François Groepe: Lessons to be learnt from progressive economies
Address by Mr François Groepe, Deputy Governor of the South African Reserve Bank, at the
18th Southern African Internal Audit Conference, hosted by the Institute of Internal Auditors
South Africa, Johannesburg, 18 August 2015.
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Chairperson, ladies and gentlemen.
Thank you for inviting me to participate in the 18th Southern African Internal Audit
Conference, hosted by the Institute of Internal Auditors, South Africa.
In my address this morning, I will spend some time discussing the lessons learnt from
progressive economies and applying them to South Africa. Economies, and the factors
affecting them, have generated much interest in our attempts to deepen our understanding of
the most appropriate and efficient ways of organising the economy in an effort to optimise the
allocation of scarce resources. At the outset, it must, however, be emphasised that the
management and allocation of resources within an economic system does not happen in
isolation or in some abstract manner. Factors such as culture, values, education, technology,
social and other institutions, political structures and legal systems all provide content and
context and set the backdrop and parameters in which the different economies function. In
this regard, Douglas North writes, "It is the admixture of formal rules, informal norms and
enforcement characteristics that shape economic performance... And economies that adopt
the formal rules of another economy will have very different performance characteristics than
the first economy because of different informal norms and enforcement".1
There are clearly different schools of economic thought, with their own analytical frameworks,
which in turn has a bearing on both the analyses of economic imbalances and the policy
prescripts to remedy them. Despite certain reservations raised by some economist it can be
argued that the United States (US) economy has made huge strides during the 20th century
in growing to become the world's largest economy and arguably one of the world's more
successful economies. One of the outcomes of this achievement was the establishment of a
large middle class population following the Second World War.
Despite this strong economic performance, inequality has widened more recently. The
average income of the top 1 per cent of the population in the US had increased by more than
250 per cent during the preceding two decades, while the income of most other Americans
had stagnated. This may have contributed to President Obama pronouncing that, "growing
inequality is the defining issue of our time". He declared that it was a tipping point for the
middle class in the US and all those aspiring to gain access into the middle class.
For an economy or any society to thrive one would need to acknowledge and redress both
economic and political inequality. Measures of economic equality include, among other
things, growth in gross domestic product per capita and a reduction in unemployment. The
World Bank defined sustainable economic development as a situation under which extreme
poverty is reduced to such an extent that the number of people making a living on less than
US$1,25 per day will eventually be lowered to less than 3 per cent of the total global
population by 2030. Furthermore, prosperity should be promoted by improving the living
standards of the bottom 40 per cent of the population in all countries. The latest World Bank
Report indicates that growth in per capita income has taken place during the past decade,
more specifically in the African region. Progress made is apparent in the world's middle
class, which is showing steady growth. According to Organisation for Economic Co-operation
and Development (OECD) estimates, five billion people would have moved into the middle
class, with about two-thirds residing in Asia, followed by the Middle East, Africa and Latin
America. The shift towards the middle class is therefore expected to occur mostly in
emerging markets, which supports the objective of inclusive growth.
The South African Institute of Race Relations estimates that the South African middle class
realistically constitutes around 10 per cent of the total population. Efforts to expand and grow
this number may, however, come under strain unless the South African growth trajectory can
be lifted to the 5 per cent target set in the National Development Plan.
To judge the progressiveness of countries, from which lessons can be learnt, it is prudent to
construct a continuum, from non-progressive countries on the one side to progressive
countries on the other. Consistent with such an approach, the IMF expressed an opinion on
the status of economies that could be used to place them on such a continuum, while also
indicating what is required for these countries to become progressive.
It is worth noting that countries such as Canada and Singapore were rated as countries with
solid growth, whilst Mexico has been acknowledged for undertaking significant structural
reforms. Bolivia, interestingly has seen per capita income tripling over the past couple of
years whilst Namibia has grown strongly. Poland is demonstrating that its macroeconomic
policies are proving to be highly conducive towards growth, followed by New Zealand at the
progressive side of this continuum. These countries are displaying good governance
structures and the prudent management of national resources.
The following principles generally contribute towards establishing a progressive economy:
Economic growth is essential, but it must be sustainable and inclusive, resulting in
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good-quality jobs and improve the living standards of the citizens of the country.
Growth without this prerequisite will fall short of creating a prosperous society and
will not be sustainable in the long run.
• High-income countries generally face challenges in terms of rising inequality due to
technological progress, which has increased the wage dispersion in favour of
higher-skilled workers. To address these matters, concerted efforts should be
introduced to promote increased investments in human capital. Flexibility in the
labour markets can contribute towards an enhance absorption of labour combined
with appropriate social support systems. The environment should also receive
attention to guard against environmental degradation.
• Developing economies face challenges to realise inclusive growth and should
pursue policies that allow for the absorption of lower skilled labour. This can be done
by investing in skills training that aligns the abilities of workers with the requirements
of the labour market. Adequate social protection systems should also be put in
place. In South Africa, despite the transformation of the economy during the past
two decades, there are still too many citizens struggling to make ends meet and who
are reliant of the social grant system.
Drawing on the latest round of Article IV consultations by the IMF, various good practices by
progressive countries are referenced within their reports. Without referring to specific
countries, the following general guidelines can be considered as good practice towards the
development of a progressive economy:
• Raising labour productivity and increasing labour force participation would improve
longer-term economic prospects by boosting potential growth.
• Increased access to financing for start-ups and the reduction of administrative
barriers for new businesses could assist in expanding an economy's production
frontier.
• Maintaining a flexible exchange rate is essential, both as a buffer against external
shocks and to facilitate adjustment towards domestic sources of growth to reduce
external imbalances. Furthermore, it is considered as advantageous to implement a
broad-based set of policy actions when required, rather than incremental actions
when confidence levels need to be shifted to a higher level.
• Pursuing structural reforms in a country should never be considered a trivial matter,
as it can be a very challenging undertaking to balance the interests of different
groups. It should, therefore, be approached in a circumspect manner. Fiscal
sustainability should always be a key consideration in any undertaking towards the
creation of a progressive economy. Governments should always address
weaknesses in public infrastructure, including through new institutions, to enable
better planning and coordination at the local level. Competition, in especially the
services sector, should be encouraged as this will increase the overall level of
productivity in an economy.
• Another prerequisite for a thriving economy is the establishment and maintenance of
good industrial relations within the labour market towards an equitable distribution of
income between the various constituencies. Quality education and training through
apprenticeship programmes, as well as immigration policies aimed at
accommodating scarce skills, have the tendency to alleviate skills mismatches in a
country. Reduced regulatory burdens and increased competition through trade
liberalisation assist in the reduction of the wage-productivity gap by lowering the
cost of living, and contributing to enhanced productivity. A dedicated focus on
research and development has proven beneficial to the advances made by
progressive economies. The pursuance of regional free-trade arrangements is also
helpful to harness the benefits of the dynamism of an adjacent region, when
applicable. Government procurement practices should ideally be characterised by
simplified bidding procedures, high levels of transparency, and standardised
contracts that reduce costs with a focus on value for money. Performance-based
budgeting practices generally also improve the impact of government programmes.
Experience in progressive economies has shown that a predictable legal framework is
paramount to broad-based and inclusive growth, as it raises confidence in practices and
processes and most importantly creates a strong degree of legal certainty. Comprehensive
and regular evaluations of programmes being implemented should be undertaken to ensure
the efficiency of execution. If found that the implementation procedures of such programmes
need to be revised, or that implementation should be abandoned in totality, the necessary
institutional leeway should be available to effect such changes.
A sound financial system supported by comprehensive macro-economic and
microprudential policy measures, and well capitalised banks with solid liquidity buffers, contribute
materially to sustainable growth within an economy. Moreover, authorities should strive
towards the strengthening of their macro-prudential toolkits to better adhere to their financial
stability mandates.
Some of the global regulatory reforms undertaken is aimed to ensure an even greater degree
of transparency and include efforts to reduce potential conflicts of interest and the risks
associated with moral hazard. Executive compensation remains firmly on the agenda, not
only because of equality considerations, but because in certain instances it may give rise to
excessive risk taking. An argument that the high levels of executive compensation is justified
due to the value created for shareholders must also be closely examined against the
exogenous factors, such as the liquidity overhang caused by the unconventional monetary
policies pursued by many of the advanced economies.
Creating an enabling environment for small- and medium-sized enterprises, which are major
sources of employment, should be part of any policy transformation attempt.
Academic research generally concludes that political freedom, strong institutions and quality
regulation are significant contributors to economic growth. Effective, fair and accountable
governments boost public confidence, raising the level of satisfaction among citizens.
Likewise, citizens' access to public officials to voice their concerns is correlated with a higher
state of well-being.
It is worth noting the most recent findings by the Institute for Management Development
responsible for the publication of the World Competitiveness Yearbook. The 2015 Yearbook
indicates that SA occupies position 53 in terms of its competitiveness within a group of 61
countries surveyed. The Yearbook ranks a mix of 61 industrialised and emerging economies
in terms of ability to create and foster an environment sustaining competitive enterprises.
Country data are evaluated based on specific criteria, categorised in terms of four
competitiveness factors, namely government efficiency, business efficiency, economic
performance and infrastructure.
South Africa's economic performance has improved by seven places to position 49 in 2015,
following an improvement in international trade and attaining the lowest cost-of-living index
that topped the world rankings. Government efficiency though is indicated to have dropped to
position 40 in 2015, after having been at position 32 two years earlier. This is mainly
attributable to the poor performance of public finance, a weak institutional framework and
business legislation. The performance of businesses' efficiency also deteriorated further in
2015, as a result of a decline in productivity and efficiency, a further deterioration in labour
market conditions, deteriorating management practices, and poor attitudes and values in the
business sector. The ranking of technological infrastructure, health and environment
infrastructure also deteriorated. The report states that business efficiency requires high
productivity in order to thrive and, in the absence of that, it is difficult for an economy to be
competitive. According to the report, it has been empirically proven that business efficiency
and productivity have been the main drivers of the competitiveness gains in the US, with that
country remaining the most competitive economy in 2015.
In dealing with our own challenges regarding competitiveness, it is important that we
continue to pursue fair access to markets and more balanced global trade. Furthermore,
although protectionism appears to be an attractive policy response against a backdrop of low
growth and a structural current account deficit, it should be approached with a degree of
circumspection as an important lesson to be taken from economic history is that the period
that followed the Great Depression was marked by an outbreak of protectionist trade policies.
These policies led to a sharp contraction in global trade in the 1930's, beyond the economic
collapse itself, and a lacklustre rebound in trade despite the eventual worldwide economic
recovery.2 It is also worth acknowledging that trade protectionism often fails to adequately
address the underlying challenges of competitiveness, or the lack thereof, within an economy
and it may even lead to a decline in the degree of competiveness as its could lead to higher
input costs and hence contribute to price inflation. Lastly, it is unlikely to restore external
balance if external demand is weak.
The International Monetary Fund (IMF) has developed sustainable growth indicators which
focus on policy, democracy, and governance as the drivers of growth. The policy component
encapsulates economic policies, while the governance component relates to accountability.
This approach by the IMF enables a link between economic growth and the role of the South
African Reserve Bank (the Bank) and bodies, such as the Institute of Internal Auditors, in
fulfilling their respective mandates.
The contribution by the Bank enhances institutional capacity in the economy as it serves the
South African society through maintaining price and financial stability in the interest of
balanced and sustainable growth. In the policy sphere, it conducts monetary policy to contain
price inflation. In doing this, the Bank assists in maintaining and improving competitiveness,
protecting the purchasing power of the currency and, thus the living standards of all South
Africans. Furthermore, this provides a favourable environment for employment creation
through balanced growth. In addition, the Bank also has the mandate to oversee and
maintain financial stability which is a distinct and separate policy objective from price stability.
We can feel very proud that South Africa was ranked first out of 144 countries ranked in the
Global Competitive Index Report for our Strength of our Auditing Standards and Reporting,
second for Accountability and third for the efficacy of our corporate boards. This is
meaningful as the internal and external auditing profession forms an integral part of the
international and domestic institutional capacity. These professions contribute to both the
moral and legal frameworks that maintain and uphold ethics and standards, while forming an
important line of defence in upholding good governance in both the public and private sector.
The auditing profession contributes to a credible and thriving business environment, while
acting as the custodians of international standards for professional conduct. Lastly, the
comfort that investors get from the auditing professions, promotes investment and thus
ultimately economic growth and therefor makes a difference to people's standards of living
and hence their quality of life.
I wish to conclude my talk this morning, by quoting former President, Nelson Mandela, when
he said "There is no passion to be found playing small - in settling for a life that is less than
the one you are capable of living". I hope we all would continuously strive towards a life that
is nothing less than the one we are capable of. More importantly, I hope that we would all
take hands and work tirelessly to create a future for our country that is reflective, not only of
the rich endowments we enjoy as a country, but a future that is reflective of our true and full
potential as a nation.
Thank you.