Secrétaire général

Economic Survey of South Africa: Discussion with the National Economic Development and Labour Council

 

Remarks by Angel Gurría, OECD Secretary-General, National Economic Development and Labour Council (Nedlac)

21 July 2010

Ladies and Gentlemen:


I am delighted to be back in Nedlac. Two years ago I had the privilege of coming here to present the Economic Assessment, a prototype of our regular Economic Surveys. This time I have the pleasure and honour to launch our first Economic Survey of South Africa. From now on, we will conduct regular Surveys for South Africa, as with the other four important non-member countries with which we have a programme of Enhanced Engagement.

 

Before discussing some of the details and recommendations of the Survey, I would like to say a few words about how we at the OECD see the global economic outlook, and to share our assessment of the challenges lying ahead.

 

The world economy is recovering, but at different speeds across countries. As was outlined in our most recent Economic Outlook, we project global output to rise by 4.6% this year and 4.5% in 2011. For the OECD area as a whole, we project a more subdued pace of expansion, with GDP growth at about 2 ¾ per cent in both 2010 and 2011.

 

OECD-wide averages mask important differences across countries and regions. In the United States, growth is expected to remain buoyant, although easing back somewhat through the remainder of the year. In Japan, business investment should continue to strengthen, while labour market weaknesses will continue to bear down on private consumption. But in the euro area activity is likely to remain subdued, although it is expected to pick up this year, assuming that recent financial market distress will not durably impair confidence.

 


Outside the OECD area, growth is poised to remain strong, despite some moderation as policy support is withdrawn in China, India and Brazil.

 

As we emerge from the recession, attention must now turn to getting economies back onto a sustainable footing. This is particularly so on the fiscal front.


Quite rightly, governments around the world increased spending sharply in an attempt to cushion the impact of the global crisis. And they were successful in this regard. However, budget deficits have skyrocketed in many OECD countries. The OECD-wide budget deficit will reach close to 8% of GDP in 2010, and government debt rise to near 100% of GDP by 2012.

 

It is now time to prepare to withdraw this stimulus starting in 2011 and to begin the consolidation of public finances. If credible plans for consolidation are not laid out, the negative side of loose fiscal policy will begin to bite.

 

Although fiscal adjustment needs are unprecedentedly high, there are options for making consolidation as growth-friendly as possible. For example, measures to increase revenues should focus on the least distorting taxes, such as those on consumption and property. And green taxes should also be considered, particularly in the South African context. On the expenditure side, savings should be sought through improvements in the efficiency of public service delivery.

 

In contrast with many OECD countries, the task for South Africa on the fiscal front is modest in the short run. Public debt levels remain moderate and the budget deficit appears to be easily financeable. The modest withdrawal of fiscal stimulus implied by the 2010/11 Budget achieves a good balance between supporting demand and preserving fiscal sustainability. In the medium term however, substantial efforts are required.

 

The more difficult tasks lay in the medium term. Growth performance has improved, but is still not good enough – South Africa is unusual among its emerging-market peers in having achieved no convergence on OECD average GDP per capita since 1994.

 

Moreover, the civil and political liberties enjoyed by South Africans are to a great extent thwarted by the burdens of joblessness, poverty, insecurity and poor education. The only way to meet the economic and social objectives of the government and the people of South Africa is to make better use of the country’s abundant resources, both human and physical, to promote and sustain faster growth.

 

The last economic cycle showed that the rapid growth of 2004-07 was based on an unsustainable consumption boom, fuelled by surging commodity prices and cheap international credit.
Successful episodes of rapid growth and growth accelerations among non-industrial countries have tended to follow a different pattern than the South African one, being export-led, with high savings and investment rates. Consequently, the Survey recommends to increase savings and to make growth more export-oriented. Avoiding overvaluation seems also to be important, and is something South Africa has not managed.

 

The challenges for south Africa are multifaceted and complex, the policy response therefore has to be broadbased, requesting reforms on many fronts, including refinements of the macroeconomic policy framework, a more competition friendly product market regulation as well as market clearing wage determination.

 

Product market regulation is another important area where policy action could boost growth.  In South Africa’s it is not sufficiently conducive to competition, and therefore holds back innovation and growth. Regulatory complexity and the level of state control in network industries are particular problems.

 

Much could also be done on the labour market front. Aspects of wage determination worsen the problems of duality and unemployment. I will come back to this later. In addition, more could and must be done to address the high levels of youth joblessness.

 

Finally, South Africa has a large carbon footprint due to its industrial structure and its heavy reliance on

 

coal for electricity generation. The need for progress on tackling climate change has been recognised by the government, but little concrete action has yet been taken to put a price on carbon or stimulate renewables. Moreover, the existence of favourable energy prices for some large industrial users, and low coal purchase prices for the dominant electricity generator tend both to hinder economic efficiency and aggravate carbon emissions.

 

Of course, Nedlac’s role in economic policy discussion in South Africa means that all these areas are of relevance. I would like to use this occasion, however, to highlight one area where Nedlac could potentially be called on to play a larger role. This relates to the issue of wage coordination.

 

The low employment rate is South Africa’s most salient economic problem. Many supply- and demand-side factors have contributed, including the intermediate level of wage co ordination. It is usually associated with poor employment outcomes, as illustrated by the recent and several instances of surprisingly high wage settlements despite the extreme levels of labour market slack and the slowing of inflation.

 

In the South African context, increasing the degree of co ordination in wage bargaining is a potentially promising direction. This might be done by bringing social partners together at the beginning of each wage negotiation round to agree on guidelines for increases in that year. Actual bargaining would continue to take place as it does at present, but against the background of such guidelines. In doing so, due account should be taken of consistency with the SARB’s inflation targets and labour market conditions. Indeed, labour market outsiders should have a greater influence on wage determination than they do at present.

 

There is doubtless more than one way of implementing such a reform, but Nedlac is an obvious place to start. The forum exists with government and the key social partners represented. In our view the potential is there to improve both employment and inflation outcomes.

 

Ladies and gentlemen, we hope that the Survey provides food for thought, and I would welcome your views on this question, as on the other main conclusions of the Survey. I look forward discussing them with you, representatives of both business and trade unions.

 

Thank you.

 

 

 

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