Parliament Portfolio Committee on Finance

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PARLIAMENT Portfolio Committee on
Finance 28 SEPTEMBER 2001 GETTING THE GROWTH
EQUATION RIGHT
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AGENDA 1 INTRODUCTION 2 MODERN ECONOMICS -
BUTTERFLIES 3 FDI VERSUS ECONOMIC
GROWTH 4 GETTING THE GROWTH EQUATION
RIGHT 5 CONCLUSION

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CONVERTING IDEAS INTO WEALTH
Introduction

• Key positive contributors to economic growth
• high quality human capital
• Governments overall policy approach
• institutional factors
• external factors
• socio-political stability
• sufficient savings

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CONVERTING IDEAS INTO WEALTH
Modern Economic Theory

• Conventional economics view economy as machine
• Behaviour predictable and controllable
• Economies complex systems living on edge of chaos
• Uncertainty and unpredictability features of such
  systems
• Individuals, firms governments adapt behaviour
  in light of events
• Makes precise control regulation impossible

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CONVERTING IDEAS INTO WEALTH
Butterfly Economics

• Economies societies not like machines, more
  like living organisms
• Complex systems living on edge of chaos
• Such systems inherently difficult to predict and
  manage
• Beating of butterflys wings on one continent,
  can cause tornado to start on another
• As long as we cling to orthodox economy theory we
  will remain powerless either to understand
  disasters or offer solutions

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CONVERTING IDEAS INTO WEALTH
Changing Global Environment

• World we operate in today, very different from
  decade ago
• Terrorist attacks introduced major element of
  uncertainty
• Not yet possible to anticipate political
  economic consequences thereof
• Bring about major changes in worlds
  geo-political landscape
• Even before tragic events we failed to understand
  why domestic financial markets operate the way
  they do

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International Determined Policy Rules

• Sound Balance of Payments position
• Surplus on current account
• Small falling budget deficit
• Inflation well below 10 level
• Healthy foreign debt profile
• Why then do we not feature prominently on
  investors radar screens?

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International Determined Policy Rules

• Financial markets do not operate according to
  conventional economic theory any longer
• Shifted their attention away from purely
  focussing on macro fundamentals
• Now also concentrate more on structural
  socio-political factors
• Factors that affect countrys risk premium

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CONVERTING IDEAS INTO WEALTH
Structural Socio-Political Factors

• Broader political environment
• Tensions within ruling alliance
• Slow pace of privatisation
• Impact of HIV/AIDS on economy
• Regional instability
• Governments soft stand on some of these issues

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CONVERTING IDEAS INTO WEALTH
Structural Socio-Political Factors

• Crime corruption
• Beaurocratic inadequacies
• Inflexible labour market
• Exchange controls
• High unemployment levels
• Lack of skills
• Tough immigration laws
• Sluggish economic growth
• Governments inability to ensure effective social
  spending
• Poverty

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CONVERTING IDEAS INTO WEALTH

• As long as we cling to orthodox economic theory,
  we will fail to understand financial market
  developments
• Move our focus to address structural factors
  mentioned earlier with much more vigour
• Not take eye off the ball
• But, need to be able to juggle more than one ball
  at a time
• When seen actively addressing these issues,
  investor sentiment should improve

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CONVERTING IDEAS INTO WEALTH

• Unfortunately for emerging markets, attention
  given to fighting terrorism, will make more
  difficult to attract FDI
• Even more reason to listen to investors credit
  rating agencies concerns and addressing them
  with vigour

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Economic Growth versus Investment

• Debate something of chicken egg scenario
• Conventional economics states growth first then
  investment will follow
• In SAs case Is lack of FDI main or only reason
  for economys inability to generate growth?
• Needed to address huge unemployment problem

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Economic Growth versus Investment

• Three broad factors contributed to weak growth
• structural adjustments
• significant tightening in fiscal policy
• series of external shocks
• These factors events together with remaining
  structural weaknesses depressed consumer,
  business foreign investor confidence
• Financial markets driven by sentiment
• Sentiment towards SA negative according to
  capital profile

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Flows into the Equity and Bond Markets
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Foreign Direct Investment (FDI)
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SAs Contribution to World Output
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SAs Contribution to Developing World Output
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Composition of FDI Flows to Developing World
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Comparative AnalysisFDI Flows to Four Major
Emerging Markets
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Equity Portfolio Flows vs Direct Investment in
the Developing World
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ZAR Weakness Against Majors
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Net Open Foreign Currency Position
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Gross Domestic Savings
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CONVERTING IDEAS INTO WEALTH
Savings and Domestic Investment

• To stimulate domestic savings, sentiment would
  have to improve
• Primary role of private sector to seek profitable
  opportunities for business
• Opportunities only actively sought if potential
  returns exceed risks taken
• Many issues thats conducive to risk taking

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CONVERTING IDEAS INTO WEALTH
Issues Conducive To Risk Taking

• Policy certainty
• Political stability
• Maintenance of law order
• Streamlined business friendly service oriented
  regulatory structure
• Strong financial system
• Availability of decent pool of skills
• Competitive currency
• Competitive tax environment
• Low inflation environment

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CONVERTING IDEAS INTO WEALTH
Savings and Domestic Investment

• Issues crucial to determine attractiveness of
  economy to foreign investors
• If unfavourable, may also encourage domestic
  investors to seek opportunities abroad
• Physical emigration versus financial emigration

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Savings and Domestic Investment

• In aftermath of US terrorist attacks, more
  important for all role players in economy to work
  together
• Consistent debate consultation
• Over time produce better policy outcomes
• Government could look at more aggressive measures
  to promote savings and domestic investment
• Policies should create investment growth friendly
  environment by focussing on structural issues
• Balanced by attempts to address plight of the
  poor

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CONVERTING IDEAS INTO WEALTH
Savings and Domestic Investment

• Short-term management of economy in uncertain
  times
• government consider fiscal stimulants
• confidence of investors seriously diluted
• wealth dramatically reduced
• Government can however for instance change
  implementation rules of CGT

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Capital Gains Tax (CGT)

• Tax realised gains in values as at 10 September
  2001 instead of average of 5 trading days ahead
  of actual implementation date
• Tax gains in sales during next 12 months on
  current proposed basis i.e. 1 October 2001 as
  basis for gains
• Tax gains after 12 months on basis of higher
  value calculated on average of monthly closing
  prices of 12-month period or market price as at 1
  October 2001

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Capital Gains Tax (CGT)

• Advantage will reflect sense of fairness during
  already trying times
• Would serve as incentive not to rush into selling
  frenzy
• Could work towards greater stability in financial
  markets

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Conclusion

• SA somewhat insulated to current developments
  than other emerging markets
• Why?
• Low level of foreign debt
• low exposure to US imports
• healthy financial position
• However, no doubt affected by impact of terrorist
  attacks

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Conclusion

• SAs fundamentals strong
• Overall macro-economic policy framework sound
  market-oriented
• Number of issues that create obstacles to attract
  FDI
• Prerequisite for sustainable faster economic
  growth

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Getting the growth equation rightWhat piece of
the puzzle is missing?
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