The global financial crisis and economic policy

Presentation to Bishops

Trevor A Manuel, MPMinister of Finance

3 November 2008

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Global public goods• We live in a world that is increasingly integrated• Globalisation provides opportunities for trade and

development…– … but it also contains risks– Not everyone benefits equally from globalisation

• Globalisation needs rules and values• Priority global public goods include:

– Achieving peace and security– Preventing the emergence and spread of infectious

diseases– Tackling global climate change– Enhancing international financial stability– Strengthening the international trading system– Generating knowledge

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The global economic crisis• The epicentre of the present crisis lies in the USA• The main causes are:

– Excessive lending by banks– Extending housing loans, initially at low interest rates and when

interest rates increased, many people got into trouble– Increased use of credit cards– Complex financial instrument that hide the real risks

• The impact of the present crisis– Lending has dried up– House prices have fallen sharply– Lending between banks have ground to a halt– Insurance companies such as AIG have got into serious trouble– Difficulty in obtaining vehicle finance is affecting the auto

industry– Business investment, which slowed after the dot-com bubble

burst has slowed further

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The US is the epicentre of the present crisis

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The responses by various countries• In total, over US$4 trillion dollars have been injected into the world’s banks• US

– Cut interest rates 1 per cent– Provided US$700 billion into the banking system, of which:

• US$125 billion is to buy shares directly in the banks– Guaranteed bank deposits up to US$250 000

• EU– Cut interest rates too– Governments have provided €2182 billion into the financial system– Increased guarantees on bank deposits

• UK– Nationalised Northern Rock– Injected £300 billion into the banking system

• £50 billion to buy shares in the big banks– Cut interest rates

• Japan, Australia, South Korea and several other countries have also announced bailout packages

• These measures are necessary in the short term, but they will increase public debt, which has to be paid back over time

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USA China

SA

US sells US$65 billion of goods a year to China

China sells US$322 billion of goods a year to US

SA sells US$10 billion of goods a year to China

China sells US$19 billion of goods a year to SA

• If the US slows down, China will have no place to sell the goods it produces

• If that happens, they have to produce less

• If that happens, they will demand less steel, coal and platinum from South Africa

• So demand for our exports slows and the price of these commodities fall

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Policy is Choice• Governments are responsible for setting policy –

elections are fought for the right to implement policy

• Different choices have different outcomes• Policy is implemented through laws and

regulations• The mandate of our economic policy is

– To build a prosperous and equitable society, reducing unemployment and expanding opportunities for especially disadvantaged SAns

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Policy choices

The RDP6 basic principles• An integrated and sustainable

programme• A people centred process• Peace and security for all• Nation building• Link reconstruction with

development• Democratise South Africa

Key programmes• Meeting basic needs• Developing human resources• Building the economy• Democratising the state and

society• Implementing the RDP

AsgiSA

• Faster and more shared growth

• Stable and competitive exchange rate

• Improve cost efficiency of infrastructure and logistics system

• Improve skills development

• Reduce barriers to entry and enhance competition

• Reduce deficiencies in the state’s performance

GEAR

• Reduce interest burden to release funds for development

• Competitive and stable exchange rate

• Reduce trade tariffs

• Tax changes to support growth

• Improve performance of the state

• Invest in infrastructure

• Expand trade flows

Reducing poverty, expanding opportunities and building a better life for all

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Skills shortages• In the past six years, our economy has created over 2 million jobs

– Most of these have been in skills intensive sectors• Key challenge for our country

– Over one million job vacancies for skilled people• Doctors, engineers, nurses, teachers, artisans, IT professionals etc

– Over 4 million people unemployed• School education

– While access to education has improved, in many schools the quality still leaves much to be desired

• Tertiary education– Enrolment is growing, but only about 10% of learners get to university

• FET– Still small but growing, only about 4% of students in on FET course

• Major challenge is the school to work transition– Almost half of black school leavers do not find work within a year– The world of work itself is changing and so skills learnt in school becomes

outdated if people are not working– Initiatives such as JIPSA, internships, skills levy funding and FET

recapitalisation are aimed at addressing this

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Reversing the spatial distortions of Apartheid

• After bantu education, the second biggest legacy of apartheid is the spatial distortions it introduced– Within cities, poor people and black people generally

live far from where the jobs are– The homeland system put millions of people in areas

with low economic potential

• Investment in better public transport is meant to address the first legacy

• Spatial corridors, rural roads and investment in rural development is aimed at addressing this second dimension

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Industrial development zones• Many countries have used IDZs to focus

investment in areas that can attract exporters• South Africa has several IDZs

– Coega, Joburg container terminal, Richards Bay, East London IDZ

• The idea is for the state to invest in the heavy infrastructure (ports, rail, high voltage electricity, roads and services) to attract investors that would use these services at a lower costs, to export

• Investors in these zones have also been provided with tax incentives

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The Port of Ngqura at Coega

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The Coega IDZ

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MAPUTOMAPUTO

Pande-Secunda Gas line. PPP Sasol completed

Coal-based Power Station2 transmission lines to

Matola completed

Liquid Fuels & Petro-chemicals: Sasol

Al smelter 500ktpaBHPB completed

Joburg-Maputo HighwayPPP- BOT completed

Port of Matola/MaputoUpgrades, PPP

Joburg to Maputo Railway line: Upgrade

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Example of a spatial development initiative:

The Maputo Development Corridor

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Conclusion• South Africa has made good progress in transforming our

economy since 1994• But too many people remain poor and unemployment

remains high– Too many people still have limited opportunities

• Our economy needs to become more export focused and more labour absorbing

• The global financial crisis will impact on South Africa’s growth

• However, South Africa is somewhat protected and well placed to grow in the future

• Growth and development is not automatic• These depend on the choices a country makes, the

institutions they build and how they implement their policies.

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Reference link http://www.ft.com/s/o/3af6c64c-9eb6-11dd-98bd-000077b07658.html

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