Question

The core elements of the Growth Employment and Redistribution (GEAR) strategy of the South
African government in 1996, under the leadership of the then finance minister Trevor Manuel were
amongst other things:
 budget reform to strengthen the redistributive thrust of expenditure
 monetary policy to prevent a resurgence of inflation
 a reduction in tariffs to contain input prices and facilitate industrial restructuring,
compensating partially for the exchange rate depreciation
1.1 With reference to the above, identify the macroeconomic objectives in these elements.

1.2 Identify and define the macroeconomic variables that can be used to measure whether
the strategy was successful or not.
1.3 With each tool in 1.2, provide a detailed explanation on how it can be measured.

Answer 1

1.

The macro-economic objectives were as follows:

• a competitive fast-growing economy which creates sufficient jobs for all work seekers
• a redistribution of income and opportunities in favour of the poor
• a society in which sound health, education and other services are available to all
• an environment in which homes are secure and places of work are productive.

2.

The core variables of the strategy are:

• budget reform to strengthen the redistributive thrust of expenditure
• a faster fiscal deficit reduction programme to contain debt service obligations, counter inflation and free resources for investment
• an exchange rate policy to keep the real effective rate stable at a competitive level
• consistent monetary policy to prevent a resurgence of inflation
• a further step in the gradual relaxation of exchange controls
• a reduction in tariffs to contain input prices and facilitate industrial restructuring, compensating partially for the exchange rate depreciation
• tax incentives to stimulate new investment in competitive and labour absorbing projects
• speeding up the restructuring of state assets to optimise investment resources
• an expansionary infrastructure programme to address service deficiencies and backlogs
• an appropriately structured flexibility within the collective bargaining system
• a strengthened levy system to fund training on a scale commensurate with needs
• an expansion of trade and investment flows in Southern Africa
• a commitment to the implementation of stable and coordinated policies.

3.

The above can be measured in the following ways:

• an acceleration of the fiscal reform process, including a tighter short term fiscal stance to counter inflation, an appropriate medium-term deficit target to eliminate government dissaving, further revision of the tax structure, and a range of budgetary restructuring initiatives to sharpen the redistributive thrust of expenditure and contain costs
• a further step in the gradual relaxation of exchange controls, the maintenance of monetary policies consistent with continued inflation reduction and exchange rate management to stabilise the real effective exchange rate at a competitive level
• a consolidation of trade and industrial policy reforms, incorporating a further lowering of tariffs to compensate for the real depreciation, the introduction of tax incentives for a fixed period to stimulate investment, a campaign to boost small and medium firm development, a strengthening of competition policy and the development of industrial cluster support programmes, amongst other initiatives
• the implementation of the public sector asset restructuring programme, including guidelines for the governance, regulation and financing of public corporations, and leading off with the sale of non-strategic assets and the creation of public-private partnerships in transport and telecommunications; · an expansionary public infrastructure investment programme to provide for more adequate and efficient economic infrastructure services in support of industrial and regional development and to address major backlogs in the provision of municipal and rural services
• a structured flexibility within the collective bargaining system to support a competitive and more labour-intensive growth path, including greater sensitivity in wage determination to varying capital intensity, skills, regional circumstances and firm size
• reduced minimum wage schedules for young trainees, reducing indirect wage costs; and increasing the incentives for more shifts, job sharing and greater employment flexibility; and · a social agreement to facilitate wage and price moderation, underpin accelerated investment and employment and enhance public service delivery.