Question

What is the economic concern if the GDP continuously decrease over a period of stretch in South Africa’s situation?

Answer 1

South Africa remains constrained by its low growth potential. Slow private investment growth and weak integration into global value chains prevent the country from reaping the new economic opportunities emerging around the globe, and from catching up with living standards in peer economies. South Africa needs to build on its comparative advantages, that of an industrial skilled economy, to develop new domestic and international markets through higher productivity and innovation. At this condition will South Africa reduce its high dependency on commodity price movements, which do not look favorable for the country in the medium term. Building on two World Bank reports – the Poverty and Inequality Assessment and the forthcoming Systematic Country Diagnostic – this 11th edition of the South Africa Economic Update argues that significantly raising South Africa’s economic potential will require breaking away from the equilibrium of low growth and high inequality in which the country has been trapped for decades. In this equilibrium, slow growth and high inequality reinforce each other: inequality fuels the contestation of resources (through taxation, expropriation, corruption and crime), which discourages the investment needed to accelerate job creation and reduce inequality. Fiscal redistribution through social assistance, while sizeable and effectively targeted, has been unable to redress the rise in inequality since 1994, and is increasingly constrained by narrowing fiscal space. Solutions are needed to foster inclusive growth, which in practice means improving the poor’s access to good jobs so they can fully participate in the economy. A credible path to sustainably redress inequalities is needed to reduce policy uncertainty and strengthen the social compact on which authorities plan to build consensus with business, labor, and civil society. A silver lining in this very challenging social, political and economic environment is the evolving nature of inequality in South Africa, on which policy interventions could further build. Previously, inequality was largely determined by race and geographical origin (reflecting the country’s legacy of exclusion). While race remains a central determinant of inequality, income inequality is now increasingly being determined by jobs status: employed versus unemployed, skilled versus unskilled. Since 1995, wage inequality has risen sharply, reflecting a severe mismatch between a labor market that demands skills and a labor force that is not fully able to respond to such demand, as mostly unskilled and often located far away from economics centers. This is concerning as it maintains inequality at such high levels that fiscal redistribution alone cannot reduce. But it is also a trend against which citizens and the government can now act more forcefully through efforts and policy initiatives, as opposed to intangible factors like race. As a matter of fact, World Bank poverty projections indicate that progress in access to education since democracy is paying off: by 2030, inequality should be back down to its 1994 level, and South Africa should count 8.3 million poor people (at $1.90 a day), down from almost 10.5 million in 2017.