SUN CITY 20 OCTOBER 1999
The Chairperson
Delegates
Ladies and gentlemen
I would like to thank you for inviting me to speak at your annual congress. The AHI is a powerful organisation amongst the Afrikaner business community. Your support of the democratic transition has contributed to the "miracle" that many people both here a nd abroad refer to when speaking of the political changes that have taken place in our country.
I have been asked to present a government perspective on economic and fiscal policy.
This is not an easy task for a historian and political activist like myself who has not been formally schooled in matters relating to the economy! I will none the less try my best!
In order to understand the current fiscal and economic policy positions of the government we have to start by examining the economy that the first democratic government inherited in 1994. (The historian in me suggests that this is the correct way to procee d!).
As business people you would understand that the economy we inherited in 1994 was in serious decline and faced structural problems. When looking back the key features of our economy then included the following:
Since the middle of the 1960s the economy has been experiencing declining rates of economic growth;
Further between 1989 and 1993 the country experienced it worst recession;
Previous governments in order to build a manufacturing sector followed an industrial strategy, based on import substitution. Such a strategy required huge tariff barriers to protect the manufacturing sector. In our case these tariff walls together wit h sanctions gave rise to a manufacturing sector which was globally un-competitive and inefficient;
The economy, ever since the 1972/73 oil crisis, experienced macro-economic instability with double digit inflation, a serious foreign exchange and a savings constraint (our manufacturing sector relied on a fair measure of imported capital and inter-me diate goods). This savings constraint was exacerbated by the debt standstill following the famous Rubicon speech when the economy was starved of foreign savings entering the country;
Unemployment levels reached frightening proportions in the country. We must not forget that unlike other developing country where unemployment remains hidden because of the existence of a subsistence economy, in our country the various Land acts and o ther measures dispossessed the African people of their land. Subsistence agriculture was destroyed. The unemployment problem was made worse by the increasing capital intensity in the manufacturing sector and widespread mechanisation in agriculture;
At the level of the labour market two serious problems had to be grappled with. Industrial relations in the country were characterised by authoritarianism and intolerance towards trade unions. This gave rise to antagonistic relations between employers and employees, marked by industrial strife and suspicion. The other serious problem was the shortage of skilled workers, which continues to plague the economy.
The Mandela Government had to devise economic policies to grapple with this inheritance. These policies continue to be implemented by the Mbeki Government and I elaborate further on how we see these policies in the medium term.
In order to improve the macro-economic performance of the economy the key fiscal policy instrument relates to the size of the budget deficit. The De Klerk Government built up the deficit to unsustainable levels. In 1998 e.g. the budget deficit was above 8% . The Government had to pursue a strategy of accelerated deficit reduction. This fell to below 3% in the 1998 financial year.
The other key elements of Government 's macro-economic policy as captured in the GEAR policy included trade liberalisation and tariff reduction.
The Government remains committed to follow GEAR. It is our view that the country was able to weather the Asian economic crisis because of this tight fiscal policy.
Over the last five years the rate of increase in the price level has been below expectations. Further we have succeeded to reduce consumer price inflation to the lowest level in over two decades because of this approach. Currently inflation stands at 3,2%. We have also created conditions for the interest rates to be reduced to where home loans now stand at 15,5%.
Since 1994 we have seen a sustained GDP growth which has averaged over 2%.
A hallmark of GEAR has been the reprioritisation of government expenditure on social services. We have succeeded in restructuring the budget so as to sharpen the redistributive thrust of government spending so as to make resources available for poverty all eviation. This meant that we have been able to increase social spending on education, housing, health and welfare.
We have been able to succeed in this also because of improving our tax collection capabilities. In January 1999 for example SARS was able to collect 8,3% more taxes than the corresponding amount for the same month in 1998.
The country has done well in attracting foreign investments. In the last three years (1996, 1997 and 1998) we have foreign investment flows of R12,6 billion, R15,8 billion and R17,2 billion respectively. We do not think these amounts are sufficient and fee l confident that the sound economic policies we have put into place would attract significantly more over the next three years.
Another important aspect of our economic policy is the restructuring of state assets. We succeeded in finding strategic equity partners for Telkom and the Airports Company. Recently we announced a deal for the sale of equity in SAA. We are confident that t he privatisation process would gain significant momentum in the coming months.
We feel particularly proud of the trade deal we have just signed with the European Union. The EU is our largest trading partner. It is also the largest source of inward investment. The agreement would in the coming years open up a significant market for ou r manufactured and agricultural commodities. It would also lay a basis for co-operation regarding the transfer of technology.
The Government also succeeded in transforming industrial relations from the adversarial nature we inherited. Through the Labour Relations Act and the Commission for Conciliation, Mediation and Arbitration the country has seen a remarkable increase in dispu te resolution.
The antagonistic and adversarial relations before 1994 have been replaced through institutions like NEDLAC. These relationships have changed into ones where we see the emergence of partnerships to grapple with key national concerns. The best example of thi s was the Presidential Jobs Summit, which was held a year ago when Government, Business and Labour were able to hammer out an agreement after intense negotiations.
Government, Business and Labour were also able to reach agreement to jointly tackle the issue of skills. Through the Skills Development Act, agreement was reached on a skills levy-grant scheme that would be introduced next year. Next year R1 billion would be raised and in the following year this would increase to R 2 billion to be used to raise the skills level of both employed and unemployed. We are confident that this strategy would go a long way to correcting the skill shortage, which is a serious constr aint on economic growth.
Our economy we all know has been based on mineral and in particular gold exports. For example gold exports in 1980 constituted 45% of exports, this constituted 17% of GDP. By 1996 gold exports had declined to 18% of exports and contributed 5% to the gross domestic product. The Minister of Trade and Industry had to grapple with formulating a strategy to promote exports to earn the badly needed foreign exchange that our economy requires to expand.
The Ministry introduced a range of supply-side measures and incentives to promote exports. These measures included the introduction of a Competitiveness Fund, the Short Term Export Finance Guarantee Facility, Finance of Export of Capital Goods and Services , the Motor Industry Development Programme, etc.
A recent study indicates that the decline in gold export earnings has been significantly compensated for by the increasing export of manufactured goods, beneficiated minerals and material-intensive goods. Since 1998 these type of exports have increased fro m one third of all exports to more than half of all exports by 1995/96.
A study published by Business Map indicates that comparative total export (January to May 1999 vs. equivalent period in 1998) for a number of key commodities significantly increased. Their figures indicate the following export increases:
More recently the ministry together with the support of manufacturers created institutions to assist companies to find markets. Clearly with the signing of the EU trade deal and improved relations with countries in the Far East, particularly Peoples China, we would see our exports increase dramatically. The decline in gold exports, not withstanding the improved price of gold, is proving to be a major push to export value added goods!
In spite of the significant success we have enjoyed vis-~-vis the performance of the economy the Government is not complacent. We still face challenges.
Clearly the greatest problem we need to confront as a nation is the widespread unemployment. Of the many targets we set for our self in GEAR that we still need to meet, is that of job creation. To some extent this is understandable. We inherited a hugely i nefficient economy with perverse incentives that encouraged mechanisation in agriculture and the use of capital intensive techniques in manufacturing when in fact we needed to encourage labour intensive methods especially in agriculture but also in manufac turing. This made sense a labour surplus country.
The challenge of job creation remains a central one. We in partnership with Business and Labour need to revisit the agreements we reached at the Presidential Jobs Summit and take stock of the situation. This was the first time in our history that the socia l partners resolved to tackle jointly the problem of unemployment.
We were equally pleased at the creation of the Business Trust to tackle the twin problem of human capacity development and job creation.
Another major challenge is that of support to the SMME sector. We know that large firms are not creating jobs. If anything they tend to shed jobs. The promotion of SMMEs is also important because it creates space for the entry into the world of business fo r previously disadvantaged persons. The government has created through the Department of Trade and Industry a number of institutions to support SMMEs. However a number of problems remain. These relate to the access to credit and the regulatory framework. C urrently these are being reviewed and as soon as this is completed we will make a statement on this.
We wish you all the best for your conference and look forward to reports on your deliberations.
Thank you