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The Employment Challenge in South Africa To grow, to share growth, to change path Alan Hirsch PCAS The Presidency South Africa May 2008 Economic growth trends Annual average GDP growth 1960s 5.7% 1970s 3.3% 1980s 1.5% 1990 to 1993 -0.4% 1994 to 2003 3.0% 2004 to 2007 5.1% Apartheid and unemployment Apartheid era -1993 Rising unemployment from the 1960s—the period of most rapid growth until the current era This was the result of policy aimed at supplying the farms and mines with cheap black labour Exacerbated with slow growth dying phases of apartheid—reaching 20% unemployment 1994-2003 Growth at 3%, employment coefficient of about 0.75, but rising unemployment to peak at 31% Reasons for rising unemployment to 2003 Decline of gold mining and weak commodity prices Misguided agricultural policies Efficiencies and productivity growth arising from trade liberalisation and openness The rising labour force participation rate— the changing position of black women Currency uncertainty and erratic monetary policy fail to support investment in nontraditional export sectors Higher growth and falling unemployment 2004-2007 Commodity boom Low inflation and low interest rates Strong fiscal position allows rapid rise in government spending (9% real) with falling debt, deficit and eventually fiscal surplus Rising domestic consumption Job created rapidly, but mainly in retail, construction and non-traded service sector Obviously vulnerability of growth—most obvious symptom the sharply rising current account deficit Comparative growth rate Figure 1: Comparative GDP growth rates 10.0 8.0 6.0 4.0 2.0 Advanced economies -4.0 Source: IMF Outlook Emerging markets and developing countries Asian NICs 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 -2.0 1989 0.0 South Africa Employment trends 1995 Employment Sep 2003 Sep 2007 Difference between 2003 AND 1995 Differenc betwe en 2007 AND 1995 Difference betwe en 2007 and 2003 9852 11424 13234 1572 3382 1810 4253 8208 7370 3955 3117 -838 14105 19632 20604 5527 6499 972 2038 4434 3945 2396 1907 -489 11890 15858 17178 3968 5288 1320 Unemployment (expanded definition) Labour Force (expanded definition) Unemployment (official definition) Labour Force (official definition) Poverty trends Category Year Headcount Rate 1995 2005 Poverty Gap Ratio 1995 2005 R322 a month poverty line (2000 Rands; 2000 US $46.50) African 63.04% 56.34% 31.86% 24.44% Coloured 39.00% 34.19% 14.66% 12.98% Asian 4.71% 8.43% 1.03% 2.17% White 0.53% 0.38% 0.22% 0.11% Total 52.54% 47.99% 26.04% 20.61% R174 a month poverty line (2000 Rands; 2000 US$ 25.10) African 38.18% 27.15% 14.71% 8.55% Coloured 14.62% 12.30% 4.09% 3.88% Asian 0.82% 1.60% 0.14% 1.07% White 0.23% 0.01% 0.09% 0.00% Total 30.92% 22.68% 11.77% 7.15% Source: Income and Expenditure Surveys 1995 and 2005/6 Bhorat et al Trade and exchange rates 35 12.00 30 10.00 25 20 8.00 Ratio of exports to GDP (%) Trade balance to GDP ratio 15 ZAR/US$ 6.00 10 5 4.00 06 2.00 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 19 92 0 -5 -10 0.00 Employment shares by broad sectors in South Africa Employment shares: all skill categories 0.5 0.45 0.4 0.35 0.3 Tradable 0.25 Private non-tradable Public non-tradable 0.2 0.15 1970 1972 1974 1976 1978 1980 1982 1984 Source: Rodrik 2006 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Path dependency Typical of natural resource exporters Exchange rate is overvalued especially during international growth cycles High exports and strong currency lead to rising consumption linked to inflows of portfolio capital The effect is growth without significant employment creation, without diversification and without savings For these reasons growth is inevitably temporary and contributes relatively little to reducing poverty and inequality except through transfers What to do (beyond transfers)? Manage the exchange rate through macroeconomic interventions? It can be expensive financially and politically. Industrial policies or sector strategies? Require incentives and coordinated government. But can it work in the absence of tailored macro policies? Building human capital, but how long does it take? Redistributive strategies—land, housing. But at what cost, and how do you ensure that the assets are used productively? South Africa has its AsgiSA: Accelerated and Shared Growth Initiative Infrastructure investment Skills and education Industrial policy—competition policy and sector strategies Environment for small business development Governance capacity, especially at local level Macroeconomic stability, especially the exchange rate Impact of AsgiSA Significant Capex (rising from 16% of GDP to >20% in 3 years) Improvements in skills and education but very slow to impact Step change in implementation of competition policy Formal support for industrial policies, but commitment & coordination is inadequate Some degree of improvement of some state institutions Greater confidence and the emergence of a common language of shared growth But the expected happens in 2008 Overvalued currency, rising consumption, current account deficit->vulnerability And skills shortages July 2007 credit crunch has no immediate impact but after: Rapid inflation to 10%: food and fuel prices Political uncertainty Electricity emergency Portfolio investors start to loose enthusiasm, though still net positive flows in the 1st quarter of 2008 Temporary setback or symptom of deficiencies? Most growth forecasts expect growth to top 5% in 2010 after two slower years But, have we built a basis for sustained shared growth? Can we build a diversified labour absorbing economy on the basis of continued microeconomic reforms, and how do we empower the state to be more effective in this arena? Or is even this futile unless we follow Asian example in terms of policy regarding the level and the stability of the currency?
