Personal Reflections on Some of the Main Highlights of the Budget Speech to the Parliament of Lesothofor the 2007/2008 Fiscal Year

A Discussion Paper Presented at  Nedbank/ LRA Post-Budget Speech Dinner
 

My Respects to His Majesty, King Letsie III,
His Right Honourable, Prime Minister Pakalitha Mosisili,
Honourable Ministers and Members of Parliament Here Present,
Your Lordships Judges of the Courts Here Present,
Excellencies, Members of the Diplomatic & Consular Missions,
Other Senior Government, Nedbank & LRA Officials,
Distinguished Guests, Ladies and Gentlemen,

A. Preamble and Caveats

1. Let me begin by congratulating the Hon. Dr. Timothy Thahane, albeit rather belatedly, on his re-appointment to the high Office of Minister for Finance and Development Planning, and, in the same breath, the Right Honourable Prime Minister, for putting the Hon. Minister back in that seat. This is reassuring both to the Basotho and Lesotho’s development partners who would like to see continuity in the policies and programmes he had begun putting in place to ensure a stable, predictable and sustainable macroeconomic environment within which to pursue Lesotho’s socio-economic development priorities.

2. My second opening remark is a caveat that researchers affiliated with major world institutions normally employ, when presenting analyses or making comments in their personal, professional capacities rather than in the name of their institutions. While the letter inviting me to make a few comments on the Budget Speech at this Post-Budget Speech Dinner was addressed to me as Economic Advisor for UNDP, let me state at the outset that the following analysis of the Budget Speech, the conclusions drawn, and the suggestions and observations made in this presentation do not in any way reflect the views or policy positions of the United Nations or the UNDP, whose Head of Mission is the only person permitted to make or authorise such public policy statements or offer views on behalf of our Organization. Therefore, any errors in judgement or interpretation made in this presentation are solely mine, as an Economist, a long-time Researcher and a practitioner with prior experience in budget processes from my own country, Ghana.

B. The Empirical Context of My Comments on the Budget Speech

3. Let me now set the empirical analytical framework for my comments on the Budget Speech made to the Parliament of Lesotho by the Hon. Minister on Friday, 30 March 2007, by making a few observations and suggestions. First, I wish to congratulate the Hon. Minister, for laying out for us the context within which the Budget process was carried out, namely: to present logical arguments and request from Parliament appropriations for programmes that will create a “conducive investment climate essential for sustainable economic growth, job creation and poverty reduction”. Let me also applaud him for setting this within the overall priorities laid out by His Majesty, and which derive from the nationally-owned Poverty Reduction Strategy. These have been summarized in eight bullet points on page 13 of the Budget Speech.

4. While I am not suggesting that the sequence of that priority list carries any implied rank-ordering, I am reminded of a very recent (March 2007) article in “Human Development Insights”, published on-line on the UNDP Human Development Report Networks by a well-known Yale University Economist, Professor Gustav Ranis. In that article, he developed a model that uses two causal chains: one leading from Economic Growth to Human Development; the other leading from Human Development to Economic Growth. He then proceeds to verify empirically which of these causal chains predominates, in terms of sustainable impact, in the socio-economic development and growth process. I shall return to some of his findings later.

5. But permit me to outline here the two stylized facts which formed the foundations for Professor Ranis’ empirical research. He states that: “There clearly exists a strong two-way connection between Economic Growth and Human Development. On one hand, Economic Growth provides the resources to promote sustained improvements in Human Development. On the other, improvements in the levels of education and health, key ingredients of Human Development, are important contributors to Economic Growth.” What is important to note, here, is that in order to achieve progress in human development, which is broader and more all-encompassing than poverty reduction, the quality of growth (that is, the growth process pursued) matters.

6. National budgets, and their related specific policy instruments for implementing the activities they finance, are critical to this growth process over time. If the policy context for pursuing economic growth over time is not carefully crafted, then, as the UNDP global Human Development Report 1996 eloquently argues, a number of policy failures may occur, which may have adverse implications for human development.

7. The latter can lead to any one or a combination of the following: (a) jobless growth (that does not expand the opportunities for employment); (b) inequitable growth (during which process the fruits of growth mostly benefit the rich); (c) voiceless growth (which is growth that is not broadly participatory and does not empower the masses); (d) rootless growth (which causes people’s cultural identity to wither); and, (e) futureless growth (during which process the present generations squander resources needed by future generations.

8. It is against these time-tested standards that I invite you to assess with me the budget statement itself, as well as the relative importance the proposed budgetary allocations and their recent trends have given to some of the broad clusters of sectors, which may be critical for human development (and, for that matter, poverty reduction and progress towards the achievement of the Millennium Development Goals). Let me hasten to applaud the Government of Lesotho for scoring high marks on account of the last two yard-sticks.

9. For, since I have been in this country, and from my review of past policy and programme documents in the course of my work, the Government’s concern for preserving the nation’s cultural heritage as well as ensuring environmental re-generation and natural resource conservation, for the present and future generations of Basotho has been consistently reflected in its policy pronouncements, planning strategies and action programmes. Just to cite one example, I am reliably informed that such concern has been reflected in the environmental and social impact assessments that will precede the commencement of work on the Metolong Dam project cited in this Budget Speech.

10. I will, therefore, focus my attention on examining, in broad terms, how this Budget Speech and the proposed sectoral or functional allocations, reflect, in my view, sufficient effort on the part of the Government, to avoid or minimize the effects of the first three potential policy failures noted earlier. These are (a) jobless growth; (b) inequitable growth; and (c) voiceless growth. For jobless growth to occur, the techniques of production will lead to less employment of labour than of machines.

11. For inequitable growth to occur, opportunities created in the process of generating growth, through deliberate policy instruments, will create an environment in which the rich will benefit more at the expense of the poor. I leave the last potential policy failure to this audience to ponder: that is, whether the processes for designing policies, strategies and programmes have been sufficiently broadly participatory in this country. For, as I have said earlier, national budgets, which are very important vehicles for determining the growth path of a country’s economy, are set within the context of such broad policies, strategies and action programmes.

12. Permit me to conclude setting the empirical frame of reference for my analysis by explaining what, in my view, is critical for a more-inclusive, equitable economic growth process, especially within the constraints of the competitive environment presented by world-wide globalization, and, particularly against the backdrop of the impending Free Trade Area contemplated for the SADC sub-region in about a year. One thing that is most important is productivity and the export cost-competitiveness of that productive process, especially for a country with a small domestic market.

13. Such productivity and export cost-competitiveness can be achieved through either: labour productivity-enhancing investments; capital productivity-enhancing investments; or a combination of both. In the first example, scaled-up investment can be made in the health, education and skills of the people, so that labour in a Mosotho firm or farm can produce increasingly more output per unit time than before or than labour employed in a comparable activity by their competitor at a given time. This will lead to lower unit export production costs compared to our competitors, other things being equal.

14. Increased productivity can also be achieved through capital-intensive processes, using more machines of the old vintage or the same quantity of new machines embodying new technologies. For instance, it is the latter technology-based production process in the South African mining industry that partly precipitated the displacement of labour and the retrenchment of migrant Basotho. Let me now turn to the specifics of the Budget Speech.

C. Specific Comments on the Budget Speech Highlights

15. Permit me to start by commending the Hon. Minister for a very well-thought out, well-structured and persuasively-argued contextual framework for the Budget Speech. On balance, the Government has focused on the critical constraints since Independence, 40 years ago. These constraints include: economic growth that was not sufficiently sustainable to generate enough jobs for the growing labour force entrants; circumscribed social and human development due to HIV and AIDS; as well as, droughts, low food production and famine (page 3).

16. My first observation here is, unless otherwise persuaded with additional information not presented in the Budget Speech, that the attention to these critical constraints in the Budget Speech has not adequately reflected their relative importance to the human development side of the productivity equation. If current trends are not reversed, HIV is capable of constraining Lesotho’s population growth rate to less than replacement levels (that is an annual growth rate that is above 2.1 percent), apart from its adverse effects on labour productivity.

17. Second, while the budget proposes (page 4) to start on an aggressive irrigation programme for the farm sector to diversify agriculture towards high value crops, the survey of the areas to be irrigated is yet to start, but more importantly, it is not clear whether the size of such a scheme will make an appreciable dent on low farm productivity and incomes, and, thereby, poverty in the farming communities. Third, farmers have been mentioned among the private sector actors critical for driving broad-based, high economic growth (page 6). However, they have not been mentioned among potential beneficiaries of the envisaged increased access to finance (page 7). One wonders whether there is any special credit package for the small-holder farmer.

18. The Minimum Infrastructure Platform (MIP) initiative is laudable. It will contribute immensely to the export cost-competitiveness consideration I referred to earlier, given Lesotho’s landlocked location. But while this will remove some of the constraints Lesotho faces in taking advantage of several bilateral and multilateral preferential trading arrangements, the launching of the Free Trade Area initiative (page 5) has two potentially countervailing implications.

19. First, Lesotho will have access to a sub-regional (SADC) market with a population of 235 million. Second, apart from the relative productivity and intra-regional export cost-competitiveness dimension, there are also implications for Lesotho’s share of revenues from the Southern African Customs Union (SACU) arrangement (currently consistently above 60 percent of tax revenues). I would like the Hon. Minister to throw some light on this latter.

20. I dare to add to the five (5) key pre-conditions necessary for job-creating sustainable growth (listed on page 5) a sixth one, namely, high and rising productivity and export product cost-competitiveness. This will be facilitated by scaled-up and sustained investments in the education, health and agricultural sectors (the latter for good nutrition through sustained food security). This is why I will focus the next few observations on the budgetary allocations to these sectors. Let me add, here, that it is possible there are complementary programmes not captured in the Budget Speech that contribute to aggressively addressing these, such as those implemented in parallel by Lesotho’s development partners. It will be helpful if the Hon. Minister can enlighten us on some of these.

21. But, turning to the budgetary allocations proposed for these sectors, I wish to observe as follows. First, the 22.3 percent increase in recurrent budgetary allocations to the social services sector (health, social security, education) over last year’s figure (page 21) is laudable. However, while the proposed allocations to health and to social security and welfare grew by 36 percent and 40.9 percent respectively, the allocation proposed for education remained constant between the last financial year and this year (although, at 25 percent of the total recurrent budget, its share is the highest for the social services sector).

22. Second, I am concerned because the laudable Free Primary Education (FPE) initiative would call for constantly increasing allocations to hiring new teachers for the increasing number of classrooms year after year, unless the pupil-per-teacher ratios have been allowed to keep rising, with adverse effects on the quality of instruction.

23. Third, let me also congratulate the Government for being one of the few in Sub-Saharan Africa that has introduced direct cash transfer payments to the elderly. While not as comprehensive as South Africa’s system, it is a very good beginning. I am also impressed by the increase in the cash outlays this year over what was paid out to each beneficiary last year. It is one small way of addressing the incidence of abject poverty or indigence.

24. Fourth, while the proposed recurrent expenditure proposed for the agricultural sector has risen by 33 percent over last year (page 21), this increase is over a very small (2006/07) base (which was just 1.0 percent of GDP). I will like an explanation on what activities are envisaged under this allocation to the sector, particularly regarding agricultural extension services, which, I would imagine, would be critical to productivity-enhancing innovations being introduced to farmers. Also, it may be worthwhile to explain what package of incentives farmers may receive to encourage them to adopt the new innovations, given their understandably risk-averse nature, because of their thin assets base.

25. Now, turning to the capital expenditure proposals (page 22), again focusing on the social services sectors and agriculture, I wish to make the following observations. First, the huge increase (53.6 percent) in capital budget expenditures in the social services sector as a whole over last year is impressive and laudable. However, when one unpacks it, most of this is attributable to the nearly 300 percent increase in the health capital expenditure proposals (presumably related to the new Queen II Hospital project). Second, capital allocations to Social security and welfare actually declined by 100 percent, while that to education, culture and recreation declined by 18.3 percent.

26. Again, one would expect an increase in capital outlays to the education sector, in terms of new classrooms, capital equipment, etc., in support of the accelerated education drive, under the Free Primary Education initiative. I am curious to know whether the FPE-related capital investments have been front-loaded at the inception of the FPE initiative a few years back (and, therefore, subsequent capital outlays are tapering off) or whether other parallel development partner programmes not reflected in the Budget figures are funding the warranted capital investments.

27. Regarding the proposed capital expenditures in the agricultural sector (page 22), apart from its small absolute size (0.3 percent of GDP, compared to 2.6 for health and 1.1 for education), it actually declined by 25.1 percent. Given the Hon. Minister’s pronouncement on some irrigation and other initiatives to boost productivity in the sector, I am baffled by the trend in these figures. Again, there may be other parallel programme interventions not captured in the Budget figures here, which may be of interest to this Dinner discussion.

28. Let me conclude my Comments on the Budget by making two points regarding budgetary processes. First, is consideration for the overall envelope of resources (the total revenue, from domestic taxes and grant financing) available for the plan period (whether one year or 3-year rolling plan). Second is the concern for ensuring that excessive deficits (of expenditure over total revenue) do not generate excessive inflationary pressures, which may negate the positive benefits of the budgetary allocations.

29. Regarding the total revenue situation, one way to move the envelope frontier out is to raise the domestic component of tax income by a more aggressive tax effort. In this regard, the Lesotho Revenue Authority has begun commendable work, which must be sustained. The other suggestion is the need to follow up on pledges made at the November 2006 Ninth Donor Round Table Conference for Lesotho. From my decade-and-half experience with RTCs, donors can easily “develop temporary amnesia” about these pledges unless the beneficiary country aggressively reminds them.

30. Now, is the time to share with you some of the key findings of Professor Ranis’ recent research, which I cited at the beginning of this presentation. He notes that between 1960 and 2001, based on data from 69 developing countries, both the Economic growth-focused lopsided approach and the Human Development-focused lopsided approach to socio-economic development could not be sustained for long for most countries. However, on balance, some countries succeeded in moving from the Human Development-lopsided category into a virtuous cycle of sustained socio-economic development, while no country succeeded in moving from Economic Growth-focused lopsided category to a virtuous cycle of sustained socio-economic development.

31. What this suggests is that in trying to improve economic growth, it is very important not to neglect the human development dimensions. This explains why, while accepting the balanced approach adopted by this budget process, I have focused most of my attention on assessing the level of resources devoted at the same time to the social services sector and agriculture.

32. My final remark is to thank Nedbank and the Lesotho Revenue Authority for this annual Post-Budget Dinner event, which creates a forum for exchanging views across a broad spectrum of the Basotho society. At least, that way, we cannot accuse the Government of promoting a “voiceless growth” process.


THANK YOU ALL FOR YOUR TIME AND ATTENTION.