A new debate is emerging about the shape of South Africa’s future economic policy. Proposals will inevitably reflect different readings of our economic performance and policies over the past seven years.
What does the government think? After its recent lekgotla, the Cabinet expressed satisfaction with the performance of its chosen macroeconomic indicators and tried to justify the economy’s low growth performance of 1,5% in the first quarter of this year.
Of special interest is how job creation was addressed. The government focused on public works as ”crucial for the inclusion of a great number of South Africans — many of whom have little possibility for immediate absorption into the formal economy — in income-generating activity from which they are also able to acquire skills”. Is it now less hopeful that the economic mainstream can provide the number and kind of jobs urgently required?
Without a policy document, it is hard to fathom. Of concern, however, are scattered messages over the past year suggesting the government is moving away from linking employment generation to economic growth.
The growth, employment and redistribution policy insists that growth will solve the unemployment problem. But recent comments imply a shift to the other extreme: that expanding output will not generate many additional jobs.
Though economic growth became less and less job-creating during the 1990s, rapid and sustained economic expansion, far from being irrelevant, would markedly improve the job prospects of the least qualified.
For this we need more infrastructure investment, and the Cabinet decision on the matter should be welcomed. However, it alone will not cater for the more than 40% of the labour force, which, according to Census 2001, is unemployed.
Over the past seven years, with the support of big business, we have tried conservative policies to attract more investment. That has not worked.
Post-1994, the private sector has been justifiably preoccupied with survival, protecting and increasing profitability and diversifying investments internationally.
However, these changes have not brought higher rates of investment and employment. Between 1996 and last year the total investment-GDP ratio declined from 16,6% to 16,2%, while the private sector’s new investment relative to GDP declined from 4,6% in 1996 to 3% last year.
The private sector’s contribution to employment is also questionable. According to the Reserve Bank, the private sector employed more than 3,9-million people in 1996. By the third quarter of last year this had declined to 3,5-million.
The link between the growth, employment and redistribution policy and high private investment was counter-intuitive, but its proponents got the benefit of the doubt. Consequently, our economy continues to substantially under-perform compared to many other medium-sized economies, as highlighted by the latest Economist.
Key changes are needed, starting with fiscal and monetary policy. The current deficit-GDP ratio of almost 0% is rare and growth-debilitating in a country with our problems. An average real lending interest rate of 10,8% between 1995 and last year is, by world standards, exceptionally high and anti-growth.
Significantly, the high real lending rate relative to the real growth rate (10,8% relative to 2,5%) forces government debt to grow faster than the economy, unless a primary surplus is secured.
Thus the Treasury’s aim of reducing the debt-GDP ratio and the Reserve Bank’s high interest-rate policy interactively hamper expansionary policy measures.
To invigorate growth, both these policies must change. Through coordinated expansionary policy interventions, the government would attract more private-sector contributions. The government needs to increase its spending, especially capital expenditure.
If business believes expansion is sustainable, it will more likely respond to higher demand with increased investment. The expansion should focus on lesser-skilled workers to minimise skills shortages, moderate inflationary pressure and ensure employment growth.
At the same time a well-developed system of bargaining over wages and broader issues is an absolute necessity for a sustainable economic expansion programme. With the increasing openness of the economy, workers and firms have faced a high degree of import competition, which inhibits large wage and price increases.
As part of any demand stimulus spreads abroad, it can only be sustained if the initial balance of payments is strong enough, or if exchange rates are allowed to fall to maintain the current account balance.
Uncertainty over exchange rates heightens the unpredictability of returns, so the above policies should be complemented with a gradual currency depreciation — but only enough to generate the extra exports required.
Finally, South Africa’s trade liberalisation and the structure of investment incentives have increased the capital-intensity of production, cutting employment.
The past decade has shown that while investment incentives can stimulate investment or exports, they are expensive and can have an undesirable impact.
There is a need to scrap the incentive programmes that are contributing to capital-intensity and the economy’s low capacity to absorb jobs.
Asgar Azeldazeh is senior policy adviser at the United Nations Development Programme. This article has been written in his personal capacity.