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 non-traditional 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

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF Outlook

Advanced economies Emerging markets and developing countries Asian NICs South Africa

Employment trends

1995 Sep 2003 Sep 2007

Difference between

2003 AND 1995

Differenc between 2007

AND 1995

Difference betwe

en 2007 and 2003

Employment 9852 11424 13234 1572 3382 1810

Unemployment (expanded definition) 4253 8208 7370 3955 3117 -838

Labour Force (expanded definition) 14105 19632 20604 5527 6499 972

Unemployment (official definition) 2038 4434 3945 2396 1907 -489

Labour Force (official definition) 11890 15858 17178 3968 5288 1320

Poverty trendsCategory Headcount Rate Poverty Gap Ratio

Year 1995 2005 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

-10

-5

0

5

10

15

20

25

30

35

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Ratio of exports to GDP (%)

Trade balance to GDP ratio

ZAR/US$

Employment shares by broad sectors in South Africa

Employment shares: all skill categories

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Tradable

Private non-tradable

Public non-tradable

Source: Rodrik 2006

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?