OECD report frankly assesses SA's problems

The Organisation for Economic Cooperation and Development’s (OECD) secretary general, Angel Gurria, said on Tuesday that in the coming years the OECD will seek active dialogue with South Africa as an enhanced engagement partner.

Part of this, he said, will be challenging the country if it ever becomes too complacent but is being left behind by other growing countries.

He said the engagement will also entail drawing on the OECD’s experience and allowing South Africa to share its own valuable experience.

“You can be proud of some major achievements, but it is good if we come here and tell you what everybody else is doing. Nobody knows what’s good for South Africa better than South Africans, but it is good to also tell you what others are doing.

“For example, while you may be moving fast, we can come and tell you others are moving faster and you may be getting left behind. This is the service we provide to our partners,” he said.

He said South Africa’s labour force had enormous potential, but key policy changes—such as the implementation of policies involving the Accelerated and Shared Growth Initiative for South Africa (Asgisa), noted constraints and less protectionism in certain industries—are needed to unlock this potential.

He was speaking at the launch of a key OECD report on South Africa that calls for broader-based growth, with the event hosted by South Africa’s Finance Minister, Trevor Manuel.

The report is the first assessment of South Africa by the OECD and studies reforms needed to create jobs, tackle poverty and allow growth to catch up with the most dynamic emerging economies.

South Africa is currently not a member of the OECD, but is among the five countries offered enhanced engagement with a view to having an opportunity to work more closely with the group of 30 countries committed to democracy and the market economy.

The release of this report is seen as a major step for South Africa on the road to becoming a fully fledged member of the OECD.

South Africa has a strong partnership with the OECD, Manuel said on Tuesday.

“South Africa has benefited from OECD policy inputs on competition policies and practices, technology and innovation, tax policy and administration and agriculture,” he said.

Gurria congratulated Manuel on stabilising public finances, but said that challenges for South Africa remain. “The people who were supposed to benefit most from democracy are still lagging behind.”

He also referred to South Africa’s high rate of unemployment and said that part of the gap between per capita income between South Africa and the OECD countries is due to labour productivity.

The report
The OECD report says that monetary policy in South Africa has been effective and credible—even if it is now under strain.

“As was the case for many other countries adopting inflation targeting in the past two decades, the early experience was broadly positive,” the report says.

However, initial progress in reducing South Africa’s inflation was temporarily unwound by the emerging-market crisis of 2001.

Despite this, inflation in South Africa on the targeted CPIX measure declined from about 7% prior to the introduction of the new monetary policy regime to just more than 3% in early 2005—and expectations quickly converged to the South African Reserve Bank’s (SARB) target zone.

Recently, however, the increase in world food and fuel prices “posed a stern challenge to the SARB, as it has to many other inflation-targeting banks”, the report says.

Despite a series of rate hikes from mid-2006 to June 2008, inflation has continued to rise in South Africa, driven by increases in food and energy prices.

“The SARB itself, in its June 2008 monetary policy statement, pushed back the expected horizon for getting inflation back into the target band to the third quarter of 2010,” the report says. The worsening in expectations shows recognition that significant inflationary pressures remain in the pipeline.

Growth rate
South Africa’s growth rate trails those of the most dynamic emerging economies such as Indonesia, Chile, India, Russia and China, according to the report.

Moreover, the faster rate of growth in the past four years has been accompanied by only a modest decline in unemployment. The government’s development strategy, Asgisa, foresees further increases in growth rates to an average of 6% a year between 2010 and 2014 in order to halve unemployment and poverty.

“The most disappointing aspect of post-apartheid economic performance is the emergence and persistence of extreme levels of unemployment, particularly for less-skilled younger blacks, together with the continuation of widespread poverty.”

The failure to bring unemployment down decisively is probably “the greatest source of popular discontent” about the government’s economic policies. The report says that this is recognised by the government, which aims to promote more employment-intensive growth.

The economy is rightly seen as suffering from a shortage of skilled labour, reads the report. Also, there are high barriers to entry and low competition in some sectors of the economy.

The report concludes that while the policy interventions set out by Asgisa are each aimed at addressing one or more of the constraints identified, in some cases the linkage between the constraint and the policy solution is weak. In others the policy action looks insufficiently strong to remove the constraint to faster and evenly shared growth.

Electricity
Power shortages are a pressing economic problem for South Africa and threaten near-term growth prospects, the report also says.

“The loss of output in the first quarter, together with the prospect of extended power shortages and outages at least during the rest of 2008, has led economic forecasters to revise down their projections for real GDP growth this year by between 0,5 and one percentage point,” it says. This has been “a blow” to financial market sentiment towards South Africa.

The government is “preparing” the population for the prospect of substantially higher electricity prices, the report says. An initial price increase of 14,2% will not be enough to cover the long-run costs of electricity production.

The National Energy Regulator of South Africa has awarded a further increase of 13,3%—but it has warned that annual increases of 20% to 25% a re expected for the next three financial years.

Unemployment
On unemployment, the OECD report says that some aspects of South Africa’s unemployment problem are clearly related to legacies of the apartheid era.

“Under apartheid, the education system was not designed to provide the majority black population with the human capital necessary to perform skilled work,” it says.

Although access to schooling for black people has “commendably been increased” and public financing per pupil largely has been equalised across the school system, serious defects remain—“which continue to impede the opportunities of historically disadvantaged groups”.

The report says that little has been done “to unwind the spatial misallocation of workers” and, despite improvements, “the marks of the homeland and township system remain visible in present settlement patterns”.

The long distances travelled in commuting and job searching raise reservation wages and depress search activity.

Another negative aspect of apartheid not fully addressed is the suppression of entrepreneurial initiative among the majority black population, the report says.

“In the formal sector, the attractiveness for skilled blacks of affirmative-action positions in existing corporations under the BEE [black economic empowerment] initiative hinders the creation of new small black-owned businesses.”

Meanwhile, the informal sector remains small for an economy of South Africa’s average income level and has absorbed surprisingly little of the surge in the supply of less-skilled labour.

Education
There are also doubts about the quality of education being provided to the majority of students in South Africa, the report says. In international tests of literacy and maths and science learning since the late 1990s, average scores for South Africa have “trailed the pack”.

In the crucial areas of maths and science, the government has set itself ambitious goals for increasing exam pass rates, “but the goals are not being met”. The number of passes even fell between 2005 and 2006, according to the report.

The poor results in the post-apartheid era may be a by-product of the “understandable effort to make the system more democratic”, the OECD says.

One factor is the expansion in the number of teachers to deliver greater access to schooling for black children. “The certification of a large number of teachers appears to have been associated with a relaxation of standards, given the shortage of experienced and well-qualified teachers.”

There have also been efforts to encourage white teachers to quit or retire to rebalance the teaching corps—“which worsened the shortage of trained teachers”, the report adds.

And in spite of the acute shortage of well-trained teachers, anecdotal evidence suggests that it can be difficult for qualified teachers from abroad to obtain working visas for South Africa.

Other problems in the education system include a shortage of texts and basic infrastructure, teacher absenteeism, the impact of HIV/Aids and “the continued disparity between the former white schools and others, especially the former black schools”, the report says.—I-Net Bridge, Sapa

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