Growth and development: path dependence Notes on South Africa’s Response to the Great Recession
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Transcript of Growth and development: path dependence Notes on South Africa’s Response to the Great Recession
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Growth and Growth and development: path development: path
dependencedependence
Notes on South Africa’s Response to Notes on South Africa’s Response to the Great Recessionthe Great Recession
Andrew DonaldsonNational Treasury
August 2009
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As global economy slows, so too As global economy slows, so too does South Africa… does South Africa…
World GDP growth and SA growth
Source: IMF WEO Apr 2009, including forecast for South Africa.
4.7
2.22.8
3.64.9 4.5
5.1 5.2
3.2
-1.3
1.9
-2
0
2
4
6
8
10
per c
ent g
rowt
h (y-o
-y)
World Emerging and developing countries South Africa
Global slowdown dampens export demand from US, Europe and JapanEmerging markets affected by lower commodity prices, reduced export demand, risk aversion.
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South Africa’s fiscal outlookSouth Africa’s fiscal outlook
Economic growth in retreat – SA savings rate too low to sustain rapid growth– Redistribution through fiscus needs to be complemented by
improved household saving and investment Global economic context is highly uncertain, outlook for
growth will depend on effective international coordination South Africa’s macroeconomic framework aims to cushion
the adjustment and sustain growth and development– Strong fiscal position: shift from surplus to deficit
– Inflation set to fall, target remains in place
– Phased approach to exchange control liberalisation
– Sound banking and financial sector regulation
– Financial support for capital spending programmes of major infrastructure utilities
2009 Budget framework emphasises continuing spending on infrastructure, public services and programmes aimed at cushioning the poor against slower growth
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Budget balances – 2000/01-Budget balances – 2000/01-2011/122011/12
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Key spending trendsKey spending trends
10,000
20,000
30,000
40,000
50,000
60,000
70,000
R m
illio
n (
1995
/96
pri
ces)
Education Health Social security and welfare Built environment (including roads)Criminal justice sector
66
Growth in gross fixed capital Growth in gross fixed capital formationformation
50.0
150.0
250.0
350.0
450.0
550.0
2000 2001 2002 2003 2004 2005 2006 2007
General Government Public Corporations
Private Sector Total
Index
77
Infrastructure finance – ten-year Infrastructure finance – ten-year outlook outlook
Infrastructure investment requirements continue over medium to long term– Pace of growth will be more moderate
Eskom capital programme will need public and private sector co-financing– Role of development finance institutions under review
Municipal water supply and treatment plants– Mix of project management & financing needs
Transport investment tied to urbanisation and industrial development– Likely to dominate post-2010 city planning
Communications liberalisation under way Education, health and social infrastructure
– Public-private partnership opportunities No more sports stadiums…
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Creating jobs – sectoral Creating jobs – sectoral trends…trends…
Formal sector employment by industry2 million jobs created since
2001… many at risk,
especially in non-traded
goods sectors.
Need to create an additional
2 million jobs…
How to create conditions
for private sector to make
more jobs?
How can public sector
contribute cost-
effectively?
50
75
100
125
150
175
200
225
250
275
2001
2002
2003
2004
2005
2006
2007
2008
2009
Inde
x (2
001=
100)
Construction
Trade
Finance
Manufacturing
Mining
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South Africa’s response to South Africa’s response to global crisisglobal crisis
Good luck doesn’t last forever:– Industrial and trade competitiveness has to be fostered
Broadening of income support and social security underpins more broad-based development
Good time to strengthen regional economic linkages
Re-assertion of the role of development finance institutions
Sectoral and industrial policy: targeted industry support measures
Re-shaping of the balance between public and private services: education, health, enterprise development…
Inclusive development: opportunities for strengthening social security and labour market institutions
Acceleration of EPWP job creation; short-term training lay-offs
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Public spending choices…
1. Size of deficit
2. Type of spending
Fiscal policy choices critical to Fiscal policy choices critical to growth and macroeconomic growth and macroeconomic
sustainabilitysustainability1. Higher deficit over the long-term =
more borrowing = less future
economic growth (as debt repaid)
2. Spending must have larger economic
impact as costs rise.
3. Borrowing to pay wages, interest on
debt is unsustainable as growth
forecast deteriorates.
Spending on investment:
Higher growth ▲ in ST & LT
= higher future tax revenue
= inflation & LT interest rates lower
= real depreciation (more competitive) =
employment ▲ in exporting industries
Spending on consumption:
Growth ▲ in ST but not LT (and lower)
= inflation & LT rates higher
= real appreciation (less comp) =
employment ▲ in domestic sectors
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Counter-cyclical fiscal stimulus supports Counter-cyclical fiscal stimulus supports economy through growth-enhancing economy through growth-enhancing
spending decisionsspending decisions• Borrowing of the public sector expands rapidly• Strong growth in expenditure, including capital• Capital expenditure (6.6 per cent average real growth over MTEF) continues to grow faster
than current expenditure (3.7 per cent average real growth over MTEF).
-2
-1
0
1
2
3
4
5
6
7
8
Pe
r c
en
t o
f G
DP
Non-financial public enterprisesGeneral government
Calibrated for supportive economic environment
Fiscus recovers with economy
Adjusts to deterioration in economy
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Adjustments to economic outlook: Adjustments to economic outlook: distributional considerationsdistributional considerations
Redistribution Pooling of funds Saving Out-of-pocket
Government UIF benefits Curtailment of tax and spending Drawdown on savings consumption
Income pc
(logscale)
Households
Income (before tax)
Income (after redistribution)
Pooling of funds
Contingent Risks
Lifetime vulnerability
Risks mitigation: pooling & saving
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Institutional perspectives: Institutional perspectives: governance countsgovernance counts
Does anybody teach Comparative Economic Systems any more?– More complex institutional arrangements:
Regulation of markets Competition within the public sector Public-private partnerships Public economics beyond the sovereign state
Governance failure: a problem the modern corporation shares with rent-seeking states
– Solutions to principal-agent problems Incentives and the profit motive Information failures, audit and disclosure requirements Corporate governance and accountability
So what has gone wrong?– Macroeconomic boom-bust – Market regulation failure– Governance on holiday– Macro-structural imbalances
Different adjustment paths in different countries– Surplus vs deficit economies– Aged vs young populations– Deindustrialising vs emerging economies– Implications for South Africa?
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Path dependencePath dependence
Future course of the economy and public finances depends on the institutional legacy– Depth of SA’s financial markets has a long history– Transport, housing and the apartheid city– Labour market policy and SA’s political transition– Social security, income security & the evolution of contractual
savings– Path dependence can extend beyond discontinuities:
monetary & fiscal restraint after hyper-inflation
‘Bounded rationality’ of applied public finance– ‘Limits of organisation’: understanding the ‘second best’– ‘Learning by doing’ – the epidemiology of institutional change– Economics of system shocks: crisis as a reconstruction
opportunity
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Government’s Medium Term Government’s Medium Term Strategic FrameworkStrategic Framework
Ten strategic priorities– Growth, decent work, sustainable livelihoods– Investment in infrastructure– Rural development, land reform, food security– Skills, schooling and further education– Improving the health profile of all South Africans– Fighting crime and corruption– African advancement and international cooperation– Sustainable resource management and use– Building a developmental state – improvement of public
services, strengthening democratic institutions
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Policy choices that need to be Policy choices that need to be supported by underlying supported by underlying
evidence… evidence… Short-term fiscal interventions to support economic activity while avoiding an
unsustainable rise in public debt…
Monetary and fiscal policy credibility, capital market deepening, credit
extension in support of growth & development…
Public infrastructure investment priorities, regulatory and tariff policies…
Effective and well-targeted government spending…
Long-term planning and alignment of budgetary and development framework
Trade and industrial policy: competitiveness, productivity, technology,
support for R&D investment…
Human capital development, effective skills development…
Health financing and systems