The World Bank presented the ninth edition of the South African Economic Update, which focused on private investment for job creation. Four main points were made:
• The World Bank foresees only a modest and fragile economic recovery in South Africa for 2017/18 unless private investment accelerates.
• It suggests reorienting South Africa’s investment tax incentives towards agriculture, manufacturing, construction, and trade to encourage private investment and increase jobs.
• It is because the commodity supercycle has ended that South Africa’s agriculture, manufacturing, construction, and trade needs become much more competitive.
• By introducing more effectively targeted investment tax incentives, poverty can be reduced through job creation at no additional cost.
In the discussion, interrogation was lively as the presentation was found to be insightful. An ANC member said the report has contributed towards stimulated thinking about practical solutions to developmental challenges being faced in South Africa. Members raised concerns about a rating downgrade and if the new BRICS rating agency might lessen the influence of S&P, Fitch, and Moody’s; the effectiveness of South Africa’s current tax incentives; the impact of the volatility of the currency; the different effects that savings, investments, and debt has on South African households from different economic brackets; what impact will the new developments taking place in the United Kingdom and the United States have on developing countries. Examples were requested of other developing countries that have reoriented their investment tax incentives and have seen positive job creation outcomes.
The Chairperson highlighted the informative value of the World Bank briefing and its timing, considering that the annual budget will soon be tabled. He specifically mentioned the importance of the macroeconomic aspects of the presentation, stating that it should help prepare the Committees present to interpret the upcoming budget, as well as empower it to make more quality inputs.
World Bank on its Report on the South African Economy
Mr Sébastien Dessus, World Bank Senior Economist and Program Leader for Southern Africa, noted that this is the ninth edition of the report with is call the South African Economic Update, which follows the typical two-part layout. The first of these deals with recent macroeconomic developments and outlook; while the second focuses on policy issues relevant to the eradication of poverty and inequality as well as fiscal issues. Across this report, Mr Dessus said that there are four main messages, which he outlined briefly:
South Africa’s overall macroeconomic environment and outlook when compared to negative GDP per capita income growth of 2014, 2015, and 2016 is projected to see modest and fragile economic recovery from 0.4 percent in 2016 to 1.1 percent in 2017 and 1.8 percent in 2018.This recovery is not guaranteed and is subject to several downside risks unless private investment takes off. The challenges that South Africa, and other commodity-exporting countries, have faced ever since 2012 stem from the end of the commodity supercycle. This trend is reflected in the decline of the commodity prices globally. These lower prices have had a substantial impact on South Africa’s overall GDP growth, which per the Bank’s estimates has resulted in almost four percentage points of GDP growth being lost since 2012. Mr Dessus mentions that this shows how dependent and vulnerable South Africa’s economy is on commodity prices. Another aspect of this trend is that population growth has been greater than the GDP per capita income growth which is likely to have resulted in poverty rising in South Africa over the past three years.
Mr Dessus stated that sectors of the South African economy that have been driving growth in recent years are the financial sector and services; while agriculture has been volatile due to the 2015/16 drought, although there has been a slight recovery. On the other hand, the sectors that employ a lot of people, such as manufacturing and mining, have been growing very slowly over the past few years. Areas where jobs have been created since 1993, which is the focus of the report, have almost all been created in services. In contrast agriculture, mining, and manufacturing have shed many jobs. However, of these sectors it is manufacturing that is having the most positive externalities. What is meant by this is that manufacturing can increase exports and can service the country’s balance of payments; moreover, it has a multiplier effect which means when one job is created or there is value added to this sector, it indirectly creates jobs in other sectors. It is worrisome for Mr Dessus, however, that since 1993 manufacturing’s total share of GDP and accumulative investment capital stock has been declining.
The quality and speed of economic growth is largely insufficient to create the number of jobs required to reduce unemployment, poverty, and inequality. Mr Dessus shows this by taking the target of six percent unemployment rate by 2030, set by the National Development Plan (NDP). To achieve this, it would mean that 600 000 new jobs would need to be made annually from 2012 to 2030. However, on average since 2012, South African has been able to make only 250 000 jobs annually, most of which were created during the commodity supercycle. As a consequence of population growth and youth entering the labour market, unemployment has remained very high, particularly for unskilled and semi-skilled workers, and for new entrants such as woman and the youth.
Looking at what is driving South Africa’s growth from the demand side, such as private and public consumption, investments, exports, Mr Dessus saw that investment has been very weak throughout 2016 and most of 2015. This indicates that over time the productive capacity of the economy will slow, lowering the potential for higher GDP growth. Two points are raised here by Mr Dessus that are important to understanding the state of the South African economy. The first concerns the structural decline of the Rand since 2011, which has depreciated by nearly fifty percent. This has weakened South Africa’s competitiveness with the rest of the world in terms of imports. The second factor is the daily volatility of the Rand. While the first factor may have some positives in terms of export competitiveness, this second point is perceived by investors as highly negative. This is because they do not know what to base their economic calculations and computations. It is possibly due to this that local investors have tended in recent years to invest more abroad than locally. Exporting financial resources to projects abroad mean fewer jobs being created locally. This trend can be seen both in the foreign direct investment (FDI) side, with investment in new economic projects, as well as the portfolio investment side. This trend in FDI is particularly worrisome since this is where, as a country, you would want to see the most investments; from local investors first, as it is the base of South Africa’s economy, and from foreign investors second, which can bring new ideas and technologies.
From these points, Mr Dessus stated that the net position of South Africa’s economy is negative and it is only in 2018 where economic growth will outpace population growth, meaning that in 2017 GDP growth per capita will remain negative. However, in these circumstances, there are opportunities to attract more investment, which in the opinion of the World Bank report, is the most effective means to reverse the current trend of slow growth. Attracting investment Mr Dessus considers to be the path with the most leverage since today private consumption in constrained by household debt, the level high level of household unemployment, low public consumption and a lack of fiscal resources. Also, there is a present risk of a downgrade to below investment grade, which the Bank calculates would involve at least one percent point of GDP being lost, which would cost R1 000 per capita and would push more than 150 000 people below the poverty line. This constrains the authorities to use fiscal policy to stimulate the economy and alternative solutions need to be found from within existing fiscal resources. To avoid the downgrade, South Africa must convince the rating agencies that it is becoming more solvent and more able to service its debt. The best way to convince the rating agencies is fostering private investment which shows the potential of the economy to increase and accelerate growth over time.
Despite there being a slight rebound in commodity prices in 2017, which is good news for South Africa, it is not a strategy which the country can rely on exclusively. This is because there is still great uncertainty in commodity markets prices, the fact that during the commodity super cycle not many jobs were created, and there will be fierce competition in this space.
Focus on Private Investment for Job Creation
Mr Dessus introduced the second part of the report, which concerns the various options that might foster private investment. Per the report’s findings, the World Bank suggests reorienting South Africa’s investment tax incentives in the agriculture, manufacturing, construction, and trade sectors to fostering private investment and speeding up job creation. However, this is not the only way to encourage private investment and government must actively pursue multiple avenues. Of these other avenues, the Bank sees making industrial policy more effective, overcoming infrastructure bottlenecks, improve education and skills, strengthen labour relations, address competition and regulation shortcomings, and reduce policy uncertainty as some of the most important.
From this, Mr Dessus directed the focus of the presentation to South Africa’s industrial policy. Since South Africa has such a policy it is evident that the authorities recognise the strategic advantage of encouraging investment and allocating factors of production to specific sectors given the externalities or benefits they provides for the society beyond the jobs it creates directly and the benefit it gives to the investors. It is for this reason the Bank believes that encouraging private investment in certain sectors of the South African economy will be able to provide some of these externalities.
Since becoming a democracy, he noted that, investments have outgrown jobs. This means South Africa’s economy has become capital intensive, meaning that the productivity and salaries of workers have increased and that the South African economy has become more competitive. However, this also mean jobs have been shed in some sectors which are becoming more efficient and automated.
Capital has gone into sectors that had least capital incentives, which is services. So, if one looks at tax incentives it is important to look at the landscape in which those tax incentives evolve and the speed at which capital has moved from one sector to another. This is because if you would like to encourage that movement you would want to ensure that capital can move between sectors otherwise the new tax incentives would have no impact. What the World Bank report concluded is that in South Africa there has been significant movement of capital between sectors in search of economic opportunities and returns. This is a good signal; however, in recent years this movement has indicated a negative trend. The reason for this being negative is because capital has shifted to the sectors where the returns on capital are the lowest. At the macroeconomic level this investment trend, which is called losses of allocation or negative gains of allocation across sectors, has slowed GDP growth by at least one percentage point. Positive gains of allocations were seen and began to slow until 2008 and 2009 and turned negative from 2012 to 2016. Mr Dessus said that this “extremely worrisome” and reflects the disengagement of investors from the manufacturing sector.
Mr Dessus said that the Bank’s report also looks at all the fiscal systems that encouraged and discouraged investors from investing in certain sectors and the South African tax code contains many provisions specific to certain sectors. To calculate the returns for the investors based on the sectors-specific tax code, the Bank calculated the investors return on their investment for their last Rand invested, called the marginal effective tax rate. This calculation allowed one to see the impact of tax codes on the returns after the tax has been paid. Tax structures in South Africa’s manufacturing sector mean that for the investor to get a post-tax return of 10 percent they need to find an investment project that generates a rate of return, before tax, of 30 percent. This is because the marginal effective tax rate is close to 20 percent. In the mining sector, on-the-other-hand, the marginal effective tax rate is almost 0 percent so an investor would only need to find a project making a return of 10 percent before tax to get the same rate of return for a manufacturing project making a before-tax return of 30 percent. Due to the rarity of a project being able to overcome such high marginal effective tax rates, investors have been investing in sectors with lower marginal effective tax rates and much lower rates of return. So, he highlights the need to review South Africa’s sector specific tax codes, which is a viable means to overcome the negative gains of allocation which has been the trend since 2012, as well as shift capital to other more effective sectors.
Mr Dessus declared however that these calculations were made in 2012, before the introduction of the Department of Trade and Industry (DTI) incentives and talk only about general allowances for capital depreciation and corporate income tax rates.
The second issue that the World Bank looked at, based on marginal tax rate calculations, is the impact that tax incentives have had in terms of encouraging or discouraging additional investment. For the Bank to conduct this section of its report it relied on the Parliament Budget Office (PBO) report on the same tax incentives they were working with. Many of the same concerns are shared in that the goal of these incentives work and generate and encourage additional investment. To assess the impact of various tax incentives, one looked at the tax files collected by the South African Revenue Service (SARS) that allowed the Bank to examine the reactions of an individual firm to changes in tax incentives. What the Bank could deduce from this is that in some sectors they see a positive and systematic response to tax incentives, resulting in greater investment and thus fulfilling the purpose of the incentive. However, in other sectors there is no response or the response is so dispersed across firms that there is no convincing statistical evidence of the incentive serving its purpose. Based on this premise, the report calculated the various impacts of reoriented tax incentives across various sectors. The report found the sectors that would benefit most from tax incentives is agriculture, forestry and fishing, trade, catering and accommodation services, community, social and personal services, construction, and manufacturing; which also happen to be the sectors with the largest employment multipliers. This drastically lowers the fiscal cost of creating jobs. Mr Dessus gave the example that for manufacturing where for every job created directly, five are created indirectly. Thus, calculations need to be made to determine where tax incentives would be most effective as well as eliminate those that are not effective. This will help make incentives overall much more effective since you would be concentrating tax incentives where they are most useful and the saving that was recovered from increasing efficiencies, can be redistributed to where they are most needed.
The third message is that the end of the commodity supercycle in 2012 requires South Africa’s agriculture, manufacturing, construction, and trade to become more competitive and realigning investment tax incentives towards these sectors may amplify growth and job creation. This requires fostering new competitive advantages which will be relocating capital away from mining.
The fourth and final message in Mr Dessus’s presentation looks at the impact of job creation on poverty reduction. From the report's analysis, they concluded that creating jobs is unfortunately not enough to reduce poverty and instead the good quality jobs are more impactful. Therefore, capital investment and investment education are vital as it make workers much more productive and they can reap the benefits. Therefore, good industrial policy is needed as it will raise the wages of the workers; moreover, is that through better-targeted investment tax incentives poverty can be reduced through job creation at no additional fiscal cost.
Dr M Figg (DA) thanked the World Bank for its insightful presentation and put forward several questions. He asked why, with the end of the commodity supercycle, the GDP per capita growth has declined and if this is not due oversupply. If this is the case, is it not feasible to regulate supply as they do for crude oil to increase prices? He referred to South Africa’s GDP growth being well behind the target set by the NDP, which is in its third year and suggested it is not working, and asked when could South Africa expect to reach the 5.3 percent target. In Mr Dessus opinion, should the NDP targets be revised? He commented on the prospects of a ratings downgrade and suggests that government’s solution is to place more emphasis on a Brazil, Russia, India, China, and South Africa (BRICS) rating agency than traditional agencies, even though investors tend to look mostly at the ratings of S&P, Fitch, and Moody’s. Would investors also look to the BRICS ratings as much as government would hope they would? He asked why the periods describing the different trends of capital allocation are not made equal as he believes this will make it easy to manipulate the figures.
Mr Dessus replied on the supply of commodities and the introduction of a cartel, saying this will serve the purpose of controlling supply and prices. However, this will introduce aspects of collusion between countries which is something that would be harmful to other countries and is not something that is desired internationally. He also is not convinced of its feasibility because there is much more dispersion amongst commodity producers than oil producers. The most important issue he sees is that excessive reliance on commodities negatively affects job creation and is not sufficient to reduce poverty.
Mr Dessus addressed revising the NDP goals and said that they are probably too ambitious and could be revised. He does see value in the NDP, which exercises long term planning. However, based on international experiences, these types of long term plans are almost by definition always too ambitious. This is positive since it shows a shared aspiration in a country and the NDP does have meaningful and practical goals such as reducing poverty and inequality. The areas that need to be revised should be adjusted based on evidence and what can be done to advance as much as possible over the defined period. The World Bank is currently working with the National Planning Commission to evaluate aspects that have been working and those that have not. In this they are looking to be more selective of goals, given the country’s strained resources, so that it is still able to progress as far as possible.
In terms of the rating agencies, he mentions a shared disdain for them and it is not only South Africa. This is because no country likes to be told by a private agency, which has not been elected, what the future of your country will be. However, for some reason, they can convince investors and if the BRICS agency can do this then that is fine.
Finally, Mr Dessus replied that they did not decide on the periods and have based the periods on the trends that are observable.
Prof Seeraj Mohamed, PBO Deputy Director of Economics, commended the value of the Bank’s presentation which he says reflects a shift within the World Bank itself in that it is thinking more about industrial policy and the allocation of capital across sectors and the social returns of capital. Additionally, he thinks this report can help South Africa to think through its problems, especially in terms of unemployment.
Prof Mohamed went on to make several points, the first of which concerns the allocation of capital. For this, he referred to his own work which has drawn from heterodox economics influences that argue points about financialisation and applied this to the South African context. From this, referring to periods of capital allocation, he saw during the period after 2002/03 there were inflows of short-term foreign capital into the South African economy, especially portfolio flows into the stock exchange. This drove a certain type of investment and reallocation of capital, unfortunately, away from productive manufacturing and towards finance. He noted that if we look at the period between 2003 and 2008 you can see a 22 percent increase in credit granted to the private sector that resulted in capital growing between 4 and 5 percent. So, for him the big question for the South African economy is what happens to the others and why are we not getting fixed investment when we have seen such a large increase in debt that comes from having such large inflows of short-term investments into the economy. A related point is that we have seen growth during this period driven by detriment consumption and speculation in financial markets and real-estate markets and so we need to thinking about tax incentives, especially in the mining and manufacturing sectors, considering the benefits of wholesale retail and in finance.
Prof Mohamed referred to the World Bank’s work and data on employment. For him,it is important to separate business services out of finance sector employment calculations. This is because if we look at the employment growth in finance during the period shown we see that most of these jobs are in business services which are linked to the reallocation of capital away from productive manufacturing. This is linked to the growth of labour brokering in South Africa, meaning that many firms were outsourcing jobs, such as cleaners, to these brokers. This means that these jobs are then measured as business services and many people are persuaded to think that the financial sector is contributing more than it is to GDP and employment growth. So, for him, it is important, for clarity, to separate out business services contributions from the financial sector contributions to GDP and employment growth figures, as many of these jobs in business services are precarious, low-paying and have contributed to inequality and poverty.
Prof Mohamed said the financialisation that is linked to finance and the inflows of short-term capital and its volatility is closely linked to the exchange rate volatility referred to in the Bank’s report. For him this is an important factor in understanding why we are not getting manufacturing and productive services investment and a shift and reallocation of capital towards other sectors, especially finance and real-estate. On real-estate, during the period of growth, there were greater increases in real-estate prices here in South than anywhere else in the world, which in part is a bubble being driven by foreign capital inflows. This also brings him to the comments about the impacts that the Bank expects of a rating downgrade, saying that he thinks that the period under evaluation is too short accurately to determine its effects. However, capital flight is a call for genuine concern which is again related to short-term capital investments and is partly responsible for the loss of jobs after the global financial crisis.
Prof Mohammed responded to Dr Figg’s concerns about the BRICS rating agency, saying it provides alternatives and provides more sympathy and experience of developing economies and their needs. So, this does not mean that they will look at what S&P, Fitch, and Moody’s say versus what the BRICS agency is saying. There is a lot of room for competition in the rating agency space for business.
Ms D Senokoanyane (ANC) commented on the various sectors which can become the drivers of economic growth as noted at the beginning of the presentation. This is useful to her as a member of the Appropriations Standing Committee. However, acknowledging that she does not have a strong background in economics, she would like more information about the weakening Rand discouraging imports and encouraging exports and foreign and domestic factors that contributed to low foreign investment to help her better understand the presentation. She asked what are the domestic constraints that slow GDP growth, for example, what does it mean to reduce policy uncertainty and improve education and how would she be able to go about this.
Mr S Tleane (ANC) saw the thrust of the Bank’s proposal as South Africa should review its investment tax incentive structures in specific sectors which it suggested could possibly improve job creation. He noted that South Africa already has an incentive bouquet, which includes investment tax incentives, which is already very attractive to investors and has been for a long time. However, he is not sure if this has translated into improvements in job creation. So, his question is, given Mr Dessus’s experience in other developing countries, are there any examples of other countries that have reoriented their investment tax incentives that have seen positive job creation outcomes that South Africa can follow.
Mr N Gwabaza (ANC) acknowledged Mr Tleane’s points but reflected on the need to reprioritise incentives in a manner that does not negatively affect the national fiscus, and asked if this is what the Bank is suggesting. Referring to the unpredictability of the national currency, he pointed out that South Africa has a floating currency and asked what should be done to arrest this volatility and what other countries have done with a similar system of currency management to control volatility. On the indebtedness of South African households, he suggested there has not been enough investigation into what drives household debt beyond simple consumption and asked if more discussion could be had on this point.
Ms S Shope-Sithole (ANC) agreed with Prof Mohammed that there is space for more competition in the rating agency space and the current lack of competition is something that worries her. She questioned why rating agencies continue intimidating South Africa and in her own research, she found the reason is because of political instability which they say will persist until the ANC goes to conference this year and the elections in 2019. She made the point that other countries like the United Kingdom with Brexit and France and other European countries where there are upcoming elections, there is also uncertainty. Why is uncertainty being more commonly used to describe countries similar to South Africa who are still developing. She argued that there is no uncertainty here in South Africa because the ANC is going to conduct its business properly until they win again in 2019 and that the biggest uncertainty is with Brexit.
Mr Dessus responded that he will able to answer all the questions, but he will do his best to provide some opinion to address them but he cannot give a definitive answer for some points for which the report did not consider. He forgot to mention earlier that the report was commissioned by the Davis Tax Committee and this is a partnership that will continue looking at the efficacy of various tax incentives and policies.
On Prof Mohamed’s questions, he replied that due to the limited space on the slide some information was left off and in the report, financialisation was distinguished from investment in more detail. Moreover, he agreed that the report could go into more detail about employment in the financial sector. He agreed with the concerns raised about the exchange rate volatility that is linked to the high rate of financialisation of the economy, the openness of the capital account, and the ability for investors to arbitrage between different options daily, which is a challenge that the economy needs to overcome. He explained that there is no clear solution, but what one can see from the literature is that a lot of the volatility in the balance of payments and the capital account of the balance of payments is not only due to short-term investment but is also linked to commodity pricing. This shows the importance of the mining sector to the economy and it drives both positives and negatives. At this point, Mr Dessus felt that he cannot go much beyond this as it is something that will require more investigation which is currently being done by the Reserve Bank and themselves to better understand the link between investment and volatility.
On the interoperability of the report, Mr Dessus said that there is constant work going into striking a balance between being technically credible and accessible so that these reports are useful when decisions are made.
On Ms Senokoanyane queries about the role of imports and exports, Mr Dessus explained that when the Rand is depreciating, imports are becoming more expensive when compared to goods produced locally and these locally produced goods also becoming more competitive both locally and on export markets. However, it is more complicated than this since South Africa’s production process incorporates many imported goods. In terms of reducing policy uncertainty, he admits that he does not know exactly what it means, although they are working towards developing a better understanding. On improving education, there are a few options that can contribute towards improving basic education in the medium term which will see fewer children than adults meaning that more resources can be invested in the education system per student. This will require a lot of planning due to population movement and other demographic changes. He raised a point here about implementing tax incentives to encourage that youth be accommodated in the job market and allow them to get professional experience, which is something he has seen in other countries.
In reply to Mr Tleane and Mr Gwabaza questions on the effect of the current tax incentives, Mr Dessus said that some are working, in that they are generating additional investment; while others are not and are wasting fiscal resources. Thus, if you are able to focus the incentives where they work you are able to increase the efficiency of the overall tax incentive structure. He does not have examples of where this has worked, but he believes developed countries are a good example of effective uses of tax incentives. However, there is a need for there to be investment opportunities available to an investor in the first place and tax incentives are meant to make the opportunities more attractive. Therefore, the report has focused on sectors that provide comparative advantages and are emerging. On the floating currency, he acknowledged again that volatility is harmful and is also linked to the exchange rate regime, financialisation, and fluctuating commodity prices. However, he does know of the instrument that should be implemented to correct this, but does think that that this is a discussion that needs to take place within government to see what can be done to address this problem. In terms of household indebtedness, he said that this is an important discussion, however he did not have the answer to this but thought these concerns and questions were very well placed. He does, however, give some insight into a study currently under way, which is a poverty assessment, and is looking at household surveys to determine their consumption, income, and debt. This he said is one way in which the welfare of the people can be determined.
In response to the comments about uncertainty and the rating agencies, he acknowledged that there is a lot of uncertainty in the world currently and this is not only a condition exclusive to South Africa. However, he cannot comment on what the rating agencies are writing since they write what they want and people take from it what they will. He suggested that if you are concerned about the rating agencies, it will be useful to convince the rating agencies that you are heading a positive direction. However, the World Bank is not a rating agency and he understands the frustrations that the rating agencies can cause.
In response to this last point, the Chairperson commented that she thought Mr Dessus was going to say the only thing is to avoid being downgraded.
Mr Dessus replied that a downgrade would be a negative outcome for South Africa; nevertheless, this will not be the end of the world. He sees it a symptom of perceptions that investors have of fiscal policies that need to be addressed. However, the downgrade should not be the centre of attention and South Africa should rather focus on expanding the quality of its fiscal and economic management overall for job creation and poverty reduction, which for the rating agencies, is not an objective they look at in itself.
Dr Mmapula Sekatane, PBO Policy Analyst, said that as a country we need to move in a direction that will achieve the goals of the NDP of doing away with unemployment and poverty. Wih the Budget Speech coming up next week, they need to ensure that it will make provisions that will service the NDP goals, specifically the need to provide adequate finance for its goals.
Mr Rashaad Amra, PBO Economic Analyst, said this discussion about adopting more efficient fiscal stimuli, which the industrial policy forms a vital part, is of critical importance in a constrained fiscal environment. He is glad to see that they are no longer having “should we or shouldn’t we” arguments about advancing fiscal policy, but are rather looking at the way forward. He looks forward to working with the World Bank. Next week the PBO will be presenting to a joint sitting of the Standing and Select Finance and Appropriations Committees about the PBO pre-budget statement work, so he would like to see continued discussion.
Ms E Coleman (ANC), Chairperson of the Portfolio Committee on Economic Development, said that the presentation was eye-opening, but noted that some of the issues are already being dealt with as a country. She thinks that the tone has been set through the State of the Nation Address (SONA), as far as commitment to full implementation of the NDP. She asked about addressing domestic constraints that will help to increase GDP growth, noting Mr Dessus spoke of constraints around competition and regulation short-comings. Could he elaborate on this and give examples. The President indicated that there will be amendments to the competition law, and she thinks it will be interesting to get Mr Dessus’ point of view. She also asked for his opinion on the motor industry incentives and if they contribute positively to job creation.
Prof Mohamed asked if the work between the World Bank and Davis Tax Committee is looking at base erosion, which he sees as having a large impact on South Africa’s fiscal space. He referred to Mr Gwabaza’s query about household debt and said household debt is very different between rich and poor people. Rich people will save in institutional investments such as pension funds, but they take on debt to pay for houses and cars and part of the escalation in house prices is linked to this. So, even rich households have debt, but it is offset by their savings for their retirement. On the other hand, poor households are accumulating debt yet are unable to save because of poverty and inequality. He said that it is important to understand that different households are affected differently by investment, savings, and debt.
Ms M Manana (ANC) asked what impact does the World Bank think new developments taking place in the United Kingdom and the United States, will have on developing countries.
Mr Dessus replied about the concerns about concentration. There are at least two issues. One involves the enforcement of existing regulations and anti-cartel laws, which was the topic of the previous update. In this area, there has been a lot of progress in enforcing existing regulations. Second,with regards to new competition laws, he does not know what they entail yet. However, if you look at the micro-level data there is the striking fact that the top one percent of firms have created about 50 percent of the jobs and value add in the country. This shows the extent of the concentration in the economic and bargaining power that very few firms have and suggests that it is not difficult to imagine that they might take advantage of their position for their own benefit. This makes it more difficult for smaller, and often more innovative firms, to enter the economy. Although he does not know the exact details about the proposed changes in competition law, they will be vital to the prospects of the country’s economy.
On the tax incentives in the automotive industry, Mr Dessus noted the data set that they looked at in compiling the report only went up to 2012, and these specific incentives were not yet in place until 2013. However, he understands them to be particularly generous when compared to the rest of the manufacturing sector. In addition, the automotive industry tax incentives have accounted for about 10 percent of total investment in the manufacturing sector since 2012. This, however, does not change the overall picture in terms of the contrast between the mining and the manufacturing sectors, in relation to effective tax rates. For now, however, he cannot comment on the effectiveness of this specific tax incentive yet, but it is something the Bank is going to consider soon.
He said that base erosion and tax evasion is not something they are looking at specifically. He did say, however, that they will be starting to look at the role of the big firms and their decisions to invest abroad, which influences tax collection and economic activity. This is also a contributing factor to the country’s negative net foreign direct investment position.
On recent developments in the UK and US, he replied that there is still a lot of uncertainty about what it will mean for trade policy, migration policy, and foreign aid. Anything that hinders trade between these countries and the developing world would be detrimental to the developing world.
Mr Dessus said that the World Bank is willing to conduct and present reports more often to bring more to the table.
The Chairperson said that this had been an interesting engagement. She commented that the marginal economic recovery predicted in the report, and how this might be accelerated, has given them some hope.
The Portfolio Committee on Economic Development Chairperson, Ms Coleman, thanked the World Bank’s representatives for the work they have done and are doing, which is key to this Parliament’s work. The briefing stimulated thinking about practical solutions to the developmental challenges faced and any contribution towards the development goals is greatly appreciated. She also thanked the PBO and hoped that they will brief her Committee on the new budget.
The Chairperson adjourned the meeting.
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