Address by the chairman of Business South Africa, MrHans J. Smith, to the Nedlac Summit

24 May 1997

I take pleasure in addressing you at this second Nedlac Summit as we review progressmade and consider the challenges which lie ahead.

For the last few years, South Africa has been a country in transition. Even thepeaceful political transition to a democratic society, hailed as a miracle, was a process,not a sudden event. In many respects, this process of change is continuing as we seek waysto secure a better way of life for all South Africans. I believe that the Nedlac partnershold this objective in common, though we may differ on the means to reach it. Businesstoday reaffirms its commitment to Nedlac in the belief that it is only cooperation and theopen exchange of ideas by the stakeholders that will allow us to develop strategies andprogrammes to achieve, and then sustain, higher rates of growth and development.

As Nedlac enters the third year of its existence, I believe that the time has come forus to be realistic about the challenges which face us, and also about the ways in whichthese challenges must be met.

Business believes that Gear is the key to future prosperity for South Africa. Itprovides a disciplined macroeconomic framework within which programmes of reconstructionand development can be formulated and investor confidence encouraged. Gear has already ledto an improved sentiment towards the country, particularly by both domestic andinternational financial markets. This has been enhanced by the presentation of a Budgetcommitting government to fiscal and economic reforms which, if successfully implemented,should ensure an improvement in the confidence of our international investors and tradingpartners.

Gear policies need to be implemented quickly and in a coordinated way. Business againcommits itself to constructive engagement with its social partners on strategies toaccelerate the implementation of Gear. We also believe that Nedlac should focus in theyear to come on how it can direct its agenda to the urgent imperatives of more rapid andefficient delivery in order to guarantee Gear's success.

In my opinion, the greatest socioeconomic problem facing South Africa today is its highunemployment. The unemployment situation inhibits government in delivering an enhancedquality of life to all the people in our country and, if this situation is not addressed,it will threaten the stability of our new-found democracy. The need to generate jobs on amassive scale is underscored by the fact that South Africa's unemployment rate is roughlyabout 30% of the total labour force. It is estimated that the country's economy needs togrow at an annual average rate of at least 6% in order to absorb new entrants into thelabour force, provided the right labour market policies are pursued.

Jobs cannot be created at the rate we need in a society where government continues todominate economic activity. Private industries must be created and, taking into accountthe amount of employment opportunities which must be created, our strategy must beexport-driven. The importance of the role of new black business and small business in thejob creation process also cannot be stressed enough. This is not only a means to jobcreation, but also a way of accelerating the economic empowerment of previouslydisadvantaged South Africans.

With the import tariff structure now liberalised, it is imperative that both existingand new industries and enterprises be internationally competitive. The poor skills base inour country inhibits this competitiveness. South Africa's rank on the human developmentindex in the World Competitiveness Report is abysmally low, and we have to devote moreresources to equip our current and prospective employees with the skills needed for thefuture. Business believes that the rapid and continuing advancement of skills willtransform the workplace as well as underpin higher rates of growth and development.

Skills development has been a major factor contributing to the success of many newlyindustrialised countries. So, too, has labour market flexibility. There is a danger thatthe new basic conditions of employment bill and other labour legislation will result in anoverly-regulated labour market. A recent Organisation for Economic Cooperation andDevelopment technical study which compared labour market outcomes based on cross-countrymeasures of flexibility, found that labour market inflexibilities contribute to highunemployment and stagnation in employment growth. This is exactly what South Africa mustavoid if the country is to achieve an economic growth path which is both sustainable andcapable of creating jobs on a massive scale in as short a time as possible.

Similarly, this growth path will only be achieved if South Africa takes its place inthe global economy. Since 1990, South Africa has been reintegrated into the globaleconomy, a process which has been facilitated by the removal of economic sanctions andradical trade and tariff reforms. The country's economy has been opened up to globalcompetition with the result that rationalisation and reallocation of resources among manyenterprises and economic sectors is currently taking place. Foreign investment is crucialif this process is to remain successful.

Financial capital is a scarce resource, and South Africa is critically dependent on itsability to attract foreign fixed investment, especially as at this stage of our economicdevelopment, current account deficits are likely to remain, given our low propensity tosave and high propensity to import.

The type of foreign investment which South Africa requires should be capable ofcontributing to job creation, to adding value to the country's mineral resources, and toraising the global competitiveness of South Africa's products and services. While thecountry has in the past managed to attract foreign investment, the major proportion ofthis has been portfolio investment flows of a short-term and volatile nature. Portfolioinvestment flows also tend to be attracted by a strong economy, high real interest ratesand a stable exchange rate, but are prone to rapid reversal on rumours of any politicalinstability or uncertainty about economic policies.

A key argument favouring direct investment flows over portfolio investment flows isthat the direct form provides more stable financing. Direct investors generally havelonger-term horizons. In crisis they may halt expansion plans, but are less likely to headfor the exit door. Direct investment is also important for its non-financial bonuses tothe benefit of recipient economies, since foreign investors typically bring with them newtechnologies, managerial skills and expand capacity, all of which is supportive of growth.

South East Asia, Latin America and East European countries have emerged as the majorbeneficiaries of foreign direct investment flows from the developed countries. SouthAfrica has attracted a meagre 2% of this investment, even less that the 5% of the MiddleEast and North Africa. This begs the question of the kind of economic policies needed toattract foreign direct investment.

Many of the successful countries implemented stable macroeconomic environments whichincluded prudent fiscal and monetary policies, export-orientated manufacturing sectors,rapid growth in skills development, encouragement of small and medium-sized businesses,labour market flexibility and the refocusing of government expenditure towards capitalgoods. These are policies which South Africa would be wise to emulate. Direct foreigninvestment should be encouraged and the regulatory framework should not present obstaclesto new ventures. Long-term growth is stimulated by investor confidence, political andeconomic certainty and education and training. It has to be recognised that investorsgenerally consider risk and return before committing their resources in a particularcountry or region.

Economic growth is a necessary condition for the creation of new jobs. A majorchallenge which the Nedlac constituents face is to make this growth a reality. Mypredecessor said at the Summit held last year that the critical challenge facing thepartners in the year ahead was to arrive at a common strategic vision focused on theinterests of the nation. Though some progress has been made, I believe we still have someway to go in reaching this shared vision. Cooperation, understanding of each other'sviewpoints and trust simply have to be developed by the Nedlac partners if South Africa'spotential is to be realised. We cannot go forward without a positive spirit ofconsensus-seeking which recognises that at times short-term constituency positions willhave to be modified for the greater good of the country.

I believe that all the roleplayers have the will and determination to agree to deliveron an implementation strategy for Gear. There can be no greater challenge for Nedlac orone which more accurately reflects its mandate and statutory obligations. If we candeliver the Gear strategies, we can make South Africa a country of first choice forforeign fixed investment and help develop the potential of the country and thesubcontinent. There is no other strategy that will create sustainable employment over thelong-term. I feel very strongly about this and believe that Nedlac, on every issue, shouldask the following question: "Will the action we propose contribute to the creation ofjobs?"

If the answer is "no", the strategy should be questioned. I am personally,for example, very much in support of the 2004 Olympic bid. This is not because I believein its commercial merits, but because, if Cape Town is successful in its bid, jobs will becreated.

Citing job creation as the most critical factor for South Africa's future could perhapsbe criticised as an oversimplification of a very complex issue. I do not underestimate thecomplexity of the issue, but recognise that often simple, focused strategies areimminently successful in solving complex problems. I also believe that many other pressingsocioeconomic problems will be alleviated if we can address unemployment.

We, the Nedlac partners, have the key to the success of this wonderful country of ours.Let us be prepared to make the necessary sacrifices and actively and positively pursue animplementation strategy for Gear and make South Africa a winning nation.