Bridging South Africa’s Economic Divide
IMF News, July 19, 2016
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Bibliographic details
- Published: July 19, 2016
Introduction and core message
- Speech by David Lipton at Witwatersrand University, Johannesburg, July 19, 2016.
- Central concern: South Africa faces a large and growing gap between accomplishments and concrete economic needs; inclusion of the excluded one-third of the working population is essential for growth.
- Urgent need for a "fresh and energetic review of South Africa’s policies" aimed at fundamental change to open opportunities for the next generation of workers, entrepreneurs, and innovators.
Positives and key statistics
- An estimated 3.6 million people have been lifted out of poverty (those living on less than 2.5 U.S. dollars a day).
- The rate of extreme poverty has been more than halved to 16.5 per cent of the population.
- Social grants benefit over 16 million people.
- South Africa ranks Number 2 in the World Economic Forum’s corporate governance rankings.
- The Fund’s annual report forecasts:
- 0.1% growth in 2016
- about 1 percent growth in 2017
- Annual population increase: 1.7%.
- Employment Tax Incentive Act brought 270,000 youths into the workforce in its first year.
- Container-handling costs at South Africa’s ports are some 175% higher than the global average.
Why growth is so weak — external factors
- Rebalancing of the Chinese economy reducing demand for exports and contributing to steep fall in commodities prices (affecting iron ore, coal, and platinum).
- China’s growth now matters more to South Africa than growth in the EU and U.S.
- Normalization of U.S. monetary policy, generally tighter financial conditions worldwide, and Brexit have increased uncertainty.
- Large share of South Africa’s bonds and equities are held by foreign investors, increasing vulnerability to rising interest rates and shifts in sentiment.
- The recent drought was the worst in decades.
- Leadership changes at the National Treasury and other political developments heightened governance concerns, deepening policy uncertainty and shaking investor confidence.
Why growth is so weak — domestic and structural factors
- Infrastructure bottlenecks and skills mismatches in the workforce.
- Regulations that stifle competition and entrepreneurship keep one-third of the labor force unemployed or discouraged.
- Wage bargaining practices:
- Sector-wide wage agreements extended to bind entire sectors impose barriers on small and medium-sized enterprises and low-skilled hiring.
- These agreements can keep low-skilled workers out of the labor force and exclude SMEs from negotiation tables.
- Privileged markets and barriers to entry:
- Concentration in retail banking with high fees and barriers favoring incumbents.
- Many South African companies exhibit profit margins often 50 percent higher than in other countries.
- Tariffs (e.g., on poultry imports) protect producers but raise costs for the poor.
- Transport sector: taxi and bus cartels deter new entrants, including with violence.
- Anti-competitive behavior common in construction, maize and wheat milling, and telecommunications.
- State-owned enterprises (SOEs):
- Plagued by inefficiencies, poor management, weak balance sheets, and growing fiscal drains.
- SOE dominance prevents private sector entry in key sectors and contributes to bottlenecks.
- Crime as a constraint: World Bank finds crime is the single biggest obstacle to economic activity in the townships.
- Corruption: National Planning Commission notes high levels of corruption in both private and public sectors, reinforcing exclusion dynamics.
Policy priorities and specific measures recommended
- Primary objective: job creation, with emphasis on private-sector jobs, including temporary and informal employment.
- Build on government-business-labor dialogue to produce substantive action; consider a social bargain:
- Agree on wage restraints in exchange for job retention and hiring commitments.
- Exempt small and medium enterprises from collective bargaining agreements to create hiring space.
- Introduce a single employment contract:
- Eliminate distinction between fixed-term and open-ended jobs.
- Implement gradual, continuous increases of rights and benefits accruing with tenure to facilitate first-job entry and on-the-job learning.
- "Do no harm" policy approach:
- Centralized evaluations of policy proposals to ensure they do not undermine job creation and to reduce business uncertainty.
- Improve SOE governance and operations:
- Greater transparency in board appointments and executive and board remuneration.
- Enhance efficiency of public investment in infrastructure; aim to ensure reliable electricity supply and lower port tariffs.
- Product market reforms and stronger Competition Authority:
- Allocate more resources to detect cartel behavior and excessive market power.
- Proactive market inquiries to facilitate market entry for smaller businesses.
- Open up telecommunications spectrum to increase broadband speed and reduce business costs.
- Procurement reforms:
- Recent procurement reforms could increase government spending efficiency, reduce corruption potential, and give smaller companies access to public contracts, potentially reducing government costs dramatically.
- Labor market and regulatory caution:
- Beware unintended consequences of well-intended policies (example: a national minimum wage could reduce inequality but, if set too high or without sub-minimums for young people and small enterprises, could increase unemployment).
- Public security: government responsibility to ensure daily security of citizens as a prerequisite for economic activity.
Expected outcomes and rationale
- Inclusion of the excluded one-third can be a source of growth and dynamism.
- A combination of filling infrastructure gaps, promoting competition, sensible labor market and industrial relations reforms, improving education and training, and insisting on better governance can re-energize growth and create jobs for young people.
- Reforms require confronting vested interests, long-term stakeholder buy-in, and a commitment comparable to South Africa’s democratic transformation.
David Lipton, "Bridging South Africa’s Economic Divide," speech at Witwatersrand University, July 19, 2016.