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SA's Unemployment Rate Makes Country Unique Case
Source: Bua News
Source Date: Monday, December 13, 2010
Focus: E-Education
Country: South Africa
Created: Dec 14, 2010

A discussion document which surfaced last week by Business Unity South Africa (Busa), following the release last month of the framework for the government's New Growth Path, highlights the cases of Brazil, Chile and in particular Malaysia which the business association believes South Africa could learn from.

This as Brazil, with its recent growth and reduction in poverty, emerged as a favourite example for many economists BuaNews spoke to, this week.

But Makgetla, Deputy Director-General for policy at the Department of Economic Development says it is difficult to compare the New Growth Path to those economic plans adopted in other countries because in the New Growth Path employment is a key focus, while in the economic plans of other countries growth is the key focus.

The key aim of the New Growth Path is to reduce the unemployment rate from 25 percent to 15 percent by 2020 and create five million jobs in the private sector over the next 10 years.

Makgetla cautions that if South Africa was to focus solely on growth as the key driver, it might raise the country's productivity, but it risked lowering employment.

She points to the example of how smelters were set up in the mining sector in the 1990s, which resulted in raising productivity levels, but slowed the rate of employment.

Much has been written about how the fast-growing Asian Tigers were able to achieve astounding growth by raising productivity levels.

But Makgetla points out that countries like China and Korea had built this growth only after putting in place equitable societies in the 1950s.

This way it was easier to get business and labour to unite around growing their respective countries economically, she says.

Economist Dawie Roodt of the Efficient Group argues that any economic plan should focus on growth first before employment and that more jobs would follow from the resulting growth.

"Jobs must be the result, not the objective," points out Roodt, who adds that he does know of any other country in the world that had job targets in its economic plans.

But Makgetla, who emphasises that the New Growth Path is not a "perfect" document, says a focus on jobs didn't mean the government wasn't "throwing growth out of the window completely" rather it was trying to encourage growth in new sectors in a bid to undo structural unemployment.

According to Busa, however, the cases of Brazil, Chile and Malaysia show that an important requisite to growth is the fostering of "high levels" of partnership and collaboration between government and business.

Busa's "Perspectives on an inclusive higher job rich growth path for SA by 2025" says particular attention should be paid to Malaysia's New Economic Model, or as it is also known the 10th Malaysia Plan, which the association believes deals with many of the issues that South Africa needs to deal with in a "very direct and honest manner".

Malaysia's plan is a reaction to the slowdown in growth the South East Asian country is experiencing, after decades of rapid growth.

The plan's vision is to create a Malaysia by 2020 that is market-led, well-governed, regionally integrated, entrepreneurial and innovative.

Among other things, the plan shifts the focus from growth primarily through accumulation to growth through productivity and from dominant state participation in the economy to private-sector-led growth.

It sets clear goals for 2020, including a high per capita income, a real gross domestic product (GDP) growth rate of 6.5 percent per annum between 2011 and 2020, with a target for private investment to double from 10 percent of GDP in 2010 to 20 percent in 2020.

Says Busa: "The most important enablers of the NEM (Malaysia's New Economic Model) have been political will and leadership to break the log-jam of resistance by vested interest groups, and preparing citizens to support deep-seated changes in policy direction."

Busa says both Chile and Malaysia offer key lessons for South Africa.

"The case studies of Chile and Malaysia indicate that technological innovation and labour upskilling are critical issues in an economy that is trying to move out of the 'middle income malaise' of a growth path that has soaked up its resource of cheap labour to meet low-cost mass manufacturing opportunities and now needs to position a relatively expensive work force to serve a service-driven economy and sophisticated manufacturing processes. This will soon be the position that China finds itself in and has been South Africa's position since the 1990's."

A number of economists pointed to Brazil as a key model for South Africa to follow.

Iraj Abedian, an economist at Pan-African Capital, believes the Asian model would never work in South Africa which has strong labour rights.

He says although there was no "perfect comparison", Brazil is probably the best example for South Africa as it had "elements of South Africa in it".

Tim Harris, the DA's shadow minister of trade and industry too says Brazil is an "excellent example" for South Africa to look more at and adds that South Africa should look more to South America than to Asia.

And when asked what a country South Africa should most look to mimic, Cosatu economist Chris Malikane suggests Brazil, pointing out that the South American country had "drastically" reduced inequality and that its development bank BNDES offered both very low interest rates and zero interest rates.

But Makgetla, who is well versed in Brazil's economy, surmised that much of the South American country's growth and success in reducing inequality can be attributed to the expansion of its agricultural sector.

She says agriculture by its nature offered more equitable distribution of wealth.

Malikane says the labour federation's "A growth path towards full employment" released in September includes important lessons from other countries.

He says Cosatu based its idea on the employer of last resort idea mooted in the document, on a report entitled "Employment Guarantees and Policies" by New York's Jerome Levy Economics Institute.

In the discussion document, the labour federation moots the setting up of a state bank with priority lending and for the creation of more state-owned enterprises in key sectors.

The Cosatu document also calls for "strategic nationalisation" of particular sectors and highlights Scandinavia, Korea and Taiwan which were able to achieve growth on back of powerful state firms.

The document includes a case study of Argentina where the state there had allowed municipalities to run their own minimum wage employment programmes (the Jefes Programme) which has resulted in increased job creation. Similarly in India's Kerala state, an employment guarantee scheme has created both permanent and temporary employment.

Malikane says the idea was that employment under programmes such as the Expanded Public Works Programme (EPWP) should be lengthened.

Three months was not enough time for workers to be properly trained and upskilled to graduate to higher levels of work, he says.

On top of this, EPWP programmes were often run on tenders which resulted in profit-making, meaning the amount of remuneration a worker could receive, compared to if they worked directly for the municipality, was significantly reduced after the contractor took their cut.

The Cosatu document also calls for the setting up of a state bank which can then carry out lending to priority sectors, specifically to sectors deemed "unprofitable" by commercial banks but which had strategic value to the state.

Malikane admitted this would be similar to India's policy of priority sector lending, in place since 1967, where banks were mandated to lend 40 percent of their net credit to certain priority sectors (such as farmers, inhabitants in poor states and small enterprises).

Those banks that fall short of the targeted lending are made to deposit the shortfall in a rural development fund.

Malikane says he was carrying out further research on state banks in India and South Korea and what the effect of such banks has been in these countries, including the state banks's relationship between private and commercial banks.

However, he stresses the importance of the state building the necessary capacity before setting up a state bank.

He says though the performance agreements that President Jacob Zuma signed with various ministers is a step in the right direction, it was still "grossly inadequate". He says the public had to be made better aware of what projects the government is opting to spend on in respective localities.

Commenting on the idea to set up a state bank, Investec economist Annabel Bishop questioned why it was necessary for the state to have another state bank when the country already has the Development Bank of South Africa (DBSA), the Public Investment Corporation, (PIC) and the Industrial Development Corporation (IDC).

Says Bishop: "... is it because these three are not sufficiently promoting development and if so why not fix them first, instead of creating a fourth development bank?"

She also questioned the idea to set up a state-owned mining company and singled out the example of PDVSA, Venezuela's oil company, formed when the industry was nationalised in 1976.

Despite social measures improving, such as a fall in poverty, infant mortality and income inequality, she says PDVSA is "sinking deeper into debt because of a bloated and costly payroll".

Turning to nationalisation, she points to research undertaken by John James Quinn an associate professor of political science at Truman State University as recently as 2002.

Bishop says Quinn's research suggest that in Africa between 1966 and 1986 the majority state ownership of mining and other industries tended to result in inward-oriented economic policies which led to lower economic growth and fewer political as well as lower living standards and lower per capita income.

She also points to the example of Mexico where mineral rights are owned by the state and Pemex, the state petroleum company, which because it contributes substantially to both government revenue and civil servant salaries, had led to a lack of investment in new productive capacity.

"The company is also heavily indebted and annual production has dropped over the last six years - currently production is only two thirds of 2004's level," says Bishop.

There is indeed a lot South Africa can learn from other countries, but an overarching comparison with another country's growth path, even Brazil's is likely to remain problematic as long as the country's high unemployment rate persists. -
BuaNews

 

 

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