Economist of the Year Banquet, Midrand
8 May 2007
"Africa, our future"
Introduction
Allow me to thank you for inviting me to address you today.
We celebrate today the accurate forecasting of certain data and this is an
important exercise. Fiscal policies, decisions about interest rates, the values
of foreign currencies and countless other observable and unobservable variables
affect the future values of key data. Forecasting any of these is no mean task.
I want to take this opportunity to push the boundaries of what we normally
think of as the job of economists. We need to recognise the importance of
pushing our limits, of identifying and testing new relationships, of finding
causal linkages between economic outcomes and inputs of less clear, social and
political origin. In particular, given our regional and domestic economic
context we need to work harder on drawing out the links between institutions,
their effectiveness, what goes into creating them and the ways in which they
affect long-term economic outcomes.
Because institutions and their governance have a temporal dimension covering
many decades, they provide a critical tie between how we think about South
Africa's present economic conditions and South Africa in the long term.
Institutions are also critical to how we manage integration with the world
economy and in particular how we as South Africans think about building the
foundations for more rapid economic growth in the Southern Africa region in the
context of globalisation. It is in this area the challenge of growth for Africa
that I want us to stretch our thinking.
Globalisation presents a critical challenge to sound institutional
development and economic governance in all states and in particular African
states. The heightened sense of challenge one gets in Africa arises from two
systemic fragilities, the role of the State in growth and the weaknesses of
regional African institutions.
In the context of inconsistent growth and widespread poverty the
globalisation challenge can tip States in the wrong direction, away from good
governance, effective regulation and pro-growth policies and toward rent
seeking, the stifling of the private sector and the further weakening of
already inadequate social policies and institutions.
At the same time, Africa has been slow to develop the sort of international
institutions capable of assisting in the policy and sectoral adjustments needed
to benefit from globalisation. Regional institutions and arrangements have also
lacked the institutional capacity to offer external support to adjustment or to
create the large-scale infrastructure projects to support market creation. And
that weakness is often mirrored by the cautious approach of many African States
to perceived losses of sovereignty incurred by regional integration.
In both of these areas, however, Africa is making great strides. The open
question and one which will influence global economic issues for decades to
come 'is whether further progress will be made on the creation of an
international environment that is capable of supporting our efforts'.
Globalisation and fragile economic growth
One of the larger challenges posed by globalisation is the extent to which
governments need to adjust macroeconomic and/or microeconomic policies to
achieve more rapid economic growth in an environment of open markets.
For African countries, that challenge assumes giant proportions. Most
African economies retain fairly high trade barriers, largely due to weaknesses
in revenue collection from other forms of taxation, whose reduction would
require significant economic adjustment in the domestic economy. Added to the
adjustment consequences of liberalising trade policy are the effects of even
small financial imbalances. Public and private regulatory institutions and
market structures are often not sufficiently developed and deep to weather the
effects of poor policies and exogenous shocks.
These brief considerations give rise to a few tentative ideas. First,
African economies will remain highly sensitive to the role of multilateral
institutions and donors, financial flows need to be handled delicately to avoid
severe economic repercussions.
And second, that multilateral adjustment programmes need to be more
holistically conceived than they are at present. Dani Rodrik has pointed out
the importance for growth of microeconomic policies that facilitate the
shifting of people from old and non-competitive industries to new industries
and new forms of economic activity. Such policies entail assertive re-skilling,
high quality education and access to social and other forms of capital in open
environments in which individuals can take advantage of new economic
opportunities.
In other words, economic growth is a function of both prudent macroeconomic
policies (low deficits and inflation and manageable debt levels) and
microeconomic policies that facilitate adjustment through the provision of
social capital and opening up of economic opportunity, especially to the
poor.
For African states to balance the distribution of economic burdens and
opportunities requires creativity and active, capable State institutions
governance reforms and technical capacity building should go hand in hand. The
challenge posed by globalisation is that as policy makers we must constantly
grapple with the new pressures and changes of our environment, new areas of
policy, new regulations and institutions all confront us every day. And some
times of course the pressures become very great and we do nothing, taking
refuge in the idea that we are sovereign and using the threat of its loss as a
means of defending our inaction.
Building regional institutions
To overcome our aversion to regional and global institutions, it seems
critical that we recognise that collective state action need not reduce
sovereignty. Indeed, it seems to me that the European experience of integration
suggests that national sovereignty may be enhanced through integration despite
the piecemeal loss of sovereignty in some areas. When applied to the pressures
of globalisation, this thesis seems to me to hold even more strongly,
globalisation can be addressed in regional and global institutions in such a
way as to increase the power of States and better reflect the social and
economic preferences of their citizens.
This idea seems especially pertinent in a regional context. Limited
infrastructure, non-existent regulation or limited enforcement capacity, thin
and undiversified markets for finance, goods and services all limit the extent
to which African economies develop. The experience and practice across the
continent is of course diverse. While some regions remain in low-level
equilibria, others have made great strides in bedding down policy, regulation
and macroeconomic stability and are reaping the rewards of higher
investment.
Despite international economic turmoil, economic growth in Africa is
expected to average over five percent this year and between six and seven
percent next year. This is more than twice the average growth we achieved from
1984 to 1993.
Macroeconomic stability is being consolidated with average consumer price
inflation rising by about 7,2% in 2006 down from 9,7% in 2003 and 13,2% in
2001. Underpinning these improving inflation figures are our fiscal balances
which have declined from â5,2% of gross domestic product (GDP) in 1994 on
average to a surplus of 1,5% in 2005 and 4,1% in 2006.
But we are unlikely to reap the rewards of more rapid economic growth with
only macroeconomic stability. Growing our economies requires us to create and
support effective regional institutions that are credible interlocutors for
national governments. This means that they are backed by appropriate economic
and political governance mechanisms, both internal to the regional institution
and at the national level.
As in the context of domestic governance noted earlier, in this area weak
States can be critical obstacles to progress.
I am not a believer in the idea that either the institution of the State or
the institution of the market can or should do everything in economic
development. There are simply too many examples of failures of systems of
paternalistic States and uncontrolled markets for me to accept either as a one
size fits all model for development.
Our model is one of an active, accountable State, dependent on appropriate
and non-distortionary revenue generation to provide the means for individuals
to engage in economic activity in markets and where people are unable or
incapable of doing so to provide a standard of living. As I said in this year's
budget speech we do this consciously as a choice of this government because
without a powerful countervailing force, the shadow of history will dictate
opportunities, entitlements and outcomes. That model depends in turn on
well-regulated markets in which the private sector invests, produces, employs
and competes. To my mind that is a very special partnership and one which
informs New Partnership for Africa's Development (NEPAD) and in particular the
move toward peer review and use of standards and codes in Africa. Such a State
can work in partnership with the private sector to unlock rents, expand
economic activity and reduce poverty.
A more robust African response to a weaker multilateral system might entail
greater focus on basing regional economic communities in Africa on free trade
agreements and customs unions of regional neighbours and then progressively
linking them to each other through phased reduction of tariffs and non-tariff
barriers. Functional regional economic governance structures based on a core of
free trade between members would provide a solid institutional underpinning for
the African Union (AU) and for negotiation with other countries and regional
communities.
Common monetary areas in regional economic communities and later the AU and
the development of effective and accountable institutions, such as the
Parliament for Africa and the peer review mechanism will further contribute to
Africa's ability to address the pressures of globalisation.
In combination with the finely structured NEPAD efforts, the international
environment must become more supportive of our efforts in Africa and the
developing world more generally. The failure so far to make significant
progress in lowering agricultural subsidies and increase market access is a
dismal reflection of global insecurities and sours the commitments made in
Monterrey and Johannesburg to do much more than trade reform.
I want to conclude my talk with some comments on what increasingly seems to
me to be a prerequisite for a supportive international economic environment.
That is to complete the reform of the international financial architecture that
was given so much energy by the Asian crisis.
One of the key realisations in the aftermath of the Asian crisis (and
reinforced by Argentina) was that domestic regulatory institutions and
governance matter, not just for prevention of crises but also for their
resolution and the recovery of the stricken economies. To get a handle on
domestic weaknesses that make economies prone to crisis, it was important to
engage more fully with governments and the national economic and regulatory
systems they are responsible for. For that reason and others a range of
emerging market economies were invited to the discussions on prevention and
resolution and helped in the formulation of new codes and standards.
All of this has been immensely beneficial for the international financial
system, the strengthening of regulatory and oversight functions in national
systems and the spreading of knowledge. Global economic governance and hence
reform of the international financial architecture, however, remains
incomplete. We need a multilateral basis for overcoming future bouts of
financial contagion to maintain the connection between developing economies and
international capital and goods markets and enable them to grow and reduce
poverty.
The logical extension of the new role of emerging market economies and other
developing countries would have been to reform the governance of multilateral
institutions to enable them to take part in the decision making of those
bodies. Not only would this strengthen reform efforts and thereby reduce the
contingent costs of future crises, but would also strengthen the legitimacy of
those institutions in other parts of the developing world.
Instead we are left with multilateral institutions which despite the
impressive efforts of their staff are experiencing a degradation of their
legitimacy because of their governance structures. As a result few developing
countries want to heed their advice unless they have to, a situation that
reinforces weak legitimacy.
In a world of volatile capital flows, powerful financial markets and
destabilising macroeconomic policy decisions it seems only a matter of time
before the major financial contributors to the International Monetary Fund
(IMF) and World Bank recognise the prudential character of reform as financial
costs grow ever higher.
We should keep in mind that there are many more actors on the international
financial and economic stage today and there will be even more tomorrow, common
interests might be more difficult to define in our developing plurality but
they are no less critical to our common future.
Thank you!
Issued by: National Treasury
8 May 2007
