The state of SA economy by the end of 2014. Minister of Finance, Nhlanhla Nene caused a stir in 22 October 2014 when he presented the Medium Term Budget Policy Statement to parliament. Though not an actual budget speech. The key indicator to our economys health is the growth rate, now only 1.4 percent. However, this actually reduces to near zero when you add the population growth rate of about 1.5 percent. Therefore let us accept that the economy growth rate was zero. It stalled. Other countries which witnessed a higher growth rate like some African countries are able to raise taxes to raise more money. If this is wisely spent on productive activity or infrastructure, then there is a return in investment which can be reinvested for further growth. Or a part used for social services and welfare, thereby improving the lives and capabilities of the masses. Why South African economy stagnated? Well there are different views to this question. The government attributes this to the shrinking world market for South African goods due to global recession in European Union and the USA and a slowdown in China, South African number one trading partner. Some economists dont hold the same view as the government but assert that this only accounts for only a third of SAs lower growth but domestic problems are the main cause of for this stagnation. 1) an increase in government spending used since 2008 to counter the recession havent stimulated the economy at. Instead we have some worrying figures ie budget deficit is 4.1 percent of the GDP, trade deficit at 5.5 percent of the GDP, domestic debt at 48 percent of GDP, over 10 percent of the total tax revenue will be spent on servicing the debt which is a huge sum. The US and the UK have debt over 100 percent. Japan have over 200 percent and many other countries have higher debts than SA without talk of a crisis but their interests rates are 1 percent whilst SAs is 4.5 percent meaning that SAs debt escalates very fast. 2) SA borrowed a lot after the 2008 recession and will have to repay around R194 billion in the next few years which will be a crisis. One may ask why cant SA reduce interest rate? The reason for not taking this direction is that interest rates attract the foreign capital inflows which SA much needs to pay for imports and domestic investment. The minister said he wont reduce spending on social services and welfare as well as infrastructure. His cuts will be elsewhere. This is in line with current IMF position in Europe and elsewhere that advocates for spending on infrastructure to escape stagnation. The question then is, Will it work for SA? Grounds for skepticism: The really economy- the sectors that produce goods and services-has been declining for decades. SA de-industrialized in 1995 in the name of opening up to the global economy . In 1994 manufacturing contributed to 21 percent of the countrys GDP whilst presently is only contributing 11 percent. A reduction in governments capital spending retarded growth. For the past 20 years, national government investment has averaged 0.5 percent of GDP. This resulted in job losses to the falling purchasing power of the population and hence a slow down in local MANUFACTURING, a downward spiral ever since. 3) State owned corporations are not providing services at prices that help industry for instance electricity is expensive, freight and port charges are very high, red tape is killing enterprise and corruption is eating up between R20billion and R100 billion. A new total approach to economic development : a joined-up government and a joined-up economy where state institutions complement the private sector in a mixed economy. The minister said, we need to recognize that that the global obsession , led by the IMF and rating agencies, with getting the fundamentals right-which in practice has meant displacing real economy investment with repeated adjustments of monetary policy-has hurt most economies. Accordingly, we need to ensure that the promised 1.3 percent increased spending is properly targeted on real multipliers. We need to launch the kind of physical infrastructure spending that allows the economy to move, especially the construction and engineering sectors. We need to grow the domestic market; stimulate infant industries, especially black owned enterprises ; and regulate monopoly industries to ensure that they introduce differential prices for domestic users as against their international clients. We need greater vigilance against transfer pricing by international corporations in South Africa. We need to be clear about the sell-off nonstrategic assets (another euphemism), and how this impacts the states influence on economic decision-making in the private sector. Finally, we need evidence that the government is serious about its economic program. This has been in question for sometime.
Posted on: Mon, 26 Jan 2015 21:58:14 +0000
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