Unlocking South Africa’s great economic potential


Remarks by Angel Gurría, OECD Secretary-General, delivered at the launch of the 2013 Economic Survey of South Africa:

Pretoria, South Africa


Minister Gordhan, Ladies and Gentlemen:


I am delighted to be back in Pretoria to launch the 2013 OECD Economic Survey of South Africa. I am proud to have released the first ever OECD Economic Survey of South Africa in 2008 with then Finance Minister Trevor Manuel, and the previous Survey in 2010 with you, Pravin.


Over these five years, South Africa has become increasingly active in the work of the OECD. Together with Brazil, China, India and Indonesia, South Africa is one of our Key Partners. And this partnership is a two-way engagement: one that allows us to support South Africa’s policy agenda for inclusive and sustainable growth; one that allows our members and other partner countries to benefit from your insights, expertise and unique experience.


Our report shows that despite South Africa’s wealth in natural resources, healthy business environment and financial system, and its sound public finances, South Africa has yet to fulfil its great potential. Clearly, the last few years have been difficult for many countries, and South Africa has not been alone in experiencing lacklustre growth following the crisis. Indeed, the weak recovery in advanced countries, especially in Europe, has been one factor sapping demand.


For sure, per capita income is rising, access to public services is improving, social conditions are strengthening, and crime rates are falling. But unemployment remains stubbornly high, and the distribution of income continues to be very skewed. Real income growth has been sluggish compared to most other middle-income economies. As your National Development Plan recognises, “there is a burning need for faster progress, more action and better implementation.”


Therefore, we suggest tackling decisively the reasons for this economic underperformance: notably the interaction of weaknesses in the labour market and weak competition in product markets. One of the main messages of this Survey, echoing previous ones, is that reforms are needed to allow labour market outsiders, thus those without a job, to be more taken into consideration when deciding on wages and work conditions. This would require increasing centralisation and co-ordination in collective bargaining. It is also critical to make product market regulation increasingly pro-competition.


These reforms are not only about making the economy more efficient, they are also about making growth more inclusive. But beyond reiterating that diagnosis, this year’s Survey focuses on two areas that are essential for boosting long-term growth: education and green growth.


Investing in Education is Investing in People.


Despite some important progress, the educational achievement of most South Africans remains rather poor. As Nelson Mandela said, “education is the most powerful weapon which you can use to change the world.” This applies for sure to South Africa.


Of course, poor educational standards are in large part a legacy of Apartheid. And it will take some time to overcome this legacy. The good news is that this process is under way: South Africa has greatly increased access to education, which is already a remarkable achievement. Average years of schooling have indeed increased by about one year every decade since 1960, and for the black population this has increased from below 7 years to around 10 years since the end of the apartheid.


There is now an urgent need to raise the quality of education. South African students fare poorly in standardised international tests, such as the Progress in International Reading Literacy Study, and outcomes are extremely uneven across and within schools. In some schools, student performance is on a par with their peers in OECD countries, while in other schools performance is worse than in sub-Saharan African countries.


In addition, too few high-school graduates qualify to go to university. Worse still, a high-school diploma is no guarantee of employment, and failing to get a job on leaving school can cripple a young person’s life prospects. Currently almost 32% of young south-Africans are neither in education nor in employment or training. And most of the unemployed in South Africa have never had a formal job.


At the same time, there are shortages of skilled workers. The education system needs to make a bigger contribution to resolving skill mismatches. What is to be done?


First, as President Zuma noted in his State of the Nation address, “All successful societies have one thing in common – they invested in education.” Ensuring that there are enough teachers, study materials and infrastructure, especially in the most deprived schools, is key.


Of course, this must be done within overall fiscal constraints. And it does not require a large expansion of spending. Instead, much can be done by reducing inefficiency and reprioritising spending towards the areas with the greatest payoffs.


Strengthening school leadership would help in this regard. In exchange for greater accountability, school principals could be offered more training and support staff. Making them responsible for teacher evaluations and for monitoring teachers’ daily attendance would also help in making best use of available resources. Meanwhile, the education authorities could be given more flexibility to appoint and dismiss principals.


The evaluation of schools and of the overall system is also very useful to help better allocate resources and monitor progress. To advance in this regard, South Africa could join the Programme for International Student Assessment (PISA) and the Teaching and Learning International Survey (TALIS). It could also undertake an OECD Review of Evaluation and Assessment Frameworks for Improving School Outcomes.


We see a range of other measures that would also be useful. To avoid grade repetition, for example, the least well-resourced schools could put greater focus on basic skills and on individual support. Teaching English could also begin earlier, and the switch to English as the language of instruction could be made later or more gradually. This would help prepare those who are not native English-speakers.


Finally, another key area for improving skills formation is vocational training. It needs to be on a larger scale and more tailored to the needs of employers.


Using Green Growth as a New Driver of Growth.


The second big theme of the Survey is green growth, with a focus on climate change and water. South Africa’s economy is energy-intensive, with primary energy use per unit of GDP among the highest in the world, second only to Finland, Canada and Iceland. It is also more reliant on coal for electricity generation than anywhere else, with 92% of electricity generation fuelled by coal. As a result, South Africa has among the highest carbon emissions per unit of GDP in the world. It is 43% higher than the global mean in per capita green house gas emission, and close to the average of upper-income countries.


Moreover, there has been less decoupling of GDP and CO2 emissions than in most other countries. This in part reflects the abundance of coal and other minerals, and that mining – which is a major activity in the South African economy – is energy-intensive. But another reason is that for a long time the prices of electricity and coal used for electricity generation have been too low. Despite sharp rises since 2008, electricity prices are still among the lowest in the world, at about half of the prices in the OECD, and remain below marginal cost.


It is therefore crucial to ensure that electricity prices fully cover costs, including capital costs, with coal inputs valued at world prices net of transport costs. This would require further increases in electricity tariffs. Since prices have already risen steeply, it should be done in a way that minimises adjustment costs and with targeted support for the poor. It is not easy, but it can be done.


Correcting below-market prices is not the whole story, however. A carbon tax has been proposed. However, its design has become more complex, and there are parallel plans for carbon budgeting by sector. Taking due account of administrative capacity constraints, we would favour a simple carbon tax rather than carbon budgeting with cap-and-trade provisions, or industrial policies driven by subsidies and tax breaks. Such a tax would be uniform, based on the carbon content of fuels. It would also apply to all sectors and avoid border tax adjustments and the earmarking of “recycled” revenues.


Beyond getting energy prices right, there is a case for other policies to raise energy efficiency. Building more energy-efficient housing and renovating buildings can be cost-effective and at the same time create jobs. Making urban areas safer and denser would also help, with improved public transport and facilitation of walking and cycling.


Tackling the Water Challenge.


Besides energy, water is a crucial issue for South Africa, which has lower water resources per capita than any OECD country, except Israel. Freshwater withdrawal represents more than 30% of total actual renewable water resources. Moreover, this rate is projected to increase with population and economic growth, as well as the effects of climate change.


As with electricity, a key step is improving price setting for water. Water charges have generally been insufficient to cover maintenance and investment needs, let alone price externalities. This is especially true in agriculture, the main water user, where much use goes unmeasured and uncharged.


Another challenge is water pollution. The system for charging for waste discharge was developed nearly a decade ago, but it has yet to be implemented. Also, acid mine drainage from old disused mines is a threat to water quality in major population centres. This has highlighted the need to improve provisions for mine closure and rehabilitation.


Many of the Survey’s recommendations are in line with the National Development Plan (NDP). Its goals in terms of GDP, employment and social objectives are ambitious but, with the right policies, they are attainable. It is important and urgent to establish effective mechanisms to implement the NDP and, just as important, to monitor progress.


The regular preparation of Economic Surveys is just one sign of South Africa’s growing engagement with the OECD. We have already conducted several other policy reviews. The latest, an Environmental Performance Review, will be released later this year. Others are under discussion, including in education. I hope they will inform your government’s debate on the best policy options to reinforce growth and improve the life of South Africans.


With these reviews, and an increasingly rich agenda for further work, let’s continue to deepen our cooperation with the shared goal of unlocking South Africa’s great economic potential for the South African people – in other words “better policies for better lives.”