At the end of 2021, South Africa recorded its highest unemployment rate since the dawn of democracy, at 35.3%. The figure has marginally dropped but there is still concern about how the country will tackle this issue. Dori Posel spoke to Trudi Makhaya, economic advisor to South Africa’s President Cyril Ramaphosa, as well as Kenneth Creamer and Liberty Mncube, who are on the Presidential Economic Advisory Council, about unemployment, job creation, the informal sector and the country’s challenges with excessive market power.
Dori Posel: South Africa has not been very successful in chipping away at a very high rate of unemployment. What could help?
Kenneth Creamer: There is a strong correlation between growth and job creation. The question is, why doesn’t South Africa have enough growth? I would say that there are historical and current factors.
Historically, colonialism and apartheid have meant that the country’s capital markets, our capital formation, has been distorted, and infrastructure investment has been distorted. If you look around the country, you can see that people in areas that were designated as “bantustans” under apartheid still don’t have the same level of health, education, and access to security services.
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And capital formation itself was pretty much linked to mining. There was some diversification, but the country’s industrial policy was stunted and shaped in a way that didn’t create enough jobs.
The current reasons include vested interests that make it difficult to implement the policies that we need. For example, it is difficult to do the right thing and to implement the energy transition due to vested interests.
A second current problem has been weak state capacity, corruption and stealing.
We need growth to create jobs. And we need more growth to create enough jobs to cater for the growing size of South Africa’s labour market. In particular, we need expanded capital formation and infrastructure. And it’s really important that we look at our fixed investment levels. During the COVID pandemic, capital investment fell to 13% of GDP – a historic low. Government, state-owned companies and the private sector must all double their capital investment if South Africa is to increase its capital investment to the 25%-30% of GDP level required to reduce unemployment.
Dori Posel: Why are there so few people starting very small businesses in the informal sector?
Trudi Makhaya: The informal sector in countries similar to South Africa creates lots of jobs. In South Africa, the informal sector accounts for about 10% of jobs. That tells us South Africa has diverged from other emerging markets.
Our regulatory frameworks are geared towards corporates. And you can go through many aspects of regulation – zoning, how municipalities enforce bylaws, regulations and safety standards for food. You need safety standards, but you also need an enabling environment where you could have a street food culture like in Asian countries. South Africa’s regulatory environment doesn’t do that. We really over-regulate. We have a lot of requirements that are not appropriate for smaller businesses. That’s why we’ve been working on red tape reduction.
The human capital element is also important. South Africa’s education system has not given people the basic education and technical skills they need – to become plumbers, for example. It’s those those kinds of activities that become self employment activities in many developing countries. India comes to mind in terms of coding, and people being able to develop businesses from that. It involves fairly low skills.
A lot of the work that we need to do is in improving the quality of basic education. And it’s not about the quantity of money that’s been spent. As a proportion of GDP, South Africa’s education expenditure is already in line with many other countries. We’re not getting the outcomes that we need to get.
There are other factors too, including access to finance. There are so many concentrated industries; it becomes quite difficult for small businesses to thrive.
Dori Posel: Excessive market power could also inhibit the growth of small businesses. Is there excessive market power in South Africa and what has been the response to this from competition policy?
Liberty Mncube: South Africa has an excessive market power problem. Here are a few examples. For those lucky enough to afford private healthcare services, there are only three main hospital groups; in air travel, there are two main airlines. One firm controls more than 40% of each of the beer, spirits, ready-to-drink and cigarette industries.
The competition authorities have uncovered anti-competitive practices facilitated by excessive market power in many areas of business activity, including maize meal, bread, milk, poultry, beer, wheat flour, healthcare, aluminium, steel, bricks, cement and ticketing services. In the last two years, the Competition Tribunal has issued 48 orders in which firms have admitted to excessive market power and excessive pricing, not only in personal protective equipment including face masks, hand sanitisers and surgical gloves, but also in eggs and maize meal.
Excessive market power increases the cost of goods and services for consumers, depresses wages, stunts investment, blocks entrepreneurship, and retards innovation. It also concentrates economic power, which monopolies and oligopolies use to win favourable policies and further entrench their dominance. At the same time, excessive market power creates profits that flow disproportionately to the affluent in society. The left-out majority of South Africans are more likely to be the victims of excessive market power and have the least ability to avoid its costs. This dynamic exacerbates income inequality and inequality of economic opportunity.
There have been two responses from competition policy.
The first one has been embedding equality considerations into competition law. The 2018 amendments exemplify this, by placing emphasis on participation by black owned firms and small businesses as well as promoting a broad spread of ownership (inclusive of workers).
The second response concerns the effect competition policy generates through the promotion of greater competitiveness and subsequently on economic equality. For example, when Pepsi wanted to buy Pioneer Foods, one of the major agro-processing firms in South Africa, the Competition Tribunal approved the deal subject to a condition that it set up a broad based worker trust and implement a broad based black economic empowerment ownership plan. Last year, when ECP, a US based investment fund, sought to buy Burger King, the Competition Tribunal approved the deal subject to local procurement and creation of a worker owner plan in Burger King South Africa.
Dori Posel: I would like us to consider another set of constraints on job growth, and this concerns issues around trust and corruption. South Africa is often described as having a “trust deficit”. What are your thoughts on how trust can be rebuilt in our institutions, and by implication, how our institutions can be made more trustworthy?
Trudi Makhaya: The one thing that has been highlighted in various instances in the South African case is the culpability of the private sector. We see a lot of the companies slowly coming to the reckoning.
But I think if we’re going to rebuild trust, I would suggest that they have a lot more to do in terms of showing they have turned a corner, and understand the economic harm that has been done.
On the flip side of it all, we have a demoralised public sector. We do have good people who tend to err on over-compliance, being afraid to take risks. Being afraid to be innovative.
We also have to strike the balance between transparency and due process, and accepting genuine mistakes which are not related to corruption.
*This is an edited excerpt of the University of the Witwatersrand School of Economics and Finance’s centenary webinar titled 100 Years of Economics at Wits: Reflecting on the Past, Looking to the Future. The event can be watched here.
