Economic surveys and country surveillance

Launch of the Economic Survey of South Africa

 

Remarks by Angel Gurría, Pretoria, 21 July 2010

 

Minister, Ladies and Gentlemen,

 

I am delighted to be back in Pretoria to launch the first Economic Survey of South Africa. This is only one part of the broader and increasingly intensive relationship between the OECD and South Africa. We have indeed embarked together in an enhanced engagement process.

 

Thanks to it, South Africa can draw on international best practice in various policy areas and share its own experience with OECD members and other important emerging economies. The recent World Cup was one manifestation of South Africa’s importance and ability to play on the global stage. Its growing involvement with the OECD is another one, albeit with fewer vuvuzelas.

 

The World Cup has earned South Africa a lot of respect and this will bring business opportunities and hopefully will open markets. Minister Gordhan has recently confirmed the positive impact, which comes from infrastructure construction and the visitors attending the championships. This tailwind should be used for reforms, which will broaden the opportunities for South Africans to improve living standards. These reforms need to tackle the two main economic challenges for South Africa: Increasing employment and improving export performance.

 

In the 2008 Economic Assessment, we praised the remarkable achievements since the transition to democracy, including the strong macroeconomic policy framework, the creation of an extensive system of social grants to alleviate poverty and the broadening of access to basic services.

 

Although the global economic crisis brought recession into South Africa for the first time since 1992, it did not undermine the achievements we praised two years ago. Indeed, it underlined them. When crisis struck, South Africa had room for fiscal stimulus, having reduced the public debt burden over the previous decade, and despite the loosening of fiscal policy, South Africa is not threatened by the sort of sovereign debt crisis that has affected more heavily indebted countries. It wisely used some of that room for manoeuvre to expand social benefits, mitigating the effects of the recession on the poor.

 

The credibility of the SARB’s monetary policy and the track record of banking system stability also helped avoid panic in September 2008. Unlike many other countries, there was no banking crisis in South Africa.
Thus, the peak-to-trough fall in output was less than 3%, smaller than in most OECD and emerging market economies. Growth resumed in the 3rd quarter of 2009 and strengthened in the next two quarters. By next year, annual growth could move above trend, which we estimate to be around 4%.

 

Nonetheless, the economy is still around 3 per cent below potential, and will probably take at least three years to reach potential. The key short-term task is therefore to consolidate the emergence from recession. Even if the World Cup is over, there is no time for complacency and there are no holidays for policy makers. And indeed, the government prepares for its retreat, “Lekgotla” as you call it. We are eager to provide inputs for this debate and beyond.

The improved transport infrastructure should allow workers from remote areas better access to employment opportunities and it should reduce congestion costs. Let’s make sure that new suppliers are not discouraged by entry barriers and job searchers are not priced out of the market.

 

Looking further out, a key challenge is to make better use of South Africa’s abundant resources, both human and physical. Although growth performance has improved, South Africa stands out as having achieved no convergence on OECD average GDP per capita since 1994. The substantial civil and political liberties enjoyed in South Africa are to some extent negated by what Amartya Sen has called the “unfreedoms” of joblessness, poverty, insecurity and poor education.

 

There is no miracle policy package that can guarantee rapid economic growth. However, international experience does offer some useful insights. Successful growth acceleration episodes have often been preceded by increases in savings rates. And the surest way to increase national savings would be to boost public savings by achieving a higher budget balance over the cycle.

 

South Africa’s weak trend export volume growth, in part a function of the strong rand, is also a concern, since export performance is found to be strongly related to economic growth in developing countries. Stronger trend growth may thus require greater efforts to avoid or reduce overvaluation. Several measures are worth considering in this regard.

 

Fiscal policy can be tightened over the cycle and made more countercyclical, to help offset private capital inflow surges that accompany commodity price booms;  foreign exchange intervention  can be used more actively, as long as this is consistent with keeping inflation within the target band; and remaining controls on capital outflows can be removed.  Wage moderation also could play an important role here and I will come back to this later.

 

Product market regulation is another area where policy action could boost growth. South Africa is among the countries with the most restrictive regulation. A less restrictive one, particularly regarding barriers to entrepreneurship, could boost growth by increasing competition, which in turn stimulates firms’ performance in innovation, capital-deepening, and corporate management.

 

Growth objectives should not be limited to GDP per capita. Environmental conditions affect both current and future well-being. South Africa scores relatively poorly on broad indices of environmental conditions. This is especially true regarding greenhouse gas emissions, due to its industrial structure and its heavy reliance on coal for electricity generation. In addition to reducing air pollution, stepping up emission mitigation efforts would ease electricity supply constraints, contribute to fiscal consolidation, and offer potential green growth opportunities.

 

As host to next year’s UN Convention on Climate Change Conference of the Parties meeting, South Africa has additional reasons to show leadership on this issue. One important step would be to move to electricity prices that cover long-run costs, with no subsidies for industrial customers. Another would be to put a price on carbon emissions, for example by means of a carbon tax.

 

The Survey also considers how the macroeconomic framework could be further strengthened. South Africa’s commendably prudent fiscal position was partly eroded in the immediate pre-crisis years, as spending was ratcheted up in the context of revenue windfalls.

 

While the Treasury’s commitment to prudence remains unquestioned, we believe that South Africa might benefit from additional mechanisms to prevent similar policy temptations in future cyclical upswings. This could usefully put more emphasis on cyclically adjusted fiscal balance, instead of the headline balance – which in boom years is downwardly biased by additional revenues. As cyclical adjustment is always open to discussion, expenditure ceilings would be a direct way to rein in cyclical revenues from being used to finance permanent expenditure programmes.

 

The inflation-targeting regime introduced a decade ago has brought improved transparency and predictability of the monetary policy, as well as lower inflation and lower interest rates. The SARB has rightly implemented inflation targeting flexibly.

We do, however, see a case for additional communication efforts to bolster the credibility of the target, especially to ensure that the social partners use it as guidance for wage- and price-setting. Making inflation expectations more forward-looking during disinflation would reduce the need for the SARB to maintain a premium on interest rates and thereby lessen the appreciation pressures from capital inflows.

 

The low employment rate is South Africa’s most salient economic problem. Many supply- and demand-side factors have contributed  with the mediocre growth performance being perhaps the most important factor.
Increasing trend growth is thus key to raising employment rates. But reforms to the wage determination processes could also help.

 

In the South African context, one promising direction could be to increase the degree of co ordination in wage bargaining. This could be done by bringing social partners together to agree on guidelines for increases in a year. Actual bargaining would continue to take place as it does at present, but against the background of such guidelines. Another useful measure would be to weaken the legal extension of sectoral bargains.

 

Given that the negative externalities of long-term unemployment are especially acute for the young, youth-specific measures should be a part of an employment strategy. A broadened wage-subsidy programme, possibly building on the existing learnerships programme, could help. Other elements are worth considering, such as expanded job search assistance, the differentiation of sectoral minimum wages by age and special extended probation periods for employees below a given age.

 

Last, but not least, let me refer to education. We see that enhancing human capital is crucial for sustainable long-term growth. That’s why two years ago we carried out an education policy review of South Africa. The statement by the president in his State of the Union Address about the inaccepatability of student and teacher absenteeism make me optimistic that the main messages from our work have been well understood.

 

Minister, Ladies and Gentlemen,

 

This is the culmination of a mutual learning process. The OECD has a lot to contribute to South Africa, but South Africa also has a lot to contribute to the OECD. While we are delighted to share our experiences with you, your experience broadens our perspective. This is how you develop a true and long lasting partnership.

 

We have been told that the 2008 Economic Assessment made a useful contribution to the economic policy debate in South Africa, and we hope that the analysis and recommendations in this first Economic Survey will likewise provide food for thought and discussion. South Africa is building a brighter future for its people and the OECD stands here to help every step of the way.

 

 

 

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