The Employment Challenge in South Africa

1. The Employment Challengein South Africa To grow, to share growth, to change path Alan Hirsch PCAS The Presidency South Africa May 2008

2. Economic growth trends

3. 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%

4. 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

5. 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

6. Comparative growth rate

7. Employment trends

8. Poverty trends Source: Income and Expenditure Surveys 1995 and 2005/6 Bhorat et al

9. Trade and exchange rates

10. Employment shares by broad sectors in South Africa Source: Rodrik 2006

11. 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

12. 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?

13. 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

14. 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

15. 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

16. 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?