NEDLAC SUMMIT 27 OCTOBER 2001

BUSINESS POSITION

By Beef Molefe - Nafcoc Secretary General

1.  Introductory Remarks

Hon Cabinet Ministers, Captains of Commerce and Industry, Leaders of Organised Labour, Distinguished Guests, Ladies and Gentlemen, Business has a vision for South Africa, one where the country is the world's leading emerging economy, where the social partners have common goals, where all work together to achieve them, where the country takes its rightful place in the global economy. How, you may ask, does Business think we can achieve this ideal given the current situation - the general global economic slowdown exacerbated by the twin towers attack on 11 September, crime, grime and corruption, lack of service delivery, lack of unity between and among stakeholders, lack of common objectives for the future, the flight of capital and of skills, unemployment and the many other downsides which can be mentioned?

In spite of the many negatives we face there are numerous positives which we can build on.

2.  What the Attack on the World Trade Centre in New York Means for Business

The events of the 11 September have had a significant impact on world economic activity.

• The decline in the world economy worsened
• International traders have had to introduce, and adhere to improved security controls in addition to, for example, the usual phyto-sanitary and environmental requirements.
• The logistics chain became congested as Customs and Immigration procedures were tightened up.
• As a result, delivery times have lengthened significantly, and,'
• This has hampered the speed with which world markets can be reached and penetrated.
• This in turn impacts negatively on South Africa's reputation as a reliable supplier, and all these
• Impact negatively on the company order book, and ultimately on company profits.

These are all gloom and doom consequences, how bleak is the real picture?

3.  The Good Things in South Africa

There are many positives in South Africa:

• Government has recognised that the restructuring of state owned enterprises must take place
• Foreign exchange controls are being phased out
• We have achieved relative price stability
• The South African fiscal regime is sound
• The gap in the digital divide is narrowing.
• We have a strong, transparent democracy that is the envy of many emerging regimes

The challenge is to speed up these processes so that we can enjoy improved economic growth and reap the rewards of the pain experienced in getting the policies right.

4.  The Legacy of the Recent Past

Before our first democratic elections South Africa had a closed economy, largely cut off from the rest of the world as a result of sanctions and market protectionism. As a consequence, industries became inefficient, insensitive to price and competition. Economic growth and competitiveness were constrained.

The political changes in the country opened up global markets, and South African industry had to adapt to competition. In order to grow we had to adapt, business had to restructure and cut costs, and at the same time improve quality and service. They did this by downsizing, and rationalising their activities, which resulted in the attrition of jobs. But the growth and investment we had hoped for have not materialised.

5.  Current Key Imperatives

South Africa has gone through the pain of change, and must now address other key imperatives, so as to enjoy the gain that follows.

Our most pressing need is to get the economy growing. One of the key activities required is to speed up the rate of privatisation of state owned assets, which is one way of locking in FDI, where our performance has been paltry.

In the past we said that foreign direct investment was necessary to spearhead growth. Increasingly we have come to recognise that sustained growth must be led by domestic investment and risk taking. Domestic investment will prove to the outside world that South Africans have confidence in their own country, thereby encouraging foreign investors to have similar confidence. Capital chases growth. Thus South Africans must be prepared to accept risks, and invest in their own futures.

A lack of FDI in the country is also directly related to the lack of skills. While attempts have been made to redress this through the Skills Development Act, the tru,th is that the provisions of this legislation are bureaucratic. Small and medium enterprises find the practicalities in applying them so taxing that they ignore its potential for skills development.

South Africa should furthermore be prepared to take a forex risk and allow our currency to find a level of certainty. This will stop the downward trend in the value of the Rand against other currencies and assist in reducing imported inflation.

However, when assessing South Africa's economic performance, it is very easy to become frustrated. At every workshop, seminar and meeting, on less formal occasions, talk inevitably turns to the economy. We repeatedly hear that our macro-economic fundamentals are strong and firmly in place. And this is indeed true. Our national debt and budget deficit are under control and price stability has been achieved through continuously reducing inflation rate.

The strategic intent underlying these policies - to create an environment of certainty through financial stability and hence credibility - is admirable. But a number of measures have been omitted from the equation, that if scrutinised, provide a different perspective.

We should benchmark ourselves against those nations that we compete with for production and capital. We are an emerging market, in competition with other emerging markets. Our competitors are not necessarily the ED and the United States - they are our trading partners. Our competitors are Central and Eastern Europe, Latin America, Australasia and South East Asia.

If we compare ourselves to these economies we find that we are in the bottom quadrant. Our unemployment levels are unacceptably high, posing a threat for much needed social stability. We are at the bottom of the log in gross domestic savings and fixed investment rates. Both domestic and Foreign Direct Investment (FDI) as a proportion of gross fixed capital formation are extremely small. Our per capita income levels put us amongst the lowest performers in emerging markets. In fact, South Africans are getting poorer - 17% lower than 1980. Our foreign reserves excluding gold are even lower than those of Columbia and Venezuela. The only currencies depreciating at a faster rate than the Rand are those of Chile, Brazil and Turkey.

The vast majority of our competitors are achieving superior economic growthrates. Five countries exceed 3% and four exceed 4% - while we are struggling to achieve 2% this year.

On the positive side, we have been very successful in reducing inflation, where we have outperformed Indonesia and Russia. And not all sectors of the economy are faring poorly. Exports are doing exceptionally well, and have shown an encouraging growth over the last few years, in substantial measure due to free trade agreements such as the EU/SA and the SADC agreements and to the African Growth and Opportunities Act promulgated by the United States government, which provides South African producers with unique opportunities to penetrate the US market. Notwithstanding the EU/SA Agreement, South African exporters are facing inequities, particularly since EU governments subsidise agriculture, making it extremely difficult for South African producers to compete price-wise in world markets. South Africa's negotiating team at the WTO must take cognisance of the inherent disadvantages faced by Southern Hemisphere countries, and of the South/North divide - the different needs and capabilities of the developed nations compared with those of the developing nations. Internationally we participate in forums such as the WTO, the IMF, the World Bank and the ILO.

However, since 11 September, globalisation has suffered a severe setback. The number of new orders has decreased dramatically, and order books post Christmas look bleak indeed. This makes the need to develop the domestic market much more urgent.

Notwithstanding the good export performance, we are not achieving desirable investment, growth and employment levels. South Africa seems to have become obsessed with macro fundamentals, thereby overlooking other equally important requirements. Regrettably we appear to have lost the ability to connect deeds with action. It is admirable to reduce the fiscal deficit, but it has little meaning when the budget expenditure does not allow for adequate capital programmes and remains emasculated by recurrent expenditure and poor service delivery. If the budget deficit increased as a result of more fiscal allocation to economic infrastructure the private sector would be encouraged to invest as well, with resultant growth in fixed capital formation. And there is always the option of shirting expenditure from government operations to capital programmes. The Reserve Bank's tight grip on interest rates has also failed to take into account the fact that in real terms, it costs more to borrow money now than a year ago. In the past twelve months inflation has fallen faster than nominal interest rates. This stifles risk taking and hence investment.

6.  What Can We do to Grow our Economy

South Africa needs to focus more directly on economic growth rather than on macro objectives that lack integration and real performance. Objectives and targets should be to achieve growth and should not exist for their sake alone A number of variables and imperatives must be considered. What we should do to boost growth potential is:

• accelerate privatisation to increase FDI, competition and reduce inflation and the cost of capital. South Africa needs a clear time bound privatisation plan. In this regard, Eskom is used as an example. Eskom is still one of the most competitive suppliers of electricity in the world. This provides industry with a meaningful competitive advantage. We must ensure that the restructuring of this utility does not result in upward price adjustments that could destroy this advantage.

• liberalise immigration requirements to reduce our skills deficit and enhance risk taking in the economy;
• simplify FDI requirements and abolish unproductive conditionalities ;
• develop integrated and predictable policy frameworks and applications
• reduce the bureaucracy in the application of the Skills Development Act to grow the skills base and hence economic activity. The skills profile of a country is directly linked to the nature and quantum of investment;
• focus on improving the delivery systems of the state itself;
• Crime and corruption continue to haunt business. Business welcomes the anti-corruption manifesto and all that it entails. Ongoing intervention will be needed to give substance to the anti-corruption drive. The Second King Report on Corporate Governance has been universally hailed as the finest document on corporate governance in the world. Companies must adopt and implement the principles contained in that report.
• develop a social compact between all social partners to achieve a shared economic vision of the future and hence create a sense of common purpose rather than conflict between stakeholders;
• remove remaining foreign exchange controls to display confidence in the economy and to stabilise the currency;
• revisit the overall tax regime and structure and reduce headline tax rates;
• spend more of the fiscus on tangible projects and foster more public / private sector partnerships. This will mobilise additional risk taking in the economy.
• simplify tax and labour regulations for small business and start up enterprises;

We must also address the following imperatives:

• Free up the entire value chain - including labour, capital, logistics -particularly transport and the virtual monopoly of our rail services.
• Implement a comprehensive national AIDS strategy that goes beyond awareness and education. We need to devise interventions that provide a social safety net, encompassing, for example, the care of orphans and of those who are ill as well as their families.

South Africa needs a comprehensive "battle plan" to bring about successful growth. We lack a shared analysis of the economic goals we should strive for, and we lack a shared vision of the future. We must develop a common purpose between all the social partners. In this regard NEDLAC has a keyrole to perform, and should take the lead. In assuming this role, NEDLAC should recognise and build on the successes achieved within other bi- and multilateral structures such as the Millennium Labour Council.

We must increase the domestic market for our goods and services so that we can increase production. The traditional "white" market is too small to sustain increased production and economic growth. There is thus an imperative, to bring the previously disadvantaged persons into the mainstream economy so that they can become both producers and consumers of products and services. In this regard, equity plans and their implementation can only scratch the surface.

Organised business has been slower than the political structures in our country to change. Parallel developments on racial lines continue to take place. Thus there is an imperative to continue to reform the institutions of organised business through a process, which although not without problems, will enable Black and White to share experiences and views, and which will provide all with access to trade services and to development opportunities. Unification of business in South Africa will result in further robust growth in the country based on independent businesspersons being prepared to take increased risks with the objective of making business work for them.

Companies also need to bring Black business into their supply chains, so doing improving the competencies of Black businesspersons, and broadening their participation in the economy. Procurement is all about how to strengthen the supply chain and to improve the productive base of a company. Reliable producers throughout the supply chain will improve the South African competitiveness in world markets and to the expansion of our export base. Small producers need to be brought into the "loop" and to become a critical component of the final output.

The need for socio-economic transformation must not be underestimated. Transformation and empowerment, however, must also address impediments inherent in the economic system, and ways and means must be found to facilitate access to capital and to markets for small and emerging business.

The establishment of incubators and role of chambers of commerce in facilitating advancement in local areas will enhance and speed up the rate at which such businesses can enter the mainstream of South African economy. In this regard, empowerment and development must not be regarded as an additional cost, but rather as an investment in expanding our production base.

On the fiscal side, business looks forward to a well managed economy. In his state of the nation address at the beginning of the year, President Mbeki gave the undertaking that government would identify the congestion points in service delivery, and undertook to allocate a greater part of the state budget to infrastructure. This is encouraging.

7.  Where to Now?

The policies which South Africa has adopted in the past several years are sound. However, there appears to be lack of focus and of political will to implement them.

What South Africa needs is a clear definition of the responsibilities of both the public and private sectors in the roll out of national policy and strategy. Business is ready and willing to be a true partner to government and other social partners in implementing these admirable policies. Business can act as an agent of the state, for example assisting the DTI to get their products and services to the communities they need to assist. In this area, organised Business, in partnership with two financial organisations, is already assisting with customs drawbacks. In such partnerships, Business is prepared to share the risks and rewards with government.

Ladies and gentlemen we must aim high. If we "shoot for the stars we have a chance of reaching the moon". We should all stretch ourselves to the limit in order to grow our economy. With the necessary will and commitment from all the social partners in the country, we can and will make South Africa a winning nation. If South does indeed become a winning nation we will be well-placed to the lead in turning New Partnership for Africa's Development into reality.