Public finance and the developmental state • The focus of the developmental state in this presentation is focused on deepening the industrialisation within countries and diversifying the productive base. • Some of the role of developmental states: • Does not only fix market failures but is actively involved in market formation, and support innovation that can enhance productivity and growth • Manages rents and market concentration and control • The developmental state is directly and actively involved in economic sectors and markets alongside the private sector • Manages cross-border flows and protects the economy from contagion • Therefore, the developmental state through its actions has the ability to support the growth of the economy • Its economic activities, other than just revenue collection, can affect the sustainability of its budget activities
South African investment has been low compared to other countries Investment (GFCF as percentages of GDP) comparing South Africa with average of country income groups 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 High income Upper middle income Middle income Lower middle income South Africa 1980-89 1990-99 2000-09 2010-2017 Source: WDI
Investment and accumulation in South Africa • Public investment has been poor at under 5% each for gen government and public enterprises • Private investment has returned to lows of the 1980s and 1990s • Fixed capital stock as a percentage of GDP at lowest levels in decades Mfg fixed cap stock % GDP Gross fixed capital formation by Gen Government, Fixed capital stock as percentage GDP Public Enterprises and Private Business Enterprises (% 35% 350% of GDP) 30% 30% 300% 25% 25% 250% 20% 20% 200% 15% 10% 150% 15% 5% 100% 10% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 50% 5% 0% 0% Total GFCF 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 General gov GFCF Public corporations GFCF Total fixed cap stock General gov Private business enterprises GFCF Public corporations Private business enterprises Source: SARB
International debt and the current account deficit • Many economists argue that investment is low because domestic savings is low, investment and link the current account deficit to this need fro foreign capital inflows • This understanding is often incorrect, and is wrong for South Africa: • South Africa has deep and sophisticated financial markets with internationally active financial institutions that are more than capable of financing domestic investment • What was referred to as foreign savings was actually foreign financial flows due to liquidity increases as a result of growing debt and quantitative easing • This liquidity searched for high, short-term returns in emerging markets and caused volatility and instability • The size of the current account deficit was been significantly enlarged not because of the trade deficit but because of financial transfers associated with foreign capital inflows • The foreign financial inflows to domestic currency bonds were not due to less domestic appetite but foreign funds searching for high returns • Reduced quantitative easing and a credit rating downgrade will cause funds to flow out of South Africa • But in low interest global environment appetite remains quite high
There has been large levels of credit extension to the private sector but low levels of investment Comparing fixed investment to credit extension (percentages of GDP) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Private business enterprises GFCF Total GFCF Total credit extension to the domestic private sector Total domestic credit extension Source: SARB
Financial payments to foreign holders’ of South African assets has been the main cause of f lar large curr rrent account defic ficit its not t th the tr trade defic ficit it • The current account deficit was not due the need for financial flows into the country because South Africans do not save enough • The flows were due to financial speculators looking for high short-term returns in South Africa at a time when there was increased liquidity in global financial markets Balance on current account and trade balance (percentage of GDP) 6% 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -2% -4% -6% Trade balance Balance on current account Source: SARB -8% The current account consists of 2 parts: Imports (M) and exports (X) of goods and services (if M>X then trade deficit & if X>M then trade surplus) Financial transfers: payments to foreign holders of a country’s investments and payments to holders’ of foreign investments and other financial transfers (e.g., foreign aid and remittances)
Where will future growth come from 2000000 Components of GDP (real 2010 prices, Rmillions), source: SARB 1500000 1000000 500000 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 • Deficit to /GDP and Debt/GDP are ratios • If the state can spend in a way that -500000 Final consumption expenditure by households support market formation, innovation Final consumption expenditure by general gov. and productivity growth it will increase Gross fixed capital formation the denominator (GDP) over time
SA has not performed well in terms of GDP per capital growth since the crisis Average annual growth in GDP per capital 6% 5% 4% 3% 2% 1% 0% South Africa Low income Lower middle Upper middle High income -1% income income -2% 1980-89 1990-99 2000-2009 2010-17
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