SA urgently needs structural reforms

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Added on 28 July 2010 @ 2:27 PM

POST-WORLD CUP, SA URGENTLY NEEDS STRUCTURAL REFORMS TO RAISE THE LONG-TERM GROWTH RATE

In the aftermath of a highly successful Soccer World Cup, South Africans now need to replicate this excellent performance and dedicate themselves to implementing the difficult structural reforms necessary to achieve the 7% annual economic growth rate the Minister of Finance recently said is required over 20 years to reduce unemployment and poverty meaningfully, according to Rian le Roux, chief economist at Old Mutual Investment Group (SA) (OMIGSA).

Speaking at a press conference in Johannesburg, le Roux said the “time is ripe” for the country to capitalise on the lessons learned from the SWC, which included:

- Delivery is possible, by competent people;

- A sharp reduction in crime can be achieved in a short period of time, through effective policing and swift justice;

- Unity among South Africans is very achievable, but it may be easy to break down again; and

- Tourism can be boosted strongly by giving tourists a safe environment and value for money.

“During the SWC, a lot of negative perceptions about SA were broken down, both here and abroad, improving our image as a well-functioning, middle-income economy with great potential,” noted le Roux. “Most of the lessons we have learned lie in the domain of policymakers, but the private sector has a role to play as well. We now have the opportunity to take advantage of this and make significant progress in boosting growth and employment, and it’s up to us not to squander it.”

Looking at the global picture, slow growth prospects in most developed countries over the next five to 10 years meant that South Africa would have to rely largely on its own policy initiatives to achieve its economic goals. “Although we are not expecting the world to collapse into a ‘double-dip’ recession, as some are warning of, we do believe the current loss of growth momentum is likely to last for several quarters, and the additional risk from fiscal tightening in many countries is a real one,” he cautioned. “Such high levels of debt in the US, UK and Europe will impair economic growth there for many years to come.”

Turning to South Africa, he added: “We know that we need 7% economic growth per year over the next 20 years to make big inroads into poverty and unemployment. Yet past experience has shown that 3% to 4% growth is the best we can achieve without further structural reforms, and this will not boost employment significantly. Currently we are forecasting GDP growth of only 3.5% for this year, 3.8% for 2011 and 4.0% for 2012.”

In order to boost economic growth, le Roux said the government must first accept that there are no “magic solutions” or “quick fixes” to achieve it, such as maintaining an artificially weak rand, nationalisation or abandoning inflation targeting. These moves would simply damage the economy.

Rather, it must acknowledge that its role in growth and job creation is to create an enabling environment in which the private sector can flourish.

Further, he advised that government, labour and business should all agree to a “package approach” comprising the following measures:

- The government needs to put to rest any lingering investor fears over maintaining macroeconomic stability – reaffirming inflation targeting, rejecting nationalisation and committing to maintaining low budget deficits;

- Maintain a strong anti-inflation focus;

- Sustain the SWC anti-crime drive and gear up the anti-corruption drive;

- Raise public sector efficiency through a competency drive that focuses on the right people, the right work ethics and measurable results;

- Carefully, and urgently, re-think labour laws that may inhibit job creation;

- Keep government’s spending focus squarely on infrastructure, as the building-block of economic growth;

- Urgently fix the education system to produce workers with the skills and qualifications needed most in the economy; and

- Shift the policy mix towards a tighter fiscal policy (lower government budget deficit, lower spending and lower borrowing) and a more expansionary monetary policy.

“Importantly, the latter will allow for lower interest rates (and therefore lower borrowing and investing costs for individuals and companies) plus a weaker rand (to encourage exports), all of which will push economic growth levels higher without sparking inflationary pressures,” elaborated le Roux. “It’s also important that infrastructure remains the key area for government spending growth, rather than wages, social security or other areas of consumption, or this consumption spending will crowd out other, more productive spending in both the public and private sectors.

“I’m convinced that if the government takes decisive steps along these lines, we can come closer to achieving the 7% growth rate we need in the next decade to set us on the path to achieving low levels of poverty and unemployment,” he concluded.

Fairbairn Capital | Old Mutual

Investment Intelligence|Articles

SA urgently needs structural reforms

POST-WORLD CUP, SA URGENTLY NEEDS STRUCTURAL REFORMS TO RAISE THE LONG-TERM GROWTH RATE

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