Public finance and the developmental state The focus of the - - PowerPoint PPT Presentation

Public finance and the developmental state

• The focus of the developmental state in this presentation is focused
• n 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

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 High income Upper middle income Middle income Lower middle income South Africa

Investment (GFCF as percentages of GDP) comparing South Africa with average of country income groups

1980-89 1990-99 2000-09 2010-2017

Source: WDI

Investment and accumulation in South Africa

0% 5% 10% 15% 20% 25% 30% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Gross fixed capital formation by Gen Government, Public Enterprises and Private Business Enterprises (%

• f GDP)

Total GFCF General gov GFCF Public corporations GFCF Private business enterprises GFCF 0% 50% 100% 150% 200% 250% 300% 350% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Fixed capital stock as percentage GDP

Total fixed cap stock General gov Public corporations Private business enterprises 0% 5% 10% 15% 20% 25% 30% 35% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Mfg fixed cap stock % GDP

• 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

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
• ut 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

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 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

Comparing fixed investment to credit extension (percentages of GDP)

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

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Balance on current account and trade balance (percentage of GDP)

Trade balance Balance on current account

Source: SARB 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)

• 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

Where will future growth come from

• 500000

500000 1000000 1500000 2000000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Components of GDP (real 2010 prices, Rmillions), source: SARB

Final consumption expenditure by households Final consumption expenditure by general gov. Gross fixed capital formation

• Deficit to /GDP and Debt/GDP are ratios
• If the state can spend in a way that

support market formation, innovation and productivity growth it will increase the denominator (GDP) over time

SA has not performed well in terms of GDP per capital growth since the crisis

• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% South Africa Low income Lower middle income Upper middle income High income

Average annual growth in GDP per capital

1980-89 1990-99 2000-2009 2010-17