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 1960sthe 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
  apartheidreaching 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 ratethe
  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 growthmost 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
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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

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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 strategiesland, housing. But at
  what cost, and how do you ensure that the assets
  are used productively?

13
South Africa has its AsgiSAAccelerated and
Shared Growth Initiative

• Infrastructure investment
• Skills and education
• Industrial policycompetition 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 gt20
  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-gtvulnerability
• 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?