1. The Employment Challenge in South Africa To grow, to share growth, to change path Alan Hirsch PCAS The Presidency South Africa May 2008

2. Economic growth trends Annual average GDP growth 1960s5.7% 1970s3.3% 1980s1.5% 1990 to 1993-0.4% 1994 to 20033.0% 2004 to 20075.1%

3. Apartheid and unemployment Apartheid era -1993 Rising unemployment from the 1960sthe period of most rapid growth until the current era This was the result of policy aimed at supplying the farms and mines with cheap black labour Exacerbated with slow growth dying phases of apartheidreaching 20% unemployment 1994-2003 Growth at 3%, employment coefficient of about 0.75, but rising unemployment to peak at 31%

4. Reasons for rising unemployment to 2003 Decline of gold mining and weak commodity prices Misguided agricultural policies Efficiencies and productivity growth arising from trade liberalisation and openness The rising labour force participation rate the changing position of black women Currency uncertainty and erratic monetary policy fail to support investment in non- traditional export sectors

5. Higher growth and falling unemployment 2004-2007 Commodity boom Low inflation and low interest rates Strong fiscal position allows rapid rise in government spending (9% real) with falling debt, deficit and eventually fiscal surplus Rising domestic consumption Job created rapidly, but mainly in retail, construction and non-traded service sector Obviously vulnerability of growthmost obvious symptom the sharply rising current account deficit

6. Comparative growth rate

7. Employment trends 1995Sep 2003Sep 2007 Difference between 2003 AND 1995 Differenc betwe en 2007 AND 1995 Difference betwe en 2007 and 2003 Employment 98521142413234157233821810 Unemployment (expanded definition) 42538208737039553117-838 Labour Force (expanded definition) 14105196322060455276499972 Unemployment (official definition) 20384434394523961907-489 Labour Force (official definition) 118901585817178396852881320

8. Poverty trends CategoryHeadcount RatePoverty Gap Ratio Year1995200519952005 R322 a month poverty line (2000 Rands; 2000 US $46.50) African63.04%56.34%31.86%24.44% Coloured39.00%34.19%14.66%12.98% Asian4.71%8.43%1.03%2.17% White0.53%0.38%0.22%0.11% Total52.54%47.99%26.04%20.61% R174 a month poverty line (2000 Rands; 2000 US$ 25.10) African38.18%27.15%14.71%8.55% Coloured14.62%12.30%4.09%3.88% Asian0.82%1.60%0.14%1.07% White0.23%0.01%0.09%0.00% Total30.92%22.68%11.77%7.15% Source: Income and Expenditure Surveys 1995 and 2005/6 Bhorat et al

9. Trade and exchange rates

10. Employment shares by broad sectors in South Africa Source: Rodrik 2006

11. Path dependency Typical of natural resource exporters Exchange rate is overvalued especially during international growth cycles High exports and strong currency lead to rising consumption linked to inflows of portfolio capital The effect is growth without significant employment creation, without diversification and without savings For these reasons growth is inevitably temporary and contributes relatively little to reducing poverty and inequality except through transfers

12. What to do (beyond transfers)? Manage the exchange rate through macroeconomic interventions? It can be expensive financially and politically. Industrial policies or sector strategies? Require incentives and coordinated government. But can it work in the absence of tailored macro policies? Building human capital, but how long does it take? Redistributive strategiesland, housing. But at what cost, and how do you ensure that the assets are used productively?

13. South Africa has its AsgiSA: Accelerated and Shared Growth Initiative Infrastructure investment Skills and education Industrial policycompetition policy and sector strategies Environment for small business development Governance capacity, especially at local level Macroeconomic stability, especially the exchange rate

14. Impact of AsgiSA Significant Capex (rising from 16% of GDP to >20% in 3 years) Improvements in skills and education but very slow to impact Step change in implementation of competition policy Formal support for industrial policies, but commitment & coordination is inadequate Some degree of improvement of some state institutions Greater confidence and the emergence of a common language of shared growth

15. But the expected happens in 2008 Overvalued currency, rising consumption, current account deficit->vulnerability And skills shortages July 2007 credit crunch has no immediate impact but after: Rapid inflation to 10%: food and fuel prices Political uncertainty Electricity emergency Portfolio investors start to loose enthusiasm, though still net positive flows in the 1 st quarter of 2008

16. Temporary setback or symptom of deficiencies? Most growth forecasts expect growth to top 5% in 2010 after two slower years But, have we built a basis for sustained shared growth? Can we build a diversified labour absorbing economy on the basis of continued microeconomic reforms, and how do we empower the state to be more effective in this arena? Or is even this futile unless we follow Asian example in terms of policy regarding the level and the stability of the currency?