High-level diagnosis of the economy
What are the factors that shape our economy and how have these developed?
A country’s level of economic development is largely determined by the interplay of several factors: labour, institutions, natural endowments and capital stock. These factors are in turn shaped by history and global factors, and they evolve over time. Labour issues include the size of the labour force, its level of skill and experience and its location. Institutions include issues such as the capacity of government, the rule of law, the level of trust in a society and the way in which regulation governs economic behaviour (producing, selling, buying, working, hiring, dismissal, training, investing, lending and borrowing). Natural endowments include land, water, coastline, minerals and geographic location. Capital stock refers to the stock of public and private assets that a country has accumulated over time, and how they are maintained, expanded and used. A related issue is savings and the extent to which they are committed to investment.
Given the number of factors and the interplay among them, there can be no recipe or one-size-fits-all plan to raise a nation’s wealth and incomes. Each of these factors is determined by history, culture, social interaction, norms and ethics. The combination of all of these factors affects how markets operate, their efficiency and who receives the bulk of the proceeds from these interactions.
In this regard, three factors stand out as most important.
· Labour and its utilisation – who works, how many people work, who they work for, how much they are paid and what work they do.
· Productivity and what influences it – the operation of economic institutions, the efficacy of the state, and the level of education and training.
· Capital stock and its expansion (investments) – how modern it is, whether it is being maintained, how quickly it is being developed and where it is being developed.
Taking these issues into account, when comparing South Africa to other middle-income countries or to developed countries, several differences stand out in sharp relief. The most glaring difference is that so few people in South Africa are involved in economic activity. One quarter of the labour force is unemployed and actively looking for work. But this statistic masks the extent that a very high proportion of South African adults do not participate in the labour market. Only about 41 percent of the adult population (ages 18 to 60) work, either in the formal or informal sector, employed or self-employed. This rate is about two-thirds in countries such as Brazil or Malaysia, and about 70 percent in the US and UK. Outside of Southern Africa, the only countries with similarly low levels of employment are in the Middle East, where a large portion of the population (women) is excluded from the workforce.
Productivity is a critical contributor to sustainable growth and rising living standards. But it is notoriously difficult to measure and interpret. Real wages can rise faster than productivity for only short periods; long term improvements in real wages depend on concomitant productivity improvements. Multi-factor productivity fell between 1970 and 1990, and rose on an annual basis by almost 2 percent between 1990 and 2009. At the same time, unit labour costs rose by 5.7 percent annually. This masks challenges where real wages of public sector employees has grown substantially, but across the economy, those of low and semi-skilled workers have not. Productivity certainly has not grown fast enough to spur the economy forward as needed. Some of the challenges lie within the behaviour of firms, and some reside in the domain of the economic environment.
Comparisons on the size or state of the capital stock are difficult for definitional reasons. What is on record is that South Africa’s level of public and private investment (including maintenance) is significantly lower than high-growth countries such as South Korea or China. Investment as a proportion of GDP reached about 24 percent in 2008 at the peak of the high-growth period, but has averaged below 20 percent since the mid-1980s. Countries such as South Korea invested about one-third of their GDP during their period of rapid economic expansion.
These observations underline the reasons for South Africa’s economic weaknesses: too few people work; there is too little investment in expanding and upgrading capital stock, especially infrastructure; and productivity is relatively low.
In summary, South Africa’s short- to medium-term challenge is to raise levels of employment, including low-skilled work. Over the longer term, the country needs higher levels of investment, and to improve productivity through better education, more efficient infrastructure, more appropriate economic regulations and better-functioning institutions. Rising employment is likely to have the biggest effect on poverty and make growth more inclusive. Higher infrastructure investment would help create conditions for higher growth. Regulatory reform that lowers prices, encourages investment and draws in more lab our into the production process are also necessary.
Why the South African economy developed a bias against using labour in the factors of production is an issue that deserves examination. This bias must be reversed.
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