South Africa's Response to the Global Economic Crisis: Ministerial briefing

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Economic Development

27 August 2009
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

Hon Ebrahim Patel, Minister of Economic Development,  briefed the Committee on South Africa's response to the Global Economic Crisis. He gave a background of the crisis and explained where it started. When evidence from real economy groups showed that South Africa would be affected by the global economic crisis, a framework agreement was drawn up, which set out principles and broad programmes to address the crisis. The framework had strong principles that sought to protect the poor, the vulnerable, the unemployed and low-income workers, to strengthen capacity to grow decent work in the future, to maintain high levels of investment and to intervene in a timely, tailored and targeted manner. This was a bold stimulus package.

The full impact on South Africa was reflected in the economic data from May. Economic growth slowed down dramatically and the manufacturing sector shrank by 20%. Job losses in one area affected other sectors and credit became more difficult to obtain. The current account (Balance of Payments) deficit pressures continued. There were 179 000 job losses in the first three months of the year. Another 267 000 jobs were lost in the second three months of the year and 302 000 additional people became discouraged work-seekers. There was a decline in Gross Domestic Product. The biggest loss by far in Gross Domestic Product was in manufacturing and there were major contractions in other sectors such as mining.

Businesses had to avoid retrenchments of workers and explore alternatives. Unions and employers were to consider training layoffs as an alternative to retrenchment. Training layoffs were extended training periods.
The training was left to the sector and workplace to determine, but three guidelines had to be adhered to. The training had to encompass company-usable skills, generic skills and literacy/numeracy and Information and Communication Technology skills. Industries affected by the crisis had to be helped to avoid de-industrialisation and to rebuild local industrial capacity. The framework also identified small businesses and listed vulnerable and distressed sectors. The framework was approved by President Zuma in June and the measures to be used against the crisis were announced in August. There were tentative signs of recovery but since these were based on stimulus packages, it was uncertain whether the economy could sustain itself. Employment losses would lag economic recovery. This was not a short-term problem that would disappear in six months, and Government would address both immediate and systemic issues.

Members stated that they would support the Minister and work with him in order to ensure the framework's success. They wondered if South Africa could follow the practice of China when it came to giving auto-manufacturers funds to avoid de-industrialisation. The Minister explained that the auto sector was in some degree of crisis in many parts of the world. The government was particularly concerned that they should not have dismantled the auto industry's productive and manufacturing capacity after the crisis was over. If the government was not cautious, there was every possibility that there could be damage to industrialisation at the end of the recession. Members also noted that there was a high vacancy rate in the public service sector. If these positions were filled, it would support the improvement of the employment issue and the public service sector. The Minister agreed that it would result in improved service delivery. In a recession, public sector employment was an important counter-cyclical measure. The Committee stated that this was an opportunity for all the stakeholders in the economy to come together and face the crisis so that it was not a crisis that government had to face alone.

Members noted that for cooperatives to be sustainable, government intervention was needed. They were concerned that medical aid schemes were under extreme distress, with many on the brink of collapse. Members also noted that the framework seemed a very good short-term response to the economic crisis, following Keynesian principles, but enquired as to the extent to which resource constraints affected global economic growth. Although the framework was a bold stimulus package, Members stressed that it also required a bold management package and identification of the skills that were needed in the economy, and suggested that a team of experts be created that could focus on the skills needed to anchor the economy during this difficult time. The Committee inquired if the government intended to amend or relax the National Credit Act, noted that some local governments increased rates and taxes by excessive amounts far above inflation rates, that there was a serious decline in real income, making it difficult for even those employed to afford basic needs, and complained about the lack of emphasis on agriculture. The Chairperson asked Government to appreciate that funds allocated for the National Job Fund would not be sufficient, and to ensure that there was proper coordination between programmes already running and new initiatives.

Meeting report

Briefing by the Minister on South Africa’s response to the Global Economic Crisis
Hon Ebrahim Patel, Minister of Economic Development, informed the Committee that the causes of the global economic crisis lay in a range of policies over past thirty years. Some of the factors included gross imbalances and inequities in the global economic system, the impact of financialisation of economies, Ineffectual regulation in key economies, and poor business practices. There were a number of smaller crises that resulted in the global economic meltdown. However, the biggest crisis happened in September 2008 when Lehman Brothers Inc declared bankruptcy. Soon after that, Wall Street had crashed and the impact across the world was dramatic and rapid. The price of oil and many minerals fell sharply, aggregate demand dropped substantially, factories slowed down and many closed, credit to companies decreased substantially, fifty million workers were estimated to be made jobless, rural poverty deepened and many people lost homes and property. The platinum and oil prices also dropped substantially.

The American government intervened by bailing out banks and an insurance company, and it had resorted to a part nationalisation of the finance sector, had rescued the auto sector, had initiated a massive stimulus package (both fiscal and monetary) to try to stop the recession, and had relied on global coordination to pump liquidity into the market. China and European countries then followed with a stimulus package. There was talk of South Africa being 'decoupled' from the crisis but evidence from real economy groups contradicted this. This triggered a South African response.

A Framework for South Africa’s response was developed and agreed to, which set out principles and broad programmes to tackle the crisis. The framework had strong principles that sought to protect the poor, the vulnerable, the unemployed and low-income workers, to strengthen capacity to grow decent work in the future, to maintain high levels of investment and to intervene in a timely, tailored and targeted manner. This was a bold stimulus package. The Government would spend R787 billion on improving public infrastructures such as housing construction, energy generation, hospitals and health clinics. Fiscal and monetary policy measures were to be used counter-cyclically, aggressively when required, and in a way that complemented trade and industrial policies. Businesses, labour and community organisations were to meet with the South African Reserve Bank (SARB) to discuss the interest rate regime, lowering the cost of capital and reducing the real interest rate gap. Industries affected by the crisis had to be helped to avoid de-industrialisation and to rebuild local industrial capacity. The Framework also identified small businesses and listed vulnerable and distressed sectors.

With regard to potential unemployment measures in the private sector, businesses had to avoid retrenchments of workers and explore alternatives. Unions and employers were to consider training layoffs as an alternative to retrenchment. In the public sector, Government could improve employment intake in key delivery areas. It could also use the Expanded Public Works Programme (EPWP). In terms of social measures, Unemployment Insurance Fund (UIF) benefits could be enhanced, the child grant was increased to age eighteen, and cooperatives were to be strengthened.

Government recognised deep weaknesses in governance of globalisation. South Africa would develop global responses with other countries and the country would address issues of global macro-economic imbalances. This would be done at the G20 and World Trade Organisation (WTO) negotiations. President Jacob Zuma endorsed the Framework as a basis of response.

The full impact on South Africa was reflected in the economic data from May. Economic growth had slowed down dramatically and the manufacturing sector shrank by 20%. Job losses in one area affected other sectors and credit became more difficult to obtain. The current account (Balance of Payments) deficit pressures still continued. There were 179 000 job losses in the first three months of the year. Another 267 000 jobs were lost in the second three months of the year and 302 000 additional people were discouraged work-seekers. There was a decline of Gross Domestic Product (GDP). The biggest loss by far in GDP was in manufacturing and there were major contractions in other sectors such as mining.

The Minister discussed South Africa’s response further. The Framework was drawn up in February 2009, a discussion on its implementation happened in March, global discussions in G20 took place in March, and the recession was declared official in May. The Framework was approved by President Zuma in June and the measures to be used against the crisis were announced in August. The Framework introduced the concept of training layoffs. It was an extended training period as an alternative to retrenchment.
The training was left to the sector and workplace to determine, but three guidelines had to be adhered to. The training had to encompass company-usable skills, generic skills and literacy/numeracy and Information and Communication Technology (ICT) skills.

Illegal imports and customs fraud led to many thousands of job losses. The South African Revenue Service (SARS) had stepped up its actions and more resources were made available. Action was taken against companies suspected of smuggling, round-tripping, export-incentive abuse, counterfeits, quota fraud, rebate item abuse and under-declaration.

The Independent Development Corporation of South Africa Ltd (IDC) made R6 billion over two years available to companies that had fallen into distress due to the recession. Since 1 April 2009, eleven financing applications totalling R743 million were approved. Packages were developed for automotives, clothing and textiles, as well as capital equipment, transport equipment and metals fabrication (CETEMF). Support for the auto industry was linked to conditionalities on jobs.

The Government aimed to
reduce food price pressures on consumers by stepping up action against companies colluding or partaking in anti-competitive action. The government wanted to address the pressure on over-indebted consumers by providing rules, standards and processes to address debt restructuring.

There were tentative signs of recovery based on stimulus packages so it was uncertain whether the economy could sustain itself. Employment losses would lag economic recovery. This was not a short-term problem that would disappear in six months. Government would address both immediate and systemic issues. It would build partnerships to confront the challenge. This was an important role for Parliamentary members,  as the representatives of the people.

Discussion
Mr Z Ntuli (ANC) thanked the Minister for a comprehensive presentation. The Committee could not disagree with the Framework presented by him. Members would support the Minister and work with him in order to ensure its success. He wondered if South Africa could follow the practice of China when it came to giving automotive manufacturers funds to avoid de-industrialisation. He noted that there was a high vacancy rate in the public service sector. If these positions were filled, it would support the improvement of the employment issue and the public service sector.

The Minister stated that there were two advantages to filling vacancies in the public sector. The first was that this would improve service delivery. The second was that, in a recession, public sector employment was an important counter-cyclical measure. If the g government failed to utilise these vacancies, there would not be a macro-effect on the economy. The Ministry was working on this issue although it was a serious challenge. He hoped to report more positively on the matter in future meetings.

The Minister stated that a challenge was that the automotive sector was in some degree of crisis in many parts of the world. Government was particularly concerned that South Africa should not have dismantled the automotive industry's productive and manufacturing capacity after the crisis was over. A recession was a huge deficit between demand and supply. There was a lack of aggregate demand. With all the factories competing in the world, generally speaking, the intention of each company was to survive. The automotive sector in South Africa faced the challenge of what decisions the Head Offices of all the big auto-makers were going to make. If the government was not cautious, there was every possibility that there could be damage to industrialisation at the end of the recession. A lot of the government's work lay in looking at appropriate responses in distressed sectors. De-industrialisation was the permanent decline in productive capacity. This was a serious problem, as South Africa was the industrial heartland of Africa. It was about fighting for a balanced growth path and economy. He stressed the general point about the importance of industrial policy and ensuring that there was a manufacturing base at the end of the recession.

Mr X Mabaso (ANC) stated that it seemed that this was an opportunity for all the stakeholders in the economy to come together and face the crisis, so that Government did not have to do so alone. Where Government intervened to look after the poor, it did so without affecting the pride of the people. He noted that for cooperatives to be sustainable, government intervention was needed.

The Minister appreciated the Members’ comments. He stated that there was a lot of scope for well-thought through and well-run cooperatives in the economy. He said that a very big part of Italy was made up of small cooperatives, but that South Africa had not been so successful with cooperatives. Government needed to find out what it needed to do to make them successful. Cooperatives would grow through Government finding the right instruments to sustain them. Simply providing resources to people to form cooperatives was not enough. If there was not significant training on financial and management skills, the cooperatives would not maintain sustainability. Kwazulu-Natal had been the most successful province in developing cooperatives. The Minister already asked the province to draw up a report stating the “do's and don'ts” of developing cooperatives.

Ms D Tsotetsi (ANC) addressed the idea of rescuing businesses that were in distress. She stated that the government did not have money but took money from tax payers. She noted that there were Bangladeshi and Pakistani businesses that were being raided by police. She thought that people from the South African Revenue Services (SARS) should accompany police to the raids, to check that these business owners were paying taxes. They also had to check if the money was being invested in South African banks. This affected economic growth in the country.

The Minister replied that the issues of tax compliance were noted. There was a need to ensure that these issues would be taken into account.

Mr S Huang (ANC) looked at training layoffs. He noted that there was some intervention through companies' negotiation with unions, since companies had to go through the Commission for Conciliation, Mediation and Arbitration (CCMA) processes to negotiate the training layoff. He thought that this negotiation would result in a lot of problems. He noted that the Industrial Development Corporation of South Africa Ltd (IDC) made available R6 billion over two years to companies in distress due to the recession. He asked for more clarity.

The Minister stated that he was in discussions with the IDC about how to get a greater impact from its lending and funding operations. This meant creating a model where every unit of capital that the IDC invested would be clearly seen, and where the direct and indirect impact it had on employment could be assessed. There had to be a much more explicit targeting of employment by the IDC. The IDC said that this was what it wished to do. It was currently seeking ways to measure their impact on employment. There were applications in the pipeline for R3.3 billion that the IDC wanted to use for the automotive industry. Once the IDC processed all the applications and made the necessary allocations, it would know what the remainder of the R6 billion represented.

Mr N Gcwabaza (ANC) stated that the Framework gave hope to the people. He stated that the medical aid schemes were under extreme distress. Many of them seemed as though they would collapse, causing a serious strain on the health care system in the country. The Minister had spoken about improving infrastructure in hospitals and other public institutions. He wondered if the Minister was considering assisting the medical aid schemes. He stated that some academics suggested that part of the reason why companies were in distress was because they had sophisticated technology in their companies that was not being used efficiently. He urged the Minister to check that companies were using technology efficiently before he provided the distressed companies with funds. This was one of the recognised weaknesses in skills development and could provide a further case for the re-skilling of workers that were facing retrenchment.

The Minister stated that he would raise the medical aid schemes matter with the Minister of Health.

The Minister then addressed the issue that companies were not fully utilising their full productive capacity. Sometimes the deficit lay in the training of workers and managers. The training layoff could be seen as an opportunity for these workers to train. The government could not compel companies to use the training layoff idea, but they could say to companies that it was a great opportunity. There was a need to address short term challenges as well as the broader need for viable sectors and enterprises. This meant addressing the need for innovation, appropriate technology and other programmes.

Mr L Greyling (ID) stated that the Framework seemed to be a very good short-term response. It was certainly a Keynesian response. He stated that the world would be very different after the recession and it would probably be put on a different development path. He asked if the Minister was looking at what the world was going to be like, so South Africa could be positioned in a way that would allow it to take advantage of that position. He wanted to know the extent to which resource constraints affected global economic growth. He also wanted to know the role that peak oil played in the economy. Many economists said that it was the rise in the price of peak oil that was the final straw that led to the crisis. He enquired to what extent South Africa would plan a response to this in the future. He also asked the extent to which economic power was shifting across the globe, and how South Africa could position itself to take advantage of the situation. He wanted to know if there was a major shift in the global economic ideology, and if the world was witnessing one of the greatest economic revolutions at the moment.

The Minister stated that the economist John Maynard Keynes was most strongly associated with measures used to address the effects of the Great Depression. Keynes had stated that in a recession or depression, it made economic sense for the government to pay people to work. When money was put into people's hands they become consumers. These consumers would buy certain products, which would require more workers to make these products. These product-makers would pay rates and this resulted in there being local authority workers. In the modern economy, countries could build structures that they would need in the long-term, such as hospitals, dams and schools. This was the time that the government needed to be “digging in” to its resources to prepare the country for the position that it would face at the end of the recession.

The Minister stated that this was a short term response, but that there were points that addressed some of the long term elements. The Framework did not address all the systemic issues. He wondered if it was a key role of Parliament  to open up debates about his issue. This was also an opportunity for the Committee to engage on these issues and to get comments from experts, so Government could take part in discussions taking place in the United Nations (UN), G20 and the International Labour Organisation (ILO). It was the government's intention to hold a policy platform on the global economic crisis on 9 September 2009, in Cape Town. He invited the Portfolio Committee to the meeting. Two experts would be addressing the meeting and sharing their thoughts on the crisis. This would be one of many initiatives that the government would take to open up discussions about the economic crisis.

The Minister addressed the question concerning the extent to which resource constraints curbed growth. He stated that this was a question that economists had been debating for years. Over the years, the growth model had not been kind to the environment. This was a deep concern to all; especially in view of global warming and the kind of economic policies that should be followed. The issue of whether there were constraints to growth was debatable, but there were certainly great costs to growth.

Mr S Ngonyama (ANC) stated that even though the Framework was a bold stimulus package, it also required a bold management package. His observation was that the management of the bold stimulus package was weak. He stated that coordination was not decisive and strong enough and it needed extraordinary discipline. He noted that the training of workers was an alternative for retrenchment, but that the identification of the skills that were necessary was left up to businesses to decide. His suggestion was that a team of experts should be created that would focus on the skills issue, as certain skills were needed to anchor the economy during this difficult time. He addressed the World Trade Organisation (WTO) agenda. He noted that the development agenda needed to be focused on; however, he did not know the extent to which South Africa would win this battle.

The Minister answered that while the government was keen on ensuring that the country would receive the best possible training outcomes, the role of the stimulus package would be proven even if the country received half of its target. Whilst saying that it was a stimulus package, he said that it was also a shortened, focused training programme that would have some benefit for workers.

The Minister agreed that one of the biggest challenges posed to Government by any recession was that it exposed the weaknesses in the economy as well as in governance. Society needed the government to be effective during the recession. President Jacob Zuma had committed to having a government that was prepared to admit to problems and was committed to resolving them. The Minister hoped there would be a feedback loop where Members would listen to problems experienced by the people regarding the manner in which the government was going to implement the stimulus package. This was one way in which the government could adjust the implementation and improve governance.

The Minister agreed that it was important to identify the anchor skills in the economy. The Joint Initiative on Priority Skills Acquisitions (JIPSA) attempted to identify some of the skill constraints and deficits, and sought to address the matter. The training layoff would run for up to three months, but it would not address all the higher order skills that the country needed. The education system needed to be working as effectively as possible, specifically Further Education and Training (FET) initiatives.

The Minister hoped that South Africa’s position in the World Trade Organisation (WTO) would prevail and that the country did not get locked into a multilateral commitment that would be damaging to its industrial interests. South Africa paid a very high price during the Uruguay Round of the WTO negotiations, because it was classified as a developed country, thereby being required to make deeper cuts to its tariffs compared to the other developing countries. South Africa hoped to recover this loss in the DoHa Round by saying that this classification was a historic injustice to South Africa that came at a point of deep vulnerability, when the country was at a point of major political transition.

Dr P Rabie (DA) stated that the presentation had outlined that it was important to know the cost of capital, that the flow of credit in the real economy had to be maintained, and there were ongoing discussions with the banking sector. He said that he had heard that 90% of all applications to banks were being turned down. He asked if the government intended to amend or relax the National Credit Act. Credit was essential for the economy to grow, but he thought that the country's credit regulations tended to impede growth.

The Chairperson informed Mr Rabie that he was touching on areas that the Minister had said were still being discussed. These discussions were still at task team level.

The Minister stated that the ILO did a Global Wage Report which showed that, across countries, labour's share of national income was declining. The challenge this posed at a systemic level was that if economies increased productivity and improved the supply of goods and services, then economic systems, through distribution, had the effect of declining the purchasing power of workers. This could be made up through credit. This could become a major means of fueling consumption. Using credit over a sufficiently long period would become unsustainable. When the credit bubble burst, it could be very difficult on people all over the world.

He added that there was no consideration being given at the moment to amending the National Credit Act, as it was a relatively new piece if legislation. The fact that the Act was put in place before the recession may have assisted in ensuring that South Africa did not follow the normal trajectory regarding credit expansion, which had caused so much damage in many economies. On the other hand, counter-cyclical theories said that countries had to have “looser” credit during bad times. Economists had a number of different theories concerning credit.

Mr A Van der Westhuizen (DA) asked the Minister how successful he was in obtaining the reports from labour unions in the fight to protect employment. He noted that there had been excessive increases in salaries, particularly in the public sector. Some local governments increased rates and taxes by percentages that far exceeded the inflation rates. This did not curb costs or make things easier for people.

The Minister stated that the government was keen to have dialogues with trade unions and the business community, whilst still respecting the latter two sectors’ constitutionally entrenched rights to collective bargaining. Government wanted to ensure that all collective bargaining processes were lawful. This was a critical ingredient for democratically sound processes.

He added that there was a very complex relationship between wages and jobs. Wages represented a cost; but were also a principle driver of consumption, which in turn held up aggregate demand. Keynes had argued that it was undesirable, in a recession, to seek to have a generalised drop in wages, as aggregate demand would also drop. This was a matter that needed to be discussed and debated further.

Mr K Manamela (ANC) stated that there was a serious decline in real income. In the past, the country experienced a “jobless” growth. Now, the ability of workers to afford basic needs was dealt a serious blow. Trade unions were demanding an increase in wages. This was an issue that had to be factored in to discussions and negotiations. He noted that some of the workers in the South African National Defence Force (SANDF) earned about R1 800 per month. This was a serious problem. People needed to speak about this issue openly. Mr Manamela stated that Government needed to be more stringent with its plans to fund the private sector. It needed to look at dividends that shareholders were receiving in companies that were in distress and that were receiving public funds to save them. Government intervention should be part of the stimulus package to finance worker cooperatives that would expand the workers' share in the economy. He agreed with the principle of increasing grants to children up to the age of eighteen years, and commented that this should have happened long ago. He recommended serious investment in the health services sector. There had to be an end to service delivery strikes, which were also a result of the economic crisis. He added that public sector vacancies had to be filled to stimulate the economy.

The Minister stated that the relationship between growth and jobs was also complex. The Department of Economic Development (DED) hoped to do more work on ensuring that the country’s growth path was a labour-absorbing growth path and that a large number of people could be brought into sustainable jobs. Not every 1% of growth had the same employment impact, but could have different impacts depending on the composition of growth.

Mr Ngonyama stated that there was lack of emphasis on agriculture. The government had to look at the matter of food security. There was very little said about an injection of funds into the agricultural sector. He cautioned Members and the Minister not to be too ambivalent about the issue.

The Minister stated that rural development and agriculture were very important. More work needed to be done on this issue, not only in agriculture and mining, but also in the manufacturing and services sector.

The Chairperson requested that the Minister reflect on one issue with his team in a negotiating forum. She noted that the government intended to spend R2.4 billion, which would come from the Unemployment Insurance Fund (UIF) and the National Skills Fund, to form the National Job Fund. There was a possibility that this money would not be sufficient. However, she urged that coordination and integration of work should prevail by ensuring that programmes that were already running could complement any new initiatives. She hoped that the Minister would be coming to Parliament to give regular briefings that would update Members on the economic crisis. She added that Members of Parliament would play a role in holding to account those stakeholders involved in the framework, so that the Committee could properly assess what these stakeholders were doing with funds.

The meeting was adjourned.

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