Copyright © 2021
May 2021
Inclusive Society Institute
50 Long Street
Cape Town
South Africa
8000
235-515 NPO
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute
DISCLAIMER
Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in May 2021
Author: Mariaan Webb, Creamer Media Writer
Edited by: Daryl Swanepoel
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Content
Abbreviations & acronyms
Introduction
Key considerations
Economic recovery
Deindustrialisation and productivity
Environmental challenges
Infrastructure bottlenecks
Job losses and employment
Macroeconomic stability
Social spending
Suggested interventions for South Africa
Conclusion
Annexure A – South Africa’s Economic Outlook, Wolfgang Fengler, lead economist southern Africa, World Bank
Annexure B – Reinvigorating South Africa’s Economy, Dr Arthur Minsat, head of unit for Africa and Middle East Development Centre, OECD
References
Abbreviations and acronyms
GDP gross domestic product
ICT information and communications technology
ISI Inclusive Society Institute
OECD Organisation for Economic Cooperation and Development
Ters Temporary Employer-Employee Relief Scheme
WCY World Competitiveness Yearbook
Introduction
This report is a summary of discussions held between the Inclusive Society Institute (ISI) and representatives of multinational funding institutions to gain a better understanding of what policies South Africa should be pursuing to encourage welfare-enhancing growth.
Economists from the World Bank and Organisation for Economic Cooperation and Development (OECD) participated in the April 2021 webinar, providing their insights on policy interventions.
The discussion forms part of the ISI’s comprehensive research to develop a new growth-centred economic blueprint for South Africa.
This report highlights that:
South Africa is at a critical juncture, with a combination of challenges on the economic, social, environmental and fiscal fronts emerging simultaneously. These issues must be responded to at the same time, presenting development challenges.
South Africa’s short-term economic recovery is fragile, and the country is underperforming against other emerging nations.
For the first time in democratic South Africa, macroeconomic stability has been flagged as one of the country’s top three concerns.
The public-sector wage bill is high by international standards and wage levels of employees in the public sector are high, compared with private-sector employees in South Africa.
A demographic dividend is big opportunity, although there is concern about population growth that is not supported by economic growth.
The report concludes with recommendations for policy interventions in green energy, digital transformation, skills, infrastructure investment and employment to help place South Africa on a path to sustained growth and inclusive development.
Participants included World Bank country director for Southern Africa, Marie Francoise Marie-Nelly; World Bank lead economist for Southern Africa, Wolfgang Fengler; and OECD Development Centre’s unit for Africa, Europe and Middle East head, Arthur Minsat.
Key considerations
Economic recovery
Against the backdrop of a deep recession in 2020, South Africa is experiencing only a mild recovery, measured against other emerging nations. Growth is forecast to resume at 3% in 2021, lower than the OECD average of 3.30% and the Brics group – Brazil, Russia, India and South Africa – average of 6.70%. Economic expansion will plateau at about 2% in 2022 – well below what is needed to aid job creation (Minsat, 2021).
Owing to the combined effect of the 7% contraction in 2020 and lingering structural constraints to growth, South Africa’s real gross domestic product (GDP) is not expected to return to prepandemic levels before the latter part of 2023 (National Treasury, 2021).
A global economic rebound of 5.60% in 2021 and 4% in 2022 presents an opportunity for South Africa to “ride the global wave” of recovery (OECD, 2021). However, as a relatively small economy with a pre-Covid GDP of $351.40-billion, global integration will be key to taking advantage of opportunities that may emerge. Thus far, South Africa’s exports have failed to follow the ‘V-shape’ recovery of foreign demand, which highlights a potential issue with their competitiveness. There is, however, an opportunity to capitalise on intra-African exports.
Further, South Africa is among a few economies that have not achieved much in terms of economic prosperity in the past ten years and has been urged not to repeat the failures of the “lost decade”. Originally coined to refer to Japan between 1991 and 2000 – a time when the economy collapsed, stock markets crashed, and unemployment and debt soared – the term has come to be applied to a wider range of economies that experienced sustained periods of low, or negative, growth rates owing to political and economic policy failures. For example, warnings were issued by US President Barack Obama that the US risked a lost decade in the wake of the Great Recession of 2007-2009 (Meckler, 2009). In the South African context, President Cyril Ramaphosa in January 2019, spoke about South Africa’s “nine lost years” resulting from the State capture and related corrupt practices that gripped the country from 2009 to 2018.
While the per-capita GDP of many other developing nations accelerated, South Africa’s stagnated and now reflects the same level as 2006. Had the country managed to replicate its pre-global financial crisis growth over the past ten years, its per-capita GDP would have been R65 000, compared with the current R50 000 (Fengler, 2021).
Deindustrialisation and productivity
South Africa has suffered a major deindustrialisation pattern in the past three decades. Manufacturing as a percentage of GDP has declined from 21.60% of GDP in 1990, to less than 12% in 2019 (World Bank, 2021). Although certain sectors are performing well, most notably automotive, the overall industry has been underperforming by global standards. This analysis is buttressed by the fact that total factor productivity – a crucial measure of efficiency in manufacturing – has declined in the past decade (Minsat, 2021).
The automotive industry is South Africa’s lead manufacturing sector. Its growth and success can be ascribed to the constructive cooperation that exists between industry and government. Government has adopted industrial polices to support the industry. The Motor Industry Development Plan started in 1995 and was replaced by the Automotive Production and Development Programme (APDP) in 2013. The South African Automotive Masterplan 2021 to 2035, alongside amendments to the APDP, take effect in mid-2021.
The APDP is a trade-related investment measure that uses import tariffs, rebate mechanisms, including a vehicle assembly allowance, a production incentive, as well as a cash grant in the form of the Automotive Investment Scheme to incentivise investment (Lamprecht, 2021).
Environmental challenges
South Africa faces many environmental challenges, the cost of which is directly affecting the country’s coffers. The welfare cost of premature death resulting from ambient particulate matter pollution is estimated to be about 5% of South Africa’s GDP. This is deemed excessively high, when compared with China’s 10%, given the disparity in levels of industrialisation.
Infrastructure bottlenecks
Infrastructure weaknesses in energy, rail and ports, are chokepoints for growth and productivity. The quality of South Africa’s infrastructure is relatively low, compared with other countries. This is underscored by the nation’s performance in the latest World Competitiveness Yearbook (WCY), which rates the ability of 63 industrialised and emerging economies to create and maintain an environment that empowers enterprises to generate value. South Africa’s ranking in 2020 fell three notches to 59 out of 63 countries rated. Of the four groups of criteria evaluated, South Africa’s weakest performance was in infrastructure, with its rating having dropped to 61 in 2020, from 60 in 2019 (Department of Employment and Labour, 2020).
Job losses and employment
South Africa’s economy lost 2.20-million jobs in the second quarter of 2020, a period marked
by a hard lockdown to combat the spread of Covid-19 (Stats SA, 2020). Only about 40% of the jobs lost had been recovered by the end of the year. The job losses were most severe for those living in lower income households before the Covid-19 pandemic, with a heavy burden among
low skilled and less educated workers.
At the end of 2020, South Africa had a labour force of 22.30-million, of which 15-million are employed and 7.20-million are unemployed. There are another 17-million who are not economically active, 2.90-million of whom are discouraged work-seekers (Stats SA, 2021).
South Africa’s working-age population is forecast to expand in the next decade, exceeding the dependent population (below 15 and above 64 years of age). This could yield a demographic dividend, although a growing workforce will need a growing economy. In the absence of economic expansion, the dividend could well convert to a liability.
Macroeconomic instability
For the first time since the advent of democracy in 1994, the World Bank has identified macroeconomic stability as one of South Africa’s top three challenges – the other being inequality and a lack of jobs. Although not considered to be at a “dangerous level”, the World Bank has flagged the issue as a worry (Fengler, 2021), echoing concerns raised by local economists.
The country’s fiscal position is weak, because of low growth and rising expenditures, which have not translated into better economic prospects. The budget deficit, at 14% of GDP in 2020/21, is at its highest ever and gross debt reached 80.30% of GDP in 2020/21 (National Treasury, 2021).
South Africa is not in a more vulnerable position owing largely to the strength of the country’s financial sector, which allows for a large degree of domestic borrowing. External borrowing remains at prudent levels, limiting the degree of currency risk.
The National Treasury presented two debt scenarios in the June 2020 Supplementary Budget. In the passive scenario, which is not deemed a viable option for South Africa and was presented for illustrative purposes only, debt will spiral upwards, exceeding 100% of GDP from 2022. The possibility that government will not be able to repay its debt leads to higher debt-service costs. This essentially redirects money that could be spent on health, education, and other policy priorities to local and overseas bondholders (National Treasury, 2020).
In the active scenario, government stabilises debt through a combination of reforms to boost economic growth and measures to increase revenue collection and lower expenditure. The deficit would be reduced strongly starting in 2021 and the debt level would start decreasing from a peak of 87% of GDP in 2023 (National Treasury, 2020).
The OECD has presented a third, progressive consolidation scenario where government fails
to implement bold economic and fiscal reforms and the reduction of the deficit is only progressive. In this scenario, the debt level will stabilise by 2028. The progressive
consolidation scenario is based on a deficit reduction of 1% a year of GDP and 2% GDP
growth from 2025 (Minsat, 2021).
The National Treasury, in its 2021 Budget Review, announced a fiscal strategy to stabilise debt at 88.90% of GDP in 2025/26. Over time, this will reduce borrowing costs and the cost of capital (National Treasury, 2021).
Besides high debt-service costs, public-service compensation has also risen sharply. The average renumeration of public servants is high by international standards and compared with private-sector employees in South Africa. Government’s payroll costs have become increasingly unsustainable, driven largely by average increases of more than 3% a year above inflation for more than a decade (Intellidex, 2020). To safeguard public finances, Finance Minister Tito Mboweni has taken a hard stance with a proposed freeze on wage increases for 1.20-million public servants.
Indexing public-sector wages below inflation for three years (at inflation minus two percentage points) could generate about R30-billion in savings over three years. This measure, the OECD says, will have a limited real cost to civil servants as inflation has receded and given that they would still benefit from annual progression in the pay scale. Wage indexation should also be linked to productivity developments (Minsat, 2021).
Social spending
South Africa allocates substantial amounts each year to roll out its social welfare programme. The social grants programme, which is the main government instrument to reduce poverty and inequality, reaches more than 17-million beneficiaries and about half of all South African households (OECD, 2020).
The World Bank, however, warns that the social protection system cannot be a substitute for growth and jobs. The World Bank also argues that the social protection system is becoming unsustainable, owing to shrinking fiscal space (Fengler, 2021).
Meanwhile, high social spending must also be converted into better results. South Africa’s investment in health and education, as a percentage of GDP, is higher than that of Turkey, but its outcomes are worse (Fengler, 2021).
Suggested interventions for South Africa
Conclusion
South Africa will ultimately have to undertake its economic planning within the confines of
the global economic architecture. By providing insight on best practice, sharing comparative data, and offering recommendations, multinational funding organisations help to shape the debate around policy interventions. Further engagement among civil society, think tanks,
African universities and policymakers is needed to deliver a framework for a strategy to accelerate inclusive economic growth.
It is recommended that policymakers take heed of the international thinking contained in
this report and that planning is measured against it. This does not mean a wholesale copying of what international funding institutions dictate, but finding unique South African solutions capable of responding to what are universal concerns.
Annexure A
Annexure B
References
Department of Employment and Labour. 2020. South Africa hits all-time low in
competitiveness ranking. June 17, 2020. [Online]. Available at http://www.labour.gov.za/
south-africa-hits-all-time-low-in-competitiveness-ranking [accessed May 10, 2021].
Fengler, W. 2021. South Africa Economic Outlook, Inclusive Society Institute panel discussion.
April 14, 2021. World Bank.
Intellidex. 2020. The Public Sector Wage Bill – an evidence-based assessment and how
to address the challenge. November 2020. [Online]. Available at: https://www.intellidex.co.za/
wp-content/uploads/2020/11/Intellidex-Public-Sector-Wage-Bill-Nov-2020.pdf [accessed
May 10, 2021].
Lamprecht, N. 2021. Automotive Export Manual 2021, Journey to 2035, April
2021. [Online]. Available at https://naacam.org.za/wp-content/uploads/2021/04/
AutomotiveExportManual2021.pdf [accessed May 10, 201].
McKinsey & Company. 2019. The Future of Work in South Africa: Digitisation, Productivity
and Job Creation. September 4, 2019. [Online]. Available at: https://www.mckinsey.com/~/
media/mckinsey/featured%20insights/middle%20east%20and%20africa/the%20future%20
of%20work%20in%20south%20africa%20digitisation%20productivity%20and%20job%20
creation/the-future-of-work-in-south-africa.pdf [accessed May 10, 2021].
Meckler, L. 2009. Obama Warns of Lost Decade, February 10, 2009. [Online]. Available at:
https://www.wsj.com/articles/SB123419281562063867?mod=djemalertNEWS [accessed
May 26, 2021].
Minsat. A 2021. Reinvigorating South Africa’s Economy: Key Considerations, Inclusive Society
Institute panel discussion, April 14, 2021. Organisation for Economic Cooperation and
Development.
National Treasury. 2021. Budget Review 2021, February 24, 2021. [Online]. Available at
http://www.treasury.gov.za/documents/National%20Budget/2021/review/FullBR.pdf
[accessed May 10, 2021].
Organisation for Economic Cooperation and Development (OECD). 2020. OECD Economic
Surveys: South Africa 2020, July 2020. [Online]. Available at https://www.oecd-ilibrary.org/sites/
d6bc2d63-en/index.html?itemId=/content/component/d6bc2d63-en [accessed May 10, 2021].
Organisation for Economic Cooperation and Development (OECD). 2021. OECD Economic Outlook, Strengthening the recovery: The need for speed, March 2021. [Online]. Available at
https://www.oecd.org/economic-outlook/ [accessed May 10, 2021].
Statistics South Africa (Stats SA). 2020. Quarterly Labour Force Survey, Quarter 2:2020,
September 29, 2020. [Online]. Available at http://www.statssa.gov.za/publications/P0211/
P02114thQuarter2020.pdf [accessed April 23, 2021].
Statistics South Africa (Stats SA). 2021. Quarterly Labour Force Survey, Quarter 4:2020,
February 23, 2021. [Online]. Available at http://www.statssa.gov.za/publications/P0211/
P02114thQuarter2020.pdf [accessed April 23, 2021].
World Bank. 2021. World Bank, Data. Manufacturing, value added (percentage of GDP) – South Africa. [Online]. Available at: https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=ZA [accessed May 10, 2021].
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
This report has been published by the Inclusive Society Institute
The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions independently from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy. The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental state. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. In South Africa, ISI’s ideological positioning is aligned with that of the current ruling party and others in broader society with similar ideals.
Email: info@inclusivesociety.org.za
Phone: +27 (0) 21 201 1589
Web: www.inclusivesociety.org.za