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This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.

2 Critical Considerations: A Framework For Growth

2.1 Present economic trends

The trends established over the past two years suggest that the economy is on track for continued, if somewhat slower, growth in exports and investment. Policies are in place to bring the fiscal deficit down steadily and to keep inflation in check. Under these circumstances, detailed simulations, based on diverse econometric models, reach a common conclusion: growth of at best 3 percent per annum can be expected on average over the next few years. Although this represents a considerable improvement on past performance, it is not a development path which meets the goals South Africans have set for themselves.

Firstly, in the context of 3 percent growth, and without significant improvements in labour absorption coefficients, it is doubtful whether annual job creation much in excess of 100 000 would be possible over the next five years. The unemployment rate would then rise by some 5 percent to about 37 percent in 2000. This estimate takes into account about 20 000 additional jobs created per annum in response to various employment-intensive public expenditure programmes such as land reform, low-cost housing, community water and municipal infrastructure.

Secondly, the scope for increased public spending on social services would be severely limited. Medium term fiscal projections incorporating a 3 percent growth scenario, a gradual deficit reduction, the recent public sector wage settlement, and severe cuts (15 percent) in real spending in several government functions, indicate that there would be sufficient resources to increase real aggregate spending on social and community services by at most 3 percent per annum, which is barely above the population growth rate. The additional funding available would not cover 15 percent of current medium term departmental expansion plans.

Thirdly, the balance of payments remains a structural barrier to accelerated growth. The economy is dependent on imported capital and intermediate goods and, as in the past, the cyclical upswing brings a deterioration in the current account. Whereas this constraint has been eased through capital inflows since the elections in 1994, the lack of sustained long term capital inflows has made the balance of payments and the economy too reliant on short term reversible flows and consequently high interest rates.

The recent exchange rate instability presents a further complication. There is a danger of a further capital outflow and a balance of payments crisis. In this scenario growth would be abruptly curtailed and structural adjustment under terms set by international agencies would be unavoidable. Leaving aside this risk, growth forecasts have already been revised downwards by most professional analysts. It is recognised that the burden of the adjustment in the short term will fall on monetary policy and that an economic contraction to reduce import demand is likely.

What options are open to government? An expansionary fiscal strategy could be considered. However, even under the most favourable circumstances, this would only give a short term boost to growth since it would reproduce the historical pattern of cyclical growth and decline. Increased growth above 3 percent would be choked off by a rising current account deficit, upward pressure on real wages and curtailment of investment plans. Higher fiscal deficits would also lead to higher inflation and higher interest rates, exacerbating the burden of interest payments on the fiscus. More importantly, in the present climate of instability a fiscal expansion would precipitate a balance of payments crisis. Without attention to more deep-rooted reforms, there is no possibility of sustainable accelerated growth.

Base Scenario Projections: 1996-2000

Model characteristics 1996 1997 1998 1999 2000 Average

Fiscal deficit (% of GDP) (fiscal 5,1 4,5 4,0 3,5 3,0 4,0

year)

Real government consumption (% of 19,8 19,5 19,1 18,6 18,1 19,0

GDP)

Average tariff (% of imports) 10,0 9,0 9,0 8,0 8,0 8,8

Average real wage growth, private 0,8 1,5 1,7 1,3 1,4 1,4

sector

Average real wage growth, government 4,8 0,4 0,4 0,3 0,0 1,2

sector

Real effective exchange rate (% -9,6 0,7 0,1 0,1 0,0 -1,8

change)

Real bank rate 7,0 6,0 5,0 4,5 3,7 5,2

Real government investment growth 2,6 2,4 2,2 2,2 2,4 2,4

Real parastatal investment growth 3,0 2,5 2,5 2,5 3,0 2,7

Real private investment growth 6,3 4,2 4,4 5,8 7,1 5,6

Real non-gold export growth 9,6 7,5 6,4 5,5 5,3 6,9

Results 1996 1997 1998 1999 2000 Average

GDP growth 3,3 2,0 2,5 2,9 3,3 2,8

Inflation (CPI) 8,4 10,9 9,6 9,3 9,1 9,5

Employment growth (non-agricultural 0,9 1,0 0,8 0,9 1,3 1,0

formal)

New jobs per year ('000) 97 101 84 103 134 104

Current account deficit (% of GDP) 1,8 1,3 1,1 1,1 1,6 1,4

Real export growth, manufacturing 12,5 10,4 7,5 6,6 5,4 8,5

Gross private savings (% of GDP) 20,5 20,7 20,8 20,8 20,6 20,7

Government dissavings (% of GDP) 3,1 2,6 2,0 1,4 0,9 2,0

2.2 Elements of a Medium Term Strategy

An integrated medium term strategy is presented below which provides a broad bridge between the present constrained economic environment and an improved growth and employment performance in the period up to 2000, while strengthening the competitive capacity of the economy in the long term. The core elements of this integrated package are:

     an acceleration of the fiscal reform process, including a tighter short term fiscal stance to counter inflation, an appropriate medium-term deficit target to eliminate government dissaving, further revision of the tax structure, and a range of budgetary restructuring initiatives to sharpen the redistributive thrust of expenditure and contain costs;

     a further step in the gradual relaxation of exchange controls, the maintenance of monetary policies consistent with continued inflation reduction and exchange rate management to stabilise the real effective exchange rate at a competitive level;

     a consolidation of trade and industrial policy reforms, incorporating a further lowering of tariffs to compensate for the real depreciation, the introduction of tax incentives for a fixed period to stimulate investment, a campaign to boost small and medium firm development, a strengthening of competition policy and the development of industrial cluster support programmes, amongst other initiatives;

     the implementation of the public sector asset restructuring programme, including guidelines for the governance, regulation and financing of public corporations, and leading off with the sale of non-strategic assets and the creation of public-private partnerships in transport and telecommunications;

     an expansionary public infrastructure investment programme to provide for more adequate and efficient economic infrastructure services in support of industrial and regional development and to address major backlogs in the provision of municipal and rural services;

     a structured flexibility within the collective bargaining system to support a competitive and more labour-intensive growth path, including greater sensitivity in wage determination to varying capital intensity, skills, regional circumstances and firm size; reduced minimum wage schedules for young trainees, reducing indirect wage costs; and increasing the incentives for more shifts, job sharing and greater employment flexibility; and

     a social agreement to facilitate wage and price moderation, underpin accelerated investment and employment and enhance public service delivery.

The measures outlined above are mutually supportive and constitute an integrated strategy to enhance economic growth and employment creation. It is Government's conviction that they will establish a stable and competitive environment for significantly improved export and investment growth.

2.3 Accelerated Growth

The recent depreciation of the rand represents one element in the improved competitiveness which the economy must achieve for higher growth to be sustained. Although higher import prices will impact negatively on importing firms in the short term, the advantages of a lower rand for producers of traded goods for both export and domestic markets represent a crucial window of opportunity over the next few years. It is Government's intention to utilise this opportunity to the fullest. This requires several further adjustments to avoid erosion of the improved trading outlook by macroeconomic imbalances.

In brief, government consumption expenditure should be cut back, private and public sector wage increases kept in check, tariff reform accelerated to compensate for the depreciation and domestic savings performance improved. These measures will counteract the inflationary impact of the exchange rate adjustment, permit fiscal deficit targets to be reached, establish a climate for continued investor confidence and facilitate the financing of both private sector investment and accelerated development expenditure.

Drawing on several models of the South African economy, the effects of an integrated economic reform strategy on growth and employment prospects have been tested. Results, bearing in mind the inevitable uncertainties of economic projections, are as follows.

The package will establish a stable platform for a powerful expansionary thrust, with non-gold export growth rising to 10 percent per annum over the period. Against the background of this expansion and supported by the proposed investment incentives, as well as the integrity of the package as a whole, private sector investment can be expected to continue its strong upward momentum, averaging some 12 percent growth between 1995 and 2000. Accelerating public sector investment growth, driven by public corporations and local authorities, programmed to reach growth rates of up to 10 percent per annum by 1998, will complement the demand stimulus of stronger non-gold exports and private investment performance. In the aggregate, these developments are expected to provide sufficient impetus for GDP growth to climb to the targeted 6 percent by the year 2000.

The danger of an increase in the rate of inflation, reinforced by a wage-price spiral, is a constant threat to the expansion anticipated by the strategy. To contain inflationary pressures requires concerted implementation of complementary stabilisation measures: accelerated tariff liberalisation, sharper deficit reduction, tight monetary policy, and above all, productivity linked wage increases. Taken together, these measures would hold the inflation rate below the 10 percent barrier throughout the period, and preserve the competitive advantage of the depreciation.

As a result of the reduction in government consumption expenditure relative to GDP, and the reversal of government dissaving, gross domestic saving is expected to rise from 18 percent to 22 percent of GDP. This represents an important basis for the sustainability of the long-run growth path. Gross domestic investment is expected to increase from 20 percent to nearly 26 percent of GDP in the year 2000. This requires capital inflows equivalent to almost 4 percent of GDP. The integrity of this growth strategy is therefore dependent on maintaining a favourable investment climate, in order to attract foreign investment.

Employment projections are sensitive to assumptions regarding real wage growth, easier access to formal job opportunities and accelerated programmes of small business and small farmer support. A favourable employment response to accelerating growth, reinforced by effective public sector programmes, would see job creation rise to 400 000 per annum by the year 2000. The unemployment rate would then begin to show a visible decline.

There are, in sum, several inter-related aspects of the growth strategy. Given the recent depreciation of the exchange rate, which provides a competitive advantage to exporters, the expected economic expansion will be strengthened if the real value of the currency remains at a stable level. Inflation will not erode competitiveness for the following reasons:

     deficit reduction releases the pressure of the fiscus on the capital market; it also facilitates the accelerated flow of domestic resources into industrial investment and contributes to the overall financial stability of the economy; and

     accelerated tariff reduction compensates for the depreciation and provides an additional buffer against inflation; it also holds imported input prices down and preserves the momentum of restructuring at the firm level.

In addition to maintaining financial stability, job creation is enhanced:

     supply-side industrial measures which replace the general export incentive scheme contribute to industrial competitiveness, investment and job creation;

     public investment to upgrade sustainable economic and municipal infrastructure crowds in private investment and boosts short-term economic performance, while laying the infrastructural foundations for long-term productivity growth;

     wage moderation increases labour demand while lowering inflationary pressures; and

     greater flexibility in the labour market regulatory framework facilitates employment creation while extending basic rights to a broader pool of the work force.

Responsible monetary policies anchor the competitiveness and stability of the economy in regard to both the domestic value of the rand and its foreign purchasing power and encourage domestic saving and investment. Finally, the fiscal containment in the package reduces the burden placed on monetary policy.

The policy package is also consistent with long-run sustainable growth on a higher plane:

     tax reforms are aimed at international competitiveness and minimising the distorting effects of taxation on economic behaviour, while preserving the fundamental progressiveness of the overall tax structure;

     trade and industrial policies aim to promote an outward-oriented industrial economy, integrated into the regional and global environment and fully responsive to market trends and opportunities;

     public sector reforms, comprising asset restructuring, budgetary reprioritisation and improved service delivery, underpin social and infrastructural development in both urban and rural areas and contribute to the redistribution of opportunities and income; and

     employment and training policies enhance the growth potential of industry, extend job opportunities to the unemployed and contribute over time to the redistribution of income.

While recognising that policy-making must remain sensitive to changing circumstances, there is an urgent need to establish firm foundations for this approach to growth and employment creation in the South African economy. The Government's proposals for such a framework are set out in more detail below.

Integrated Scenario Projections:

1996-2000

Model characteristics 1996 1997 1998 1999 2000 Average

Fiscal deficit (% of GDP) (fiscal 5,1 4,0 3,5 3,0 3,0 3,7

year)

Real government consumption (% of 19,9 19,5 19,0 18,5 18,1 19,0

GDP)

Average tariff (% of imports) 10,0 8,0 7,0 7,0 6,0 7,6

Average real wage growth, private -0,5 1,0 1,0 1,0 1,0 0,8

sector

Average real wage growth, government 4,4 0,7 0,4 0,8 0,4 1,3

sector

Real effective exchange rate (% -8,5 -0,3 0,0 0,0 0,0 -1,8

change)

Real bank rate 7,0 5,0 4,0 3,0 3,0 4,4

Real government investment growth 3,4 2,7 5,4 7,5 16,7 7,1

Real parastatal investment growth 3,0 5,0 10,0 10,0 10,0 7,6

Real private sector investment 9,3 9,1 9,3 13,9 17,0 11,7

growth

Real non-gold export growth 9,1 8,0 7,0 7,8 10,2 8,4

Additional foreign direct investment 155 365 504 716 804 509

(US$ m)

Results 1996 1997 1998 1999 2000 Average

GDP growth 3,5 2,9 3,8 4,9 6,1 4,2

Inflation (CPI) 8,0 9,7 8,1 7,7 7,6 8,2

Employment growth (non-agricultural 1,3 3,0 2,7 3,5 4,3 2,9

formal)

New jobs per year ('000) 126 252 246 320 409 270

Current account deficit (% of GDP) 2,2 2,0 2,2 2,5 3,1 2,4

Real export growth, manufacturing 10,3 12,2 8,3 10,5 12,8 10,8

Gross private savings (% of GDP) 20,5 21,0 21,2 21,5 21,9 21,2

Government dissavings (% of GDP) 3,1 2,3 1,7 0,7 0,6 1,9

This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. Return to the Nelson Mandela Centre of Memory site.