Johannesburg - After contracting by 1.75% in 2009, South Africa's economy has turned the corner and is expected to expand by around 3% in 2010, though a growth rate of 6% is needed to reduce high structural unemployment, according to a survey on SA by the International Monetary Fund (IMF) on Thursday.
While the recovery should continue in South Africa in the absence of a major change in the external environment, baseline growth over the medium term of 4% to 4.5% will not be enough to reverse the sharp cyclical increase in unemployment, now at the 25% mark.
The IMF economists cautioned in their regular review of Africa's biggest economy that that unemployment in South Africa is likely to remain high “for a considerable period”.
“Raising the economy's growth rate and making such growth more labor intensive is paramount to large-scale job creation and a reduction of inequality,” said the report.
They paint a worsening picture of the jobless situation.
“South Africa's strong overall economic performance is tarnished by the difficulty encountered in reducing its high unemployment level. The recession worsened the country's unemployment picture considerably, with close to one million jobs lost since end-2008. This contributes to the high degree of income inequality.”
As South Africa navigates its way out of its first recession since 1992, the report said, the country faces two important tasks: sustaining the incipient recovery and raising potential economic growth.
The focus in the coming months accordingly needs to be on sustaining the recovery while recalibrating policies amid the ebb and flow of portfolio flows and uncertain global economic prospects.
And reducing the high structural unemployment level would require growth rates in the range of 6%. And this in turn would require major changes to the incentives facing firms and employees.
Reforms are needed sooner rather than later
South Africa's growth potential cannot be unleashed without tapping into the large reservoir of unemployed people, the report said. The severity of the unemployment problem calls for bolder action to enhance the efficacy of labour and product markets.
"There is a strong case for undertaking these reforms now during the upswing of a business cycle, when profitability is improving and more jobs can be created,” said the IMF.
While the labour market appears to be flexible in the volume dimension, wage flexibility seems more limited.
"South Africa's labor legislation provides important and necessary protections for workers, but the large decline in employment during the recession suggests that some hard choices must now be confronted."
Accordingly, a closer look at the bargaining framework so that it encourages employers and employees to conclude more flexible wage contracts could help. Such provisions should allow companies to adjust more easily to economic fluctuations in a way that preserves jobs.
More competitive product markets are called for.
“Product markets in key economic sectors such as finance and infrastructure services need to be made more competitive. Taking into account stability considerations, greater competition in the financial sector should help lower fees and reduce the cost of capital for businesses.”
Similarly, lower input costs stemming from increased competition in the intermediate industrial products market can help the external competitiveness of the manufacturing and other tradable sectors. Continued trade liberalization, including by reducing nontariff barriers, could be an impetus for greater competition and innovation.
“There is also scope for creating an enabling environment for private sector participation in infrastructure projects. While it may not be necessary nor politically feasible to consider wholesale private sector involvement in some areas, experimenting with private sector partners on a project-by-project basis might help reduce infrastructure bottlenecks more quickly,” concludes the IMF.