A group of man seat on a shade in the hot sunny day while other one read newspaper, at corner of railway street and Church Street in Mayfair. They seat at the same corner everyday waiting for a construction company or an individual person who have a piece jobs for them.
Picture: Motshwari Mofokeng
635 03.02.2015 A group of man seat on a shade in the hot sunny day while other one read newspaper, at corner of railway street and Church Street in Mayfair. They seat at the same corner everyday waiting for a construction company or an individual person who have a piece jobs for them. Picture: Motshwari Mofokeng

South Africa’s triple challenge

By Chris Hart and Lesiba Mothata Time of article published May 31, 2015

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If South Africa had full employment, then poverty and unemployment would be dramatically diminished as issues, write Chris Hart and Lesiba Mothata.

Johannesburg - We are frequently reminded by the political establishment of South Africa’s triple challenge of poverty, inequality and unemployment. This weighs heavily on the social, political and economic fabric of the country.

This is why the unemployment and economic growth data just released points to South Africa sinking into crisis. Official unemployment, at 26.4 percent, rose to a 12-year high. Growth slumped to 1.3 percent for the first quarter this year, below expectation.

The official unemployment rate is one of the highest in the world. The measure masks a low economic participation rate and excludes discouraged work-seekers. In other words, people who want work but have stopped looking for work due to being discouraged are not counted among the unemployed. If a higher participation rate was factored in and discouraged work-seekers were included in the data, the unemployment rate would be nudging towards 50 percent.

The economy is not big enough to absorb everyone into it. The solution is a bigger economy. For that, the economy needs growth. Not difficult. But growth has ground down to 1.3 percent and looks set to slow further. At the recent Monetary Policy Committee meeting, the SA Reserve Bank warned the inflation risks were to the downside but the risks to economic growth were on the downside.

The combination of weak economic prospects, along with higher inflation, means unemployment is set to rise even further. This is clearly a crisis. Eskom load shedding and the 2008 global financial crisis are wonderful scapegoats. Why not throw in Jan van Riebeeck as well?

But the growth slowdown has been unfolding over the past several years, even during periods where there has been no load shedding.

But a more in-depth comparison exposes the massive economic underperformance of South Africa when compared to its emerging market and African peers. South Africa is one of the only emerging markets where unemployment has increased since 2008. Most emerging markets rebounded strongly in the wake of 2008 and managed to maintain and contain their debt levels to pre-crisis levels. South Africa had more than double the debt on less than half the growth.

The underperformance of South Africa has been self-inflicted. It struggles under its triple triple.

First Triple: poverty, inequality and unemployment.

This is a problem in itself, as these problems are ranked equally. Yet it is actually an unemployment problem from which there is a poverty and inequality consequence. Put differently – if South Africa had full employment, then poverty and unemployment would be dramatically diminished as issues. However, by not emphasising this perspective, policy is focused on inequality and poverty but is not resolving unemployment.

The national budget is a case in point where the “rich” (success) are penalised through a very “progressive” tax take. Inequality is reduced by pulling down the top end of earners (in reality right down to the working class).

Poverty is tackled through a very aggressive redistribution spending policy. Through this whole process, unemployment is neglected and perpetuated. Policy focus on poverty alleviation has the effect of transferring economic resources to consumption, which is in complete contrast to poverty reduction that transfers resources to investment.

Yet the intervention of the government through its tax and spend strategy has left an unsatisfactory legacy. Dissatisfaction is rising and the economic outcome is inadequate. Measures like BEE also depend on an expanding economy.

This shift of resources to consumption has resulted in the second triple, which has become a major constraint and stumbling block to resolving the first triple.

Second Triple: the triple deficit.

The budget deficit in recent years has led to a multiple downgrade of the credit rating. Of the face of it, the government “needs” more taxes to balance its books. Yet households, the core of the tax base, are also in deficit. The cost pressures in recent years and availability of credit has led to households spending more than they have earned. The ability to meet a higher tax bill is simply not there. The tax base is both narrow and shallow.

The high unemployment rate also places pressure in a higher dependency ratio on each salary and wage earner. And the government has very ambitious spending plans and faces at least four expenditure threats where each one can take South Africa to a solvency crisis. These are: the public sector wage bill; National Health Insurance; State Owned Enterprises’ need for capital; and the nuclear deal. So far, indications are that the government is going to commit to all four.

The third deficit is the current account deficit. This has been widening to record levels, especially since 2008. Of particular concern is that the current account deficit has been widening while the economy has been slowing and the currency has been weakening. This is a major concern as it means the country is losing competitiveness at an alarming rate.

Part of the reason for the loss of competitiveness comes down to the third triple:

Third Triple: the triple mistake.

The first mistake is labour unrest. No one invests in labour unrest, and investment is essential to grow the economy. South Africa must find a way to resolve labour disputes without unrest. Labour relations is where South Africa languishes near the bottom of the World Economic Forum’s Global Competitiveness survey. The unemployment crisis needs attraction of investment into labour, not away from it.

The second major mistake is the regulatory tsunami that has hit the business sector. The economy is being attacked by policymakers not nurtured. Companies trying to contain costs in a low growth environment have resources diverted to compliance, leaving less to grow their businesses. The biggest problem is that the regulatory burden requires economies of scale in order to be compliant. This is manageable by big business but debilitating for the SME sector. And it is the SME sector that is the engine of job creation. South Africa should be seeking to make South Africa an easier place to invest and do business not more difficult.

The regulatory own goal is because policy has never been prioritised. Unemployment IS the national emergency. Job creation SHOULD be the policy priority and other issues and policies should be subordinate to this goal. If this were the case, the whole gambit of regulations would have been constructed very differently. But the current morass means that unemployment and job creation have been relegated to the lowest priority. Not by intention, but by the consequences of what has been put in place. The most recent example is the visa requirements put in place by Home Affairs. If job creation was a higher priority, then this development would never have been allowed.

The third mistake South Africa is making is in taxes. Economic expansion cannot happen without investment. Investment cannot be sustained without savings. The investment rate is currently 19 percent of GDP. This will buy a long-term growth rate of 2 to 3 percent.

The NDP calls for a 30 percent investment rate. However, already the low 19 percent investment rate can’t be sustained as the saving rate is only around 14 percent. This is an economic mismatch, which is one of the causes of the triple deficit. South Africa has a capital deficient economy. Yet part of the tax structure included taxes that target capital formation and investment viability.

Job creation is driven through the SME sector. The NDP aim is to generate 11 million new jobs by 2030. This means 2 to 4 million new SMEs need to be established. This can only be capitalised through the resources households build-up. Taxes like capital gains tax, property transfer duties and death duties are extremely destructive and counter-productive in the context South Africa faces. It is like eating seeds and wondering why harvests are not forthcoming. Investment viability is also adversely affected by taxes imposed on dividends and interest earned. Policy favours the borrower over the saver.

In short, unemployment 26.4 percent; growth 1.3 percent – a national crisis. Self-inflicted. The good news is that resolution is entirely within South Africa’s control.

* Hart is chief strategist and Mothata chief economist at Investment Solutions.

** The views expressed here are not necessarily those of Independent Media.

The Sunday Independent

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