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South Africa: Improving productivity and the efficiency of public spending to bolster living standards

By Falilou Fall, OECD Economics Department

South Africa needs bold structural reforms to lift economic growth. The coronavirus crisis, flooding in Kwa-Zulu Natal and widespread electricity cuts have weakened an already fragile economy (Figure 1). GDP growth is projected to slow to 1.8% and 1.3% in 2022 and 2023, respectively. The war in Ukraine is creating additional risks: on the one hand, rising commodity prices are prolonging the commodity boom cycle, but, on the other hand, higher inflation is denting purchasing power. The social distress relief grant, put in place during the pandemic and covering up to 10.5 million individuals, has helped mitigate the effects of the crisis and inflation on poverty, but may not be sufficient if the economy does not grow faster: unemployment stood at 34.5% in the first quarter of 2022.

Figure 1. Electricity availability has fallen dramatically

Yearly hours of load shedding by stages and total annual supply in TWh

Note: Loadshedding is implemented in stages with more frequent power cuts at higher stages. At every stage of loadshedding, Eskom rations the country by a further 1 000MW of power. Stage 1 = 1 000 MW, Stage 2 = 2 000 MW, Stage 3 = 3 000 MW, Stage 4 = 4 000 MW, Stage 5 = 5 000 MW, Stage 6 = 6 000 MW.
Source: Eskom; Council for Scientific and Industrial Research, South Africa; Statistics South Africa; OECD calculations.

Weak growth performance has deep roots. South Africa’s growth underperformed during the past decade: GDP per capita was already lower in 2019 than in 2008, and over the period 2009–2019, GDP growth averaged only 1.1%. Weak economic growth is mostly explained by declining productivity due to deteriorating infrastructure, weak telecommunication networks and low investment. Failing electricity generation has become the main bottleneck to production and concern for investors. Skills shortages remain a constraint in several sectors. Adding to the issue, there is limited fiscal space to cope with high public spending pressures, notably for infrastructure projects, electricity generation, education and also social transfers. The debt-to-GDP ratio stands now at 70% of GDP.

The 2022 OECD Economic Survey of South Africa highlights three areas to boost potential growth and improve medium-term fiscal sustainability. The government should:

  • Improve the efficiency of public spending and of the tax system: Government exposure to state-owned enterprises remains high and, in terms of state guarantees, amounts to around 16% of GDP. The financial performance of SOEs worsened with the pandemic, increasing the pressure on public finances. Restoring the finances of the main SOEs and privatising those intervening in competitive markets would reduce the fiscal burden. Better enforcement of sanctions for corruption offences is needed to restore public confidence and the proper functioning of public services. Reducing the size of the government’s wage bill also remains essential. Finally, even though South Africa’s tax-to-GDP ratio, standing at 26% of GDP, is higher than many emerging economies, there is room to increase tax revenues, while reducing inequality and making the tax system less distortive to growth. There is a wide range of tax provisions and exemptions that reduce effective tax rates significantly below statutory tax rates. The corporate income tax rate of 28%, for instance, is relatively high but tax liabilities are reduced by generous assessed losses.
  • Reduce labour market rigidities: The pandemic has worsened labour market outcomes and further increased inequality. Unemployment is higher than the OECD average and peer countries, particularly for the youth. Wage bargaining remains confrontational and labour-employer relations have been ranked among the weakest by the World Economic Forum. The wage bargaining system suffers from a relatively high level of bargaining, at the industry level, declining representativeness of bargaining councils. Agreements are extended to non-members and often inadequate for SMEs. More wage negotiations at the firm level should be encouraged. For instance, agreements with representative unions at the firm level could be accepted as substitute to agreements at the sector level.
  • Boost productivity growth: South Africa’s productivity is comparatively low, and it has been falling over time (Figure 2). Improved infrastructure, enhanced competition and better skills are required to lift productivity, potential growth and living standards. Low and inefficient public investment, with insufficient cost-benefit analyses, are weighing on the quality of transport, telecommunications, and energy infrastructure. Maintenance is not conducted as regularly and early as needed. The funding of infrastructure projects from the general government budget should be augmented based on cost-benefit analysis. The economy suffers from lack of openness and competition. New broadband frequencies should be allocated rapidly to increase speed and lower subscription fees. Entry into professional services should be facilitated. Aligning competition policies of sectors regulators with the Competition Commission would open business opportunities and ease the entry and growth of SMEs. The country suffers from shortages of skilled workers and skills mismatches more generally. Efforts to increase the quality of education should continue and include increasing the quality of primary and secondary schools, further developing vocational training and adult learning. Changing the financing formula of universities would reduce the cost per student and allow enrolling more students in tertiary education.

Figure 2. Productivity is lagging behind

GDP per hour worked in constant USD PPPs, 2021 or latest

Source: OECD productivity database.

Reference:

OECD (2022), OECD Economic Surveys: South Africa 2020, OECD Publishing, Paris, https://doi.org/10.1787/d6a7301d-en




Making tourism development part of the crisis recovery in South Africa

By Daniela Glocker, Economist, OECD Economics Department

The recent COVID-19 pandemic and resulting containment measures have hit hard the economy and in particular tourism. Yet, the sector has good potential to support the South African economy and contribute to employment growth post-COVID-19. As tourism is a labour intensive sector that can also bring foreign currency into the country, it was identified as a priority area by the South African government. Between 1995 and 2017, international tourist arrivals doubled while employment directly related to tourism tripled. To ensure that the sector continues to play a key role in the economy following the COVID-19 pandemic, a recovery plan is being finalised focussing on stimulating demand, protecting and renewing supply and strengthening enabling capability.

South Africa has rich and diverse natural and cultural assets. Still, tourism development has been challenged by the country’s geographic location and perceived safety and security issues. As the country is a long-haul destination for many large source markets, good accessibility and international openness is key to expand international tourism. Following the COVID-19 crisis, a managed re-opening is envisioned, followed by growth interventions to reclaim market share and drive long-term growth. Although South Africa’s air transport infrastructure is well developed compared to African competitors (see Figure 1), the country lags far behind in terms of international openness due to burdensome visa regulations for tourists. Tourism strategies to attract international visitors therefore have to reduce the administrative barriers and uncertainty related to visa requirements to remain globally competitive.

Once travel restrictions due to the COVID-19 pandemic are eased, potential tourists could still be deterred from selecting South Africa as a destination based on concerns around safety and security. South Africa continuously performs poorly with respect to safety and security indicators. As these indicators do not capture tourism-related incidents, credible and up-to-date information on safe areas that are easily accessible for domestic and international tourists alike should be provided. Such information could be complemented by greater visibility of safety and police personnel in main tourist areas as proposed in the recently finalised safety monitor programme. This is a welcome step as it could reduce crime against tourists, make them feel safer and portray a more positive outlook to potential tourists. A general reduction in crime will also improve the well-being of the local population.

Note: Range of selected competitors include Botswana, Namibia, Mauritius, Kenya and Tanzania.
Source: World Economic Forum (2019), Travel and Tourism Competitiveness Index, http://www3.weforum.org/docs/WEF_TTCR19_data_for_download.xlsx

Increasing tourist arrivals is necessary for tourism development, but the strength of the relationship between tourism and economic growth depends on the economic integration of the tourism industry in the local economy. In order to achieve inclusive growth, the economic benefits of tourism must also spread geographically –beyond mature destinations in South Africa – to create economic opportunities in less travelled and less prosperous regions. This is especially important in a country that is as spatially segregated and unequal as South Africa. To promote the geographic spread of tourists into more remote or distressed areas requires better domestic transport infrastructure. Moreover, municipalities need sufficient capacity to plan for sustainable tourism development and to provide supportive infrastructure for basic services and tourism-related activities. As unchecked tourism growth can increase the pressure on environmental resources and on housing markets and increase inequality, tourism policies need to be planned carefully and in a holistic way. Policies that are taking into account the interdependencies across different sectors and are allowing for input from different levels of government will not only create a more enjoyable visitor experience, but will also contribute to better living conditions for residents in the local tourist destination.

References:

OECD (2020), OECD Economic Surveys: South Africa 2020, OECD Publishing, Paris, https://doi.org/10.1787/2218614x.




South Africa: it is time to rekindle the economy

By Falilou Fall, Head of South Africa Desk, OECD Economics Department

Growth is recovering but inequality remains persistent. Growth is projected to reach 1.5% in 2018 after many years below one percent or negative in per capita terms. Low growth and high unemployment have adversely affected the well-being of South Africans. Since 2010, inequality, measured by the Gini coefficient at 0.62, has almost stagnated withering the social contract in a context of policy mistrust (Figure 1).

ZAF1 Feb 18

As pointed out by the 2017 OECD Economic Survey of South Africa, the weak growth reflects lacklustre investment and continued low business confidence and the impact of high unemployment, moderate wage increases and persistent indebtedness on sluggish household consumption (Figure 2).

Low growth and weak fiscal discipline contributed to rising public debt burden — from 41% in 2012 to 53% of GDP in 2017. The shortfalls in meeting fiscal objectives, policy uncertainty and corruption concerns in turn led to the downgrading of the government bond ratings to sub-investment level by two major rating agencies in 2017.  This makes it harder to meet the large social needs of much of the population.

ZAF2 Feb 18

The election of a new political leadership should brighten the outlook. Business and household confidence are up. Indeed, after three years of contraction, private investment is now expected to drive growth. But, growth perspectives remain too low to create enough jobs and generate enough government revenues for spending and debt reduction, while social and infrastructure needs are high.

In the short run, a more accommodative macroeconomic policy mix can boost growth. Inflation has come down throughout 2017 and, at 4.4% in January 2018, it is in the middle of the Reserve Bank’s target band. Interest rates can now be further reduced to amplify the investment pick up. Smoothing the pace of fiscal consolidation could further sustain demand and thus contribute to growth acceleration. In a low growth era, fiscal consolidation is detrimental to consumption demand, although reassuring for investors (Blanchard et al., 2013; Sutherland et al., 2012). South Africa made limited progress in fiscal consolidation over the last five years as growth kept falling.

Along with slower consolidation, budget reallocation toward more growth-enhancing investment should continue. Limiting wage growth in the public sector and subsidies and transfers to state-owned enterprises would create fiscal space for infrastructure and social investment.ZAF3 Feb 18

Bold structural reforms are needed to increase potential growth in a longer perspective. OECD South Africa Economic Surveys (2013, 2015) have pointed to many growth boosting reforms: broadening competition in the economy, limiting the size and grip of state-owned enterprises (SOEs) on the economy, and improving the quality of the education system. Important input and technology sectors such as telecommunications, energy, transport and services in general should be opened up to more competition. In particular, telecoms or the airline company, which are in markets with enough competition could be privatised. Moreover, South Africa lacks a proper urban transport system. Putting in place a national plan to expand public transport and allowing more private operators would reduce the cost of transport on the budget and raise well-being.

Job creation remains a major challenge for the quarter of workforce without jobs. The 2017 OECD South Africa Economic survey found that boosting entrepreneurship and growing small businesses can play an important role in creating jobs. Steps have been taken to ease starting a business, but red tape remains a burden. There is room to reduce harmful product market regulations and restrictions to entrepreneurship and entry in professional services. The quality of the education system and lack of work experience contribute to gaps in entrepreneurial skills. Policies should provide more financial and non-financial support for entrepreneurs and small businesses. But, a lack of co-ordination and evaluation hampers effective policy-making.

Greater regional integration within the Southern African Development Community (SADC) could provide new opportunities for growth. Despite large growth potential, economic integration in the sub-region has not advanced much. Intra-regional trade in the Community is only 10% of total compared to about 25% in the ASEAN or 40% in the European Union. Better implementation of SADC protocols and agreements would advance integration and create jobs. Reducing non-tariff barriers by improving customs procedures and simplifying rules of origin would reduce trade costs in the region. Weak infrastructure and institutions and barriers to competition limit industrial development. More ambitious and effective infrastructure and investment policies are necessary at the regional level.

References

Blanchard, O. J., and D. Leigh. “Growth Forecast Errors and Fiscal Multipliers.” The American Economic Review 103, no. 3 (2013): 117-20.

OECD (2013), OECD Economic Surveys: South Africa, OECD Publishing, Paris.
http://dx.doi.org/10.1787/eco_surveys-zaf-2013-en

OECD (2015), OECD Economic Surveys: South Africa, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-zaf-2015-en

OECD (2017), OECD Economic Surveys: South Africa, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-zaf-2017-en

Sutherland, D., P. Hoeller and R. Merola (2012), “Fiscal Consolidation: How Much, How Fast and by What Means?“, OECD Economic Policy Papers, No. 1, OECD Publishing, Paris.
http://dx.doi.org/10.1787/5k9bj10bz60t-en