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Economy needs a big dose of tough love

The interests of the unemployed must be put ahead of the short-term pain of the employed, writes Greg Mills.

South Africa’s de-industrialisation strategy is working well. Take Dimbaza, 20km west of King William’s Town. It was created under the apartheid “border industry” scheme, with ridiculous subsidies (peaking at more than 50% of wages per worker) to ward off competition. After 1994, rather than wean at least some of these industries to become self-sustainable, the government cut them off completely.

The Dimbaza industrial park wilted and died. Today, there are just three factories operating where once there were 200. Many buildings have been picked clean, like vrot animals in the veld. The railway has stopped running.

Similar sad sights are repeated elsewhere, from Botshabelo outside Bloemfontein to Berlin and Butterworth. The South African textile sector, once a key employer in these areas, has lost about 75 000 jobs this past decade, mainly to cheaper Chinese competition. Africa as a whole has lost more than 250 000 jobs.

Take East London, for example, where Mercedes-Benz now has state-of-the-art technology to make its C-Class model. It looks rosy but in fact the business has returned virtually to what it started out as 60 years ago—an assembly plant. Today robots weld and spray the steel panels imported from Germany while workers screw together a kit of nearly all foreign-supplied parts. Little wonder that the number of workers has declined from 7 000 a few years ago to 3 000 today.

The government lauds the R70-billion contribution South Africa’s seven car manufacturers make to the balance of payments, but consider the costs of imports to the economy. The treasury calculates that the annual subsidy to the motor industry is R17.8-billion, comprising tax allowances, cash grants, preferential financing from the Industrial Development Corporation and costs to consumers from higher prices as a result of import tariffs.

For the 36 000 workers directly employed, this works out to R585 000 per worker per year for a sector where workers earn on average R143 000 annually, or, if the downstream 80 000 workers are included, R205 000. Of course, the car companies think it’s worth it, but why does the government—or taxpayers?

The ANC was elected by the racially marginalised and the poorest of the poor. Those elected were largely of a socialist persuasion (no matter the penchant of some members for decadent Western trappings) so it was assumed the state would be at the centre of all things, including the economy. But they did not fully appreciate, or want to appreciate, how the private sector operated. They certainly wanted a different development route to Asia. As we have often been told, the ANC does not want its people working in “sweatshops”.

The ANC took over at a difficult time—the Cold War had ended, South Africa became democratic and high-speed globalisation forced governments to expose previously protected industries to fierce competition, against which many simply folded.

Thus, the government’s strategy has been to take advantage of South Africa’s natural resources and, with a tougher tax regime, generate income for redistribution. The preferential employment of whites in the civil service was ended, although it has also been expanded, as has welfare. Tony Blair’s New Labour did much the same thing in the United Kingdom after 1997.

The recent StatsSA Labour Force Survey shows an increase of 42 000 civil service jobs in the past year, although 91 000 jobs were lost in the private sector. In an era when technological improvements should have made governments leaner and meaner, such a shift is an ideological choice.

But this model is unsustainable for three reasons, apart from the high slice (about 40%) of government expenditure taken by the state wage bill.

First, the tax burden. Revenue from corporate tax almost tripled in the five years to March 2009, but the bulk of such tax comes from less than 10% of registered companies. The bulk of individual tax comes from just five million of nearly 50-million people.

Second, welfare is not only expensive it removes incentives to seek work, or even to subsist with informal jobs or by agriculture. There is a high social cost too—as the treasury’s 2011 Budget Review states: “Employment is not only about earning an income—it is the condition for a decent life.” It is about setting a framework for social engagement and stability.

Third, and most importantly, it is not enough. It does not meet the demands of young people, now the majority of our population. The treasury notes that just 13.1-million South Africans are employed: “Two out of five persons of working age (41%) have a job, compared with 65% in Brazil, 71% China and 55% in India — To match the emerging markets’ average of 56%, South Africa would need to employ 18-million people—five million more than are employed today. To keep pace with the number of people entering the labour market, this would require the economy to create about nine million jobs over the next 10 years.”

It is a tall order given current trends. Moreover, the unemployment rate among 15- to 24-year-olds is 51%, more than twice the national unemployment rate of 25%, according to the South African Institute of Race Relations. As North Africa shows, this is a social time bomb.

Globalisation is part of the reason for these changes but that is only the half of it. The reason it is so difficult to absorb people into the South African labour market is simple—a combination of a lack of opportunity and a lack of competitiveness. Underlying both is a failure to understand how the private sector works. For one thing, it is not a bottomless pit of excess and charity.

Fixing this is a political rather than a policy challenge. It is well known from case studies worldwide what best (or at least better) practice looks like. South Africa has to create an environment in which labour is more productive (the costs of production are cheaper), in which opportunities are created (largely by the government getting out of the way) and businesses are encouraged to employ people. It is that simple.

From this, three strategies follow:

  • Reinforce the basics for growth, including a good education system, macroeconomic stability and prudent management. Vital practices and institutions include not only the rule of law but also systems that encourage innovation and policy and political checks and balances—academic freedom, a dynamic civil society, a free press, an independent legal profession and prosecution service and courts worthy of the name. Without this we won’t have the ideas and investment we need but the high cost of corruption and cronyism instead.

  • Improve conditions for employers rather than just employees and resolve labour laws and practices that institutionalise a lack of competition—how else to ensure manufacturers can compete against China or others in Asia? Their salaries, in the textile sector, for example, are half South Africa’s, or in factories, a quarter. Like Colombia, the government should provide tax breaks to companies which take on first-time employees and give them requisite job experience and skills. It should re-examine the way mandatory bargaining councils lump together heterogeneous businesses based on union membership rather than on the basis of their specific needs, strengths and weaknesses.

  • Make targeted interventions. If the government can subsidise the car industry to the tune of more than R1 000 a worker a day, it can help other sectors. It’s not as if they are asking for charity. “There is a 30% transport differential, working here compared with in Johannesburg,” said an East London factory owner. “That’s what we would like to see government help with.” One response is to use training or research and development expenditure as tax credits, or lowering the tax rate for less developed areas. There is a need to give companies incentives to go elsewhere, especially those outside the natural resources sector. Without such assistance, many such businesses will downsize to become repackages of cheaper Chinese products, or they will close altogether—as has East London’s Castellano Beltrame, a leader in the high-end trimmings business for more than 40 years, with the loss of 1 500 jobs.

It also means working out why projects such as Coega end up as white elephants. The clusters that might exist should be identified, as should the relationship between them and how they might support one another.

You know what we will do, of course—the practice at which we Africans are world champions: talk about it, host a series of meetings, issue policy papers and directives, establish a cluster, working group, a commission or two, initiate a review or panel or action team, talk about clusters and value chains — Anything to avoid taking the difficult political decisions that would benefit the unemployed at the short-term expense of the employed.

It is said in defence of the government’s (lack of) industrial policy that we will be able to compete with China. Well, we will never know if we don’t give the private sector the chance.

Greg Mills heads the Johannesburg-based Brenthurst Foundation, which has recently hosted youth employment policy exchanges in Zambia, Mozambique and Swaziland

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