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Policies to Promote Growth and Employment in South Africa

Literature › Works

Jeffrey D. Lewis (2001). Policies to Promote Growth and Employment in South Africa. World Bank Informal Discussion Papers on Aspects of the Economy of South Africa, No. 16 (Southern Africa Department); presented at the TIPS 2001 Annual Forum, Misty Hills, Muldersdrift. The World Bank.
Type working paper
Scope Post-1994 South African economy
Method mixed
Period studied 1970–2010
Regions South Africa, Greater Johannesburg, SADC
Themes transition post apartheid, labour markets wages, inequality poverty unemployment, macro fiscal finance debt, manufacturing industrial policy, agriculture land, sanctions divestment, education human capital, methods data sources
Citation key lewis2001

Argument

Lewis argues that post-apartheid macro stabilisation (GEAR) has not produced growth or jobs, because the binding limits are structural and supply-side. He traces these to apartheid-era distortions in labour, capital and land markets: capital-intensive production despite abundant labour, skills deprivation, low savings and FDI, and a destroyed small-farm sector. He holds that unskilled and semi-skilled workers have been "priced out" by rapid real wage growth and an inflexible industrial relations system. He proposes concerted reforms (investment climate, privatisation, tariff reform, SMMEs, wage flexibility/subsidies, skills, land reform), and uses a CGE model to show these could raise growth and cut unemployment. HIV/AIDS is flagged as a major downside risk.

Evidence and method

World Bank-Greater Johannesburg 1999 surveys (325 large manufacturing firms; 792 SMMEs); Quantec Research series on employment, unemployment and real remuneration by skill class 1970-99; SARB savings data; TRAINS tariff data; October Household Survey and Klasen and Woolard on unemployment; a South Africa CGE model (base year 1997) and a multi-country southern Africa CGE model (GTAP 1995 SAM); input-output decomposition by Edwards (2001); econometrics of exports by Tsikata (1999); and secondary studies (Fallon and Lucas, Deininger and May, Kingdon and Knight, ING Barings).

Findings

  • Long-run decline in GDP growth across decades predates and persists after 1994. (p. 9)

    GDP growth has fallen steadily, from an average of nearly 6 percent during the 1960s, to around 3 percent during the 1970s, 2 percent in the 1980s, and erratic performance throughout the 1990s

  • Formal job shedding for unskilled and semi-skilled workers was massive after 1981, while informal jobs quadrupled. (p. 28)

    Between 1981 and 1999, the level of formal sector employment declined in every year but three, losing a total of 1.3 million jobs in the space of less than two decades.

  • Real wages of unskilled and semi-skilled workers rose far faster than those of other skill groups, supporting the 'priced out' thesis. (p. 30)

    real remuneration per unskilled and semi-skilled worker in 1999 had grown to 250 percent of the 1970 level.

  • Unemployment is concentrated among semi-skilled and unskilled labour, with overall expanded unemployment at 36% in 2000. (p. 27)

    Semi-skilled and unskilled labor represent half of the work force, but two-thirds of the unemployment.

  • Apartheid land policy left an extremely skewed and dualistic agrarian structure. (p. 34)

    the average land held per person was 1.3 hectares by blacks compared to 1,570 hectares by whites, and the white-owned, large-scale farm sector accounted for 90 percent of the value added

  • Apartheid's legacy of capital-intensive production inconsistent with factor endowments persists in the export structure. (p. 46)

    One economic legacy of apartheid is a structure of production that is fundamentally inconsistent with the country's factor endowments, most notably in the phenomenon of high capital intensity in the presence of abundant labor.

  • Domestic savings fell sharply, largely due to falling government saving, and FDI has been very low. (p. 31)

    from an average of 22 percent of GDP during the 1980s to only 14 percent during 1998.

  • Post-1994 FDI was small compared with other emerging markets, constraining investment to 15-16% of GDP. (p. 33)

    FDI in South Africa has averaged less than 1 percent of GDP; for 2000, estimates are that this figure fell below 0.5 percent.

  • Deficit reduction and macro stabilisation succeeded, but GEAR's growth and job targets were missed. (p. 21)

    Based on the GEAR package of policies, it was forecast that growth would accelerate to 6 percent by 2000, with job creation reaching 400,000 jobs annually.

  • The sanctions era (1986-91) depressed exports, followed by a post-sanctions export boom; exports are highly sensitive to real exchange rates and tariffs. (p. 46)

    Sanctions had the expected dampening effect for the years 1986-1991, while there is also a statistically significant post-sanctions export boom captured in a dummy over the 1991-96 period.

  • CGE scenario: combining reforms with skills and wage moderation could markedly reduce unskilled unemployment. (p. 58)

    the unemployment rate drops from 50 percent in 2001 to 30 percent in 2010.

  • HIV/AIDS is projected to cut GDP substantially, mainly through investment crowding-out rather than labour supply. (p. 61)

    total GDP could decline by as much as 19 percent by 2010, or 8 percent in per capita terms relative to a hypothetical "no AIDS" scenario.