continues to grow faster

than current expenditure (3.7 per cent average real growth over MTEF).

-2

-1

0

1

2

3

4

5

6

7

8

Pe

r c

en

t o

f G

DP

Non-financial public enterprisesGeneral government

Calibrated for supportive economic environment

Fiscus recovers with economy

Adjusts to deterioration in economy

1212

Adjustments to economic outlook: Adjustments to economic outlook: distributional considerationsdistributional considerations

Redistribution Pooling of funds Saving Out-of-pocket

Government UIF benefits Curtailment of tax and spending Drawdown on savings consumption

Income pc

(logscale)

Households

Income (before tax)

Income (after redistribution)

Pooling of funds

Contingent Risks

Lifetime vulnerability

Risks mitigation: pooling & saving

1313

Institutional perspectives: Institutional perspectives: governance countsgovernance counts

Does anybody teach Comparative Economic Systems any more?– More complex institutional arrangements:

Regulation of markets Competition within the public sector Public-private partnerships Public economics beyond the sovereign state

Governance failure: a problem the modern corporation shares with rent-seeking states

– Solutions to principal-agent problems Incentives and the profit motive Information failures, audit and disclosure requirements Corporate governance and accountability

So what has gone wrong?– Macroeconomic boom-bust – Market regulation failure– Governance on holiday– Macro-structural imbalances

Different adjustment paths in different countries– Surplus vs deficit economies– Aged vs young populations– Deindustrialising vs emerging economies– Implications for South Africa?

1414

Path dependencePath dependence

Future course of the economy and public finances depends on the institutional legacy– Depth of SA’s financial markets has a long history– Transport, housing and the apartheid city– Labour market policy and SA’s political transition– Social security, income security & the evolution of contractual

savings– Path dependence can extend beyond discontinuities:

monetary & fiscal restraint after hyper-inflation

‘Bounded rationality’ of applied public finance– ‘Limits of organisation’: understanding the ‘second best’– ‘Learning by doing’ – the epidemiology of institutional change– Economics of system shocks: crisis as a reconstruction

opportunity

1515

Government’s Medium Term Government’s Medium Term Strategic FrameworkStrategic Framework

Ten strategic priorities– Growth, decent work, sustainable livelihoods– Investment in infrastructure– Rural development, land reform, food security– Skills, schooling and further education– Improving the health profile of all South Africans– Fighting crime and corruption– African advancement and international cooperation– Sustainable resource management and use– Building a developmental state – improvement of public

services, strengthening democratic institutions

1616

Policy choices that need to be Policy choices that need to be supported by underlying supported by underlying

evidence… evidence… Short-term fiscal interventions to support economic activity while avoiding an

unsustainable rise in public debt…

Monetary and fiscal policy credibility, capital market deepening, credit

extension in support of growth & development…

Public infrastructure investment priorities, regulatory and tariff policies…

Effective and well-targeted government spending…

Long-term planning and alignment of budgetary and development framework

Trade and industrial policy: competitiveness, productivity, technology,

support for R&D investment…

Human capital development, effective skills development…

Health financing and systems