Question

South Africa has a high unemployment rate, researchers have suggested that the SA government should adopt expert-led growth policies to address this problem given that increasing exports has the potential to increase productivity, should the South African government increase its economic openness without government regulation of any kind? 100 words

please give additional insight

thank you

Answer 1

ANSWER-

This country is an interesting case study in some of the growth constraint factors that have been discussed in previous chapters of the study companion. The underlying pace of expansion of national income – known by economists as the trend rate of growth – is held back by a number of key features:

Two speed economy

• Tourism, banking and finance, some parts of mining and farming doing well
• Slower growth in many informal urban industries, traditional manufacturing and many parts of South African farming

Low capital investment

• Capital investment in South Africa has been falling measured as a share of GDP
• Many South African companies invest abroad rather than focus on the domestic economy

Gold prices

• In recent years the surper-charged world price of gold may have proved a resource curse for South Africa - creating a Dutch Disease effect
• As gold prices has risen, the value of the local currency (the rand) has appreciated undermining the cost / price competitiveness of South African manufacturers

Wage rises

• South Africa has a powerful trade union movement that is part of government
• The annual rise in wages has been strong - boosting purchasing power for those in work but lifting unit wage costs and affecting global competitiveness

Closed economy

• Common to many developing countries - South Africa has monopolistic / oligopolistic utility businesses whose prices are high and efficiency is low
• The South African economy is relatively closed and highly protectionist

Deep inequality

• South Africa has very high levels of income and wealth inequality
• There is plenty of private sector wealth but the Gini coefficient is around 0.6
• Millions of people inactive in the labour market dependent on public and private cash transfers

Infrastructure Gaps

• A widely acknowledged problem for South Africa especially in the areas of roads, sanitation, energy efficiency, supply and cost
• Ambitious plans to boost infrastructure spending and signs of inward investment from China that might help to close the gap

Human capital

• In part a historical legacy from apartheid - an entire generation deprived of access to schooling
• Standards of literacy and training are lower than for many other emerging countries

Over the past year, there has been growing concern that the country has become trapped in economic stagnation because the Ramaphosa administration has failed to act decisively to address the many problems which we face. Hopefully the new plan will stimulate the action required to set us back on a growth path.

The paper rightly emphasises that policy should be focused. Successful economic policy requires that priority be given to interventions which offer the greatest impact at the least cost. The current situation is dire. However, there are simple things that can be done that can have a meaningful impact in a relatively short period of time. Rapid action to promote these opportunities is the best way to get the economy going again. Among these are the following:

1. Export earnings and foreign investment

Economic growth in South Africa is leveraged off its export earnings. Accordingly, priority must be given to supporting initiatives which boost exports or generate service receipts. However, this alone will not be enough. Given South Africa’s shortage of domestic savings, stimulating economic growth requires foreign investment. The president’s programme to attract foreign investment recognises this reality. This will succeed only if policy is rationally formulated so that investors have confidence in the long-term sustainability of South Africa as an investment destination.

2. The shortage of skills

The most important cause of South Africa’s present economic woes is a shortage of technical and managerial skills. This is most clearly seen in government, but is a problem throughout the economy. The increasing income disparity between the skilled and unskilled referred to in the paper is a direct consequence of this shortage. Notable business failures in the public sector, such as Eskom, and the scandalous state of public hospitals, can be directly attributed to appalling mismanagement. The failures of the state educational system are well known and understood.

It will take a long time to fix this and to build up the required skills base. In the interim, if South Africa is to get its economy going again, it must be open to importing skills where required.

3. Decisive changes at Home Affairs

In the modern global economy, skills are mobile. Multinational companies require the freedom to transfer key personnel from country to country. They will not willingly locate their operations in countries which deny them this right. South African business also needs to tap into such skills.

It must be understood that in a society with a skills shortage, inward migration of persons who can fill this gap does not create unemployment. On the contrary, as a rule, every skilled person entering the country contributes to economic growth, which creates work opportunities in the domestic economy. This is cautiously admitted in the Treasury paper, which argues for the admission of persons with acceptable tertiary degrees. Policy changes need to be much bolder. At the very least they should be expanded to include persons who are willing to establish a business and those whom existing businesses are willing to sponsor.

Retired persons from other countries who have an acceptable pension income should also be made welcome. It is better that they spend their pensions here rather than elsewhere. Unless the byzantine complexities of the present system for gaining permission for permanent residence are radically simplified, we shall be unable to attract the skills we so desperately need.

4. The tourism opportunity

It is encouraging that President Ramaphosa has publicly stated that in recent years, visa regulations have damaged our tourism industry and that steps are being taken to remedy this. Tourism probably represents South Africa’s greatest short-term economic opportunity. When one compares the contribution of tourism to the South African economy with that of countries such as Spain or Italy, we are clearly attracting far fewer visitors than we should. An important reason for this is unnecessary impediments to entry imposed by Home Affairs. If these are removed, tourism could boom.

Apart from instituting a welcoming visa regime, little else is required of government. Some international promotion is desirable, and the proposal that there be some mechanism to reduce red tape has merit. The rest can be left to the private sector. Tourism is the simplest way to create jobs for relatively unskilled persons. It can have a big impact on the economy, especially as it generates foreign exchange earnings. The economy is leveraged to export and service receipts. Growth in tourism will have a strong multiplier effect on the economy.

5. Documentation of property ownership

There is widespread occupation of land and houses by persons who are legally entitled to a property but do not have title deeds to confirm their ownership. A serious effort by the state to remedy this is required not merely on grounds of simple justice, but also because registered ownership would provide collateral which entrepreneurs could use to raise capital, thereby boosting the small business sector.

6. The opportunity in agriculture

In the past decade, agriculture has been one of South Africa’s success stories. Its farmers have taken advantage of growing demand in Africa, and China becoming a major food importer. This has been achieved despite serious climatic challenges.

This success is the outcome of the consolidation of the industry into a small number of well-managed operations, which are large enough to take advantage of the economies of scale required for profitable farming. It is often said that 800 farmers produce 80% of South Africa’s food production. While this is a soft statistic, it provides an accurate representation of reality. Only well-managed, efficient farming businesses can meet the demand of domestic retailers and the international food trade for low prices. These farmers provide large numbers of sustainable jobs for unskilled workers.

Agricultural policy should be focused on taking advantage of this success. Policies aimed at promoting subsistence farming may have considerable social value, but are unlikely to be sustainable without continuing financial support from the state.

7. Eskom

Everyone now recognises that fixing Eskom is an urgent priority. Underlying its financial collapse has been a flawed business model. It ignored the simple law of economics that increasing prices reduces demand. Massive price increases have decimated demand as consumers have reorganised their affairs to reduce consumption. Certain energy-intensive industries have been driven into closure.

The electricity price shock has been a significant contributor to South Africa’s current economic malaise. Tariff increases have wiped out a significant proportion of Eskom’s potential sales, leaving them 10% lower than they were eight years ago. This, in turn, has diminished the cash flow available to service Eskom’s financial obligations. Further tariff hikes will exacerbate matters. The debate on tariffs should not be about how much they should be increased to make Eskom financially viable; rather, it should be about how Eskom should be structured to keep prices low enough to promote growth.

The paper correctly sees the opportunity presented by renewables. However, a baseload of coal will be required for many years. The economically best outcome requires optimal use of existing capital stock. The idea of selling existing coal-fired stations looks good in theory, but it may prove difficult in practice. Coal is increasingly being demonised. Large pension funds in developed economies are unwilling to invest in coal. Banks are being pressured by lobby groups to cease lending to the carbon economy. Funding of any purchase of coal stations is likely to be very expensive.

The most important task in fixing Eskom is to install an efficient and credible management team. While a lot of attention has been given to how Eskom is to be funded, nothing can be done until the management issues are resolved. A sustainable funding package requires a management team in which credit providers have confidence.

8. The urban rail system

The commuter rail system in South Africa’s major cities is in a state of serious decay due to a combination of mismanagement and neglect. This diverts traffic onto the roads, aggravating an already serious congestion problem. High priority should be given to fixing the management of the urban rail system as this can deliver at relatively low cost a significant improvement in the quality of life of commuters and will have a positive economic impact on major cities.

9. Labour laws

While the political impediments to creating a more business-friendly labour dispensation are well known, it needs to be clearly recognised that the present dispensation is a principal cause of the high level of unemployment. It constitutes a formidable obstacle to starting a new business and has the unintended consequence that investment is biased towards technologies that require a minimal workforce. Curtailing the activities of labour brokers has eliminated what was one of the easiest ways for a new entrant to the labour market to find a job.

Promoting apprenticeships is probably the most effective intervention which can ameliorate the adverse consequences of labour legislation. A combination of further subsidies and incentives to promote apprenticeship schemes is required.

10. Law and order

Perhaps the most serious immediate threat to the South African economy is increasing lawlessness. The operation of many businesses is being disrupted by extortionate demands from communities and opportunists who are conducting what can be described as protection rackets. Given increasing poverty and the lack of legitimate work opportunities, these developments are understandable. However, social disorder is imposing a serious additional burden on business, which will have a cost in the form of reduced economic growth, which, in turn, will further exacerbate poverty.

If the police are unable to protect those conducting legitimate businesses, many of these businesses will close. The president’s ambitious programme to attract foreign investment is being put at risk. More resources need to be allocated to maintaining law and order and to training the police on how to maintain civic peace.

How to fix South Africa’s unemployment crisis-

The Centre for Development and Enterprise (CDE) has published a new report looking at South Africa’s growing unemployment rate and what it calls a ‘job bloodbath’.

The think tank says that South Africa has one of the deepest and most persistent unemployment crisis in the world, with the situation worsening due to slow economic growth and labour market policies that discourage employers from hiring unskilled workers.

The CDE – using data from StatsSA, the World Bank, the Reserve Bank and other sources – said that only 42% of adult South Africans actually work, and this figure has continued to slide, now down from 46% in 2008.

Of the potential workforce, over 38.5% is unemployed, it said – far higher than the ‘official’ unemployment rate published by Stats SA, which stood at 29.1% near the end of 2019.

“Between 2008 and 2019 the number of people who want work but cannot find it or have given up looking rose from 6.5 million to 10.3 million. Every day some 1,700 adults join the labour market and fewer than 500 of them find work,” the CDE said. This is roughly 3 in every 10.

“The situation for young people (aged 15-34) is even worse. Between 2008 and 2019 the population of young people increased by 2.2 million but the number employed fell by more than 500,000.”

“This problem has been exacerbated by years of neglect and inappropriate policies,” said CDE executive director Ann Bernstein.

“But all is not lost. We could make significant progress in stimulating growth and increasing employment if government were to adopt a package of realistic policies.”

Official unemployment rate

South Africa’s official unemployment rate climbed to 29.1% in the third quarter of 2019 – its highest rate in over 16 years. The country’s unemployment rate last reached 28% in 2003.

The working-age population increased by 149,000 or 0.4% in the third quarter of 2019 compared to the second quarter of the same year. Compared to Q3: 2018, the working-age population increased by 597,000 or 1.6%.

The number of employed persons increased by 62,000 to 16.4 million in Q3: 2019, but the number of unemployed persons also increased by 78,000 to 6.7 million compared to Q2: 2019, resulting in an increase of 141,000 in the number of people in the labour force.

Reforms

Bernstein said that key to South Africa’s jobs turnaround in introducing a number of structural reforms and restarting the country’s growth.

“It is widely recognised that unemployment is high because economic growth is low,” she said.

“This is largely because governance has been so poor. Before 1994, apartheid was to blame; after 2008, state capture, increased antagonism towards business and widespread corruption precipitated a near-fatal collapse of governance.”

Bernstein said that three other factors are especially important: South Africa’s multi-generational failure to educate its workforce; the spatial legacy of apartheid which imprisoned many in poverty traps and retarded urban growth; and many bad policy choices in the last two decades.

Bernstein said that reforms should include:

• Securing more generating capacity;
• Putting South Africa’s finances on a sustainable footing;
• Tackling the skills crisis through fundamental reform of basic education and training;
• Encouraging as much skilled immigration as we can attract.

Policies that undermine property rights must also be rolled back, while the government will have to rethink its attitude to business, the role of markets and the size of the state, she said.

However, Bernstein cautioned that growth alone will not make for a job-rich economy and that labour market reforms are also urgent.

The best route to an inclusive society and less poverty is to get as many people as possible into formal jobs, she said.

Bernstein said that the reforms that would achieve this include:

• Legal exemptions for small and new firms from collective bargaining agreements to which they are not party;
• Rebalancing collective bargaining to ensure small and new firms are better represented;
• The existing biases of industrial policy – which work in favour of capital-intensive firms – should be reversed;
• the employment tax incentive should be expanded to include more workers and for a longer period;
• Making it easier for firms to get rid of employees during their probationary periods would help de-risk the employment decision.

“It’s time South Africa got serious about this devastating crisis,” said Bernstein.

“Tweaking around the edges of difficult issues or avoiding them will not result in faster growth or more employment.”