the president’s advisers discuss what it will take
At the end of 2021, South Africa recorded its highest unemployment rate since the dawn of democracy, at 35.3%. The figure has dropped slightly, but there are still concerns about how the country will tackle this problem. Dori Posel spoke with Trudi Makhaya, economic adviser to South African President Cyril Ramaphosa, as well as Kenneth Creamer and Liberty Mncube, who sit on the Presidential Economic Advisory Council, about unemployment, job creation, the sector informal and challenges the country with excessive market power.
Dori Posel: South Africa has failed to reduce a very high unemployment rate. What might help?
Kenneth Creamer: There is a strong correlation between growth and job creation. The question is, why isn’t South Africa growing enough? I would say there are historical and current factors.
Historically, colonialism and apartheid meant that the country’s capital markets, our capital formation, were skewed and infrastructure investment was skewed. If you look around the country, you can see that people living in areas designated as “bantustans” under apartheid still do not have the same level of health, education and access to security services.
And the capital formation itself was pretty much tied to mining. There was some diversification, but the country’s industrial policy was stunted and shaped in a way that did not create enough jobs.
Current reasons include vested interests that make it difficult to implement the policies we need. For example, it is difficult to do the right thing and implement the energy transition due to vested interests.
A second current problem is weak state capacity, corruption and theft.
We need growth to create jobs. And we need more growth to create enough jobs to meet the growing size of the South African labor market. In particular, we need increased capital formation and infrastructure. And it’s really important that we look at our fixed investment levels. During the COVID pandemic, capital investment fell to 13% of GDP – a historic low. Government, state-owned enterprises and the private sector all need to double their capital investment if South Africa is to increase its capital investment to the level of 25-30% of GDP required to reduce unemployment.
Dori Posel: Why are so few people starting very small businesses in the informal sector?
Trudi Makhaya: The informal sector in countries like South Africa creates a lot of jobs. In South Africa, the informal sector accounts for about 10% of jobs. This tells us that South Africa has moved away from other emerging markets.
Our regulatory frameworks are business-oriented. And you can review many aspects of regulations – zoning, how municipalities enforce regulations, regulations and food safety standards. You need safety standards, but you also need a conducive environment where you could have a street food culture like in Asian countries. South Africa’s regulatory environment does not do this. We really regulate too much. We have a lot of requirements that are not suitable for small businesses. That’s why we’re working on reducing red tape.
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The human capital element is also important. The South African education system has failed to give people the basic education and technical skills they need – to become plumbers, for example. It is these types of activities that are becoming self-employment activities in many developing countries. India comes to mind in terms of coding and people who can grow businesses out of it. This involves fairly low skills.
Much of the work we need to do is to improve the quality of basic education. And it’s not about the amount of money that has been spent. As a share of GDP, South Africa’s spending on education is already comparable to that of many other countries. We are not getting the results we need.
There are also other factors, including access to finance. There are so many concentrated industries; it becomes quite difficult for small businesses to thrive.
Dori Posel: Excessive market power could also inhibit the growth of small businesses. Is there excessive market power in South Africa and what has been the competition policy response?
Freedom Mncube: South Africa has a problem with excessive market power. Here are some examples. For those lucky enough to afford private health services, there are only three main hospital groups; In air transport, there are two main airlines. One company controls more than 40% each of the beer, spirits, ready-to-drink, and cigarette industries.
Competition authorities have found anti-competitive practices facilitated by excessive market power in many business areas, including cornmeal, bread, milk, poultry, beer, wheat flour, health , aluminum, steel, bricks, cement and ticketing services. Over the past two years, the Competition Tribunal has issued 48 orders in which companies have admitted excessive market power and excessive prices, not only for personal protective equipment, including face masks, disinfectants for hands and surgical gloves, but also for eggs and corn flour.
Excessive market power raises the cost of goods and services to consumers, drives down wages, stifles investment, stifles entrepreneurship and retards innovation. It also concentrates economic power, which monopolies and oligopolies use to secure favorable policies and further entrench their dominance. At the same time, excessive market power creates profits that disproportionately benefit the wealthiest in society. The left-behind majority of South Africans are more likely to fall victim to excessive market power and are the least able to avoid its costs. This dynamic exacerbates income inequality and inequality of economic opportunity.
There were two responses from competition policy.
The first was to integrate equality considerations into competition law. The 2018 amendments are an example of this, emphasizing the participation of black-owned businesses and small businesses, as well as promoting a broad distribution of ownership (including workers).
The second answer concerns the effect that competition policy generates through the promotion of greater competitiveness and therefore on economic equality. For example, when Pepsi wanted to buy Pioneer Foods, one of South Africa’s leading food processors, the Competition Tribunal approved the deal on the condition that it establish a broad workers’ trust and implement a broad base of black economic empowerment. property project. Last year, when ECP, a US-based investment fund, sought to buy Burger King, the Competition Tribunal approved the deal subject to local sourcing and the creation of a employee share plan at Burger King South Africa.
Dori Posel: I would like us to look at another set of constraints to employment growth, and that concerns issues of trust and corruption. South Africa is often described as having a ‘trust deficit’. What do you think of how trust can be rebuilt in our institutions and, by implication, how our institutions can be made more trustworthy?
Trudi Makhaya: The one thing that has been repeatedly emphasized in the South African case is the culpability of the private sector. We see a lot of companies slowly getting to their accounts.
But I think if we’re going to restore trust, I would say they have a lot more to do to show that they’ve turned a corner and understand the economic damage that’s been done.
On the other hand, we have a demoralized public sector. We have good people who tend to err on the side of over-compliance, afraid to take risks. Being afraid to be innovative.
We must also strike a balance between transparency and due process, and accept genuine mistakes that are not related to corruption.
*This is an edited excerpt from the University of the Witwatersrand Faculty of Economics and Finance centenary webinar titled 100 Years of Economics at Wits: Looking Back, Looking Ahead. The event can be viewed here.