Achieving shared growth: some ideas on how to advance the goals of ASGI-SA

1. Achieving shared growth:some ideas on how to advance the goals of ASGI-SA International Growth Advisory Panel June, 2008

2. A Busy Two Years • 4 Visits to South Africa • Met with various government departments, labor, private sector, and academics throughout South Africa • Pursued research in teams focused on : • Research outputs: • 20+ papers • Seminars, conferences and presentations to cabinet

3. The core team Philippe Aghion, Harvard University Matthew Andrews, Harvard University Abhijit Banerjee, MIT Jeffrey Frankel, Harvard University Sebastian Galiani, Washington U. Lawrence Harris, LSE Ricardo Hausmann, Harvard University Steven Kelman, Harvard University Asim Khwaja, Harvard University Bailey Klinger, Harvard University Robert Lawrence, Harvard University Jonathan Leape, LSE Jim Levinsohn, University of Michigan Roberto Rigobon, MIT James A. Robinson, Harvard University Dani Rodrik, Harvard University Christopher Stone, Harvard University Federico Sturzenegger, Harvard Lynn Thomas, LSE Other international co-authors Daron Acemoglu, MIT Matias Braun, UCLA Alberto Ortiz, Boston University South African Authors Stanley du Plessis, University of Stellenbosch Lawrence Edwards, University of Cape Town Johannes Fedderke, University of Cape Town Stephen Gelb, The EDGE Institute Ben Smit, University of Stellenbosch Ingrid Woolard, University of Cape Town The team

4. The fundamental question in 2004 • The country underwent a very successful political transition • It had benefited from improved relations with the rest of the world • From sanctions to role model • It had drastically improved macro performance • Inflation, credit ratings, reserves • It had carried out substantial economic reform • After 10 years, what did it have to show for it?

5. Disappointing growth Log GDP per capita

6. High and rising unemployment • About 4 million people are unemployed

7. Inequality on the rise Source: Human Sciences Research Council

8. As we arrived in the country, the situation appeared to change • Growth accelerated since 2004 • Unemployment started to come down • Had the long-lost check-in-the-mail finally arrived? • Was the market anticipating the success of our study?

9. However, since 2004 growth has improved Did the market anticipate our effectiveness?

10. Growth accelerated

11. …but with a widening current account deficit

12. The boom… • Had been driven by an investment boom in nontradables… Investment in tradables and nontradables Total investment

13. and a consumption boom in durables Consumption of durables Consumption of non durables

14. In conclusion • The growth acceleration was temporary • Growth was based on a boom in domestic spending financed by foreign borrowing • The money borrowed was not used to increase future exports so as to have increased resources to pay back • Eventually, borrowing would slow down, cooling off domestic spending • When this happens, export growth will be key to sustain GDP growth

15. We tried to develop a fresh look at the facts Here are a few that we found surprising

16. Some not so well known facts • Participation and employment rates in South Africa are very low • The tradable sector has been shedding jobs in a massive way, while employment growth has been concentrated in non-tradables • The tradable sector is unskilled-labor intensive • This aggravates the skills constraint • …and makes Keynesian policies ineffective • Long run export performance has been dismal

17. Participation and employment rates in South Africa are very low

18. Employment is unusually low, unemployment unusually high

19. This is problematic for shared growth • Unused productive potential • Bad for growth • Many families not participating in the growth process • Bad for equity • If South Africa had Latin American employment ratios, over 6.6 million more South Africans would be working today

20. Full employment of highly skilled, low employment even of those with Matric Matric is equivalent to a high school diploma

21. Unemployment rate by race in South Africa, 2005 Unemployment Rate 35 30 25 20 15 10 5 0 White Indian Colored African

22. Unemployment affects disproportionately the young

23. Conclusion • The South Africans excluded from the labor market are predominantly less skilled, black, young and female • If South Africa had “normal” employment rates, these groups would be the main beneficiaries • Increasing employment ratios productively would achieve shared growth

24. The tradable sector has been shedding jobs in a massive way, while employment growth has been concentrated in non-tradables

25. Massive losses in employment in the tradables sector Tradable Public non-tradable Private non-tradable

26. Absolute employment losses across all tradable sectors Manufacturing Agriculture Mining

27. The tradable sector happens to be less skill intensive Tradable Manufacturing Public non-tradable Private non-tradable

28. What does this mean? • The sectors that have been shedding jobs have been intensive in unskilled labor • The sectors that have been growing have been intensive in skilled labor • This has aggravated the skills constraint

29. One uncomfortable implication: in this context, Keynesian policies do not work • Keynesian policies increase the demand for (skill-intensive) non-tradables • But there is full employment of high skilled workers • …so they have to be taken out of the tradable sector • But for every skilled person you take out of tradables, you loose more non-skilled jobs in tradables than those that you make up in non-tradables • So, unemployment may very well rise!!

30. Long run export performance has been dismal

31. The real purchasing power of exports per capita is at 1960s levels

32. A rather unusual performance Malaysia Canada Australia Argentina South Africa

33. The pattern of South African low growth GDP per capita Consumption per capita Exports per capita

34. …driven in large part by declining mining per capita

35. ..not compensated by manufacturing

36. Implication • Whatever is holding back economic growth seems to affect differentially the tradable sector • We need to search for binding constraints that could explain this outcome

37. Camels & Hippos • Why are there so few animals in the Sahara? • It is informative to know that the few animals you do find tend to be camels and not hippos • The successful / surviving sectors are least intensive in the binding constraint • You can infer binding constraints by the revealed structure of production

38. The Heart of the Matter • New export jobs aren’t being created quickly enough to replace contracting tradable industries • Unemployment • or quickly enough to keep up with growing import demand • Current Account Deficit • ‘Exporting for jobs’ is the key

39. The Heart of the Matter • With the export dynamism you have, you cannot achieve the ASGI-SA targets • Export jobs are the harder to create • Need to compete with other countries • They are needed to make the other jobs possible • If you got more jobs in exports, you would get more demand for the other jobs. The reverse is not true. Therefore, export jobs are the binding constraint. • Good jobs (of any kind) are the key to shared growth

40. In conclusion • Achieving shared growth is about creating jobs for those who are currently not working, i.e. the lesser skilled • To do it in an externally sustainable way the tradable sector must expand • …but that happens to be the sector that hires mostly low-skilled people • …which are the people who are currently out of jobs • In synthesis: export for jobs

41. Explaining the binding constraint • It has been relatively unprofitable to invest in tradeables • This is related to the level and volatility of the real exchange rate • How to achieve this? • Structural transformation • Market failures in changing what you produce: the chicken and egg problem • Specific and complementary public inputs • Costs that the non-tradable sector can pass on to consumers but the tradable sector cannot • New activities require new public inputs that are hard to identify

42. Achieving shared growth has not been the only goal of the government • An additional goal has been empowerment (BEE) • …and this has implied mainly ownership and control • Equity participation • Senior management • Preferential procurement • There may be a virtuous circle between empowerment and employment • …but there may also be important trade-offs

43. The trade-offs of BEE • BEE is creating many opportunities at the top • …but it is exacerbating the skills constraint, making it harder to create jobs at the bottom • It attempts to redistribute ownership and control over capital • …but may be taxing new investments • Two goals that may collide: • Making the top black • Making the bottom better

44. What did we suggest South Africa should do? Increase the speed limit Drive at the speed limit

45. How to increase the speed limit? Eliminate the binding constraints that have been identified

46. The components • Macro policy • The level and volatility of the real exchange rate • The sustainability of growth • Creating the space for needed infrastructure spending • Labour market policies • Easing the skills constraint • Industrial Policy • Allowing faster structural transformation • Trade and competition policy • Creating more competitive input markets • BEE and Public Administration • Rebalancing the scorecard • Making political decentralization compatible with administrative efficiency

47. Achieving a competitive and stable real exchange rate • The real exchange rate is an outcome • It depends on a stable balance between domestic savings and investment • A more competitive exchange rate requires higher domestic savings • A tighter fiscal policy can contribute • Needed given current account deficit and inflation • For any given inflation target, it is compatible with a lower interest rate • …and hence a more competitive exchange rate • A more stable exchange rate requires a less volatile evolution of supply and demand • To achieve stability the government must shift from targeting the fiscal balance • Which is pro-cyclical • …to targeting a cyclically adjusted balance • Monetary policy needs to pay more attention to the exchange rate • And announce that it will do so

48. Easing the skills constraint • High skill and low skill are complements • Like coffee and sugar, not like coffee and tea • You want more of one if you have more of the other • If you do not have enough supply of high skilled, you will have lower demand for low skilled • And greater wage inequality • The skills constraint is going to get even tighter as the continues to grow • What to do about it?

49. Proposals to relax the skills constraint • Immigration policy • Liberalize work visas for those with higher education • …and work to retain those you have • Reform of the training system • Allow SETAs to self-organize • Allow firms to affiliate to the SETAs of their choice • Targeted wage subsidy to accelerate school to work transition and encourage firms to experiment • Subsidize approximately a year’s worth of employment • 6 monthly minimum wages over the course of 12 working months • Coupled with a probation period with no-questions-asked dismissal

50. Obstacles to structural transformation • Countries grow rich by changing what they produce • But new products require new inputs • This poses a chicken and egg problem • Why accumulate the inputs if there is not demand for them? • How to produce if the inputs are not there? • In practice, countries move from the products they are in to products that require similar inputs • Publicly provided inputs are part of what needs to be provided • But governments don’t know what is important • Information, incentives, resources • How can the government find out? • “Industrial Policy”