Commentary on Output and Employment in the South African Economy

The Economic Freedom of the World annual report for 2016, released in mid-September, shows that South Africa has continued to decline in economic freedom across all five major measured categories. SA declined in absolute terms to an overall rating of 6.64 (out of 10), compared to 6.74 the previous year. The relative decline is even more glaring. Of 159 countries rated this year, South Africa placed 105th, which is a severe drop from the previous year’s rank of 96th, and from 89th the year before that. This report was compiled using the latest complete data, from 2014, and gives us insight into subsequent economic performance up to the present. For South Africa it implies a loss both of economic potential in absolute terms and of relative competitiveness in the world.

The growth rate of South Africa’s real Gross Domestic Product (GDP) averaged about 1.3% during 2015, down from 1.6% during 2014. In the first quarter of 2016, real GDP growth was slightly negative at -0.2% year-on-year and is expected to remain under 1%, with forecasts averaging about 0.8% growth for the year.

Estimates of the “output gap” – which is the difference between actual real GDP growth and an estimate of what the potential GDP growth rate could be in a country when all available resources and technology are fully employed – continue to be large and negative. They remain large due to the low-to-negative growth in GDP, but this effect is countered by falling expectations and the commensurately lower estimates of potential growth.

Even though drought can be blamed for wilting agricultural output, a lack of physical resources has never been a primary problem in South Africa. Materials and physical capital can all be obtained through trade and the credible promise of future productivity. But those promises are harder to keep in sectors particularly vulnerable to current political risks. It is worth noting that gross fixed capital formation fell by 6% in the first quarter of 2016, and has fallen in three of the last four recorded quarters.

The mining industry is particularly dependent on location specific mineral rights, huge fixed capital investments, and labour relations. Faced with labour disruptions, supply risks, political regime uncertainty, rising costs, and periods of falling commodity prices, the South African mining industry has undergone extensive reorganisation, severe cost-cutting, and international diversification of assets.

Government policies continue to drive up the cost of employing labour. Despite its persistence, there is nothing natural about an unemployment rate that exceeds a quarter of the labour force. The overall unemployment rate reached 26.7% in the first quarter of 2016. Further, the expanded measure of unemployment – which includes working age people who have become “disillusioned” with their employment prospects and have dropped out of the labour force – exceeded 36%. The youth unemployment rate was above 54%, which suggests that many young people are not getting the type of experience, training, and mentorship that would prepare them for future careers and guide them in their future life choices.

Heavy regulations, high taxes, high inflation, and high interest rates all raise the cost of doing business. The whole complex of laws and regulations reduce the willingness of employers to hire and thereby reduce the choices available to individual workers. If workers seem forever to be facing a weak job market, it is the mass of intrusive laws that has taken away the opportunities to trade their services with employers.

Governments perennially seem to see the problem lying “out there” in nature, not as a product of their own actions. They see jobs as something to be created rather than as something to be allowed. Not even wages are left to private agreements. The Labour Relations Act of 1995 divided the industrial labour market into a number of sectors, each of which would have a bargaining council to manage collective-bargaining agreements and to set the minimum wage for each sector. The Basic Conditions of Employment Act of 1997 extended wage regulation to much of the remainder of the labour force. That Act created the Employment Conditions Commission, which has the role of formulating “Sectoral Determinations” that set minimum wages and conditions of employment for each sector.

South Africa’s persistent, but now worsening, economic stagnation is a direct reflection of the character and worldview of its current leaders. The pervasive culture of corruption that has grown up around the ruling party is not independent of the prevailing worldview that sees in almost every human relation the need for some government assistance or solution. The failure to rely on the natural human institutions of what we call the “civil society” has resulted in the growth of bureaucracy and the centralisation of powers and decisions that would best be left to each individual and family.

 Author Richard J Grant is a Professor of Finance & Economics, Lipscomb University, Nashville, Tennessee and a Publications Editor of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

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