Remarks by Angel Gurría,
16 July 2015
Pretoria, Republic of South Africa
(As prepared for delivery)
Good morning Minister Nene, ladies and gentlemen,
It is my great pleasure to return to Pretoria to launch our fourth Economic Survey. South Africa is a Key Partner of the OECD, and in many respects it spearheads our co-operation with Africa.
The social progress South Africa has made over the past two decades is impressive. The transition to democracy has of course been a defining feature, and successive governments have implemented policies to increase well-being. The expansion of social grants has lifted many South Africans out of absolute poverty. Access to services such as water, electricity and sanitation – as well as health and education – has been broadened greatly.
This progress has been underpinned by a sound framework for macroeconomic policy. The conduct of monetary policy in South Africa is aligned with best practices in OECD countries, including an independent, inflation-targeting central bank. Fiscal policy is following a prudent course, with expenditure ceilings and a medium-term fiscal framework. Together, these elements have maintained the confidence of financial markets.
Last year, international and domestic headwinds reduced GDP growth to 1.5%. Notwithstanding the risks and uncertainties, we forecast GDP growth to pick up to 1.9% this year and 2.2% next year.
Nonetheless, pressing challenges remain.
But South Africa still faces challenges. South Africa remains a highly unequal society, with the Gini coefficient close to 0.8 before taxes and transfers. Overall, fiscal policy reduces the Gini coefficient to 0.6. A key factor behind the high income inequality in South Africa is the low employment rate, especially for black South Africans.
Millions of South African young people are eager to work. Their future is precious enough to justify tough reforms and hard spending choices. The potential of the young South African population must not be wasted. This calls for stronger, sustainable and inclusive growth. The protracted strikes last year and ongoing power cuts dented an already slow recovery. And they demonstrate the urgency of deep reforms to unlock South Africa’s full potential.
The National Development Plan sets out the direction for reforms to achieve a more inclusive economy. Our messages focus on building solid foundations for stronger and more inclusive growth: adequate infrastructure; more inclusive and effective labour market institutions; and a regulatory environment to foster entrepreneurship and firm growth. Allow me to address each of these in turn.
First, the electricity shortages that have continued to damage the economy highlight the importance of tackling infrastructure bottlenecks. Electricity supply problems are structural: one third of capacity is from generators that are over 40 years old. More infrastructure is also needed in other areas to boost growth, including transport, telecommunications and housing. Given the large needs, prioritisation and cost effectiveness will be crucial.
Second, last year’s costly strikes highlighted the fractious nature of the current wage negotiations processes. Furthermore, unemployed South Africans face substantial barriers. Delivery of existing government programmes – such as training, matching vacancies and job seekers, and wage subsidies – is fragmented. This is partly because there is no fully rolled out public employment service. The long distances many people must travel to look for work raise the cost of job search even further.
Third, barriers to entrepreneurship are still high. The government has rightly identified a key role for SMEs in generating growth and employment opportunities. Once they overcome entry barriers, SMEs face a high regulatory burden, which is harder for them to bear compared to large firms. Added to these obstacles are frequent regulatory changes, insufficient infrastructure, and large distances between housing settlements and economic centres. In short, too few SMEs are being created. The development of SMEs is also hindered by a lack of skilled workers. Closer linkages between employers and the training system would help. Earlier OECD studies have recommended reforms to improve the basic education system as well as vocational education.
Addressing most of these challenges will require more public and private investment. Resources are also needed for other spending programmes such as the planned national health insurance scheme. And in the medium term, fiscal consolidation must continue, to contain public debt increases.
So where will the money come from? There are certainly spending efficiencies to be achieved in South Africa. Prioritisation and privatisation are both important. But ultimately, more tax revenues will also be needed to fund investments for a stronger more inclusive economy. This needs to happen in a way that does not increase inequality or penalise growth. Fortunately, South Africa’s starting point is a relatively well balanced and efficient tax system that performs particularly well given the narrow base on which taxes are raised.
The OECD Economic Survey of South Africa provides recommendations to help address these challenges.
Excellencies, ladies and gentlemen,
In all of these areas and others, our Economic Survey of South Africa makes concrete recommendations.
First, additional electricity supply must be secured as a matter of urgency. Two measures include facilitating private co-generation and accelerating the expansion of the independent producers programme. At the same time, more fundamental reforms are necessary to create a more responsive market with private participation. South Africa needs cost-reflective prices, an independent grid operator, and to open up the grid for new providers.
Second, the labour market would work better if wage negotiations were shorter and more co-operative. Allowing members of unions to cast secret ballots would make wage negotiations more representative. Increasing the role of mediation and arbitration could shorten strikes and limit income lost by workers and firms, and the damage to the economy.
Job seekers, as well as employers, would be able to find each other more quickly and at lower cost if there was a “one stop shop” that delivered programmes and had a database of job vacancies. That is, if there was a full public employment service.
Finally, the creation and growth of SMEs depends on reducing the regulatory burden that I mentioned a moment ago, eliminating entry barriers, and promoting competition. Re-focusing black economic empowerment programmes towards fostering black entrepreneurship could unleash enormous potential. Greater policy certainty and stability would help increase investment and lower compliance costs in traditional sectors such as mining and agriculture. And more business opportunities could be reaped if settlements were built closer to economic centres, or better connected through affordable and efficient public transport.
Looking further ahead, South Africa’s tax base could be broadened by removing deductions, allowances and exemptions on the key tax bases. This would increase the equity of the system across taxpayers. In addition, tax increases for the wealthier would help make the system more progressive.
Allow me also to commend the government’s plans to introduce a carbon tax, which will provide an instrument to help the South African economy to transition to a more sustainable, low carbon growth path.
In short, South Africa’s challenges are real and many reforms will be difficult. But by laying the foundations for stronger, more sustainable, and more inclusive growth, the rewards will be worth the effort. Minister Nene, dear colleagues: the OECD looks forward to continued close collaboration with South Africa in the pursuit of our common goal: Better Policies for Better Lives.