Accelerated and Shared Growth Initiative South Africa A Strategic Perspective Alan Hirsch The Presidency November 2006
Challenge: objectives set in May 2004 Halve poverty from about one third of households in 2004 to less than one-sixth of households by 2014 Halve unemployment from about 30% in 2004 to lower than 15% by 2014 This requires growth averaging over 5% between 2004 and 2014 The objective we set was to average >4.5% growth up to 2009 and >6% growth after 2010
ASGISA Task Team Strategy derives from the GDS, the Ten Year Review and mandate of current government: higher growth & socio-economic inclusion National Treasury prepared a concept paper President appointed a team to take matter forward after July 2005 lekgotla: led by Deputy President and including Ministers of Finance, T&I and Public Enterprises, Premiers of Gauteng and Eastern Cape, and Mayor of Johannesburg Objective: not a new economic policy, but initiatives to sustain higher and shared growth
The challenge of unemployment Unemployment is very high at 25% or >4 million It is high by international standards U/E in Latin American middle income countries >10% (except for Argentina) Labour force participation rate is still low at about 55 percent Compared with 64 % in Latin America Unemployment is highly correlated with poverty in SA
Reason for weak employment Falling employment in agriculture (300 000) and mining (350 000) Flat employment in manufacturing Declining to flat employment in government services since the early 1990s No significant increase in value added per capita since 1970 Structural U/E began as early as the 1960s resulted from cheap labour policies Got sharply worse in the 1990s Been improving since it peaked at 31% 2002
Growth is somewhat unbalanced First imbalance is growth profile: Strong commodity prices and capital inflows lead to strengthening of the rand Trade deficit of 5-6% of GDP in 2006 so far Difficult conditions for producers of tradable noncommodity goods and services Risk of hollowing out potentially vulnerable economy to changes in world economic conditions Second imbalance is the fact that one-third of the population cannot directly benefit from the stronger growth the second economy remains largely excluded except through remittances and social grants
The two imbalances are linked Our uneven development, our lack of diversification, our relative weakness in noncommodity tradables contributes to unemployment Unemployment is highly correlated with poverty in SA Significantly increasing employment in noncommodity tradables is a central strategy way to attack the 2 nd economy challenge but It would not be enough on its own Specific 2nd economy interventions also needed And the contribution of the non-tradable sector and the resource will be significant
Recently growth has accelerated, but Since 2004 growth has averaged about 4.5% and employment creation has been strong But the trade deficit and the current account deficit have risen Capital inflows have contributed to our growth, but not enough of it is FDI as opposed to FEP Input prices are rising and skills are in short supply Growth at the rate required to roll back unemployment and poverty is difficult to sustain AsgiSA is about sustaining faster growth and addressing some distribution issues
AsgiSA s Binding Constraints Relative volatility of the currency Cost and efficiency of national logistics system and some infrastructure Shortage of suitably skilled labour and disjointed spatial settlement patterns Barriers to entry and competition in sectors of the economy Regulatory environment and burden on SMMEs Deficiencies in state organisation, capacity and strategic leadership impacting on delivery
ASGI-SA interventions Intervention focus of AsgiSA (later supported by the research of the Harvard Team and by the recent survey of the BER): Infrastructure programmes Sector investment strategies Education and skills 2 nd economy & SMME interventions, including regulatory reform Macro-economic issues Public administration issues / delivery
Nature of AsgiSA Not always understood: it is an initiative to foster coordination and implementation of prioritised programmes Inside and outside of Government it is sometimes wrongly thought that there is an AsgiSA budget or a parallel planning process Rather, it is a modality for prioritising and pursuing implementation Overall, the modality of AsgiSA has been reaping rewards especially in areas of government policy and implementation that require high levels of cooperation and coordination Has engaged the attention of the public Provides a valuable common agenda for discussions between government, business, & other stakeholders
AsgiSA progress: macro & state capacity Better alignment of fiscal and monetary policy RIA on track Red-tape review of DEAT leads the way Siyenza Manje project at DBSA Crack team working on Department of Home Affairs Mining rights conversions now flowing and royalty bill gives greater comfort
AsgiSA progress: Infrastructure Investment/GDP up from 14 to 18.5% Currently growing at 11% p.a. New Eskom power station approved and CTL plant being considered Tenders for IPPs have been issued Huge orders for locomotives from Mitsubishi-led consortium for general freight and dedicated ore lines
AsgiSA progress: Infrastructure Gautrain construction has commenced King Shaka Airport and Dube Trade Port airport aimed for completion by 2010 De Hoop Dam opening up the region for platinum mining, tourism and agriculture Vaal River Augmentation Project water supplies to Sasol and Eskom project under way Additional funds to commuter rail, roads and public transport systems R15bn for 2010 stadiums and infrastructure plus provincial and local government contributions
AsgiSA Progress: Education & Skills Success and support for JIPSA Interventions in primary and high schools FET Capitalisation and new bursary/loan programme Upscaling output in key tertiary fields Additional funds for bursaries and loans for key skills at tertiary level ABET programme developed Higher level of cooperation between DOE and DOL
AsgiSA Progress: Industrial Policy and Regulation National Industrial Policy Framework being finalised Tourism programmes under way BPO product nearly ready Biofuels strategy ready for Cabinet Tax and tax admin reform and amnesty Labour law engagement Municipal policy reform programme
AsgiSA Influence: Vision and Models Realistic targets and recent successes have caused investors to rethink: South Africa has been re-rated Eskom and Transnet have adjusted their models Private sector infrastructure suppliers are making significant long-term investments Economy is shifting from consumption driven to investment driven
AsgiSA is on track Growth forecasts show SA achieving target of 4.5% between 2004 and 2009 Long term forecasts show growth rising above 5% for the period 2009 to 2011 This suggests that the targets of AsgiSA are feasible With employment elasticity at 0.75, employment targets could be met Success will depend on how quickly and how well AsgiSA s binding constraints are addressed
New challenges Is rising consumption sustainable? How to balance the current account deficit? How to finance the investment boom?
Employment trends and the new middle class grow consumption 8 6 4 2 0-2 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 % Changes Dec-03 Dec-04 Dec-05 Disposable Income Consumption Expenditure
Reduction in poverty since 2000 Table 2: Selected indicators of poverty, assuming AMPS intra-race distribution and own estimates of inter -race distribution 1993 2000 2004 Per capita income: Quintile 1 R855 R866 R1 185 Per capita income: Quintile 2 R2 162 R2 086 R2 770 Using poverty line of R3 371 per capita per year P 0 (Headcount ratio) 0.441 0.446 0.366 P 1 (Poverty gap ratio) 0.224 0.230 0.169 P 2 (Squared poverty gap/poverty severity ratio) 0.144 0.146 0.100 Number of poor (million) 16.9 18.7 18.0 Number of non-poor (million) 23.0 26.0 28.4 Using poverty line of R3 000 per capita per year P 0 (Headcount ratio) P 1 (Poverty gap ratio) 0.406 0.200 0.413 0.205 0.332 0.146 Vd Berg et al P 2 (Squared poverty gap/poverty severity ratio) 0.126 0.127 0.085 Number of poor (million) 16.2 18.5 15.4 Number of non-poor (million) 23.7 26.2 31.0
Growth of the African middle strata Table 3: A growing middle class 1994 2004 The higher middle-class (above R40 000 per capita): Blacks 397 987 1 193 780 Other (non-black) 2 826 092 3 635 405 All 3 224 079 4 829 184 % of whole population 8.1% 10.4% % of blacks 1.3% 3.3% Black share of higher middle class 12.3% 24.7% The working and lower middle class (above R25 000 per capita): Blacks 1 137 367 2 553 998 Other (non-black) All % of whole population 4 240 358 5 377 724 13.5% 5 105 222 7 659 220 16.5% Note: all amounts are in 2000 Rand. Source: vd Bergh et al % of blacks 3.7% 7.0% Black share of working and lower middle class 21.1% 33.3%
The rise of the black middle strata is a key driver of rising consumption Ave monthly household income % black 2000 % black 2005 LSM 6 R4 075 65.5 72.7 LSM 7 R6 455 37.1 48.6 LSM 8 R8 471 20.4 34.0 LSM 9 R11 566 9.0 19.9 LSM 10 R18 649 2.5 8.0 BER/SAARP
While the confidence of high income consumers has moderated, low income consumers respond 40 30 20 10 0-10 -20-30 -40 1995-Q1 1995-Q4 1996-Q3 1997-Q2 1998-Q1 1998-Q4 1999-Q3 2000-Q2 2001-Q1 2001-Q4 2002-Q3 2003-Q2 2004-Q1 2004-Q4 2005-Q3 2006-Q2 CC Low Income HH CC High Income HH BER index
Consumption not a credit bubble The rate of growth of consumption is largely based on real income growth Credit driven consumption is softening Recent increases in credit are largely driven by businesses shifting to domestic sources of credit Nevertheless, there remains a possible case for trying to slow the import of luxuries
The gap between imports and exports (and low savings rates) has led to greater dependence on foreign inflows 35 33 31 29 27 25 23 21 19 17 15 (% of GDP) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Imports Exports
Capital inflows have been positive since 1994, very strong recently: FEP & FDI 8% 6% 4% % of GDP 2% 0% -2% -4% -6% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Trade deficit is manageable Government debt levels are extremely low Foreign debt is extremely low South Africa has very low vulnerability on the Moodys vulnerability index If investments are efficient, competitiveness capacity and growth potential must rise But exports, traditional and non-traditional, must show a rising trend the exchange rate will be a crucial determinant of the pace of growth
AsgiSA is on track Growth forecasts show SA achieving target of 4.5% between 2004 and 2009 Long term forecasts show growth rising above 5% for the period 2009 to 2011 This suggests that the targets of AsgiSA are feasible With employment elasticity at 0.75, employment targets could be met Success will depend on how quickly and how well AsgiSA s binding constraints are addressed
The End