The World Bank’s latest review of the SA economy is an attempt to steer policymakers’ focus back to forgotten reforms involving the labour market and small businesses. It believes these offer SA its best shot at counteracting the jobs carnage wrought by the pandemic.
These reforms — similar to proposals in finance minister Tito Mboweni’s 2019 growth document — have fallen off government’s radar screen or have been shelved for being too politically contentious. However, it’s extremely unlikely that SA will make significant inroads into youth unemployment until it tackles labour market reform.
The World Bank has now put the issue back on the table. It warns: "There is a risk that the recovery leaves behind most of the potential economically active population, particularly young job-seekers, which would mean that the pandemic [would have] permanently impaired the country’s long-term development prospects."
The annual review was launched last week amid intense rioting and looting, which, together with the severity of the third Covid wave, have severely dented SA’s near-term economic prospects, as well as its longer-term investment appeal.
Business Unity SA (Busa) president Sipho Pityana says: "This disorder has had a devastating economic impact that represents a significant setback for economic recovery, and has significantly magnified the challenge of dealing with poverty, inequality and unemployment. It has hugely undermined investor confidence, which will take years to rebuild."
Early estimates of the damage vary widely. PwC fears SA’s 2021 growth rate could be 0.4 percentage points lower. However, Intellidex, which puts the total cost of the carnage at R50bn, with 150,000 jobs at risk, has slashed 0.7 percentage points off its 2021 GDP forecast, taking it down to 3.1%.
Fitch Ratings is more sanguine, saying that even if the riots escalate, the effects on the economy should be temporary and are unlikely to affect SA’s BB– rating, given the better than expected recovery. (In June, Fitch revised its 2021 growth forecast up to 4.9% from 4.3%.)
"The greater near-term risk is that SA’s public finances could be affected if the government reacts to the riots by easing fiscal policy," it warns, adding that the unrest also underscores the risk that SA’s exceptionally high income inequality and unemployment rate could jeopardise social and political stability over time.
Indeed, despite evidence that political and criminal elements are fanning the violence, the unrest is a stark reminder of how unsustainable SA’s levels of poverty, unemployment and inequality are and of how urgently reform measures are needed to spur a jobs recovery.
"Cosatu has been arguing for a long time that unemployment is a ticking time bomb," says the trade union federation’s Sizwe Pamla. "This is another reminder that millions of South Africans are hungry and unemployed. As they have been systematically isolated from the mainstream economy and their survivalist economy is constantly sabotaged, they have reached a point where they feel they have nothing to lose. The crisis of poverty, inequality and unemployment … needs to be addressed without fail."
This disorder has had a devastating economic impact … It has hugely undermined investor confidence, which will take years to rebuild
— Sipho Pityana
The World Bank pulls no punches in its analysis of SA’s economic predicament, warning that the average South African will be worse off in 2023 than in 2019 if real GDP growth slows back to its forecast of 1.5% over the medium term.
The SA economy shrank by 7% in 2020 — a decline exceeded by only three major emerging economies: Argentina, India and Mexico. All three are expected to recover faster than the 4% the bank has pencilled in for SA in 2021 — an estimate it made before the latest unrest.
While the "extremely strong" global recovery is helping SA, the bank says the country risks being left behind, given the severity of the Covid third wave, fiscal tightening and rising unemployment.
SA’s growth path has been lagging other emerging markets for the past 10 years. While the typical middle-income economy almost doubled its per capita income between 2000 and 2019, a decade of low growth left the average South African poorer in 2019 than in 2010.
The bank attributes SA’s decline mainly to its failure to get on top of long-standing structural constraints, including the lack of a cost-effective national logistics system, a scarcity of skilled labour and the regulatory burden on small businesses.
The pandemic — by accelerating SA’s fiscal deterioration, lowering growth and fuelling unemployment — has made a bad situation worse, says the bank. Should SA not urgently undertake broad-based structural reforms to unlock growth and competitiveness, "it risks suffering another lost decade".
While the bank acknowledges that the government has moved to liberalise energy generation and the ports, and that these kinds of reforms "remain critical", it’s concerned that their impact will materialise only in the longer run. It thus proposes additional labour market measures to strengthen the jobs recovery — an area that has been repeatedly sidelined during policy debates to avoid angering labour.
The report shows that over the past year employment in SA declined more rapidly and recovered more slowly than in peer countries. By the end of 2020, about 1.4-million people had still not regained their jobs, representing an 8% contraction in total employment.
The bank is particularly concerned about the fact that the Covid crisis has widened inequality by causing severe and unequal job losses: low-wage workers suffered almost four times more job losses than high-wage earners last year.
In addition, the wages of workers who still had jobs fell by 10%-15% on average. With the combined loss of employment and earnings, the bank estimates that the average South African of working age was 18% worse off at the end of 2020 than at the start.
To strengthen the jobs recovery, the bank proposes emergency support for poorer workers combined with reforms to increase the size of the labour market.
First, it urges SA to expand the existing employment tax incentive (ETI) to enhance access to jobs, particularly for young people. It should also extend the temporary employer/employee relief scheme (Ters) for lockdown-damaged sectors until a sizable share of firms are again operational. These measures should be time bound, but could together support the jobs of about 2.3-million people for about R18bn a year, according to the bank’s estimates.
Second, SA should consider suspending regulations that both increase the real cost of labour and make job creation more difficult. This moratorium should be limited for 12 to 18 months and primarily benefit the most vulnerable. The bank declined to specify which labour laws SA should suspend, leaving it to the National Economic Development & Labour Council to determine.
Third, SA should relax laws and regulations such as zoning and licensing requirements that constrain small businesses. It should also scale up programmes that provide entrepreneurial training and start-up grants. Self-employment represents only 10% of all jobs in SA, against 30% in most upper-middle-income economies, so if SA were to match its peers, it could potentially halve its unemployment rate.
Mboweni went further in his 2019 growth document, recommending that, to boost small businesses, the government should slash red tape by 25% over five years and consider amending labour laws to exempt small firms from unaffordable wage agreements struck centrally between big business and big unions.
Neither of these recommendations made it into President Cyril Ramaphosa’s economic recovery plan, though the document did undertake to extend the ETI for 10 years.
Before the latest rioting, the government also agreed to extend Ters for sectors hardest hit by the third wave.
Last week Cosatu called for extensive fiscal support in the wake of the carnage, including the reinstatement of the R350 Covid grant for poor, unemployed adults, a revamped loan guarantee scheme to help companies rebuild and the doubling of the presidential employment programme’s budget to R22bn.
Busa, worried that the state’s special-risk insurer, Sasria, will not be able settle an estimated R10bn-R12bn in claims, has called for the urgent establishment of a disaster relief fund, spending reprioritisation and additional state borrowing if necessary.
In supporting the need for a strong fiscal response, Intellidex’s Peter Attard Montalto argues that there is enough fiscal room (given the state’s R412bn in cash balances and the country’s R30bn terms-of-trade windfall) to fund many of the measures called for, even if it means breaching the fiscal framework.
However, he warns that while fiscal (and monetary) policies can be used as a bridge to help SA out of the crisis, "they cannot solve the problems that are catalysing the carnage — hence we don’t believe in quantitative easing or in major long-term fiscal expansion as any kind of solution; only hard work on reform [will do it]."
Responding to the World Bank report, Ramaphosa’s economic adviser Trudi Makhaya conceded during a webinar last week that important reforms such as the liberalisation of the ports and allocation of spectrum have been stuck for 10 to 15 years. This has been due partly to the inability to overcome vested interests and partly to state incapacity.
"The president has taken to heart that the state must not get mired in vested interests and must just get moving," she said. "Significant momentum" has been achieved this year, Makhaya noted. But "we shouldn’t overemphasise where we are. We still have a mammoth task and need to do a lot more."
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