Remarks by Angel Gurría, OECD Secretary-General
Pretoria, 15 July 2008
Minister Manuel, ladies and gentlemen,
I am delighted to present the first OECD Economic Assessment of South Africa. This report is another strong sign of the OECD’s growing involvement with your country.
Last year, the OECD invited South Africa, along with four other major emerging economies, to enter into a relationship of “Enhanced Engagement with a view to possible membership”. This initiative offers each partner country the opportunity to work more closely with the OECD with a view to possible membership in the future, in ways that are focused, comprehensive and mutually beneficial. Over the coming years, we will seek to have an increasingly active dialogue between the OECD and South Africa, a dialogue through which you can both draw on international best practice in a range of policy areas and share your own valuable experience and insights with OECD Members.
In preparing this Economic Assessment we were struck by the many remarkable achievements of post-apartheid South Africa. Economic performance since 1994 has been impressive, especially considering the social and political challenges of the transition to democracy and the difficult economic legacy of the apartheid era. The successive governments have been prudent, refraining from artificially boosting short-term growth for the sake of economic populism.
Congratulations are in order. You have stabilised public finances, brought down inflation, attracted increasing foreign capital and increased economic growth. In addition, social measures were taken to tackle poverty, and the population now has much better access to basic services such as electricity and telecommunications.
But those who might have been expected to benefit most from the transition to democracy have lagged in economic terms. The black population, formerly confined to remote “homelands” and sub-urban townships, disadvantaged by a segregated education system, and held back by discriminatory labour market rules, still suffers disproportionately from unemployment, poverty, and inadequate education.
Most worrying is the very large number of young people not finding work. The unemployment rate for the group aged 15-24 is around 50 per cent. South Africa’s overall unemployment rate of 23 per cent is about four times the OECD average. And in reality, the situation is even worse as the unemployment figures to do not cover the full extent of inactivity. Statistics South Africa estimates that a further 10% of the working age population would like to work but are not actively searching because it is so hard to find a job.
The government has of course recognised the need to share the benefits of growth more widely. To address this challenge, the Accelerated and Shared Growth Initiative for South Africa, or AsgiSA, was launched in 2006. The OECD’s Economic Assessment contains an evaluation of this strategy and I would like to share a few of our findings with you.
AsgiSA is a commendably, and, for South Africa, characteristically, democratic exercise, both in its aims and its process. The main objectives are to halve the level of unemployment and poverty by 2014. In formulating the strategy, the government consulted widely with social partners and sought international expert opinion on economic development.
AsgiSA identifies a limited number of constraints to economic growth and outlines policies to address them. This is a valid approach, and we broadly share the diagnosis of the constraints to growth. In particular, we agree that there are deficiencies in state organisation, capacity, and strategic leadership, along with high cost and low efficiency of some areas of infrastructure.
AsgiSA also rightly points out the problems of shortage of skilled labour as well as high barriers to entry and low competition in some sectors of the economy. We agree that the regulatory environment could be improved, especially to reduce the burden on small and medium-sized enterprises. Probably the least clear-cut of the constraints identified in AsgiSA is the strength and volatility of the rand. Much of the appreciation of 2003 06 has since been unwound, and to some extent the volatility of the exchange rate reflects the fluctuation of key export commodity prices.
In certain policy areas, AsgiSA is less convincing in moving from constraints to policy actions. For example, the emphasis on industrial policies risks perpetuating the apartheid-era pattern of protected national champions that are insulated from foreign competition and enjoy high mark-ups. This contradicts the acknowledged need to enhance competition in the economy. There is also a tension between the emphasis on government programmes and initiatives and the recognition of failures of government planning, coordination, and administrative capacity.
The second and third chapters of the Economic Assessment focus on two areas that we see as critical for convergence towards OECD living standards: competition in goods and services markets and the functioning of labour markets. These areas are not much covered in AsgiSA but have in our view great potential for increasing and sharing prosperity in South Africa. And they are complementary. Strengthening product market competition can yield benefits for labour market outcomes, make firms more productive and restrain inflation.
About half of the gap between per capita incomes in South Africa and the OECD average is due to differences in average labour productivity. The other half is due to the big difference in labour utilisation, given South Africa’s extremely low rate of employment. There is strong international evidence that a competition-friendly regulatory environment can boost long-run labour productivity growth. Our computation of the OECD’s Product Market Regulation indicators for South Africa shows highly restricted product markets, with high mark-ups and concentration in many sectors, and extensive state involvement in the economy. We therefore see considerable potential for strengthening competition policy via regulatory reform, greater trade openness, and competition-friendly reforms of network industries.
Part of the problem of low labour utilisation is clearly related to legacies of the apartheid era when the education system did not prepare the majority black population to perform skilled work. Apartheid also forced many workers to live far from the main sources of jobs. South Africa, like other countries, has seen a shift in labour demand towards higher-skilled workers. Access to education has greatly improved since the early 1990s, but quality remains too low on average and extremely uneven, exacerbating the problem of excess supply of unskilled labour.
More books, better school infrastructure, and easier immigration of trained teachers from abroad are some of the more obvious needs. There may also be a case for curtailing the practice of public schools to top up government funding by charging fees.
Despite some improvements, the marks of the homeland and township system remain visible in present settlement patterns. The long distances travelled for commuting and job search not only discourage workers from searching for jobs but also raise the level of wages that makes employment worthwhile for workers. Better public transport, especially in cities, and streamlined regulation on urban housing could go a long way in improving the functioning of labour markets.
But unemployment is so high and persistent that additional factors must also be playing a role. One prominent complaint heard is that firing is too costly and difficult. Our analysis suggests that, in fact, the laws are not particularly restrictive, even as regards firing. But the regulations could be implemented more efficiently to speed up the arbitration process and make it less burdensome. In addition, the pattern of industrial relations, with strong trade unions bargaining at the sectoral level, probably has negative consequences for labour demand in the formal sector.
There may also be scope for more active measures to allow young less-skilled blacks to gain a foothold in employment. This could be done by lengthening the maximum allowable probation periods during which normal labour regulations do not apply, or by expanding the system of wage subsidies for first-time workers.
In conclusion, post-apartheid South Africa can be proud of major achievements but your country also faces major challenges. The OECD sees a combination of continued sound macroeconomic policies and competition-enhancing structural policies as the most promising approach to unleashing the enormous potential of South-Africa’s labour force and addressing social ambitions within the framework of a strongly growing economy. Following this initial Economic Assessment, the OECD’s Economics Department will begin to conduct full regular Economic Surveys for South Africa, as we do for all OECD Member countries.
We are looking forward to continuing our collaboration with you and we stand ready to support South Africa in finding ways to share economic growth and prosperity in the widest possible way.
Official visit of the Secretary-General to South Africa (Pretoria - Johannesburg, 15 July 2008)