OECD Report Says South Africa Could Be Doing Better Economically

OECD released a report that concluded that Africa’s biggest economy, South Africa, could be doing much better.

AFRICA’S biggest economy is being held back by one of the world’s lowest labor-participation rates and one of its highest unemployment rates. Barely 40% of South Africa’s working-age population have jobs, compared with around 60-75% in other middle-income emerging markets, according to a report out this week by the OECD. One in three South Africans in the labour force, including half of young black people aged 15-24, is unemployed. This, more than anything, most constrains South Africa’s economic growth, says the Paris-based outfit.

To create jobs for so many people would require “many years of 6% or even 7% growth”, says Ángel Gurriá, the OECD’s secretary-general. Pravin Gordhan, South Africa’s finance minister, puts the bar even higher, saying that average growth of 7% would be needed for 20 years “to make a significant impact”. In the past four decades South Africa has never achieved such speedy growth. Its best performance was in 2004-07, when GDP rose by an average of 5% a year.

Long regarded as a rich-countries’ club, the OECD has recently been helping middle-income developing countries share and compare best economic practice. Mexico, Chile, the Czech Republic and Slovenia are already among its 32 members. Estonia, Israel and Russia are expected to join soon, whereas Brazil, China, India, Indonesia and South Africa have been granted “enhanced engagement” status while they decide whether they want to apply for membership. This is the OECD’s first “economic survey” of South Africa.

Although largely complimentary about the country’s prudent macroeconomic policies since the ruling African National Congress came to power in 1994, the report says a lot more could be done on the microeconomic front to raise growth potential and enable living standards to catch up with those in OECD countries. Despite abundant physical and human resources, South Africa is one of the rare emerging markets to have failed to converge towards the club’s average GDP per person over the past 16 years, the OECD notes.

In its 2006 development strategy, the government set a target of 4.5% growth a year up to 2009, rising to 6% over the next five years, with the aim of cutting poverty and unemployment by half by 2014. The global slump has made those targets unrealistic. But South Africa’s economy was already slowing down before the crisis hit, the report says, falling from a peak of 5.5% in 2007 to 3.7% in 2008. Although South Africa proved more resilient than most OECD countries, output shrank by 1.8% last year, the country’s first recession in 17 years.

The OECD expects a return to growth of 3.3% this year, accelerating to 5% next year. That is higher than most other forecasts and well above the government’s own estimates of 2.3% this year and 3.2% next, but still too slow to reduce poverty and unemployment at anywhere near the government’s proposed rates. Over 1m formal jobs were lost in the five quarters up to March this year. Officially, unemployment is 25%, but it tops 35% if you count those too discouraged to go on looking for a job. And, unlike most of the world’s poor countries, South Africa, with its widespread welfare system, does not have a thriving informal economy where the jobless can take refuge. According to OECD estimates, only 15% of South African jobs are in the shadow economy, compared with around half in Brazil and India and nearly three-quarters in Indonesia.

Among other recommendations, the OECD says that South Africa’s government should encourage more saving and investment; a liberalization of product-market regulation; easier access to credit for small businesses; greater co-ordination in wage bargaining; and a raft of measures to tackle the wretched level of youth unemployment. This could include wage subsidies for people being trained, a minimum wage differentiated by age, and extended periods of probation for young workers. The government would find it easier to do such things were it not for the power of South Africa’s trade unions, which tend to look after their own employed members at the expense of the millions who cannot find jobs at all.

Problem: The ANC is not the governing party as long as it includes COSATU & the Communist Party.  Time to:

  • a)Go it alone
  • b)Take hard decisions on who is appointed to do what,based on competence NOT affiliation to the ANC
  • c)Get some control over the excessive wages settlements which follow the pattern Wages up 10% Employment down 10%

South Africa’s problem is far more complex – it stems from the unbalanced level of economic development. The powerful economic engine of the country lives in a developed world environment which has reached a stage of being a consumption driven economy – people are rich enough to buy imported products and are stifling the growth of the of the other sector of the economy – the developing world sector – which needs to be more export and manufacturing growth oriented.  BUT the South Africa’s impressive liberalization of their economy has succeeded in getting their currency , the Rand, to be listed as one the 12 most traded currencies in the world (click on www.xe.com and see for yourself) not even the might Brazil or China has a currency that is so highly traded.  SA has very little control on the exchange rate and for this reason the Rand is grossly over valued.

On top of this China has succeeded in exporting mass deflation to South Africa. With that rich sector buying primarily cheap Chinese products with the strong Rand the export sector and local manufacturing is being hammered. That is what the Wall-Street Journal Reports:

South Africa’s rand is sky high despite shaky economic fundamentals and violent strikes in recent months. The government is so concerned about the rand’s rise, and its effect on exports, that it is considering a tax on financial inflows to bring the currency back down, a move that could supercharge the country’s cost of borrowing.

And yet, the main factor behind the rand’s strength, and a possible drop in the future, is China, South Africa’s biggest trade partner and a major consumer of its metals exports…..

South Africa’s currency is a symbol of big themes in global financial markets over the past two years. Along with other emerging-market currencies, the rand plunged lower as investors fled to safety when Lehman Brothers Holdings Inc. collapsed in 2008. Since then, however, it has become one of the fastest-climbing currencies in the world.

In real terms, the rand has strengthened about 40% over that period, data from Morgan Stanley show, putting the rand a shade behind the Brazilian real in the global rankings.

Strong currencies make exports appear more expensive abroad and rarely please politicians. South Africa is no exception. This month, a document released by its ruling African National Congress party proposed capital controls, taxes on inflows, as a way to rein in the currency. The document, which lays out topics for discussion at September’s party assembly, noted that “the state must respond more effectively to factors that impose unnecessary costs on business and the economy, notably around the value of the rand.”


While currency analysts criticized the party’s plans, they also expressed doubts over its effects, and the rand barely moved. Brazil took similar steps last year, and they did nothing in the long term to hold down its currency.

“It’s a very difficult decision, and one they may not take,” André Roux, co-head of global fixed income at Investec Asset Management in Cape Town, said of the government’s plans. “A slowdown in China is more of a risk. There’s a big risk there.”

The rand’s strength comes against a backdrop of persistently high unemployment and public-sector strikes over pay that could, if successful, push South Africa’s inflation rate, already predicted to be above 5% by the end of this year, even higher.

The rand will not be devalued because it is such a tricky and difficult thing to do. And there is very little will from the economic masters to do so.  South Africa needs to install a tremendous amount of tariffs on the flood of cheap Chinese imports.

In essence the South African  economy needs rebalancing.

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