COMMISSION ON RESTRUCTURING THE SOUTH AFRICAN ECONOMY

Facilitator: Ravi Naidoo, Director - Naledi

Speakers: Vincent Phaahla - Nafcoc

                Neil Coleman - Cosatu

Issues for discussion

• Macro-economic conditions and how these relate to poverty
• Sustainability of inflation drop
• Targeting
• Volatility of financial markets
• Scope for social dialogue
• Role of the SARB in the PFMPC

Note: This is a summary report - the full transcript is available on request)

Input from Vincent Phaahla

The problems of South East Asian countries alerted policy makers all over the world to the vulnerability and the limitations of textbook economic policy instruments, more especially the usage of monetary policy in the stabilisation of the economy.

Mr Phaahla said developing countries had come to realise that their economies had to develop a sound economic base in order to withstand unexpected shocks that may develop as a result of international economic distortions, internal economic distortions, or other external factors.

With reference to statistics from the SARB, Mr Phaahla argued that if external factors continued to stabilise, then lower levels of inflation rates could be sustained over a long period of time.

He said monetary policy over the past 16 months had been strongly influenced by developments in the foreign exchange markets, however, the Bank never lost sight of its overriding objective of financial and overall price stability. Referring to inflation targeting and the Reserve Bank's intervention in the forward market, Mr Phaahla argued that such macro-economic policy instruments need to be debated beyond the SARB.

He said many in business and labour believed that policy formulation around monetary policy should be a result of dialogue between the Reserve Bank and critical partners.

He said goals to restructure the economy in order to create high levels of economic growth, accompanied by high levels of employment generation, required policy co-ordination that would provide stable monetary policy, complimented by stable fiscal policy.

He said the existence of GEAR and RDP policies needed to be filtered into policy formulation during the period of dialogue. In addition to restructuring the economy, he said we needed fundamental economic transformation. He said monetary policy and interest rates were merely 'massaging' the economy. The challenge was to reverse the pattern of ownership and management of the South African economy.

Input from Neil Coleman

It was generally accepted that fiscal and monetary policy were critical to our developmental challenges, and therefore important that the Presidential Jobs Summit Declaration focused on these issues. The agreement at the summit was that an appropriate macro-economic policy should reinforce the RDP in promoting three outcomes:

• To eliminate poverty, reduce inequality and lead to redistribution of resources
• To increase per capita GDP through higher levels of investment
• To seek to maximise net job creation within an employment generating growth path

Mr Coleman said that given the current international climate and the current local situation, there was a window of opportunity opening up for South Africa to pioneer a new approach to macro-economic policy which would attempt to drive it in the direction of the developmental path which had been outlined in the Presidential Jobs Summit. He said the textbook approach was no longer appropriate in the wake of the Asian crisis.

The World Bank and to a lesser extent, the IMF, were revising their prescriptions, and there was an emerging agreement in various multilateral bodies such as UNCTAD and the UN that a new approach needed consideration.

He said it was interesting to note that those countries which had best withstood the crisis were those which had maintained various capital controls and regulations which made them less vulnerable to speculators. China and India had maintained controls which made them less vulnerable to the devastating impact of the crisis. Through capital controls, Malaysia had succeeded in reestablishing its economic position.

Mr Coleman argued that the implementation of stringent macro-economic policies introduced in 1996 had not led to investment in South Africa by local and international business. Fixed investment had recently plummeted, the latest figures showed that foreign investment in South Africa had plummeted to less than one quarter of the 1997 figures. Employment indicators since 1996 showed deterioration in the levels of employment.

The only targets that had been reached since 1996 were budget deficits and inflation targets with a resulting squeeze in economic growth. He said labour was of the view that a fundamental review of the economic policy direction was crucial.

However, he said there was a sense of complacency in South Africa, based on the false sense that our economic fundamentals were sound and that the economy had moved onto a very stable economic footing. He said the existing concept of stability depended on the criteria used.

He said low inflation rates, defence of the currency and our balance of payments position had been maintained through one of the highest interest rate regimes in the world. Stabilisation of these macro-economic indicators had taken place at the cost of massive social and economic destruction. These policies had also discouraged productive investment and stifled SMMEs.

Civil debt judgements against business, which was an indication of insolvency, had risen from R 565 million in 1996 to a projected R 1, 428 billion this year, an increase of nearly 300% over the period.

A Naledi survey of various corporations showed the following critical factors in determining a decision to invest:

• The top factor which they rated was interest rates - 70%
• Economic growth - 60%
• Consumer spending - 60%
• Exchange rates - 50%

Only 30% rated average wages as a key factor and 40% rated inflation as a key factor in their decision to invest.

Referring to senior World Bank economists, Mr Coleman argued that South Africa could tolerate a moderate increase in inflation and budget deficits to the extent that that was necessary to achieve the objectives of rising employment and lower interest rates.

He welcomed the ANC manifesto which committed itself to a developmental monetary policy, the lowering of interest rates and a more transparent and inclusive style which was being seen from the new Reserve Bank Governor.

He said there appeared to be growing national consensus that the high interest rates had had a devastating effect on our country and that there needed to be change. He said the modest reduction in interest rates was a start, but the country needed a sustained and continued reduction, since current levels remained out of step with our developmental challenges as well as the international experience.

He said inflation targeting could only work as part of a coherent co-ordinated set of developmental targets which would be given an equal weight including employment, investment etc. (sentence deleted)

He said these issues could form the basis of detailed discussion in the Nedlac's Public Finance and Monetary Policy Chamber, provided those current problems affecting the chamber were resolved.

Discussion

The Minister of Finance, Trevor Manuel, said he regretted the fact that both speakers had failed to touch on the fundamental difficulty in our economy, the absence of savings. He said Malaysia's recovery had resulted from 40% of GDP in savings. He said both China and India also had significant savings levels compared to South Africa, at 14% of GDP.

He said that based on per capita GDP decline in countries such as Zambia and Zimbabwe, South Africa needed to focus on what was realistic and what could be maintained in an economy that had very low levels of savings. In respect of the co-ordination of fiscal and monetary policy, he said key questions related to how much taxes could be raised and from whom. Some participants said that they had not realised the importance that government was attaching to the savings issue. A few agreed strongly that savings levels needed to be improved, though there was a debate as to what would cause savings to increase. In particular, do savings cause investment, or does investment cause savings? The inability of the poor to save was also raised as a constraint. Participants also pointed to the need for future detailed discussion on impediments to savings, including poverty, unemployment, mal-distribution of income, capital flights and lack of productive investment of contractual savings.

Many participants felt that high inflation levels were not ideal in the economy. Inflation has the potential to erode the buying power of the poor and high inflation is a benefit to those who own assets. At the same time, the view was expressed that the use of high interest rates to pursue deflationery policies had high costs in terms of economic growth and employment. A balance therefore needed to be achieved.

Participants raised the issue of government support for SMMEs, and argued also that business should concentrate on strengthening local chambers of commerce.

There was agreement on the need to create an environment for serious debate on the range of issues raised. The Public Finance and Monetary Policy Chamber was seen as a forum for debate on a range of issues, including savings. However, current problems in the chamber and the need to discuss possible outcomes around specific issues needed to be resolved urgently

Closing remarks by the facilitator

The facilitator noted four priority areas raised in the commission:

• All the participants agree that there is a need to transform the economy and change the existing ownership patterns. In particular this must include changing ownership distribution of economic assets.
• South Africa's economic transformation will be a long-term, and difficult, process. All participants agree that there is an important role for Nedlac in charting a path forward through this difficult transition.
• Reaching agreements on economic transformation will not happen quickly. However, this makes Nedlac's role more crucial. In particular, an important task for Nedlac is to ensure that, through discussion and debate, all parties develop a common set of assumptions about the constraints and opportunities facing economic transformation.
• There is a need for the Nedlac Public Finance and Monetary Policy chanmber to prioritise taking forward the debate on economic ownership, the role of savings, SMME development, and so on.
• Strong opinion was voiced about the need to circulate prepared commission inputs in advance so as to enable delegates to comment effectively on the issues. It was recommended that in future Nedlac would arrange to distribute copies of prepared inputs ahead of commissions.