Road project in Johannesburg, South Africa: trials with private sector partners on project-by-project basis might help reduce infrastructure bottlenecks (IMF photo)
ECONOMIC HEALTH CHECK
The authorities have taken advantage of the fairly robust macroeconomic position at the eve of the global financial crisis and vigorously responded with expansionary macroeconomic policies. Absent a major change in the external environment, the recovery should continue, the economists said in their regular review of Africa’s biggest economy.
The report cautioned, however, that unemployment in South Africa is likely to remain high for a considerable period. Raising the economy’s growth rate and making such growth more labor intensive is paramount to large-scale job creation and a reduction of inequality.
Jobless picture worsens
South Africa’s strong overall economic performance is tarnished by the difficulty encountered in reducing its high unemployment level. The recession worsened the country’s unemployment picture considerably, with close to 1 million jobs lost since end-2008. As of June 2010, unemployment stood at some 25 percent. This contributes to the high degree of income inequality.
As South Africa navigates its way out of its first recession since 1992, the report said, the country faces two important tasks.
• Sustaining the incipient recovery. After contracting by 1¾ percent in 2009, South Africa’s economy has turned the corner and is expected to expand by around 3 percent in 2010. The focus in the coming months accordingly needs to be on sustaining the recovery while recalibrating policies amid the ebb and flow of portfolio flows and uncertain global economic prospects.
• Raising potential economic growth. The growth rates considered most probable under a baseline scenario (4–4½ percent over the medium term) are unlikely to quickly reverse the sharp cyclical increase in unemployment, much less make inroads into reducing the high structural unemployment level. That would instead require growth rates in the range of 6 percent. And this in turn would require major changes to the incentives facing firms and employees.
Case for reforming now
South Africa’s growth potential cannot be unleashed without tapping into the large reservoir of unemployed people, the report said. The severity of the unemployment problem calls for bolder action to enhance the efficacy of labor and product markets. There is a strong case for undertaking these reforms now during the upswing of a business cycle, when profitability is improving and more jobs can be created.
The labor market appears to be flexible in the volume dimension but wage flexibility seems more limited. South Africa’s labor legislation provides important and necessary protections for workers, but the large decline in employment during the recession suggests that some hard choices must now be confronted.
Accordingly, a closer look at the bargaining framework so that it encourages employers and employees to conclude more flexible wage contracts could help. Such provisions should allow companies to adjust more easily to economic fluctuations in a way that preserves jobs.
More competitive product markets
Product markets in key economic sectors such as finance and infrastructure services need to be made more competitive. Taking into account stability considerations, greater competition in the financial sector should help lower fees and reduce the cost of capital for businesses.
Similarly, lower input costs stemming from increased competition in the intermediate industrial products market can help the external competitiveness of the manufacturing and other tradable sectors. Continued trade liberalization, including by reducing nontariff barriers, could be an impetus for greater competition and innovation.
There is also scope for creating an enabling environment for private sector participation in infrastructure projects. While it may not be necessary nor politically feasible to consider wholesale private sector involvement in some areas, experimenting with private sector partners on a project-by-project basis might help reduce infrastructure bottlenecks more quickly.
