SA’s unemployment is a national disgrace
A quarter century of failed economic policies tipped South Africa over the brink when Covid-19 hit. There is a solution, if the government is prepared to mobilise its resources.
Author:
26 November 2020
The unemployment crisis in South Africa is the most heartbreaking betrayal of the promises and dreams of our liberation. The government has failed the people who fought and struggled for so long for a better life for all. After 26 years of failed economic policies, the time has come to change course and learn the lessons of economic development that have enabled some countries to transform their economies in one generation.
Statistics South Africa’s (Stats SA) Quarterly Labour Force Survey (QLFS) for the third quarter of 2020 showed that 1.7 million people had lost their jobs since the start of the Covid-19 lockdown at the end of March. There are now 11.1 million unemployed people in the country, according to the expanded definition, which includes discouraged work seekers.
The unemployment rate for Africans is 47.4%. For African females it is 51.4%. In the Eastern Cape, the unemployment rate for people of all races is 51.2%. The tragedy is that there has been a statistical anomaly that has pushed most of the people who lost their jobs into a category where they cannot be counted because the lockdown made it impossible for them to look for work. If these people were counted, the unemployment statistics would be even worse.
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The absorption rate, which measures the percentage of the working-age population (aged 15 to 64) that is employed, was 37.5%. For women of all races it was 32.4%. In the Eastern Cape only 27.9% of the working-age population is employed. According to Lesego Moshikaro, an economist at economic policy think-tank Trade & Industrial Policy Strategies, the absorption rate in upper middle-income countries is 60%.
To achieve this benchmark during the third quarter of 2020, South Africa would have had to create another 8.8 million jobs. But the country would still have 2.3 million unemployed people and an unemployment rate of 9%. To achieve full employment, with an unemployment rate of about 5%, would require 9.9 million jobs to be created.
Four phases
There have been four phases in terms of economic development and employment since 1994. There have also been three surveys that collected employment statistics: the annual October Household Survey (OHS) between 1995 and 1999, the bi-annual Labour Force Survey (LFS) between 2000 and 2007, and the QLFS since 2008. The OHS and the LFS used different methodologies, which makes it difficult to make direct comparisons between them. Since the start of the lockdown, Stats SA has used telephone rather than face-to-face interviews. Moshikaro says this is not a trivial matter. For example, the sample size was smaller. Stats SA did not collect data in April, the deepest part of the lockdown and the downturn. “Also, households with telephones tend to be better off than those without,” she says.
During the first phase, from 1996 to 2003, the government implemented the Growth, Employment and Redistribution (Gear) programme, a neoliberal stabilisation plan. It is not clear why there was a need to implement Gear because there was no macroeconomic instability. The debt-to-GDP ratio of 49.5% in 1996 was low by international standards. The inflation rate was 7%. Gear’s slash-and-burn fiscal and monetary policies, which included deep cuts to capital spending and sky-high interest rates, depressed the economy.
There was an average gross domestic product (GDP) growth rate of 2.6% between 1996 and 2003. GDP per capita, a measure of average living standards, which takes into account a country’s population growth, increased by an annual average of 0.9%. The number of unemployed people, according to the expanded definition, increased to eight million in March 2003 from 4.6 million in 1996. The expanded unemployment rate increased to 40.6% in March 2003 from 33% in 1996.
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There were expansionary monetary and fiscal policies after the end of Gear, which resulted in a mini-boom between 2004 and 2008. The Reserve Bank dropped its repo rate by 650 basis points to 7% in April 2005 from 13.5% in June 2003. This spurred a consumption and property boom and average house prices soared. Government consumption spending increased by an annual average of 5.2% between 2003 and 2008, after taking into account inflation. Between 2003 and 2008, public investment – by general government and public corporations – increased by 19.2% a year. Investment by public corporations alone increased by an incredible 26.5% a year.
Gross fixed capital formation (GFCF), a measure of investment, increased by 14.4% a year. It soared to 23.5% of GDP in 2008 from 16% in 2003. Between 2004 and 2008, the economy grew by an annual average of 4.8%. GDP per capita grew by an annual average of 3.2%.
The economy created 3.1 million jobs as total employment increased to 14.8 million in December 2008 from 11.7 million in March 2003, according to a spreadsheet provided by Stats SA. Most of the jobs were created in trade (779 000), construction (656 000), finance (606 000), and community and social services (586 000), which refers to the government and the non-governmental sector. The number of unemployed people fell by 2.1 million to 5.9 million. The expanded unemployment rate declined sharply to 28.7%. Another reason for this large drop in the unemployment rate is that the labour force grew by only 1.3% a year between March 2003 and March 2008, likely due to Aids deaths.
SA’s lost decade
During the third phase, between 2009 and 2019, South Africa had a “lost decade” during which GDP per capita did not grow. The economy shed one million jobs between December 2008 and March 2010 as GDP dropped by 1.5% in 2009 in the wake of the global financial crisis. There was a mild recovery between 2010 and 2013, during which the economy grew by an annual average of 2.8% a year. The economy created 2.2 million jobs between March 2010 and December 2015, when total employment reached 16 million. The trend GDP growth rate collapsed to 1.1% a year between 2014 and 2019, partly as a result of contractionary monetary and fiscal policies. Over the four years from 2016 to 2019, the economy created almost no jobs as total employment fluctuated at just above 16 million people.
South Africa entered a fourth phase in terms of economic development and employment after the start of the Covid-19 lockdown in late March. The subsequent economic collapse, the worst in a century, wiped out all the jobs that were created after the global financial crisis.
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Between December 2008 and December 2019, the labour force grew by an annual average of 2.4%, almost double the growth rate during the earlier period of rapid reductions in the unemployment rate. Between December 2008 and September 2020, the labour force grew by 5.1 million people. But total employment fell by 78 000 to 14.7 million from 14.8 million people.
There were 176 000 jobs created in the formal (85 000) and informal (91 000) sectors. But 255 000 jobs were shed in private households, which refers to domestic workers. As a result, the number of unemployed people increased by 5.2 million. The expanded unemployment rate increased to 43.1% for South Africans of all races. A sectoral analysis shows that the economy created 1.3 million jobs in finance (655 000), community and social services (550 000), mining (79 000) and transport (48 000). But 1.4 million jobs were shed in manufacturing (637 000), trade (327 000), private households (225 000) and construction (196 000).
Unsuccessful youth initiatives
Since becoming president in 2018, Cyril Ramaphosa has announced numerous plans to increase employment. In May 2018, he launched the Youth Employment Service that would create 300 000 jobs a year. In October 2018, stakeholders at the National Economic Development and Labour Council Jobs Summit signed an agreement that would create 275 000 jobs a year. In his State of the Nation address in February 2020, Ramaphosa announced the Presidential Youth Intervention that had six priority actions, including setting aside 1% of the budget for initiatives that would deal with youth unemployment.
In the medium-term budget policy statement on 28 October, the National Treasury said it would spend R12.6 billion to create 800 000 jobs by the end of the 2021 fiscal year as part of the president’s recovery plan. The implied wage was about R3 500 a month. This was part of a commitment to spend R100 billion over three years on “mass employment” to create 2.4 million jobs. The treasury said structural reforms in the recovery plan, which had been announced previously on numerous occasions before the start of the coronavirus pandemic, would increase GDP growth to 3% and create one million jobs within 10 years.
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However, the Youth Employment Service has only created 40 000 so-called work experiences. The economy created no jobs after the Jobs Summit agreement. The treasury has not allocated any funds towards youth employment. The mass employment plan will not get funding for R100 billion over three years. The target of one million jobs over 10 years is hopelessly inadequate within the context of an economy that shed 1.7 million jobs after the lockdown, had 11.1 million unemployed people and whose labour force is increasing by about 600 000 people a year.
If one projects the growth of the labour force at a conservative 2% a year from December 2019, it will soar to 33.3 million people by 2030. To achieve full employment, South Africa will have to create 17 million jobs by 2030, an annual average of about 1.7 million. Employment would have to increase at an annual average rate of about 7.2%. It is tricky, to put it mildly, to calculate the relationship between GDP growth and employment. Business association Business for South Africa says GDP growth of 1% results in employment growth of 0.9%. If this is true, South Africa’s GDP will have to grow at 8% a year.
How to leapfrog, a template
The East Asian developmental states and China provide the only template in the history of economic development for how to achieve such high levels of GDP growth, and leapfrog from dirt-poor to newly industrialised within one generation. It requires, most importantly, a developmental mindset. The five pillars of the template are state capacity to initiate economic development, high rates of capital accumulation (or investment) of more than 30% of GDP, human development to provide mass access to education and health, industrial upgrading to change the structure of production and social policy.
Their macroeconomic policies had multiple targets, including GDP growth and the development of sectors. They used multiple policy tools that went far beyond Keynesian policies – lower interest rates and more government spending – to boost aggregate demand. Developmental states did not simply reduce interest rates and leave matters to the market, they used additional policy tools that “got prices wrong”, as economist Alice Amsden said, to change market outcomes and achieve developmental goals. For example, monetary policies manipulated exchange rates to keep them deliberately and artificially weak to boost exports. This has implications for the independence and mandates of central banks. The South African system of one target (the inflation rate) and one policy tool (the interest rate) is primitive.
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South Africa must mobilise its resources to finance a R1 trillion stimulus package. The Reserve Bank can provide the means to harness what economist Stephanie Kelton refers to as “our public money, or sovereign currency, to balance the economy”. The government can borrow from the Reserve Bank and the Public Investment Corporation on favourable terms. It can also tap into large surpluses in state pension and unemployment funds and excess foreign exchange reserves. The package must address the immediate humanitarian crisis, because even the best policies will take time to deliver rapid reductions in the unemployment rate.
A basic income grant at the upper-bound poverty level (R1 227 a month) would cost R500 billion a year. It would establish a dignity floor, below which no South African should fall, develop local economies and become the most transformative policy implemented since 1994. The package should also allocate an additional R500 billion towards public investment over the next three years.
According to the International Monetary Fund, a 1% increase in public investment could boost GDP by 2.7%, private investment by 10% and employment by 1.2%. Such investments in basic income and infrastructure would pay for themselves, and kick-start economic development and the process of creating a better life for all.
