François Groepe: South Africa's structural unemployment challenge -
the most important issues to be addressed to place South Africa on a
sustainable growth path in an effort to reduce unemployment levels
Address by Mr François Groepe, Deputy Governor of the South African Reserve Bank, on
the occasion of the release of the 14th UASA South African Employment Report,
Johannesburg, 30 April 2015.
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Chairperson, ladies and gentlemen, I am pleased to be part of the proceedings of the day, as
we gather here for the release of the 14th UASA Employment Report. This publication has
grown in stature over the years and has earned itself a place amongst various high-level
publications informing on the state of the South African labour market.
This morning, I shall focus on the most important issues to be addressed to place South
Africa on a sustainable growth path in an effort to, amongst others reduce the unemployment
levels.
South Africa counts, among its key challenges, its high level of structural unemployment
which is exacerbated by the levels of poverty and inequality in the country. These
challenges, in turn, give rise to a host of other socio-economic and socio-political challenges.
Earlier policies, such as the Accelerated and Shared Growth Initiative (ASGISA) (2006), as
well as the more recent long-term vision for South Africa, as captured in the National
Development Plan first released in 2012, highlight the requirement for economic growth in
excess of 5 per cent on a sustained basis to meaningfully make inroads towards reducing the
high levels of unemployment. Prior to the global financial crisis in 2008/09, some progress
had been made in reducing overall levels of unemployment in the country as strong global
and local economic growth resulted in higher levels of output leading to increased demand
for labour. South Africa, in fact, had experienced one of its longest periods of uninterrupted
economic growth - 55 quarters of growth averaging between 3 and 5,6 per cent annually. As
the global economic growth recovered after the financial crisis, albeit hesitantly and
unevenly, South Africa lagged behind, growing at rates well below its potential, which had
been negatively been impacted by strained relations and industrial action, but also by
structural deficiencies such as the electricity load shedding.
While South Africa has performed well in managing to largely contain inflation, within the
inflation target range, and no doubt assisted in part by the lower international food and oil
prices, the country has been less successful in matching levels of growth as experienced in
other developing countries. Within the BRICS partnership, South Africa is the smallest
economy in terms of its gross domestic product and population size and had both the lowest
levels of average growth and employment over the past decade. Of some concern is the fact
that South Africa continues to experience levels of inequality that are ranked amongst the
most elevated in the world. All these indicators require a renewed focus on both the basic
drivers of development, such as education enhancement and interventions that directly
address structural barriers to growth and employment.
Broadly speaking, any effective solution should not only focus on stimulating growth in key
industries, but those industries that are lagging should actively be engaged through
appropriate policies. Such policies should improve the micro-foundations of economic
growth, which include education and skills training, industrial and trade policy, labour market
policies and competition policy.
Along these lines the National Development Plan (NDP) has as its central focus the
elimination of unemployment, poverty and inequality by 2030. Within this Plan, nine main
challenges are being highlighted, namely:
• The elevated levels of unemployment;
The standard of education, which for a large proportion of learners is arguably of an
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undesirable quality;
• Infrastructure, which is not always optimally located, and which at times is
undermaintained and insufficient to foster higher growth rates;
• Spatial patterns which exclude the poor from the benefits of development;
• An economy is that could be described as overly and unsustainably resource
intensive;
• A widespread disease burden that is compounded by the challenges faced by the
public health system;
• Public services that are uneven and often of in certain circumstances of inadequate
quality;
• The corruption levels that is perceived to be wide spread; and
• The perception that exist regarding the divisions within the broader society.
The NDP provides a useful framework by which these issues can be addressed in a
systematic and structured manner as government actively pursues its implementation. The
challenge remains the alignment of medium-term and short-term planning by government in
its efforts to effectively implement the NDP. The adoption by cabinet of the Medium Term
Strategic Framework for 2014 to 2019 for each outcome of the NDP is clear evidence of the
government's commitment towards the successful implementation of the NDP.
The key pillars of the Medium Term Strategic Framework comprise the following:
Infrastructure programmes must lead to a crowding in of productive investment as
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government spending boosts the demand for goods, leading to increased private
demand for new output sources, such as factories;
• Growth and employment of the productive sectors of our economy should be
supported;
• Red tape and the unintended consequences of regulation should be reduced;
• Skills planning, to address the needs of the economy, should be improved;
• The level of employment in agriculture should be increased;
• Growth and investment should be supported by sustainable fiscal policies;
• Strong partnerships, with business and labour, should be built and workplace
conflict should be reduced;
• Public Employment Programmes should be scaled up;
• Economic opportunities for historically excluded and vulnerable groups should be
expanded; and
• Investment in research, development and innovation should be supported.
Returning now to the NDP, as part of a broader development agenda, business investment is
being identified as a cornerstone to create 11-million jobs and eliminate poverty in South
Africa by 2030. It sets a target of reducing the unemployment rate from its current level of
25 per cent to 14 per cent in 2020 and to 6 per cent in 2030 and to increase the labour force
participation rate from 54 per cent to 65 per cent. Per capita income is also envisaged to
increase from around R50 000 to around R120 000 per year.
The NDP suggests that some labour regulations be relaxed in an effort to encourage
business enterprises to employ more easily, as well as lower entry-level wages to facilitate a
higher uptake of young people in the jobs market. Some of the proposals in this Plan will no
doubt fall within the area of public discourse on possible contestation and will require
continued intense negotiations among all social partners in an effort to reach broad
consensus in order to secure its implementation.
The Plan takes a pragmatic and broad-based approach to the challenges that South Africa
faces in eradicating unemployment. The role that the Plan sees for government's intervention
is permeated with a willingness to work with the private sector, as the plan leans towards
less regulation of the economy. The Plan envisages small and expanding companies
creating around 90 per cent of the new employment opportunities in the economy in the next
20 years. This will place South Africa in step with global employment trends. Small firms
would benefit from bold proposals to drastically reduce so-called "red tape" and improve
employment and practices and procedures.
The NDP strives towards an economy that will be more enabling for business entry and
expansion, with a focus on credit and market access. Cognisance is taken of the fact that
any inclusive growth strategy that does not harness the creativity, innovation and
competitiveness of the private sector is unlikely to succeed. Regulatory reform and support
being advocated by the Plan has the intention to boost mass entrepreneurship.
The topic of strained labour relations is also addressed, indicating that it is inconceivable,
that the economy will evolve into a more labour-intensive structure if tensions between
employers and labour persist. Ways need to be found to reduce the probability of the
occurrence of lengthy strikes, such as those experienced during last year. These tensions
need to be dealt with in a transparent and honest manner and not only by amending labour
legislation, in order to be conducive of enhanced labour absorbing growth. As the social
partners, re-establish trust among themselves, it will go some way towards the process of
reinforcing their social pact.
Central to the propositions made in the NDP related to the jobs market, is the statement that
over a 20-year horizon wage growth needs to be linked to productivity growth as it is not
feasible to sustain a labour absorbing path, unless both are growing in tandem.
In an effort to enhance the labour absorption rate of the economy, the Plan has already led to
a reduction in the initial cost of employing young labour-market entrants, through the
implementation of the Employment Tax Incentive, Act no 26 of 2013 which came into effect
on 1 January 2014. This initiative compliments government's measures to create jobs for
young workers and those in special economic zones through offering tax incentives to
employers to encourage the employment of these workers. This initiative, according to the
Minister of Finance, had led to 200 000 young people being employed, which is significantly
in excess of government's initial expectation of 70 000 within six months of implementation.
Furthermore, newly introduced changes to labour legislation, in general, hold the promise of
improving the functioning of the labour market, as it better addresses discrimination, and
advances the approach of equal pay for work of equal value. These changes will not only
benefit young people, but will result in a more equitable labour relations environment in
general.
Over and above the focus on the jobs market, the NDP also advances some frank
recommendations in areas such as education, health and the public sector, as part of the
creation of a nurturing and enabling environment for business to prosper. A set of integrated
actions is being proposed to address the issue of inefficiency and other challenges related to
public service delivery. To improve educational outcomes, the Plan directly confronts issues,
such as teacher performance, appointment procedures and accountability. The challenges in
public health management are also addressed and in building a capable state, detailed
recommendations are made on professionalising the public service. Some areas of
Government, where improvements have occurred, such as the South African Revenue
Service through an improvement in operational procedures, management and delivery
systems should be emulated by other organs of state.
An initiative worth mentioning in terms of already improved processes in the public sector is
the introduction of an e-portal on 1 April 2015 that will reshape the South African government
supply chain processes, particularly as it relates to government tenders. It is envisaged that
the public will eventually be able to see all tenders, bidders and their prices quoted, as well
as minutes of bid committee meetings. Over and above the e-portal, a national database of
all approved and compliant suppliers and an "online shop", where government departments
will place orders of less than R500 000, will be established. Initiatives such as these are
laudable and will contribute towards increased efficiencies in service delivery which is
essential for improved growth prospects.
The focus within the NDP on the eradication of corruption from the system is most welcome,
in taking cognisance of the fact that for state officials to act in a corrupt fashion, requires a
willing counter party from the private sector is necessary. The introduction of the
government's new tender process, as already mentioned, will go a long way in exposing and
limiting possible corruption within the system.
The NDP recognises the need for increased fixed investment in the economy and has set a
target of raising the level of gross fixed capital formation from around 20 per cent of GDP
currently, to as high as 30 per cent by 2030. Inarguably, well-planned and appropriate
infrastructural development is conducive to higher levels of economic growth and job
creation. The NDP clearly distinguishes between investment that generates immediate
financial returns, such as in airports and power stations and those projects where financial
returns are far less measurable, such as in schools and hospitals. The role of business in
increasing the overall level of fixed investment in the country will most appropriately lie in the
area of fixed investment where financial returns are more evident, through public private
partnerships. International experience has shown that private sector participation in
infrastructure provision is most successful in the transport and energy sectors. The
participation of the private sector contributes to effective cost containment through the profit
motive, improves efficiency and leads to more sustainable jobs through more ambitious skills
transfer initiatives.
An area, in which the private sector can excel, given appropriate incentives, is that of
research and development which could act as a driver of competitiveness and job creation. A
number of large R&D projects have already shown feasibility and have the ability to develop
into new industries, creating substantial opportunities for increased employment, foreign
revenue income, beneficiation and competitiveness.
Many infrastructure investment projects can act as an attractive asset class for private
investors, due to the predictable nature of returns, thereby providing a low risk investment
profile. Infrastructure investment projects may provide a means whereby a consistent real
return over inflation can be attained through a low volatility investment vehicle. Private sector
funding is, however, subject to policy certainty so that private investors can be assured that
they will be able to realise a return on their investments.
The NDP proposes that Regulatory Impact Assessments be done on all new regulations, and
that an expert panel be appointed to prepare a comprehensive regulatory review for small-
and medium-sized firms in an effort to assess whether special conditions are required for
such entities. To this end, a new unit is being created in the Presidency to carry out thorough
impact assessments of both new and existing legislation and regulations within a Social
Economic Impact Assessment System that will ensure alignment with the NDP and reduce
the risk of unintended consequences.
The continued drive towards the establishment of a viable renewable energy sector in South
Africa should be supported and is an example of an area in which small businesses could
rapidly gain traction, as countries become more inclined to embrace a Green Growth
development approach, as we enter the so-called Solar Age.
The proper implementation of the NDP will be conducive to an increased level of
entrepreneurship in the economy, as the ease of doing business improves. The obvious
outcome of such a process will be the creation of more sustainable jobs. Small businesses
generally have the capacity to attract those who are low to moderately skilled and are,
therefore, best placed to recruit from among the significant pool of unemployed workers.
The NDP is already facilitating the bringing together of various stakeholders in the economy
within an environment of common purpose. The NDP thus constitutes a powerful and
integrated development agenda for the state and the whole of South Africa, and for the Plan
to succeed it should continuously be translated into action plans, with clear milestone along
the way, within realistic time frames.
To yield relatively swift results, in terms of improved growth, the following two focus areas
deserve mentioning. The first is a better integration of the South African economy with that of
Africa. This will indeed be beneficial through boosting interregional trade, investment and
capital flows, and allow the domestic economy to tap into the more vibrant growth rates being
experienced in the rest of sub-Saharan Africa. It is estimated that an effective integration with
the sub-continent could add as much as 1,5 per cent to South Africa's growth rate.
Furthermore, South Africa should capitalise on its comparative advantages, related to
physical, financial and telecommunication infrastructure to attract international firms with the
aspiration to gain a foothold in Africa.
A study, recently conducted by the World Bank, identified three areas of opportunity to
improve this country's export competitiveness, namely, boosting local competition by opening
South African markets to domestic and foreign entry; promoting deeper regional integration
in goods and services within Africa; and alleviating infrastructure bottlenecks.
This brings us to the second factor which would meaningfully enhance South Africa's growth
potential, namely the forceful implementation of the R1 trillion infrastructure expenditure
programme of government. Through multiplier effects, and in terms of job creation, especially
with regard to the promotion of low-skilled jobs, economic growth can be materially
enhanced. Several studies have shown that investment in economic infrastructure has the
potential to act as one of the most effective policies in terms of promoting economic growth.
Employment is created during the construction phase of such infrastructure projects, as well
as during the operational life thereof.
Moreover, the key driver of private sector investment is public sector investment as it inspires
both business and consumer confidence. A combination of these two driving forces has the
potential to easily boost South Africa's growth to rates well in excess of current levels, putting
this country on a higher road to economic prosperity, thus hopefully reducing unemployment
levels, poverty levels and the degree of inequality. I further believe that it will positively
contribute to further restore the dignity of our fellow South Africans.
South Africans at times can tend to be fairly pessimistic. The challenges we face are
immense, but not dissimilar in scale and extent to those faced not only by developing
economies but also developed economies. I however choose to be optimistic and do believe
that we have many factors that do count in our favour and am convinced that with the right
policy choices we can go a long way towards successfully addressing the triple challenges of
structural unemployment, poverty and inequality.
I thank you.