18 February 1997
ECONOMIC DEVELOPMENTS, STRATEGIES AND FUTURE PROSPECTS
Good morning.
I am told that it is traditional for the Minister of Finance to speak at this conference, and that this is now the 20th annual conference that Frankel Pollak has held. I am not sure as to whether there have been more changes to the name of the company, or more Finance Ministers during that time! Anyway, thank you for inviting me to the Soc. Gen. Frankel Pollak Investment Conference. I have been asked to speak on a "yesterday, today and tomorrow" theme - developments, strategies and future prospects.
Looking back at developments, it strikes one that from the early 1980s through the first half of the nineties, the South African economy grew by little more than 1,0 percent per year, and national income per capita fell by about 18 percent.
Over this period, consumption expenditure by general government increased from 15 percent to 21 percent of GDP and gross domestic fixed investment fell from 27 percent to 16 percent of the aggregate. Government debt increased from 30 percent to nearly 60 percent of GDP.
These are trends which we have begun to reverse. The growth recovery, which has averaged 3 percent a year since 1994, has for the first time in many decades been led mainly by investment in the private sector and a strong expansion of non-gold exports. The strong inflow of foreign capital onto the JSE during the first six weeks of 1997 has contributed to bringing bond rates down below 15% for the first time since March last year. A lower public sector borrowing requirement in 1997/98 will reinforce this downward trend in interest rates. We also expect government debt to come down from 58% of GDP in the second half of 1995 to below 55% in 1997 - a fall in this ratio for the first time in 6 years. Figures released last week indicated that we on target for achieving our target of a 5,1% budget deficit for 1996/97, and we remain committed to achieving 4% in the forthcoming budget, with a reduction to 3% by the year 2000.
What are the strategies that are affecting this turnaround? Several elements of the macroeconomic strategy to which we are committed are aimed at strengthening the investment trend in the economy and ensuring that our international competitiveness is consolidated and enhanced.
In some of these areas, policies are already in place and programmes are up and running. In others there is further work to do - in labour market policies, for example, time has to be allowed for the negotiations process within the Nedlac environment, and the trade reform programme requires extensive international consultation and sometimes tough bargaining.
Growth in the manufacturing sector during 1996 has been disappointing and we have not made sufficient progress in meeting the employment challenge which confronts us, But on other fronts, the record of the past year has been consistent with our growth strategy projections. Exports have continued to grow strongly, government has kept to its deficit target for this fiscal year, and industrial investment continues to take the lead in the expansion of domestic expenditure.
Against the background of the long decline in average living standards up to 1993, real income per capita in South Africa has increased by between 4 and 5 percent over the past three years. A mild slowdown in the economy is now in progress, but we anticipate a growth recovery towards the end of 1997, sustained and strengthened during the remaining years of the decade. The underlying growth potential of this economy has for many decades been suppressed by discriminatory human development policies, a plethora of ideologically motivated regulatory constraints, an absurd spatial development framework and a series of unproductive so-called strategic industrial investments. This is behind us. We will enter the twenty-first century a robust, revitalised, rapidly industrialising powerhouse of the Southern African region, capable of taking full advantage of the opportunities the global economy offers.
I would like to step back a little now from our growth strategy, and say some things about the social and developmental challenges which we face, and which are integrally bound up with our economic opportunities and constraints. South Africa is a highly unequal society, we have a serious crime problem and there are many people whose daily struggle for survival will not be significantly changed by improved trade or growth statistics over the next three to five years.
This Government entered office in 1994 with a clear vision for redistribution and a strategy for attacking poverty, set out in our Reconstruction and Development Programme. Far from replacing the RDP, as some have alleged, our macroeconomic strategy is a fundamental cornerstone in this larger project: a broad framework within which longer term goals can realistically and sustainably be met.
Apartheid resulted in a very unbalanced economy, in which many rural areas are poor, under-developed and over-populated and many people live far away from their work opportunities. The RDP requires new investments in infrastructure in our towns and cities, and a major urban housing programme. It also requires a coordinated rural development strategy, so that former homeland areas can become economically viable, generating incomes and providing self-sustaining employment opportunities.
Urbanisation and the acceleration of housing programmes must be accompanied by appropriate infrastructural investment. There are many millions of people whose livelihoods depend on improved maintenance of rural roads and water supplies and rehabilitation of the carrying capacity of the land.
In the longer term, one of the most important benefits of coordinated urban and rural development strategies will be the decline of the migrant labour system. Too many South African families are divided and impoverished by the long distances which separate bread-winners from their households. The reintegration of households and communities is in turn inseparable from our campaigns against crime and against the violence which impacts so severely on women and children throughout our society.
These commitments - a substantial housing drive, support for municipal infrastructural development, a reintegration of agricultural and rural development programmes - are firmly embedded in government policy and will continue to enjoy priority in our budget planning.
Apartheid also involved discriminatory and inadequate investment in human resources. The Government now seeks to ensure that all children have access to at least nine years of schooling, that public schools are financed equitably, that the curriculum is overhauled, that the education of teachers is upgraded and that classrooms and school facilities and built and properly maintained. There has been a rapid expansion in enrolment in colleges, technikons and universities in recent years. A green paper on higher education has just been released, recommending measures aimed at redressing the inequities in this sector and bringing our institutions of higher learning more in line with the development needs of the economy in the 21st century.
In the health sector, a transformation is underway which will lead in due course to a district-based primary health care system, based on the principle of universal access to basic preventive, promotional and essential curative services. South Africa has a well-established hospital sector which includes some of the finest specialist and academic medical facilities in the developing world. We need to preserve these centres of excellence, while re-focusing resource allocation in favour of community health centres and clinics. This is an immense challenge, and will involve a thorough reorganisation of how our hospitals are administered and a greater role for private sources of finance in hospitals and specialist services. At the same time, we have removed fees and charges at the primary level of care, removing ability to pay as a barrier preventing the poor from accessing public health services.
The RDP also involves bringing electricity, water and sanitation and telephone lines to communities and households which were previously without these services. Progress with electrification has been rapid, bringing lighting and the use of electrical appliances to some 500 000 households in recent years. Several hundred water supply projects have been initiated since the change of government. These are investments which improve the quality of life of the poor, and enhance the economic opportunities of low-income communities and rural areas.
There are numerous other RDP-related initiatives, now fully integrated into national and provincial budgets or in some cases devolved to local government or non-governmental implementing agencies. These include a primary school nutrition programme, land redistribution and support for small-scale farmers, a range of initiatives aimed at encouraging the small business sector, employment creation through labour-intensive community projects, the construction of community centres in smaller towns or low-income neighbourhoods, support for sport and recreation, and a range of programmes aimed at improving the criminal justice system.
In all these initiatives, the need to redress the inequities of government spending under apartheid has been a primary consideration in programme design. The Departments of Finance and State Expenditure have also introduced stringent business planning principles into RDP project development, including attention to progress monitoring based on key performance indicators, aimed at fostering efficiency and productivity in the way Government delivers services. Reforms of the expenditure planning process are underway which will extend these disciplines across the entire budget.
Within the context of a tight budget constraint, RDP programmes have of course required cutbacks in expenditure in other areas. But there is a broader restructuring within the economy at large which is a crucial counterpart to the budgetary reprioritisation for which Government is responsible. In education and in health services, in transport and communications, indeed throughout the economy, a re-shaping of the mix between the public and the private sectors is in progress.
Private colleges now account for at least 150 000 students, and the number is growing rapidly. In keeping with developments in many other parts of the world, the public school system and our public universities, technikons and colleges are drawing to a greater extent than in the past on fee income and other sources of revenue in addition to taxpayers' contributions.
South Africa already has a mixed health system, in which the public and private sectors each account for roughly half of total spending. Considerable work has gone into re-thinking the financing and organisation of health services in recent years, both in Government and the private sector where rising medical insurance premiums are putting upward pressure on labour costs. As in any other industry, international trends play an important role in determining the pace and character of health system change. A comprehensive audit of our public hospital estate last year revealed rehabilitation and replacement needs amounting to some R8 billion, for which both public and private financial resources will be required.
This audience will be aware, lastly, of the enhanced role which private financing arrangements will play in major infrastructural projects and related services in future. There are direct advantages to the fiscus in this, but the more important point is that transparent cost-recovery mechanisms, concessioning of service delivery and longer-term contracts based on a competitive tender process are the keys to achieving better value for taxpayers' money and a sustainable expansion in service delivery.
There are exciting opportunities in manufacturing, tourism and other export-oriented industries in South Africa today. But there are also investment opportunities in the services sector, in infrastructural development and in contributing to the deepening and diversifying of activities which have traditionally been regarded as the preserve of the public sector.
I hope that this conference is able to take these challenges further than I have been able to do in the time available to me. South Africa's economic strategy, and future prospects, require strong and energetic partnerships between the public and private sectors across many fields of activity. I look forward to our further working together.
Issued by the Ministry of Finance, 18 February 1997