T Manuel: Directors' Dinner

29 November 2006

Let's start off by playing a little game. Whose favourite movie is 'So I
married an axe murderer?' Any takers? Let me give you another clue. Whose nick
name is Barney? Getting warmer? Okay here's a give away clue. Who made their
debut as the Basil Kenyon Stadium against that great rugby power, Canada?

Hi John. How are you? Congratulations on beating England on Saturday.

There are two jobs in South Africa that every person in the country thinks
that they should have. The one is the springbok rugby coach and the other is
the Minister of Finance. I'm no exception. I'd love to be the springbok rugby
coach. So John let me give you few tips on how to win a match. That rush
defence thing, it's like raising interest rates too fast. It just doesn't work.
When someone kicks an up and under, it will be great if the other guys give
chase too and don't just stand and watch the ball.

I could go on but then John could probably give me a few tips on how to run
the economy too.

A coach of a rugby team, well most coaches or managers find themselves
muttering from time to time that "if you want to get the job done properly you
have to do it yourself." This is the problem of agency. One person cannot play
prop, hooker, blind side flanker and when they get home, water the plants and
work on global peace and prosperity all at once.

So for at least some of these projects or part of each of them, we rely on
other people.

But here is the problem. We rely on other people but they are seldom
perfectly or completely reliable. The great disillusioning with which we have
to come to terms is that we can't do it all ourselves, and the power of
delegation always carries the risk of disappointment. Just ask Jake.

The factors that influence the performance of the economy are immensely
complex and often difficult to measure properly. At a macro level we have a
series of both global and domestic factors that affect our economy. However, at
a micro level the behaviour of individuals both as individuals but also as a
team is what makes a difference. Not too different from a rugby team.

Let me give you two examples. South Africa's savings rate has been low both
by international standards and relative to our own economic history. One of the
reasons sighted for the low savings rate is the rising tax burden on the
economy for the past 20 years. And so we decided to significantly reduce tax
rates over the past decade. For individuals, disposable income has risen faster
than earnings. We had hoped that this would have contributed at least in part
to rising household savings. Individuals, each person acting on their own have
not only spent the tax cuts but they've even spent the next tax cut too.

This reduction in savings comes at a time of accelerating investment in the
economy. The net effect of the two is that we become reliant on foreign savings
to fund our investments increasing the risk for all in the economy.

Both John and Jake know all too well what happens when people don't stick to
a game plan.

A second example of how individuals, each acting on their own can have large
consequences for society as a whole; many individuals feel that if they just
dodge a little on the tax side they'll be better off. Some tax payers
especially a few high income earners, look for every opportunity to skimp a
little here and a little there. They're probably thinking, 'Ah! Government has
so much money, my little bit won't matter.' When this happens on a large scale
then the State cannot collect the resources to deliver proper services, provide
sufficient vehicles for the police to patrol the streets, supply enough
textbooks to schools and so on. And so we complain about crime, which we are
all legitimately entitled to do but we continue to skimp just a little each
year.

Individual actions, seemingly rational actions, can have hugely damaging
consequences for a country.

Economic theory suggests that if individuals and firms act in their own
self-interest, the welfare of society is advanced. There are certainly cases
where this is true. But surely it cannot be an absolute rule.

The behaviour of both firms and individuals often has negative consequences
for other people. The economic term for this is 'externalities.'

The most obvious example of an externality is when someone pollutes the air
through their driving. Their action causes harm to other people. The cost of
driving or the cost of the fuel does not capture the full economic cost of the
damage done to the environment.

Externalities can be positive too. If someone beautifies their garden, it
provides an appealing environment for their neighbours too. Research and
innovation often has a positive externality of society, where the benefits are
larger than can be captured by the individual who makes the invention. A large
portion of public economics is dedicated to dealing with externalities. We tax
or regulate actions that have a negative externality, and we attempt to
incentivise positive externalities through subsidies or tax breaks.

The economics of externalities and of individual action goes to the heart of
the fact that we are not islands. The actions and behaviour of individuals
affect societies, how we develop and how our culture is shaped. You often don't
hear finance ministers or economists using the term human solidarity, but much
of economic management is about an understanding of human solidarity, an
understanding or belief that we share a common planet, a country and common
destiny.

Good corporate governance seems a real pain, when you're sitting in a board
meeting trying to make the books look good. However, countries or cultures
where corporate governance is weak receive less investment, innovate less and
grow at a slower pace. Individual action makes a huge difference to the
prosperity of both their society and ultimately of themselves.

We have seen a number of cases in South Africa where board members have
simply washed their hands of their fiduciary responsibility and have sought
short term gain. I'm sure in many cases they did achieve some short term gain.
But we as a country pay the price.

The entire system of corporate governance is based on two assumptions, that
by having external interested parties represented on boards the rights of all
shareholders can be protected. Second, that by aligning the interests of senior
managers with those of shareholders the interest of shareholders is
advanced.

These assumptions don't always hold. Perhaps the temptation to make the
books look good in the short term is just too strong. Perhaps we need a
re-think on how we can realign the interests of managers, board members and
shareholders. In South Africa we have made progress in enhancing corporate
governance through changes to company law, the auditing industry, accounting
standards and better financial sector regulation.

As members of boards you don't only have a responsibility to shareholders
today. You also have a responsibility to shareholders tomorrow. You also have a
responsibility to ensure that the environment within which your business
operates is conducive to growth. Only by taking a broader perspective of the
term 'fiduciary responsibility' can society as a whole prosper.

There is increasing recognition that externalities don't only operate on a
national level but on an international level as well. The actions of countries
often have negative consequences for the rest of the world. The fact that a
single country with five percent of the world's population consumes 25 percent
of the world's natural resources has severe consequences for global peace and
stability.

In South Africa, we are planning to build a dam on the Olifants' River in
the north east of the country. We need this dam to serve local communities who
presently do not have access to clean water, to support mining in the area and
to increase electricity generation. However, this river flows into another
river that runs through Mozambique. Their needs must be considered too. What we
do, how we behave has consequences for those around us?

In the past decade we have seen the development of a literature around
global public goods. Clean air, water, thriving oceans, pristine environments
like the Antarctic are all assets that belong to us all and to future
generations. If we plunder these resources today then there will be nothing for
our children tomorrow.

At a national level societies thrive and prosper because individuals accept
that they are part of a collective, they benefit from social institutions and
they have a responsibility to contribute towards these institutions. Similarly,
good corporate citizens are beneficiaries from open and growing markets.

At an international level too we have rights and we have responsibilities.
Progress, sustainable growth and development depend on how we act as global
citizens.

Ladies and gentlemen, enjoy your dinner. In essence I've been talking about
team work as appropriate to the rugby team as to managing the economy. A
successful team requires individuals to act both in their own interests and in
the interests of the team. Our team is our country and the world. After dinner
I look forward to getting a few tips from John on how to run the economy.

Thank you!

Issued by: National Treasury
29 November 2006