For much of the past decade, we have become a country accustomed to bouts of panic over some of our deteriorating economic fundamentals.
To improve our stock in the world, the focus been on restructuring the energy market, improving governance and in turn the performance of state-owned enterprises, and rebuilding institutions such as South African Revenue Services.
Now it is indeed critical the administration of President Cyril Ramaphosa focuses on these structural reforms, which we’ve urged for at every possible turn. But I think in focusing on such “big ticket” items to change the narrative around the South African economy, we’ve lost track of reforms that could have a significant impact on improving confidence. We need to deal with labour reform, a topic that lurks but never really comes to the fore.
It’s “now or never” on the matter given the damage being wrought on the labour market by the Covid-19 pandemic
In the first quarter of this year, unemployment came in at a high of 30.1 percent, the third worst in Africa, according to Trading Economics. The hard lockdown was in effect only for the past two weeks of that quarter. Since then, companies in various industries have had to cut back on their staffing numbers to survive, with tourism clearly the worst hit. According to the National Income Dynamics Study, 3 million jobs were lost between February and April because of the pandemic.
Next Tuesday, Statistics South Africa is expected to release second-quarter jobless figures that will reflect the devastation to jobs that the pandemic is causing. That will quite naturally spur another panic-ridden round of screaming newspaper headlines. I think it’s essential that we bring labour reform back onto the table.
Broadly speaking, our problem after the global economic crises of 2001 and 2008 was that South Africa’s recovery was capital-intensive in nature, with businesses using low interest rates to borrow and invest in capital-intensive growth rather than hiring more workers. Now of course, this virus-induced crisis is unprecedented and we may not follow a similar path. But if you were hedging your bets with interest rates at lows last seen in the 1970s, it’s more than likely we will follow a similar course.
Barriers to entry also prevent small and medium enterprises from moving into the economy to create new jobs, which means we remain reliant on large firms or the public sector for labour absorption. After the 2008 crisis, blessed with a surplus position and a low debt-to-gross domestic product ratio, South Africa followed a counter-cyclical fiscal policy as it spent its way out of recession. As part of that course, the public sector expanded while, even more problematic, public sector wages grew faster than in the private sector.
Given our high unemployment, it is clearly not desirable to be so dependent on big business and big government to be a source for jobs. Treasury is trying to rein in wage growth in the public sector, which is proving a political minefield.
We must make better use of business incentives to not only improve competitiveness but also improve labour market skills through initiatives such as Harambee. Through Africa’s Continental Free Trade Agreement that was unfortunately born into a Covid-19 world this past July, we need to push sectors that have high growth potential to expand so as to increase job creation locally through supply chains.
There’s an urgent need for innovative thinking to boost prospects for our manufacturing sector. We’ve long spoken of the benefits of the development of special economic zones with looser labour laws to repurpose the sector. We acknowledge attempts by government agencies to reduce red tape for small businesses and improve the ease of doing business. This has to be intensified, with a focus on streamlining UIF registration and PAYE.
In the private sector, collective bargaining is increasingly less effective, resulting in stalemates and prolonged strike action that have dire ramifications for production and the long-term viability of business operations. Business, government and labour need to find mechanisms to smooth over this process as we seek to set the stage for the country’s economic recovery. Among emerging market countries, we stand out as having particularly rigid labour practices, specifically when it comes to hiring and firing.
To implement many of the reforms needed to improve job absorption we will need buy in from unions, which of course oppose such measures. They are fighting their corner. We hope, however, that given how dire our unemployment situation is – and given that it is getting worse by the day and will keep getting worse until concrete measures are taken to address it – the unions will show some flexibility in the interests of the greater good.
These labour market rigidities remain a deterrent to investors as they prevent capital from finding a home here. Through policy, the state can make some significant reforms, the results of which could feed much faster into the recovery efforts for the South African economy. The pandemic has brought forward the urgency of labour reform.
This piece was first published in Business Report.