To understand South Africa’s poor economic performance, especially in the past decade, we must focus on key features that set the country’s economy apart from those of more successful countries. The very low levels of labour participation are a good place to start. Few people are looking for work, and those who are, have great difficulty in finding a job.
To create the jobs that the country needs, the export sectors must be expanded significantly and urgently. South Africa’s export performance is dismal. Mineral exports are declining and manufacturing remains stagnant. Until these structural problems are overcome, South Africa will not grow and unemployment will remain unacceptably high.
Driving above the economic ‘speed limit’ that the current environment imposes will only lead to further problems. What South Africa needs is to implement changes that will permanently raise the limit. To achieve this, some core policy challenges must be addressed.
The wrong approach
Many in government has long considered mineral beneficiation as the panacea for South Africa’s woes. Focusing on this relatively difficult-to- achieve economic outcome is, however, unnecessarily costly and prevents policymakers from noticing other opportunities for economic development.
Some form of black economic empowerment (BEE) is necessary, but in the existing policy framework too much emphasis has been placed on changing ownership, rather than helping to create jobs that can be accessed by ordinary South Africans. BEE also has an adverse impact on the establishment of new firms, thus preventing further job creation. South Africa has fallen into a rut of thinking that wage agreements have to be ’progressive’, without considering whether they should be realistic.
This has put the country in a weak fiscal position. It means there is not enough funds left for public investment, resulting in major challenges for Eskom, Telkom and other state-owned enterprises. The various tiers of government and the private sector are not working towards a common goal or co-operating to achieve results that will benefit the country as a whole.
Finally, it is critical to alleviate South Africa’s skills constraints. The cheapest and most effective way to do this is to encourage skilled immigration. Unfortunately, recent immigration policy reforms have made a bad policy even worse.
Historical perspective
Between 2004 and 2008, I was chairperson of the international panel on the Accelerated and Shared Growth Initiative (ASGISA) that advised the government. The country had made it through a successful political transition and had gone from being heavily sanctioned to having unprecedented access to international markets.
In 2004, inflation was in the single digits, monetary policies were consistent, the country was attracting investment, and international reserves were recovering. Government had implemented substantial economic reforms between 1994 and 2004, especially the Growth, Employment, and Redistribution (GEAR) programme. However, all these positive developments did not appear to deliver the expected results.
Economic growth was low, the unemployment rate rose to nearly 30% and inequality was rising. To unpack the causes of these disappointing results, my team and I focused on potential growth constraints. We soon made some surprising discoveries. For example, participation and employment rates in South Africa are incredibly low. It is amazing how few people work. Not only does the country have a low labour participation rate, it also has a high unemployment rate.
If South Africa had a labour force employment ratio similar to that of Latin America, employment would be 66% higher. For example, South Africa’s labour force participation rate for women older than 15 years is 44%. In Brazil, the labour force participation rate for women is 60%, in Colombia 56%, in Peru 68%, and in Venezuela 51%.
For males older than 15 years, South Africa’s labour force participation rate is 60%. In Brazil the equivalent rate is 81%, Colombia 80%, Peru 84%, and Venezuela 79%. A comparison can also be made with Egypt, which also has a very low labour force participation rate. This is mainly because women do not work, yet unemployment is low. The few who want to work usually find jobs.
In South Africa, the few who search, struggle to find work. Much productive potential goes unused and those who are not part of the labour force have no chance of ever attaining prosperity. If South Africa raised its employment rate to Latin American levels, those who most needed it would be incorporated into the development process. Sharing the benefits of growth is not really about wage differentials, it is mostly about increasing employment levels.
Tradable vs non-tradable
Another concerning trend at that stage was that the tradable sector had been shedding jobs for some time. This sector is made up of industries that produce commodities that can be exported, such as the mining, agriculture and manufacturing industries. Non-tradable industries do not produce goods that can be traded in this way. In addition, they tend to be more skills-intensive. Shifting resources from tradable to non-tradable activities aggravates a country’s skills constraints – and South Africa has significant skills constraints.
Labour participation rates and employment levels drop along with education levels. The highly skilled, in stark contrast to the uneducated, effectively have full employment. The shift from the tradable to the non-tradable sector means that the economy is becoming more skills-intensive, but many South Africans do not have the necessary skills to participate in this trend.
This explains why increased government spending fails to generate higher growth and more jobs.– Roelof Bezuidenhout
Phone Roelof Bezuidenhout on 083 262 2817 or email [email protected].
