COMMISSION ON GLOBALISATION AND THE PROSPECTS FOR INVESTMENT AND GROWTH

Chairperson: Cas Coovadia, General Manager, Banking Council
Speaker: Elias Masilela, Chief Director: Macroeconomic Policy, Government Convenor in Public Finance and Monetary Policy Chamber
Respondent: Sipho Masuku, S.A. Youth Council

1. Welcome and opening

The chairperson opened the commission and welcomed all present. He stated that globalisation was a very important issue for South Africa especially in the following context:

• Its relationship with and impact on investment and growth; and
• The way in which South Africa should respond to and approach globalisation.

2. Summary of issues raised by Elias Masilela

2.1. South Africa is part of the global village.

Globalisation impacts on South Africa via the following channels: trade, investment, capital flows (savings gap), technology, prices, growth and employment. South Africa is part of the global village and as such it cannot isolate itself.

2.2. Importance of the global environment for SA

The global environment is very important for South Africa given its reliance on the external account for growth, investment and our employment. Government projects that, within the next five years in terms of South Africa's exports and imports, the SA economy would be operating at a level of between 80-100% "openness". In the recent World Economic Outlook of the IMF, it is shown that there is a strong correlation between emerging market economies (South Africa belongs in this group) and the G7 economies.

2.3. South Africa's savings performance

Prior to 1994 the Government mainly relied on domestic savings in order to fund the requisite investment for growth. However, post-1994, with the change in perception towards the SA economy, there has been a turn around where investment is now higher then domestic savings. This means that South Africa is able to use foreign savings to fund our growth. Investment and savings are important because of the close relationship between the two and output. High investment and high output increase the potential for growth and job creation.

For a long time Government has been mainly responsible for the poor savings record of the economy. However, that is turning around. By the 2002/2003 financial year this should be greatly improved and we forecast a dissavings rate of 0%, to GDP. The same applies to households. After 1997/1998 there was a change in household behaviour where the spike in the interest rates tended to cause people to try to reduce their debt exposure and save more. South Africa's ability to use foreign savings in order to fund investment is positive on the one hand, but there is a negative aspect to it, as these capital flows have been volatile.

2.4. FDI vs. portfolio flows

One of the assumptions in the Government's macroeconomic policy, GEAR was strong FDI into South Africa. However, this did not happen. Instead South Africa has attracted portfolio investment which is short-tem in nature. Portfolio investment creates a lot of uncertainty in the economy, which adds to the declining confidence of business and consumers. There is a debate emerging in Government that economies that have deep and liquid financial markets tend to attract portfolio investment. The South African economy has the character of developed economies with deep and liquid financial markets. The question that should be asked is whether South Africa should really be focusing on attracting FDI? Or should South Africa concentrate on harnessing the portfolio, in which we have a comparative advantage in attracting and making sure that it works for the economy? Despite the volatility of of capital flows, South Africa has been able to bring down its net open forward position, which has caused discomfort to investors.

2.5. Negative sentiments about the South African economy and exchange rate volatility

Despite South Africa's good macroeconomic performance, there has not been an improvement in investor sentiment. This has had an impact on the exchange rate, where the exchange rate has been volatile. One of the assumptions made regarding the decline of the rand is the extent of liquidity of the South African market. However, there are benefits of rand depreciation. These include: expenditure switching, increased competitiveness of the export sector, increased domestic investment and fundamental economic restructuring.

2.6. Capital expenditure too low for South Africa

It is important that expenditure is switched away from consumption expenditure to capital expenditure which is critical for South Africa, as there are huge social and economic infrastructural backlogs facing the country.

2.7. Debt management

Debt in the public and private sector has been well managed. This has contributed to Government's capacity to deliver in the future in that South Africa is paying less and less in debt service costs.

2.8. Benefits of sound fiscal management

As a result of good fiscal performance there has been a decline in interest rates. This has made it possible for the private sector to start issuing bonds in the domestic market, which was not feasible in the past, because the cost of borrowing was too high. It has been argued that one of the reasons why the SA economy is not growing at a fast pace is due to high interest rates. However, when compared to other emerging markets, South Africa is not performing badly. Now that sufficient macroeconomic stability has been achieved, the focus is shifting towards sectoral and structural policy issues. Government's vision is to move the economy from a dependent one to an independent economy.

2.9. Policy and duality

In order to improve growth, increase employment and self-sustainability, Government has planned different levels of policy interventions such as: short- term policy interventions, intermediate policies and long term policies including those of a regulatory nature. Government expects the fiscal allocation towards short-term intervention to decline as a proportion of total expenditure, going forward.

2.10. Maintaining a growth-oriented balance of spending

The challenges to a healthy balance of fiscal spending include: social security proposals, lack of employment growth, weak public service delivery, HIV/AIDS and growth-constraining regulation

3. Summary of issues raised by Sipho Masuku

3.1. Domestic private sector commitment to investment

Prospects for investment and growth are dependent to a large extent on the commitment of the private sector, in terms of investing capital in the economy. The domestic private sector continues to invest internationally, and this sends a negative signal to potential foreign investors who may be interested in investing in South Africa.

3.2. Regulation of the informal sector

Due to increasing job losses in the formal sector, the informal sector is growing steadily. The informal sector is not regulated, labour and environmental standards are not being adhered to and the skills problem within this sector is not being adequately addressed.

3.3. South Africa's industrial strategy

The South African economy relies too heavily on primary production. It is important that South Africa has a clear and focused industrial strategy that would enable the Nedlac constituencies to identify sectors in the economy that are declining in terms of growth and those sectors that are shedding jobs. It would also enable constituencies to engage on ways to improve South Africa's performance in weak sectors as well as to identify sectors that have potential in terms of growth.

3.4. State-led growth is important

In order to achieve the desired growth rates and investment and savings levels necessary to sustain the economy, state-led growth is crucial.

3.5. Government should consider the impact of privatisation on marginalised groups

Government should carefully consider privatisation of basic services such as water and electricity as this exacerbates poverty and hardship in communities particularly to those who are unemployed and cannot afford to pay high prices for services.

4. Summary of the themes in the discussion

• The significance of the Proudly South African Campaign
• The need for Government policies to be consistent and not contradict each other
• The impact of casinos and lottery games in depleting the savings of the poor
• Investment in the economy should be made by all stakeholders
• One of the most important impediments to growth and investment in South Africa is the huge skills shortage we experience
• State-led growth is not sustainable or conducive in the long run
• The role of the South African Reserve Bank in terms of protecting the value of the currency
• The impact of sentiment on investment and growth