Transcript MTBPS Presentation

Growth and development:
path dependence
Notes on South Africa’s Response to the
Great Recession
Andrew Donaldson
National Treasury
August 2009
1
As global economy slows, so too does
South Africa…
World GDP growth and SA growth
World
Emerging and developing countries
South Africa
8
6
4.9
4.7
4
3.6
2.8
2.2
5.2
5.1
4.5
3.2
1.9
2
0
-2
Global slowdown dampens
export demand from US,
Europe and Japan
Emerging markets affected
by lower commodity prices,
reduced export demand, risk
aversion.
Source: IMF WEO Apr 2009, including forecast for South Africa.
10
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
20
00
-1.3
20
per cent growth (y-o-y)
10
2
South 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
3
Budget balances – 2000/01-2011/12
4
Key spending trends
70,000
50,000
40,000
30,000
20,000
95
/
19 96
96
/
19 97
97
/
19 98
98
/
19 99
99
/
20 00
00
/
20 01
01
/
20 02
02
/
20 03
03
/
20 04
04
/
20 05
05
/
20 06
06
/
20 07
07
/
20 08
08
/
20 09
09
/
20 10
10
/
20 11
11
/1
2
10,000
19
R million (1995/96 prices)
60,000
Education
Health
Social security and welfare
Built environment (including roads)
Criminal justice sector
5
Growth in gross fixed capital formation
Index
General Government
Private Sector
550.0
Public Corporations
Total
450.0
350.0
250.0
150.0
50.0
2000
2001
2002
2003
2004
2005
2006
2007
6
Infrastructure finance – ten-year
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 cofinancing
– 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…
7
Creating jobs – sectoral trends…
2 million jobs created since
Formal sector employment by industry
2001… many at risk,
especially in non-traded
275
250
Construction
goods sectors.
Index (2001=100)
225
Need to create an additional
200
175
Finance
150
Trade
125
Manufacturing
100
75
50
2 million jobs…
How to create conditions
for private sector to make
more jobs?
Mining
How can public sector
contribute costeffectively?
8
South Africa’s response to global
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
9
Fiscal policy choices critical to growth
and macroeconomic sustainability
Public spending
choices…
1. Higher deficit over the long-term =
more borrowing = less future
1. Size of deficit
economic growth (as debt repaid)
2. Type of spending
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 consumption:
Spending on investment:
Growth ▲ in ST but not LT (and lower)
Higher growth ▲ in ST & LT
= inflation & LT rates higher
= real appreciation (less comp) =
employment ▲ in domestic sectors
= higher future tax revenue
= inflation & LT interest rates lower
= real depreciation (more competitive) =
employment ▲ in exporting industries
10
Counter-cyclical fiscal stimulus supports economy
through growth-enhancing spending 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).
Adjusts to deterioration
in economy
Fiscus recovers with
economy
8
7
Non-financial public enterprises
6
General government
5
4
Calibrated for supportive
economic environment
3
2
1
0
-1
*
20
11
/1
2
*
20
10
/1
1
*
20
09
/1
0
*
/0
9
08
20
/0
8
07
20
/0
7
06
20
05
/0
6
-2
20
Per cent of GDP
•
•
•
11
Adjustments to economic outlook:
distributional considerations
Redistribution
Pooling of funds
Government
tax and spending
Saving
UIF benefits
Drawdown on savings
Out-of-pocket
Curtailment of
consumption
Income pc
(logscale)
Risks mitigation: pooling & saving
Contingent Risks
Income (before tax)
Lifetime vulnerability
Pooling of funds
Income (after redistribution)
Households
12
Institutional perspectives: governance
counts

Does anybody teach Comparative Economic Systems any more?
–
More complex institutional arrangements:





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?
–
–
–
–

Regulation of markets
Competition within the public sector
Public-private partnerships
Public economics beyond the sovereign state
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?
13
Path 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
14
Government’s Medium Term Strategic
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
15
Policy choices that need to be
supported by underlying 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
16