Achieving full employment, decent work and sustainable livelihoods is the only way to improve living standards and ensure a dignified existence for all in the long run. This will be achieved by expanding the economy to absorb labour and improving the ability of South Africa’s people and institutions to respond to opportunities and challenges These are central tenets of the National Development Plan (NDP).
Much has been said about the NDP. It is sometimes invoked or even villified, without any real reference to what is proposed – especially in relation to the economy and employment. The Plan was never meant to be fixed in stone. Instead, it is the general principles and insights that are important to frame an overall vision for application in policy and for action. In this article, I lay out some of the elements that informed our thinking.
The NDP sets out a goal of full employment by 2030. This would mean official unemployment falls to 6.5% and labour force participation rises from 54% to 65%, requiring an average annual GDP growth rate of 5% and 11 million net new jobs created over a 20-year period. Economic growth must accelerate and become more labour absorbing.
Every family must have an acceptable standard of living within their reach. Not only should there be sufficient economic opportunities, but there must also be a supportive system of social protection and services. Achieving this requires leadership, difficult political choices and effective implementation. We have to rebalance and realign key areas of government policy while reprioritising economic policy. The targets are only unrealistic if we accept the status quo.
Structural challenges in reaching full employment
Extremely high unemployment is mostly addressed by indirect means. The only direct way of creating employment is through make-work schemes and public employment. Otherwise, employment is created as a result of rising demand for goods and services. This creates a challenge for a framing policy aimed at solving high unemployment, as it is difficult to determine direct causation. There is little doubt that structural change is needed to shift South Africa’s development path.
Mineral economies face particular constraints
South Africa is a resource-intensive minerals economy. Almost half of exports are categorised as mining and minerals-related. At a domestic level, most economic activity happens in the services industry.
Over four decades our per capita growth has largely stagnated. Some countries that had similar GDP per capita levels in 1975 have powered ahead: South Korea’s GDP per capita rose by a factor of five; while Malaysia and Turkey doubled their GDP per capita.
Resource curse: Economic development and employment transitions are never easy to achieve; but the challenge is magnified for minerals economies. These economies often find it difficult to diversify their industrial base and experience slower than average growth and high inequality.
For these economies, exchange rates are often linked to commodity prices, resulting in volatility and an overvalued currency when resource prices trend upwards, creating a brake on non-commodity exports. Activities that are not traded benefit, such as retail, banking and housing construction; but when the boom is over, goods producers are left weakened. Some firms have adapted to this cycle by switching between local and export markets depending on domestic market conditions and the exchange rate.
This enables business survival, but is not conducive to long-term planning and growth. Higher commodity prices buffer the economy and create the appearance of growth, leading governments and companies to become complacent and under-invest in people and productivity growth. If these pitfalls are consciously avoided and if mineral endowments are used to facilitate mature cluster development, these resources can serve as a springboard for a new wave of industrialisation and services for domestic use and exports. Like many minerals exporters, we did not take advantage of the last commodity boom in this way. Not enough resources have been devoted to industrialisation and diversification in order for SA to break free of its resource
Middle income trap: Many economies that have achieved middle income status struggle to shift further upwards, with South Korea as one of the few exceptions. The average annual GDP growth rate for upper middle income countries was 3.6% between 1994 and 2008, the same as for South Africa. Middle income economies struggle to compete in labour-intensive sectors, as the cost structure is higher than for a low income economy.
In order to move from middle to high income, countries must build companies with great products and processes, brands and/or distribution networks and encourage a culture of innovation. South Korea’s real competitive advantage came from its capabilities and products; but Malaysia, also a middle income country, was unable to realise the same ambition as it relied on multi-national investments that did not lead to substantial technology spillovers.
Shift to services: Job opportunities are increasingly located in the services sector for upper middle income and high income countries, with manufacturing accounting for a smaller share of employment. In minerals economies in particular, the manufacturing sector accounts for fewer jobs than in non-minerals exporters. In this, South Africa is no exception.
Most jobs are found in domestic-oriented services (such as retail, personal services, security, domestic work and office cleaning), where productivity and wage growth is lower. Economic growth is often found in tradable sectors, including manufacturing, as they contribute to foreign exchange earnings and productivity growth. This trend may be even more pronounced in sub-Saharan Africa, given our history.
Overcoming our minerals legacy
South Africa’s industrial policy needs to address the structural challenges presented by the minerals economy. We need to provide a more competitive base for growth, with better use of our energy and water resources and more investment in transport and telecommunications. Lifting these constraints would have a powerful economy-wide stimulatory effect and would induce productivity improvements that stimulate employment.
As a middle income economy, we cannot compete on cost. Investment in research and development and product development is essential to our success in shifting the economy upwards. Expanding trade will be an essential ingredient in driving growth, especially if there is a growing share of dynamic products and substantial investment in domestic suppliers.
Employment growth will come from labour intensive goods and services like hospitality, retail, business and social services. These jobs tend to be low paid and precarious. As a result, social protection assumes greater importance in improving quality of life and access to social mobility. This should be linked to the worker and not the workplace.
In a context where job changing is common, our towns and cities must be responsive to changing locations of work with available rental stock and good, affordable public transport systems. Labour-matching services, transition support and easy access to retraining are critical to improve the chances of securing continuous work. Many people are low paid, relative to the cost of living. It is essential that we reduce the cost of food, transport, education, health and other basic services.
Leverage minerals for upstream industrialisation
We advocate significant investment in upstream manufacturing and services linked to commodities. SA was a global leader in mining inputs such as equipment, engineering and chemicals; but this advantage has slipped away, as has our capability.
There are contradictions that need to be resolved: we are losing ground in global markets for initial stage beneficiation (such as smelting). It is not strategic to sell raw material, with a vast price difference in chrome ore versus ferrochrome. However, these sectors are highly energy intensive, carbon intensive, draw resources away from labour intensive activities and are not a requirement of high value manufacturing.
Address cultural challenges specific to South Africa
Nominally, we are an upper-middle-income economy, although as a result of our high inequality, most people do not have the experience of living in a middle income country.
South Africa faces some specific structural challenges, such as high levels of inequality, poor circulation of goods and services, limited energy and water resources, deteriorating labour relations, access to markets and our distance from major global markets. Currently, the state of education, health and safety is not conducive to human development and it is virtually impossible for us to grow sustainably without greater investment in this area.
Although the corporate landscape of SA has changed remarkably since 1994, it remains highly concentrated. This poses a barrier to business entry and expansion in key markets, which is critical to employment creation. We have to address anti-competitive behaviour, promote business entry and ensure that policies promote opportunities. Government can help reduce racial patterns of ownership of wealth and income, through procurement, licensing and other forms of economic rents, as can corporate procurement programmes.
Marked disparity between urban and rural areas and within urban areas, has led to greater inequality and fewer opportunities for economic growth at a local level.
In our favour, we have a growing lower middle class, scientific capability and institutions, fiscal resources and capabilities in dynamic sectors that are experiencing global growth. We are located in a high growth region and have a high enrolment in education. If properly managed, our strong minerals base could fuel growth.
Social and labour policy to be shaped to serve changing labour market conditions
Most jobs will arise in services sectors; but these jobs are often precarious, temporary and poorly organised. Labour market matching can ensure contiguous employment opportunities and provide access to social insurance, UIF and other benefits. Instead, labour market regulation has shifted in the opposite direction in order to ensure that workers on long-term temporary contracts are recognised as permanent and receiving fair and equal treatment. This may instead reduce the number of people employed and could make workers more vulnerable as there is no agency representing their interests.
Moving towards full employment
1. Increasing the supply of skilled labour
The annual supply of highly skilled labour needs to double by 2018. Currently, the number of people who receive tertiary education and training increases by 1% per annum, or about 175 000 people. The availability of highly skilled workers enables firms to hire a complement of skilled and unskilled labour. This is currently a binding constraint. Either tertiary education institutions should dramatically expand their capacity, or – additionally – skilled labour must be actively attracted to SA from other countries. Our research showed that doubling the availability of high skill labour would double the employment impact of any other intervention.
2. Addressing macro-economic constraints
The rate of investment to GDP needs to rise from 17% to 30% by 2030, fueled by a gradually expanding pool of domestic savings as well as foreign capital. Public sector capital investment should rise to 7% of GDP, consistent with ratios during high growth phases of other countries. The macro-economic platform needs to be enabling and offer stability, with efforts to buffer producers from a volatile currency and improvements in the quality of public spending. Creating this enabling foundation is necessary, but not sufficient to guarantee growth and employment. The right incentives and support are also needed to take advantage of global, regional and domestic opportunities.
3. Strengthening labour market institutions
The labour regime needs to be more conducive to employment growth. This requires significant commitment by the state, private sector and organised labour to improve human resource management and strengthen institutions aimed at dispute resolution and collective bargaining. The Department of Labour needs to strengthen its capability to enforce health and safety regulations and ensure adherence to sector minimum wages and standards for unorganised labour.
4. Expanding South Africa’s share of global goods and service markets
By diversifying trade, we can reduce the strong link to commodity cycles and associated volatility in the exchange rate and earnings. This will cushion the economy from economic shocks, with sufficient reserves and fiscal space. In turn, a more stable environment for domestic-oriented firms, which create the majority of employment, will emerge.
Moreover, stability in exports reduces the risk of a foreign debt trap, protecting critical public spending programmes. We would secure larger foreign exchange earnings, enabling us to purchase inputs for further industrialisation and infrastructure investments.
It would improve productivity and economic growth throughout the economy. Significantly, we could create up to 15% of new jobs directly as well as indirect employment by promoting linkages in domestic industries.
In this we need to give more attention to areas of competitive advantage in inputs industries and in key service sectors. This also requires stronger economic and diplomatic support to exporters and South African investors. We need to build great South African companies.
5. Playing a greater role in regional development
As the most developed economy, South Africa can stimulate growth in the region. Our own growth in part depends on this, but currently we do not play this leadership role. South African companies will be encouraged to participate in regional infrastructure projects but also in integrating regional supply chains to promote industrialisation. As a result, we can expect exports to rise, with a growing portion of non-mineral manufactures and services. A greater proportion of exports will be directed to emerging markets.
Opportunities for increased trade and bilateral investment in Africa will develop. Offshore business services will be attracted from the UK, USA and India, fueling site developments and employment.
6. Promoting employment in labour absorbing industries
National resource allocation must support productive sectors with competitive advantage. To promote employment, these activities should have the following characteristics: a competitive advantage, global growth potential; and either direct or indirect job potential on a significant scale through linkages in the domestic economy. Promoting backward linkage industries into mining, back office IT-enabled services, or tourism would be consistent with this policy. The promotion of smelting in the 1990s however, contradicts these principles.
Several high growth economies have benefited from growing trade in services – such as South Korea, Malaysia, India and the Philippines. SA’s rate of growth in service trade is about half what they have achieved. Examples of competitive niches for SA include construction, tourism, retail and IT-enabled services. Specifically, the plan proposes a target of 700 000 jobs created in IT-enabled services. While services are thought of as non-tradable, in fact there is evidence and potential to trade almost any service activity. It is a policy choice.
To succeed, we need stronger economic diplomatic relations into key markets, development finance support, significant and targeted human resource development, supportive trade arrangements, targeted innovation funds; and competitive telecommunications services. More than 70% of the jobs will be created in domestic-oriented activities and in the services sector.
7. Promoting small business
Some 90% of jobs will be created in small and expanding firms. The economy needs to be more enabling of business entry and expansion, with an eye to credit and market access. By 2030 the share of small and medium-sized firms in output must grow substantially. Public and private sector procurement programmes can improve access to opportunities for SMMEs. A simple commitment to timeous payment – in 15 or 30 days – would make a significant contribution to small business survival
8. Promoting innovation
While more resources have been directed towards innovation and R&D, programmes are still too small and unfocused to properly diversify South Africa’s economy. Much innovation comes from small business; but this sector has not received the support it needs. We need to ask whether investments in R&D and innovation are seen as complementary to or competing with poverty alleviation initiatives. The principles of the NDP are that innovation can drive job creation and reduce poverty. We will have to compete globally on the basis of our leading products and processes.
While agriculture usually shrinks as economies develop, in SA there is still potential for job growth. Economic participation in rural areas is low and the percentage of rural employment in agriculture is very low by global standards. Rural employment could grow with reformed land tenure, support to farmers, expanded social services, higher agricultural output, mining social investment and tourism.
10. Public employment
Government can be an important employer, especially in peri-urban and rural areas. But the current grading structure pushes departments to focus their resources on professionals and front line staff, who often don’t have sufficient support from porters, clerks and similar roles. They are then less able to perform their core function and there are fewer opportunities for semi-skilled and unskilled workers to access work, benefits and labour representation. This is a highly contentious issue that needs to
Public employment programmes, like Community Works, are an essential element of any employment strategy. Up to two million opportunities should be created annually, mostly through community based services. These opportunities will be needed over the entire period.
The NDP argues that public employment schemes should absorb two million workers in any one year. When economic growth is slow, the scale of these programmes needs to be larger; but in these times, the available fiscal resources are less.
11. Stronger institutions, better accountability
South Africa has to be capable of implementing programmes and policies effectively and consistently, at least in the most critical priority areas. Accountability, combating corruption and professionalising the public service are critical. Stronger oversight of public entities is essential.
South Africa will move beyond promises and targets and into implementation and real change. There must be a change in mind-set across all sectors of society – public, private and civil society.
Our combined responsibilities
Looking ahead, now that the term of the first National Planning Commission has come to an end; I believe there are some areas that really need to be driven harder for us to achieve the goals of the NDP. First and foremost is building a shared and authentic vision that the nation can coalesce around. The plan does offer a vision; but far more needs to be done to gain on-the-ground engagement so that community voices are heard.
To be authentic, stakeholders must be able to participate in its coming to fruition. Second, is to implement proposals in respect of governance, accountability and the strength of institutions, with special focus on energy, transport, water, labour relations