T Manuel: Helen Suzman Foundation/Gordon Institute of Business
Science

6 April 2009

Introduction

Thank you for inviting me to speak to you today. I believe it is an
appropriate occasion for me to extend a word of appreciation to you for
creating such a vibrant and active forum for public discussion, which further
deepens our culture of democracy.

Let me begin by positing a radical suggestion. I am confident that the
global economic crisis will in due course give way to a more robust and more
enduring era of economic development in Africa and the developing world than we
have hitherto contemplated. Stronger economic development in the countries of
the south is not a new event. It has roots that go back a decade or two, and it
has several inter-connected strands:

* The extraordinary economic growth of China and India and the sharp decline
in the number of people living in poverty worldwide.
* The sustained rise in commodity prices, reflecting much more broad-based
industrialisation and modernisation and associated demand for infrastructure
and traded goods and services.
* The rapid increase in the use of new, lower cost and efficiency-enhancing
information and telecommunications technologies.
* The rise in urbanisation rates and mega-cities across the developing world,
and rapid increases in education and technology adoption.
* Greater macroeconomic stability in much of the developing world, including
several leading African economies.

Although growth may be interrupted for a period, these are powerful dynamics
and they are not going to be reversed. In some respects the structural
imbalances that underlie the present crisis are constraints to broader
development, and so the resolution of these imbalances is a condition for more
sustainable growth and prosperity. These are not just economic dynamics, or
changing trade and financial relations. Structural change is also about the
evolution of institutions:

* There is, worldwide, a welcome (though sometimes troublesome) decline in
political timidity, a strengthening of people-cantered democracy, and a
willingness to pursue reforms within developing countries.
* There is an opportunity now to re-shape the international financial and
developmental architecture to bring about both greater transparency and better
resource flows to support the developing world.
* Alongside the restructuring of trade and financial relationships we will
begin to see better management of earnings disparities and, over time, greater
fairness in labour market outcomes across the world.

These are trends that will complement other economic transitions:
south-south economic links will strengthen, and in Africa a renewed impetus to
reform intra-African economic barriers and commitment to cross-border public
infrastructure will assist in supporting growth of markets.

Institutional evolution and overcoming barriers to broader economic
development are not automatic, elegant trajectories however: the process will
be uneven and for now we have to contend with a series of grave challenges
associated with the current crisis, in particular the economic damage caused in
the short-term by declining capital flows, rising macroeconomic instability,
and job losses in vulnerable societies. Raw statistics cannot capture the
magnitude of these adjustments, but the numbers are nonetheless startling:

* The World Bank estimates that 53 million more people will fall below the
level of extreme poverty in 2009 and an additional 32 million people will lose
their jobs in emerging countries in 2009.
* The International Labour Organisation (ILO) estimates that the global number
of unemployed will increase from 190 million in 2007 to 210 million in
2009.

The G20 dialogue

Over the past few weeks there has been something of a turnaround in markets
internationally and in South Africa. I wish I could report that the G20
leaders' meeting last week and the process leading up to it have diagnosed the
problem, identified the remedies required and agreed on an appropriate burden
of adjustment. I would love dearly to tell you that the world economy is now
reviving.

There are tentative indications of a recovery, but this is not just about a
new direction in financial market trends; there are also deep-rooted structural
imbalances and massively distressed institutions which will take considerable
time to be resolved.

Rising new orders and the continued sharp decline in inventories, reflected
for example in the leading purchasing managers' indices of production, provide
encouraging signs of improvement in global manufacturing. Sharply lower
inventories, among other things, suggest that consumption of intermediate and
final goods is now increasing. As inventories deplete, firms need to increase
production to meet ongoing demand. The data underlying these developments come
out of the United States (US) economy and a range of emerging markets,
including China, Korea, Taiwan, Thailand, Brazil, and others.

The corresponding indicators in Europe and other parts of Asia are, however,
less encouraging, and suggest that the sharp plunge in economic activity in the
centres of the crisis is still working its way around the globe, and may be
followed by a succession of after-shocks. The impact of these waves of
retrenchment on employment is perhaps our most critical concern because of the
effect job destruction has on aggregate demand.

The world still needs to fight through these turbulent tides, and the
under-currents are powerful and unpredictable. Part of doing that requires
governments to demonstrate not just a capacity to reach diplomatic agreements,
but also to implement difficult fiscal and financial adjustment programmes,
often of unprecedented complexity. It is not enough to diagnose what is wrong,
it is also necessary to design a response and construct the institutional
capacity required for its implementation.

We are fortunate in that there have not been major shocks to our banking
system, and the institutional implementation of our fiscal response very
largely builds on plans and capacity that is in place, and infrastructure
projects that are in progress.

But I can also report that President Motlanthe and I came away from the G20
Leaders' summit in London last week heartened by both the substance of
engagement with extraordinarily difficult policy issues and the willingness of
global leaders to think differently about the challenges of financing
development.

I don't want to pretend that the world's structural trade problems have been
dealt with or that there are not important differences of perspective between
global leaders. Even the most immediate challenges of stimulating global demand
and dealing with the non-performing assets on major financial institutions'
balance sheets evoke sharply contrasting analyses and opinions amongst the
major protagonists. There are different views on how the regulatory systems
should evolve and on what kind of re-shaping of financial institutions and
markets we should pursue.

It is not that the G20 is unfamiliar with the structural issues: it was in
this forum that the issue of global macroeconomic imbalances was recognised and
defined as a serious impediment to world economic stability several years ago.
The implications of those imbalances for financial stability and international
financial contagion were extensively and intensively discussed. The
International Monetary Fund (IMF) and external observers of the global economic
trajectory issued warnings over the inconsistencies building up in key
economies. They pointed out the risks accruing to the developing world, which
had benefited from the flow of capital looking for higher returns and the boom
in commodity prices driven by growth in China and elsewhere. Too little of
these discussions has filtered through to multilateral action or to national
authorities and their assessment of domestic monetary policy or financial
regulators.

Credit rating agencies implicitly validated the underlying view of the
protagonists that the world could go on forever with the US and the United
Kingdom (UK) over consuming and China over exporting. The search for yield on
investments took progressively less account of the risks associated with the
assets being sold to investors. And underpinning all of this was the idea that
households, especially those in wealthy countries and enclaves around the
world, could perpetually take on more debt because of sustained growth, asset
appreciation, financial stability, low inflation and positive investment
returns.

Nonetheless, the G20 has emerged as the successor to the G7/8 and a more
credible forum for addressing the global economic crisis, and we need to see it
as an important body in moving forwards to resolution and towards a new
foundation for global economic co-ordination. For the latter effort, of course,
the G20 has brought in heads of state and heads of government, and some beyond
the normal G20 membership, and it seems sensible that this collective will need
to be broadened further.

Certainly the G20 will need to make much faster progress in ensuring that
our multilateral institutions more effectively raise the voice and
participation of all members. A range of options are available for that,
centred around reform of the governance and institutional makeup of these
organisations, and involving adjustments to shareholdings and decision
processes that reflect in a more balanced way the interacting interests of
member states and their people. These actions should be grounded in a new
compact with the developing world – on an agreed set of support mechanisms that
add value to economic development – and a new compact with the developed world
that emphasises mutual macroeconomic and financial dependence and the shared
responsibility of the global community for our global endowment – the physical
environment, human solidarity, accumulated knowledge and technology, shared
transport, communications and energy resources and the institutions of social
and economic co-operation that cut across national boundaries.

Measures to respond to the crisis

The fact of the matter is that global macroeconomic imbalances need to
decline in size, and toxic assets need to be disposed of (written-off). The
first requires a rise in saving in debtor countries and a decline in saving in
creditor countries, and higher world interest rates for some years. The G20 has
focused on:
* stabilising the global financial system
* countering the economic downturn
* ensuring resources and means of preventing a collapse in developing
economies
* securing an open and fair trade and finance system for the long-term.

In the short-term, economic stabilisation is an obvious priority, while
remaining perilously out of reach. Household saving has already risen in many
countries and in due course household debt levels will retreat. But this will
also lower consumer spending for an extended period of time, and therefore drag
down economic growth in economies like the US, the UK and Europe. Consumer
spending in those economies accounts for 40 percent of total economic activity
in the world. As lower consumer spending feeds through into investment, medium
term growth will also falter, and growth in economies with trade and financial
ties with large advanced economies will also slow. We have seen this process in
action over the past year or so as economic growth rates plunge around the
world.

Declining debt levels for households and firms will emerge as the underlying
dynamic driving the future economic recovery, but the pain experienced in the
short-term is dramatic. Governments around the world have implemented fiscal
measures to boost aggregate demand in the near term, in part to offset the
general economic dislocation associated with the de-leveraging. Monetary easing
has in some countries been extensive, with historically low interest rates and
quantitative easing in place in the United State (US) and the United Kingdom
(UK) to try to get financial institutions to extend credit to firms and
households. In other countries, including our own, interest rates have begun to
fall quite sharply.

By any fiscal or monetary measure, South Africa's macroeconomic response has
been large. Our fiscal response as a ratio of the slowing in our gross domestic
product has been larger than nearly all other countries, except for the United
States. On the monetary side, the interest rate has been cut by 250 basis
points, ranking us in the middle of the G20 spectrum. Unlike in the US and the
UK, we have plenty of room for further monetary easing, and as inflation
continues to fall, so too will our interest rates.

But these sorts of macroeconomic offsets to falling demand are not a
panacea, and will do little to stop the economic adjustment facing overly
indebted households and firms. Our task in the short and medium term is to
ensure that we minimise the damage to the rest of the economy from deflation in
the over-indebted groups and sectors. Unfortunately, this is not a simple
exercise, and many firms that have expanded in recent years will fall back to
more sustainable levels of production and employment. Some sectors will need to
shrink even further as they are more fundamentally uncompetitive. Governments
here and abroad must address these challenges by ensuring that safety nets are
in place and effective, that skills retraining works well and quickly and those
sectors of the economy not burdened by debt are able to grow and increase
employment.

The adjustment of the South African economy to the crisis has been less
severe than in many other countries. The exchange rate has depreciated
significantly, by 27% in 2008, and it remains today 17% below the value
pertaining in July 2008 at the height of the commodity boom. When the global
economy begins to recover, a more competitive exchange rate should enhance
foreign demand for our exports.

At the same time, South African households have set the stage for a recovery
in the medium term in consumption. Household debt levels have declined sharply,
from about 78% of gross domestic product (GDP) to our estimate of nearer 70%
today, which, along with declining debt service costs, will help to free up
considerable purchasing power. This will be offset negatively by a lower value
for financial and property assets which are unlikely to reach their mid 2008
highs in the next few years, and which impact on consumer spending.

Easing credit constraints in advanced economies is critical to
reinvigorating economic growth. But a major part of the crisis has been caused
by the uncertainty about the value of defaulting assets on the balance sheets
of many financial institutions – the so called toxic assets of collateralised
debt obligations and somewhat more indirectly credit default swaps. These need
to be addressed to enable banks to stop restricting credit, and are being
tackled in different ways in affected economies, including the use of liquidity
support, government guarantees, equity purchases, deposit insurance, and moving
impaired assets to bad banks or making markets to realise prices for the
assets.

Exiting the crisis and setting the ground for a renewal of macroeconomic and
financial stability and sustained economic growth will depend on how countries
address national and international financial regulatory concerns. As you all
know by now, widespread failures have become evident in everything from
mortgage lending practices to the failure to realise that off-balance sheet
special purpose vehicles constitute major balance sheet risks. The world's
financial intelligentsia clearly erred in judging an appropriate and
sustainable balance between supporting financial innovation and feeding the
credit default swap casino. I fundamentally disagree with the idea that we can
get the former only if we allow the latter. We are in danger now of having both
being shut down by populations angry at this folly.

Nevertheless, I believe the G20 has stepped out onto the right path by
identifying a range of specific areas of financial regulation that need urgent
attention. Many more areas that need to be addressed will most assuredly be
added by other observers and analysts.

The G20 has discussed the need to:
* broaden effective regulation to all systemically important institutions
* ensure the registration and regulation of hedge funds
* call for registration and compliance with relevant codes of all credit rating
agencies whose ratings are used for regulatory purposes
* reinforce macro-prudential oversight
* enhance the counter-cyclical effects of financial regulation
* strengthen international regulatory co-operation.

Addressing the financial aspects of the crisis is clearly necessary, and
while we might agree on many of the reforms to regulations, regulators, and
financial markets, we also need to remain mindful of the long-term implications
of what we do. We need to remain cognisant of the gains that have accrued to
marginalised communities from the extension of financial services in recent
years.

I believe that it will be necessary in coming months to move to protect
those achievements and the economic benefits associated with them. The Mzanzi
accounts, and the services related to them, have helped bring poorer
communities closer to the formal economy, over time helping to reduce recourse
to loan sharks and ultimately strengthening information networks that are
important to more distant needs, like searching for jobs. In short, I am
concerned that we wander too far down the road of reaction to the financial
markets by penalising those among us that have least access and need it the
most.

Yet the global crisis is pulling down growth rates in the developing world,
as trade finance dries up and capital flows back to originating countries
generates macro-economic instability and reveals large financing gaps. The cost
of capital for emerging markets which are able to borrow in international and
sometimes their own domestic capital markets has increased and remains high.
The JP Morgan Emerging Market Bond Index has the average risk premium now at
633 basis points above the yield on US Treasuries. This elevated cost of
capital will remain a constraint on emerging markets and developing countries
until the global crisis eases.

The Institute for International Finance expects private capital flows to the
developing world in 2009 to fall to just 165 billion US dollars, compared to
the high of 920 billion US dollars achieved in 2007. This is a serious decline,
and risks putting the recent favourable performance of many economies at risk
of reversal. The developing world has taken on a more important role in world
economic growth, and in 2009 and 2010 provides some buoyancy to global growth
rates.

The G20 has agreed to a significant increase in financing for the IMF – 250
billion US dollars – and considerably more was discussed as an option. The
multilateral development banks will be further supported too. These represent
important additions to the capacity of our multilateral institutions to prevent
crises in the developing world and foster economic growth and sustainable
macroeconomic policies.

Declining commodity prices and failing capital flows need to be offset
within the developing world by greater access to multilateral financial flows,
and critically a renewed commitment to domestic policies focusing on human
capital development, institution and capacity building, and of course
macroeconomic stability. Reinforcing the good policy trajectory of the past 15
or more years is in many ways the only response that the developing world has
in its own power to decide on and implement. It needs to do so. Africa has to
build on the progress achieved in defining regional economic integration as the
building block of a successful continental economy. Meaningful steps to
lowering tariff and non-tariff barriers between African economies would provide
impetus to economic growth without, in the current environment, presenting
opportunity costs in the form of trade diversion.

So where does this leave us?

It is trite to observe that the global economic crisis will not disappear
overnight. This is because the global macro-economic imbalances of surplus
countries feeding the insatiable appetites of deficit countries will not unwind
quickly, especially for as long as we believe that it is the sole
responsibility of the US to alter its policies to solve the immediate collapse
in world aggregate demand. Yes, the US needs to act, and is doing so, but so
too do countries with large current account surpluses and the rest of us. The
unwinding of global imbalances depends on longer-term structural, regulatory
and behavioural changes in many countries that will take time to achieve. In
the meantime, macroeconomic volatility and international financial contagion
emanating from advanced economies will present serious problems for the
developing world.

There is a risk that global crisis will lead to national or regional
inaction – I hope that I have made clear that I believe this is a time for
renewed efforts towards accelerated economic integration in Africa and more
broadly across the developing South. As trade and financial ties, many of
timeworn provenance, disintegrate, new opportunities to forge more economically
efficient relationships emerge. Trade between African countries seems a target
worth examining in the interest of developing robust regional economic
communities. Deeper integration and more rapid economic growth in Africa and
the developing world generally carries with it extensive benefits for the world
economy. Getting those regional policies right, however, requires us to focus
ever more fervently on economic reform and institution building at home.

It is also important to examine in more detail what kind of economic
adjustment is needed in conditions of declining foreign and domestic demand.
While macroeconomic policy can, to some extent, help support demand, it cannot
offset the decline on a one-for-one basis. This implies that demand for some
sectors' output will fall, irrespective of government actions. The further
implication is that firms will need to price to re-establish volumes of product
sold or in demand. There are numerous examples of companies moving in that
direction, including the recent announcements by ArcelorMittal South Africa and
many retailers of significant price cuts.

Unfortunately, some other industries appear to believe they can adjust best
by raising prices in an effort to maintain profit margins on a smaller volume
of sales. This seems especially unhelpful in the current environment, and will
be costly in terms of employment.

From the side of government, limited state resources should continue to be
deployed in the pursuit of economy-wide measures that have as broad an economic
impact across as wide a range of firms, sectors and workers as possible. This
starts of course with a stable, low inflation fiscal and monetary environment.
It includes vigorous enforcement of competition laws, continued improvements in
our regulatory regime, streamlining of our tax and tariff systems and upgrading
of basic transport, energy and telecoms infrastructures. Improvements in
education and basic health delivery must remain at the heart of our efforts to
improve both competitiveness and social justice.

These are, in my view, better uses of public resources than the frequent
demand made for special assistance to specific firms and sectors. In the
National Treasury we have come to recognise the importance of creating the
fiscal space when revenues are strong to help offset the downturns. Extended to
the private sector, it suggests that expectations that government will
socialise the costs of irrational exuberance cannot be entertained. This is
neither good for long term growth nor is it what is required to deal with our
shorter term difficulties. A vigorous and competitive private sector is
essential to our long-term economic development, backed up by an effective and
capable public sector.

Allow me to conclude by making a few points about our multilateral system. A
sustainable recovery for the global economy in my view requires a more balanced
and inclusive governance structure for the world economy. Achieving that has
proven rather difficult, largely because too much of the developed world and
too much of the emerging world find it expedient to cling to the vestiges of
power conferred on them (or held out to them) by our multilateral system. But
we need to stand back and ask what the point of that jealousy really is. If we
buy into the view that economics is a positive sum game, then our institutions
should have as their central themes transparency, inclusion, and agreed rules.
I fear that our historical legacy of nationalism and the national exercise of
power continues to betray our global interest in a more inclusive system, and
that this will have the effect of delaying our exit from the present economic
crisis.

We can respond to this problem in several ways. One is to vigorously pursue
regional economic integration – creating cross-border infrastructure, making
better use of the multilaterals that we have agreed to strengthen, becoming
bolder in our drives to reform and deliver. A second is to work much harder to
ensure that we are delivering effective public services. A third is to place
employment, productivity and competitiveness at the heart of our approach to
trade and industrial policy and sector regulation. A fourth is to maintain our
counter-cyclical, low inflation and prudent approach to macroeconomic
policy.

Finally, we must continue to define and give expression to the need for an
inclusive and fair global economic system.

Thank you.

Issued by: National Treasury
6 April 2009