Primary Sector Contributions to the Economy: hearings

FINANCE PORTFOLIO COMMITTEE
14 February 2007
PRIMARY SECTOR CONTRIBUTIONS TO THE ECONOMY: HEARINGS

Chairperson: Mr N Nene (ANC)

Documents handed out:
AgriSA Presentation
Prof Nick Vink’s Presentation

Audio Recording of the meeting

SUMMARY
AgriSA said that the primary sectors had become less important in terms of their direct contribution to the Gross Domestic Product and this was consistent with trends observed in the advanced economies of the world. It was important to note that fixed capital stock in agriculture had been steadily declining from about 13% in 1958 to just under 3.5% in 2005. Even though this was the case, the multi-factor, labour and fixed capital productivity indexes were all going up.

There had to be a process of empowerment in all sectors of the agrifood sector and targeted investment to enhance competitiveness. The overall cost of production, including a further reduction in the taxes and duties on diesel and other inputs, had to be lowered as well.

The Chair of the Department of Agricultural Economics at the University of Stellenbosch, Professor Nick Vink, said that the share of primary agriculture in the Gross Geographical Product was much higher in many rural areas but the share of food processing was lower as these were the areas with the greatest number of poor people. An important question was whether agriculture could act as a vehicle of growth. Agriculture’s contribution to GDP was small but it was not declining.

What was required for agriculture to act as an ‘engine of growth’ was new farmers with new ideas and new initiatives. Farmer support services in poor rural areas were required as well as investment in irrigation due to South Africa’s erratic rainfall. The land reform programme was not delivering sufficiently on any of these.

MINUTES
AgriSA Presentation
Mr Johan Pienaar, AgriSA's Director of Economics and Trade, explained that the Gross Domestic Product (GDP) was the total value of final goods and services produced within the boundary of the country in a particular period. The four important elements were: the total value; final goods and services; within the boundaries of the country and within a particular period. Agriculture did not produce final goods and services but contributed intermediate goods.

He said the primary sectors had become less important in terms of their direct contribution to the GDP and this was consistent with trends observed in the advanced economies of the world. The pattern of activity in the South African Economy had changed, as part of developmental processes in the economy, with a shift from primary and secondary sectors, to the tertiary or service sectors.

For example, while the contribution of agriculture to South Africa’s GDP dropped from 10.5% to 2.4% (between 1946 to 2005), that of the financial intermediation, insurance, real-estate and business services sector rose from 9% to 18.6% in the same period. According to the South African Reserve Bank, the contribution of the primary sector (agriculture and mining) continued to drop over the last decade, while that of the secondary sector (manufacturing, construction and electricity) almost stayed the same.

The relative share of value added (measured in terms of gross domestic product GDP) by the tertiary sector rose from 56% of total value added in 1946, to 67% in 2005, and that of the secondary sectors from 21% to 23%. Over the same period, the relative share of the primary sectors declined from 23% to 10% and this was not peculiar to South Africa only. Various constraints included the fact that only 13.5% of the South African was arable and high potential soil was limited.

In terms of the forward and backward linkages, the final consumption expenditure in agriculture was on food, beverages and tobacco. The empirical results suggested that for a 1% growth in the agricultural sector, the non-agricultural sector (manufacturing) responded by more than 1%. The empirical results supported the argument of the President that South Africa should follow an “agricultural-led” growth strategy for successful development.

It was important to note that fixed capital stock in agriculture had been steadily declining from about 13% in 1958 to just under 3.5% in 2005. Even though this was the case the multi-factor, labour, and fixed capital productivity indexes were all going up. The real earnings per employee the capital to labour ration was also increasing.

some of the challenges facing agriculture were the political environment (in the areas of land reform and party political imperatives); the economic environment (terms of trade, the uneven international playing field, high input costs and the exchange rate); the social environment (labour relations, housing issues and rural poverty); the technological environment (research and extension), the ecological environment (sustainable resource use, risk and disaster management) and the legal environment (the BEE charter, codes of good practice, and other legislation). ASGISA also presented some challenges with the Biofuels Industry Strategy and Agro-processing presented some issues as well.

A strategic plan for agriculture could include the implementation of a safety and security strategy with improved governance and implementation of partnerships and a mentorship programme. The Land Redistribution for Agricultural Development (LRAD) programme had to be improved. A broadly accessible market information system had to be established and an effective risk management system had to be developed and operationalised. Fair competition locally and internationally had to be ensured and a shared vision on labour and land reform had Implementation.

There had to be a process of empowerment in all sectors of the agrifood sector and targeted investment to enhance competitiveness. The overall cost of production, including a further reduction in the taxes and duties on diesel and other inputs had to be lowered as well.

In conclusion agriculture was growing relatively slowly. Some possibilities existed in agro-processing and biofuels. The economic environment needed to be changed and there had to be the will to exploit even the most marginal of opportunities.

Discussion
Mr A Moloto (ANC) asked if the AGOA programme was helping to grow the agricultural sector. in terms of forward and backward linkages, what part did agriculture play in helping to grow rural areas?

Mr Pienaar replied that since AGOA had been initiated, exports to the US had increased and there was better access to new markets. Agriculture was not the “magic wand” that would help rural areas grow. it was important to use any and all opportunities to help growth, such as the biofuel initiative.

Dr Van Dyk (DA) said that the capital to labour ratio had increased. Was this because of Regulations?

Mr Pienaar said that farmers claimed that the ratio was increasing due to wages but AgriSA thought that wages did play a role but the minimum wages were not excessive.

Ms M Mabe (ANC) asked if the earnings for employees in the study were at supervisor level or reflected the lowest earnings.

Mr Pienaar replied that the earnings in the report were an average figure for all employees and they were well above the minimum wage.

Mr I Davidson (DA) said that agriculture was highlighted as an area where South Africa did have a competitive advantage but the Committee needed more detailed information about where the sector needed help to make use of these advantages. what type of support did agriculture in South Africa need to speed up growth?

Mr Pienaar replied that agriculture and the primary sector could not be a growth sector. only marginal opportunities in areas like biofuels existed. to help agriculture, fuel taxes could be brought down, and other agricultural opportunities in the SADC region could be explored, to develop economies of scale for example. Other incentives could include the provision of housing for farm workers and introducing export incentives as in the US.

Prof. Nick Vink’s Presentation
Prof Nick Vink, Chair of the Department of Agricultural Economics at the University of Stellenbosch, said that agriculture contributed 3.1% to the GDP. the manufacture of food products, beverages and tobacco products contributed 18% to the manufacturing sector output, which contributed 19% to GDP. Assuming that the food processing share of output equaled the share of the GDP, then the manufacture of food products, beverages and tobacco products was 3.4%. Agriculture’s total procurement of goods and services was R40 billion or the equivalent of 3.2% of GDP.

The share of primary agriculture in the Gross Geographical Product was much higher in many rural areas but the share of food processing was lower as these were the areas with the greatest number of poor people. The multipliers between agriculture and the non-agricultural rural economy were very high world-wide so opportunities for value-adding to agricultural production existed.

An important question was whether agriculture could act as a vehicle of growth. Agriculture’s contribution to GDP was small but it was not declining. While agricultural GDP was small, the agro-industrial complex was 10% of GDP. In most poor rural areas the agricultural contribution was larger, and there were strong multipliers to the non-farm economy. Physical output had increased since the early 1990s and the value of output has increased since the early 1990s.

Agricultural exports had increased as a share of total exports in the 1990s. Agriculture was not using more and more of the foreign exchange it generated to pay for imports and employment was not in long-term decline. There was also an upturn in the employment of skilled workers. The wage bill and current expenditure had increased, leading to stronger multiplier effects in the rest of the economy. There was little evidence to suggest that there was no new investment in agriculture which would lead to negative multipliers in the long run.

What was required for agriculture to act as an ‘engine of growth’ was new farmers with new ideas and new initiatives. Farmer support services in poor rural areas were required and added investment in irrigation due to South Africa’s erratic rainfall. The land reform programme was not delivering sufficiently on any of these.

Discussion
Prof B Turok (ANC) asked why there were no programmes to help poverty and unemployment through agriculture.

Prof Vink replied that he did not know why.

Dr Van Dyk asked what his opinion was on production subsidies.

Prof Vink replied that South Africa could not have subsidies because it could not afford them and countries such as Russia, Australia and New Zealand that had the least subsidies had the highest growth rates in agriculture.

Mr Moloto said that there was a high debt ratio in the land redistribution programme. What problems did new farmers have in accessing finance?

Prof Vink replied that under the land redistribution programme farmers could get up to R100 000 and they could also borrow from banks. In practice, 40 – 60% of this money went into land costs, meaning very little went into working capital.

Mr Bici asked why the Comprehensive Agricultural Support Programme (CASP) and the Mafisa and the land redistribution programmes were not working.

Prof Vink replied that CASP and Mafisa in practice were aimed only at land reform beneficiaries, but they were actually supposed to benefit those who wanted to go into farming.

Mr B Mnguni (ANC) asked what support was needed for small farmers to become commercialised.

Prof Vink replied that land redistribution was difficult because it was a political issue. The programme was aimed at getting all new farmers to the point of commercialisation but the focus should be on changing the structure of the sector to make access into the industry easier.

The meeting was adjourned.