Macroeconomic Perspectives on the Budget

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Finance Standing Committee

05 March 2003
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Meeting Summary

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Meeting report

5 March 2003

Chairpersons: Ms B Hogan (ANC) [Portfolio] ; Ms Q Mahlangu (ANC) [Select]; Joint Budget: Mr N Nene (ANC) [NA] ; Mr T Ralane (ANC) [NCOP: Free State]

Relevant Documents
PowerPoint Presentation on by Ms S Gordon, Independent Economist
PowerPoint Presentation by Prof C. Okeahalam, Chair of the Minerva Group
PowerPoint Presentation by Dr I Abedian, Standard Bank Part One.
PowerPoint Presentation by Dr I Abedian, Standard Bank Part Two.

The experts noted that South Africa indeed has a very sound and expansionary budget for 2003, and the success of policy choices needed to be acknowledged.

Ms Sandra Gordon recommended that government now needed to focus on bolstering domestic demand rather than focus on export-led growth. Here is scope for an increased role for the government. New measures to accelerate growth need to be implemented as capacity for delivery improves.

Professor Okeahalam asserted that although the budget was very sound, there existed the belief that the private sector will assist in reducing unemployment and poverty which are supply side measures. However, he stated that unemployment and poverty will not be solved by supply side measures. Thus two major challenges remain: the alleviation of poverty and eradication of unemployment.

Dr Abedian conceptualized some important messages: The rising level of confidence in government in particular by the business sector. The nature of the global economy where for the first time in four decades South Africa's growth rate of 3% is above the global average of 2.5%. Budget 2003 is a leap forward in normalizing macroeconomic conditions and South Africa's evolving macro-economy is marked by rising economic resilience.

Macroeconomic Perspectives on Budget by Ms Sandra Gordon, Independent Economist
Ms Gordon remarked that it was very difficult to criticize the budget as it was very well received.

She noted the lack of surprises in the budget. Inflation remains a concern, especially with a war looming in the Middle East, and the drivers of inflation being oil and food. She recommended that the government now needed to focus away from export-led growth, and rather focus on bolstering domestic demand. It was also noted that the government has a tendency to underestimate revenue proceeds.

She believed that we need a more stimulatory budget. However, the threat of war threatens global growth prospects. In the US economy corporate and household debt are at record levels with growth rates of 2.5% instead of 4%. South Africa has focused very heavily on export led strategies. Countries in Europe are trying to look at domestic demand for growth. Although South Africa's export policy has been extremely successful, the threat of war will have an impact on export-led growth. There are also risks of further petrol price increases. Thus, what happens in the international environment has a major impact on growth prospects.

In terms of fiscal policy she stated a need for less conservative revenue estimates. It is evident that reforms have led to a more resilient economy. Tax relief assisted and brought relief to household debt. During the period of jobless growth in the 1990s, South Africa experienced a steady shedding of employment. There needed to be a strong focus on the capacity to deliver on expenditure.

Ms Gordon posed the following questions:
What is the scope to increase the role of government in the economy?
What is driving growth in China? To which she answered, capital expenditure.

In conclusion, she remarked that South Africa indeed has an expansionary budget for 2003, and that we needed to acknowledge the success of policies. Global trends suggest a focus on shifts to fostering domestic demand. Here is scope for an increased role for the government. We need to accelerate new measures as capacity for delivery improves.

Discussion and Questions
Mr Moloto (ANC) asked what were the concrete measures to stimulate domestic demand, considering unemployment.

Ms Gordon responded that demand within the economy could be created through land redistribution, public works programmes, the establishment of SMMEs, the creation of an entrepreneurial spirit and learnerships in the workplace. Spending potential need to be created for growth.

Mr Nene (ANC) asked what the government could do to dampen inflation in terms of monetary policy.

Ms Gordon replied that the position of the Reserve Bank was severely complicated by the threat of war and the value of the Rand. She proposed that interest rates be cut as soon as possible. Although there is a higher level of confidence in government policy, it is also recognized that more needs to be done in terms of growth.

Ms Taljaard (DP) commented that more than 60% of the budget is taken up by the tertiary sector. She remarked that studies regarding export led growth have been done on China and India, and that maybe we need to look at how one borrows from different models to suit our circumstances.

Mr Koornhof (UDM) asked to what extent should government involve itself in various sectors, and what were the international models.

Ms Gordon answered that South Africa was unique and needed to find its own way. The key role was to enhance South Africa's future growth. The corporate sector cannot tackle this unaided by government.

Dr Rabie (NNP) asked in the case of war, to what price will fuel increase.

Ms Gordon said that it would spike to $40 per barrel, but that one did not know what the response of the Arab world would be.

Mr Tsheole (ANC) wanted to know more regarding what informs the held views on increasing domestic demand as the Chinese experience have been unsustainable.

Ms Gordon replied that she was broadening the focus on domestic demand, but not abandoning export led growth. She remarked that China was creating unnecessary infrastructure. She was also cautious, in that, although there were lessons to be gained, we should guard against wholesale adoption.

Ms Joemat (ANC) offered a word of caution that what has worked in China and India may not work in South Africa.

Prof Turok (ANC) remarked that there were two ways of creating demand: through redistribution and taxes, and job creation etc. He went on to ask whether any serious study had been done on this.

Ms Gordon replied no.

Professor Turok remarked that it was extraordinary that no study had been done.

Macroeconomic Policy by Prof Charles C. Okeahalam, Chair of Minerva Group
Professor Okeahalam asserted that macroeconomic reform should be looked at over time. The economy has done well in certain areas, but there are still structural problems. The export position is clearly improving. Gross domestic savings have increased and this is not surprising with real interest rates as high as they are. The concern should be with the household savings structure. The difference between government revenue and expenditure was not very wide.

He remarked that this was a very good budget. It is fiscally sound and shows carefully minded housekeeping. The debt burden is low. The supply side system in the US under President Reagan did not narrow the Gini-Coefficient, but widened it. There exists no empirical evidence or study that supply side measures show a reduction in unemployment.

Increased performance at the local level will lead to increased productivity.
The multiplier effects of HIV/AIDS are fairly difficult to obtain. Yet there are so many studies, which leads to confusion.

He posed the following questions:
Can the supply side deliver?
Can SARS continue to meet the challenges?
He remarked that the international terms of trade were unfair and that this was beyond our control.

Professor Okeahalam concluded that this was a very sound budget, but that there were two problems: He asserted that the belief that the private sector will assist in reducing unemployment and poverty, are supply side measures. However, unemployment and poverty will not be solved by supply side measures.

Macroeconomic Perspective on Budget by Dr Iraj Abedian, Director & Group Economist, Standard Bank
Dr Abedian conceptualized three important messages:
1. The rising level of general confidence and in particular of the business sector in government.
2. The nature of the global economy in which the budget is presented. For the first time in four decades South Africa's growth rate of 3% is above the global average of 2.5%.
3. Budget 2003 is a leap forward in normalizing macroeconomic conditions. Disposal incomes have been rising since 1994.

Furthermore, Dr Abedian outlined four pillars of rising economic resilience in which South Africa's macro-economy has evolved:
Pillar One: Reinforced by Structural Changes, South Africa's Economic Efficiency is rising.
It is no longer a primary sector economy, but it has diversified into secondary and tertiary sectors. Thus, structural changes have transformed the economy.

Pillar Two: South Africa's export diversification is paying off.
In comparison with the economies with whom we compete, we are more competitive. Out of 84 countries, South Africa is ranked 32nd.

Pillar Three: Macroeconomic Stability & Solid Fiscal Conditions (Predictability).
Inflation targeting is a sterile debate, and there is no replacement. Inflationary trends are declining.

Pillar Four: Deepening Democracy & Social Stability.

Macroeconomic aspects of Budget 2003 (see PowerPoint presentation)
Dr Abedian remarked that confidence in the tertiary sector was far more important than any other sector.

Discussion and Questions
Ms Taljaard commented that the government has achieved much in terms of structural changes in the growth and redistribution strategy. The area of insufficient structural reform seems to be privatization. Comment on skills mismatch and the Immigration Bill was sought. Furthermore, it is agreed that there was mutual confidence in terms of macroeconomic management but not across all portfolios.

Professor Okeahalam replied that privatization has value as an effective efficiency policy, but called for a robust regulatory framework.

Dr Abedian responded that the problem was not with privatization, but with competition policy. We should be careful not to replace a public monopoly with a private monopoly. This issue is not to be politicized. In his response to the second part of the question, he said that we need to re-skill and at the same time develop and implement human resource development strategies. We need skilled people in the country. By having such skills in the country you open up avenues for further growth and employment in the economy. Xenophobia needs to stop if the problem of unemployment is to be solved. In his response to the third part, he remarked that there will never be confidence across the board. A tertiary economy is managed very differently. Space need to be created for different sectors to air their views.

Mr Moloto remarked that there was a general perception that exchange controls were not viable. In which areas can there be improvement and are there any alternatives. Furthermore, he remarked that there has been a critique of competition policy. Also, not enough attention was being paid to the secondary sector.

Professor Okeahalam replied that lessons were learnt every day and that the speed of capital was very fast. He also explained that the cost of administering exchange controls were expensive. Broad competition policy does not work across industries equally, but that these issues need to be examined at the industry sector.

Dr Abedian, on the question of exchange controls, remarked that every policy has its set of institutions. We simply do not have the institutions in place to make changes. However, the sooner we start, the more progress could be made. Activity in the secondary sector is different than ten years ago. There need to be more effort in this sector, but labour intensity has diminished.

Mr Tsheole wanted to know the presenters' views on Black Economic Empowerment (with
R10billion in the budget set aside for new ventures).

Mr Mnguni wanted to know what type of people and skills were needed to advance the economy.

Professor Okeahalam responded that a number of countries have a history of adopting policies for Black Economic Empowerment (BEE). The problem is that a only small number of elites benefit from BEE. When we look at South Africa 30 years from now it has to be vastly different. These instruments of policy do not affect the people who are supposed to benefit.

Dr Abedian responded that the most important risk was maldistribution of wealth and income. BEE is a double-edged sword. The tertiary sector economy consists of skills and knowledge. The focus has to be on how broadly and effectively we disperse skills and knowledge.

Meeting adjourned.


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