Macro-Economic Policy Budget hearing

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Finance Standing Committee

28 February 2005
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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES, AND JOINT BUDGET COMMITTEE
1 March 2005
MACRO-ECONOMIC POLICY BUDGET HEARING

Chairpersons:

Dr R Davies (ANC) [NA], Mr M Nene (ANC) [Joint Budget] and Mr T Ralane (ANC) [NCOP]

Documents handed out:
 

University of Cape Town Development Policy Research Unit briefing
Econometrix briefing
Standard Bank briefing

SUMMARY
The Standard Bank presentation outlined issues such as the position of the Rand and the tax relief position; the aggregate consumer spending demand from 2002-2004; the state of debt exposure for the past 12 years; the progress made in relation to debt affordability and export rates; and household consumption. The UCT Development Policy Research Unit presentation outlined a snapshot of key labour market trends from 1995-2002, the sectoral share of employment between 1995-2002, the share of employment by three skills categories, the unemployment rates by race and gender between 1995-2002 and the tertiary unemployment rates by race and gender 1995-2002. The presentation by Mr Tony Twine provided background information on the macro- versus micro-economic dynamics, government policy and political power, the current macro-economic policy of the South African government and the potential conflicts from current micro-economic policies with special reference to pharmaceutical pricing interventions and Black Economic Empowerment (BEE) Regulations.

During the discussion, the Committee sought clarity on the following issues:
- whether government’s BEE strategy could be improved;
- whether the Barclays Bank merger posed any threats to job creation;
- the consequences of the gap between Standard Bank growth of exports figures and those predicted by Treasury;
- whether the fuel increase had any consequences for inflation targeting;
- whether the cost of doing business in South Africa was reasonable;
- the measures that needed to be put in place to make a meaningful impact on the ever-increasing labour force;
- whether government should completely abolish the exchange control regulations;
- whether government had invested sufficiently for the projected economic growth over the Medium Term Expenditure Framework (MTEF) period;
- whether the promotion of growth of the economy alone and the failure to address any structural problems within the economy would provide a solution;
- whether tax cuts were an appropriate policy instrument to ensure economic growth;
- the reason for the high unemployment rate of tertiary level graduates and the fields that were most plagued;
- whether the inflation rates of countries in the region would be reduced to below double digits by the 2018 target date;
- whether the unemployment figures included the informal employment sector;
- why South Africa was consistently at the bottom of the poll of economics forecasts and real economic growth; and
- whether the skills shortage would severely constrain growth of the economy in the near future.

MINUTES

The Chairperson stated that the Development Bank of South Africa (DBSA) representative would not be addressing the Committee as initially planned.

Standard bank briefing
Mr Goolam Ballim, Group Economist, outlined the position of the Rand and the tax relief position; the aggregate consumer spending demand from 2002-2004; the state of debt exposure for the past 12 years; the progress made in relation to debt affordability, the annual percentage change of annual GDP to the fiscal balance of GDP, Standard Bank and National Treasury figures on gross domestic expenditure, export rates and household consumption, Rand fundamentals, the Rand exchange rate, as well as a sectoral mix of GDP.

UCT Development Policy Research Unit briefing
Mr Haroon Bhorat, Director, outlined a snapshot of key labour market trends from 1995-2002, the sectoral share of employment 1995-2002, the share of employment by three skills categories, the unemployment rates by race and gender 1995-2002 and the tertiary unemployment rates by race and gender 1995-2002.

Econometrix briefing
Mr Tony Twine, Director and Senior Economist, provided background information on the macro- versus micro-economic dynamics, government policy and political power, the current macro-economic policy of the South African government and the potential conflicts from current micro-economic policies with special reference to pharmaceutical pricing interventions and Black Economic Empowerment (BEE) Regulations.

Discussion
Mr Ralane requested Mr Twine to elaborate further on his own reservations regarding government’s BEE strategy.

Mr Nene asked Mr Twine to explain what should be done to best address the problems he outlined with government’s BEE strategy.

Mr Twine responded stated that this was attributable to one particular economic aspect, which was that it assumed that "the black resources are sitting there waiting to be empowered", that the necessary skills were already there, that the interface with the rest of the first world economy within South Africa all existed. He stated that he doubted whether this was in fact the case, as the Minister of Finance expressed his concern with lack of skills within government. He assured the Committee that the skills available to the private sector were no more abundant than they were within government, and if the Minister was sweating about skills "you can imagine what we in the private sector are doing".

Mr Ralane asked the presenters to indicate the implications and threats of the Barclays Bank merger for job creation as well as far as the Financial Sector Charter was concerned.

Mr Ballim responded that the merger was likely to be negative for job creation as it would seek to minimise the damage caused by the run up in the share price. He doubted whether a re-rating in the market was envisaged as was initially expected, and would thus pay substantially more than when the idea was initially spawned. Apart from seeking to recover the initial investment from a variety of other institutional and organisational areas, there was certainly the scope for almost downloading a variety of its capital market and corporate banking operations as well as its off-shore strength into its local operation. This would result in some element of job shedding, particularly in the highly skilled area.

Banking was largely becoming more technology driven, as they were shifting from interest income towards trading revenue and product innovation. He stated that Barclays Bank would help immensely while South Africa had a fairly dynamic and sophisticated financial sector. The developed world dynamics into the local market would help in terms of perhaps lowering cost structures, but also providing more innovative structures for businesses to enhance profitability and also to mitigate risk.

With regard to the financial sector charter, government could do little more than nudge the transformation process into being willing participants or perhaps a negotiated settlement as, in many respects, the charters were precisely that. The important issue was leverage and whether South African authorities had sufficient power to influence international institutions, and it was for this reason that he doubted the mass migration of foreign banks into South Africa. He submitted that one international institution that took over one South African institution did not necessarily create that kind of environment.

Mr Bhorat replied that he was not aware of the specifics of the deal, but it depended on the new cost structures that Barclays Bank was currently considering. The repatriation of profits was also an issue and would impact on job creation, as well as the management structure envisaged.

Mr Ralane sought clarity on the implications of the fuel increases on inflation targeting.

Mr Twain responded that for the month of March it would add 0.46 percentage points to the CPIX inflation rate. Thus if the current CPIX rate was at approximately 3.5% it would virtually close the gap back to 4% for the month of March. Indirect and knock-on effects were extremely difficult to measure, but he assured the Committee that these effects were far less prevalent with a CPIX figure of 4% than a figure of 14% and above, as was the case in the mid 1980’s. In the current inflation environment it was much more difficult to cheat and pass funds off as transport costs or floor prices.

Mr Nene sought the presenters’ opinion on National Treasury’s statement that South Africa’s impressive growth was characterised by strong consumer demand, but was also met by muted supply side response.

Secondly, he asked Mr Bhorat to indicate what needed to be done and whether government’s interventions that related to the reduction in the cost of doing business could assist the situation.

Mr M Stephen (UDM) [NA] stated that the cost of doing business in South Africa was comparatively high, and diminished the opportunities for businessmen as the cost of capital remained relatively high. He proposed that the cost of business should be reduced by lowering the cost of capital.

Mr B Mnguni (ANC) [NA] asked the opinion of the presenters on the cost of doing business in South Africa, and whether it was reasonable.

Mr Bhorat responded to these three questions by stating that there were two key factors that acted as a restraint on investment and therefore job creation: the first was crime and the second was the labour legislative environment. With regard to crime it was generally accepted that the perception of the foreign investor regarding the crime levels in South Africa was the deciding factor, whether or not that perception was factually sound. The second was a tougher issue and he argued that a softer approach would be to consider the functioning of the Commission for Conciliation, Mediation and Arbitration (CCMA). The cost of conciliation, mediation and arbitration in terms of time and inefficiencies was huge, and that alone acted as a labour market constraint. Both unions and employers would agree that the CCMA needed to become more efficient. This would be preferable to simply reducing wages.

A statistic gathered from employers in the greater Johannesburg area indicated that the cost of terminating a manager was one third of the cost of firing a labourer, and this cost included the CCMA process. Thus it was very specific to a skill level and the legislative environment with regard to "hiring and firing" was huge.

Mr G Schneeman (ANC) [NA] asked Mr Bhorat to indicate what needed to be done to make a meaningful impact on the ever-increasing labour force.

Mr Bhorat replied that problems with crime, the labour legislative environment and domestic investment needed to be addressed in order to "kick up the demand for labour". Yet on the supply side a key factor would be improving the schooling system, the Further Education and Training (FET) system as well as the higher education system. The problems here ranged from poor incentive structures for maths and science teachers, the lack of resources, large classroom sizes and the improper focus placed on the matric pass rate. Nobody ever looked at the exemption rate that was the key indicator, yet it was drastically lower, let alone the exemption rate for students with maths and science. If this was considered by race, the results were "shocking". He suggested that the national psyche needed to move away from focusing on the pass rate as it was a meaningless figure.

The actual question was how many matriculants had a pass that was of a quality that allowed them entry into a higher education institution and, furthermore, how many of those had maths and science. Focusing on the exemption rate was the very supply characteristics needed to improve the probabilities of employment for the youth, including the enhancement of the FET system. .

Mr Mnguni asked the presenters to express their views as to whether government should completely abolish the exchange control regulations.

Mr Ballim responded that he was concerned when the pendulum swung the other way, when there was a build up of capital in South Africa simply because its returns over the last 2 years have compared favourably with other emerging markets and far superior to the developed markets. He believed that government needed to be cautious of brisk liberalisation of foreign exchange control. A time would come when the proposition for South African investment would be less seductive than in the developed world, because when the concentration of savings in the local market turned it would yield the capacity for lumpy flows exiting the market. This would then impact on the psyche of the market and what has traditionally been a very volatile currency.

Mr Mnguni asked whether the presenters were convinced that government had invested sufficiently for the projected economic growth over the Medium Term Expenditure Framework (MTEF) period.

Mr Ballim responded that he was concerned by the current account deficit, but not alarmingly so. He proposed that it should rise to around 3 or 4% for the coming year and perhaps would remain at that level for 2006. South Africa never before was as well placed to receive foreign direct investment as it was right now. There were currently 90 basis points between South Africa’s sovereign bonds and American treasuries, which means that they were prepared to pay only 90 basis points in risk assessment over and above the American treasuries. This was testimony to the profound transition, performance and growth of the economy over the last 10 years. Thus from a portfolio point of view South Africa was currently less attractive than it was in 2004 because the stock market has rerated, and it could still exhibit growth rates of 10-15% in the stock market. Treasury was also playing its part by attempting to raise approximately US$1,5bn this year. He thus believed that the current account would be serviced.

Mr Van Dyk (DA) disagreed with Mr Bhorat’s assertion that the employment figures were low and unemployment figures were high simply due to an increase in the labour force, as the fact of the matter was that a higher growth rate of between 5-6% was needed for the next 10 years to properly address the unemployment rate.

Mr Bhorat replied that he indicated during the presentation that in the context of the jobless growth debate, for the given level of growth rate the employment performance matched well. This was very different from saying that the growth rate was currently insufficient to absorb new work seekers. He agreed with Mr Van Dyk that in order to get to the 52% target growth rate a much higher level of economic growth was needed, and the trajectory needed to continue. Thus 6-8% of sustained levels of growth was needed.

The Chairperson stated that both Mr Ballim and Mr Bhorat were suggesting that the higher growth that was exhibited would not itself solve the unemployment and poverty problems, as there were serious structural issues in the labour market. He asked the presenters to indicate whether the promotion of growth alone and the failure to address any structural questions would not solve any of the major problems facing South Africa. The structural issues must be addressed through a series of programmes and government must thus be focusing on the expenditure programmes within the budget that dealt with job creation, sustainable livelihood and promotion of training.

Mr Bhorat responded that it was clear from international research that growth was a necessary but not a sufficient condition for poverty reduction and employment creation. He stated that he was currently conducting research that suggested that over the same period, even though South Africa had growth, the process of growth helped reduce poverty but there were redistributional shifts within the process. Thus the process of growing inequality in fact resulted in an increase in poverty levels, which was probably the danger as the nature of growth needed to be pro-poor. If there was no pro-poor growth, even in the face of 8-10% growth rates for several years, the creation of high levels of inequality in the process could result in a society that was poorer in the aggregate. He agreed that higher growth rates were needed, but government should ensure that the nature of the growth did not create further poverty. This was currently the problem in China.

Mr Ballim replied that the productive base of the economy must always be the first point of concern. Human capital investment and social investment was also important, apart from economic investment. The capacity of individuals to participate in the economy must be enhanced. A study has shown that in India an increased budgetary allocation to improve basic health and education has increased the capacity for individuals to participate in the economy, particularly for women. It appeared that the South African budgetary allocation seemed to have been informed by that thinking.

A blended approach was needed to address the structural problems. The new regime inherited a system that was designed to cripple black people intellectually, and this placed a structural hangover on the economy. Government cannot adopt a pro-growth approach that did not deal with structural issues, yet hope that that pro-growth would be sustainable. Instead a series of short term thrusts with good growth rates was preferable as this would ultimately destroy structural bottlenecks either in the labour market or capital resources.

Mr Twine responded that his presentation was arguing from example and not from any position of deductive reasoning. There were surely lists of micro-economic interventions that were working towards the same direction as macro-economic policy, however he requested the Committee to consider whether there were some that were not and whether anything could be done about them.

Mr Stephen asked the presenters to indicate whether tax cuts were an appropriate policy instrument to use in the current stage, given the fact that South Africa had a very strong consumer demand and a very dampened response from the supply side. Government was in danger of increasing the disequilibrium between the supply and demand sides. The macro-economic situation was still such that the increased demand would be met much more economically by importing the products than by increasing productive capacity within the country.

Mr Twine responded that there has been a demand-led growth in the South African economy and, within that, there was a slight dominance by the contribution of consumer demand growth as opposed to fixed investment growth. When the South African Reserve Bank (SARB) released its demand side figures at the end of March 2005, fixed investment growth during 2004 would be faster than private consumption growth. Of course fixed investment spending in South Africa was only around 15-16% of spending on GDP, whereas the spending by households on consumption items was somewhere over 60%. As it was four times the size it only needed to grow at one quarter of the rate to out-perform the Rand contribution for fixed investment spending.

He stated that tax cuts were probably a good response on the policy front, because the Minister of Finance had only given back what he did not take last year. Direct personal tax receipts budgeted by the government will grow by 5.3% this year, thus ahead of the generally predicted inflation environment. The Minister was thus really softening the blow, and was not truly stoking a fire as might be imagined. He cautioned against being "hypnotised" by cuts in indirect taxes. Over the past 5-10 years the rate of indirect taxes that affected individuals, such as the ‘sin taxes’ and fuel levies, had grown steadily and within each R100 of gross income for consumers, the amount taken by direct tax was overtaken by the amount taken by indirect taxes.

Mr Bhorat replied that tax cuts would yield an inelastic response for as long as the high costs of doing business continued to exist.

Mr Ballim responded that a balance should be struck between various forms of fiscal injection. Government spending that was geared towards investment tended to have three-times the multiplier effect over the long-term on GDP growth, as opposed to tax relief to individuals. The preferred option was an optimal allocation and a weighting towards productive investment. It was also related to the Gini co-efficient, as tax relief was not geared towards allowing individuals to purchase a second home but tax relief was aimed at the poorest of the poor. Thus targeted tax relief towards lower and middle income individuals as far as it lowered the Gini coefficient was an investment in social cohesion, and a longer term investment in sustainable economic growth in solidifying the current trajectory of the political cycle. Any attempts to quantify this purely in terms of Rands and cents divorced from the political cycle would be partial.

Dr P Rabie (DA) [NA] stated that Mr Bhorat indicated that South Africa’s unemployment rate of tertiary level graduates was very high, and sought clarity on their fields of study as well as the international norms.

Mr Bhorat replied that his presentation indicated the massive increase in tertiary unemployment. Most of the increases both in quantity and rate terms were attributable to African unemployment, which ranged from 10-26%. There were increases across the other race groups, but the percentage change and quantity change was smaller. This meant that something specific was happening in the accumulation of human capital by African individuals as opposed to non-Africans. There was however no firm data which suggested what was driving this, but there were quasi-quantifiable reasons. The first was public sector restructuring, as many individuals with a tertiary qualification lost their jobs in the period. This appeared to allay fears as the problem could then be attributed to a once-off occurrence. Yet the other reasons appeared more chronic in nature, and indicated that African individuals more so than non-Africans tended to accumulate tertiary qualifications "in the wrong fields of study".

The important consideration here was that the tertiary qualification was not homogenous as a philosophy degree was not the same as an engineering degree, which meant that especially at the higher end level the racial representivity according to field of study was skewed. For Africans it was skewed towards the humanities and away from the hard sciences, which was a key area because the demand for labour was at the top end for skilled labours but was of a specific type, such as IT engineers and chemical engineers. It did not necessarily include a strong need for doctorates in philosophy. The third reason was the signalling effect. Employers perceived a degree from a historically disadvantaged institution as being of a lower quality than one from a historically white institution. The fourth reason was unofficial continued discrimination.

This related to the difficult question of the kind of skills required. The Department of Labour conducted a study on firms’ hiring preferences, which indicated that there was a glut of MBA graduates with a human resource specialisation and a shortage of those with a specialisation in finance. The point was that it was extremely difficult to pinpoint the skills that were required by the economy in the long run as they changed all the time.

The experience of South Africa’s trading partners differed from one country to the next. He stated that he did not have hard data but in Germany the uptake in employment was greater because of the unification issue, as most of the unemployment was caused by the loss of jobs by East Germans.

Ms J Fubbs (ANC) [NA] sought clarity on the kinds of skills that were required by the economy, and what the gender mix was. Clarity was needed on the percentage of women that were employed at the low income level.

Mr Bhorat responded that the growth in the services sector has meant that the barriers to entry for women have in fact been lowered, and it was thus easier for women to gain entry into employment. This was the reason for the significant increase in female employment relative to male employment.

Ms Fubbs stated that the presentations all appeared to suggest that the regulatory framework was the primary problem and needed to be reviewed, rather than measures such as tax cuts.

Mr Ballim responded that for as long as the marginal return of investment superceded the marginal cost, firms would be inclined to invest in the economy. The little changes introduced by government regarding the process of establishment of small businesses were very encouraging in so far as it lowered the marginal cost threshold, and this spoke directly to profitability. Small businesses comprised roughly one third of the overall GDP in the local economy, whereas the norm in the developed world was double that. Thus the potential for South Africa to generate greater employment gains and value additions in those areas was substantial. He added that Standard Bank has been reinvigorating its small business handling.

Mr Bhorat replied that Ms Fubbs was partly correct, but crime levels, resources and commitment were also important factors. He preferred to think of these as constraints on doing business rather than costs.

The Chairperson and Mr Nene asked Mr Ballim to explain the consequences of the gap between Standard Bank’s growth of export figures and those of Treasury.

Ms Fubbs requested Mr Ballim to explain the default position adopted by Standard Bank with regard to the export figures, and questioned whether the focus placed by Standard Bank solely on the fluctuation of the American Dollar was a sound route to follow.

Mr Ballim replied to these three questions by stating that currency was a relative price, and it thus related to the relative fundamentals of the two economies. Over the long term currency would gravitate to some form of equilibrium or purchasing power parity (PPP). In 2001 the Rand’s PPP value was R6 but the reality was that the market value was R13.85, thus while the current purchasing price value was approximately R6 it was plausible that this could result in R5.50. Standard Bank has argued consistently in the face of contentious opinion that South Africa would yield a strong currency. The reason was that, although currency could be partially explained in terms of a long-term equilibrium model that looked at growth and money supply differentials, there was also an element of error correction which explained currency rates. It was a popular model in explaining the Rand because of the deviation from trends.

The fact of the matter was that the current environment was, broadly speaking, averse to the American Dollar. He stated that he dissected his currency analysis into two areas: merit and default. Merit dealt with how much of a currency’s appreciation was premised on underlying fundamentals, whereas default dealt with how much was simply reflecting the weaker American Dollar. South Africa was a combination of the two as it had stronger commodity prices, a high yield on the stock market, rising reduced sovereign risk etc. It thus made a compelling case for investing in the South African market. The presentation indicated the Rand’s default trading position as it rode on the tailcoat of the Euro.

Ms Fubbs questioned Mr Twine’s negative view of the fact that government had now taken control of the post-training working environment in the medical industry, but there could perhaps be more incentives to reverse the brain drain. She stated that she expected most countries would attempt to match the geographical and other demands in the consumer base with skills.

Mr Twine replied that incentives would be far preferable to "the ordering of people around like pieces on a chess board". The issue was whether the incentives actually were more expensive than they were acceptable, or whether the marginal cost exceeded the marginal utility of a typical micro-economic problem. South Africa had a surface area of 122 million km² that was the same size as Europe west of the Russian border, yet they had far more health professionals than South Africa. South Africa must therefore be practical for what it wished for itself otherwise neither incentives nor captive employees would ever live up to expectations, simply because of South Africa’s size and lack of population density and scientifically trained graduates.

Mr K Moloto (ANC) [NA] referred to Mr Ballim’s slide that indicated its gross fixed capital formation figures were 2% higher than those of Treasury, and requested him to explain the sectors which were more likely to increase their productive capacity.

Mr Baillim responded that the 2% represented a performance noticeably above previous trend. Standard Bank foresaw investment in select areas of the manufacturing sector, particularly retail construction, transport and telecommunication as well as the motor vehicle industry.

Mr L Zita (ANC) [Joint Budget Committee] asked Mr Twine to explain the alternatives to the current form of government’s BEE strategy.

Mr Twine replied that he did not have a ready made answer as to what needed to be done to step up government’s BEE programme.

Mr Stephen questioned whether South Africa was in fact de-industrialising, as the figures presented indicated a decrease in the contribution from the manufacturing sector as well as an increase in sales forces.

Mr Zita asked Mr Ballim and Mr Bhorat to indicate whether government was doing enough to stimulate the production side of the economy.

Mr Ballim responded to these two questions by stating that government decided some years ago to be more expenditure oriented, which is why its export dynamic was nearly 50% larger than it was 12 years ago. During the 1990’s the liberalisation did take away from the competitiveness of certain sectors of the economy, such as the textile industry, and the brisk movement in the currency at the moment was taking away from competitiveness. It was also a cleansing process as it allowed the identification of areas in which there was a comparative advantage. The theory probably did not sit so well with the practical situation in so far as firms struggled to adjust to the violent moves in the currency to find the productive areas. The industrialisation process must be carefully thought out, as government’s currency stabilisation system that sought to develop reserves would not necessarily add greater stability to the currency. The Japanese Yen was a prime example.

Mr Bhorat replied that this issue concerned itself with the social consequences of growth. The notion of state-led growth away from privatisation and towards continued ownership of state assets was not a route down nationalisation. Instead it was an east-Asian model of sorts where the state became a key role player in the development process and pro-poor growth.

Mr M Johnson (ANC) [NA] requested comment from the presenters on the recent meeting of central bankers on inflation targets in the region which indicated that these varied from below 10% to over 300%, and whether these would be reduced to below double digits by the 2018 target date.

Mr Twine responded that it would be more difficult to converge the 14 SADC member states than it was to converge Western Europe into "Euroland" simply because in SADC there was the one very large economy, South Africa, versus 13 much smaller economies. It would thus be quite a task to converge the economies sufficiently to have a common currency by 2015; much longer than the considerable period of time it took Europe to converge its economies.

Mr Ballim responded that he was more optimistic than Mr Twine because the forecast for Africa was generally better. Inflation was dying in most parts of the world and approximately 20 years ago most emerging markets operated at an average of 60-70% inflation, whereas the inflation figure for emerging markets currently was at 6-7%. Globalisation therefore had its benefits. The size of the South African economy would also have a positive impact on the countries closer to it. The largest risk would probably be in the exchange rates as African countries had volatile exchange rates.

Mr Johnson asked whether government’s performance was sufficient to achieve its Millennium Development Goals (MDG) by 2015, in light of the recent review conducted on the matter.

Mr Bhorat replied that it was doubtful that the 2015 deadline would be met. The barely visible silver lining was that every other developing country with the exception of India and China would not be meeting their MDGs.

Mr Johnson sought clarity on the deficit projections over the next two years.

Mr Ballim responded that he foresaw a spread between internal dynamic and the production side of the economy, and the deficit of about 3,5% of GDP would probably persist for a while. It was financeable over the short to medium term. He stated that 2005 should still see a persistently strong Rand in subsequent years because the currency will adjust.

Mr Johnson asked the presenters to comment on the election budget concept.

Mr D Botha (ANC) [Limpopo] asked whether the unemployment figures included the informal employment sector such as hawkers or those who work out of their backyards, because these people were registered as unemployed even though they were deriving income.

Mr Bhorat responded that this related to the regulatory burden faced by SMME’s. Most of the unemployment and labour market data was obtained from household surveys, and it involved a fairly detailed questionnaire that made sure people were not lying about the status of their employment. It was thus difficult to ascribe the high unemployment rates to those people who were earning money but declared themselves as unemployed. He stated that if the person was being remunerated they would be considered as part of the employed, and any non-remunerated activity would count as unemployed.

One of the key missing links both in the GDP data as well as the measurable forecast was the informal sector, as Statistics South Africa has pretty much fine tuned the household survey data side. Yet the firm level data, which was really the basis for South Africa’s national accounts, "was an extremely dodgy data set". Researchers did not have access to the raw data due to confidentiality, coverage of the informal sector was poor and the sample survey on which the national accounts were based had changed consistently over time. This was the reason for the revised estimates creeping through all the time. He suggested that because of these reasons the national accounts were thus open to more questions at this stage due to the data quality, rather than the data of the household surveys.

Mr Davidson (DA) [NA] asked the presenters to explain why South Africa was consistently at the bottom of the poll of economics forecasts and real economic growth, and what the constraints were.

Secondly, Mr Davidson sought clarity on the skills shortage that was plaguing the economy, and whether it would severely constrain growth of the economy in the near future.

Mr Bhorat replied to these two questions by stating that the reasons were those he listed earlier viz. crime, labour and the skills shortage. He agreed that the skills shortage would ultimately become a supply constraint. A further problem was "Afro-pessimism" linked to the fact that foreign investors saw the continent as a block, and thus whatever happened in Zimbabwe impacted on South Africa. Perhaps this could be addressed by promoting or marketing the country in a better way. The difference with the Chinese, Indian and east Asian economies was that they had a very large and dynamic informal economy, as they had been engines of growth in those economies. The South African informal sector was however very small and not very dynamic.

A short-term measure for addressing the skills shortage problem was sorting out the current immigration legislation. He stated that he was not convinced that the current Act did that, and government must instead opt for something far more hard-hitting and simple given the chronic nature of the problem. The German government achieved this by having one law, whereas the South African government has a myriad of laws that need consolidation.

Mr Ballim responded that the economies towards the top of the pile were different because they were economies of scale and countries such as Japan employed regional trade to aid the growth rate before expanding to Anglo-Saxon markets. South Africa might be restricted in its current relatively mediocre growth rates because of the region, although poor yet did provide opportunity for greater trade opportunities, its political dynamic certainly was not helpful. Intra-regional trade with SADC was thus possibly part of the answer to increasing South Africa’s growth rate.

The meeting was adjourned.


 

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