Economic Development Challenges
The chills of the global economic crisis expose our economic vulnerability and the
underlying structural flaws in the economy.
Domestic economic growth has slowed down from an annual average of 5% in 2004 -
2007 to 3% in 2008. Rising interest rates in response to above potential GDP growth
fuelled by strong credit growth, a widening current account deficit and high inflation have
restricted consumer spending. Conditions in the global economy have deteriorated in the
wake of the spillover from the subprime crisis. The volatility in financial and commodity
markets both helped and hindered the domestic economy in 2008. Exports were initially
boosted by higher prices and volumes, but have now been severely hurt as South Africa
begins to feel the impact of the global economic crisis. Economic growth is expected to
slow to 1.2% in 2009, the lowest rate since 1998.24
Among the more critical macro-economic challenges is growth in employment, managing inflation, ensuring sufficient earnings in foreign exchange and the maintenance of a healthy current account balance.
The cost of doing business in South Africa also remains high, driven by a lack of competition, inadequate infrastructure, high input costs such as telecommunications, and an inflexible labour market in certain sectors.
The WEF Global Competitiveness Index 2008/09 reveals that while South Africa ranks a
favourable 45th out of 135 countries, the ranking has been gradually declining since 2000,
and there are worrying underlying trends. South Africa ranks 88th in labour market
flexibility, 123rd in flexibility of wage determination and 119th in poor labour-employer
relations. With a university enrolment rate of only 15%, we rate 93rd, placing our innovation
potential at risk.25
In terms of infrastructure, South Africa ranks 48th, with electricity supply slipping down to 101st from 83rd in 2007. The concern about crime and citizen safety is a serious obstacle to doing business in South Africa. The country ranks 134th out of 135 in terms of the costs of crime and violence to business. With respect to the health of the workforce, South Africa ranks 129th due to the high rates of communicable diseases.26
In some instances, BEE could serve as an inhibitor of new investment in South Africa,
because it places restrictions on the ownership and management structures of firms:
"Firm creation is the riskiest part of economic activity. Very, very few firms that are born
survive, [but] some of those very few do grow. and become an important part of the
economy. So reducing the chances of those firms being born is a problem."27
We have achieved much in the realm of macro-economic policy but key macro- and
micro-economic challenges remain. Poverty and unemployment are exacerbated by
the global crisis; the cost of doing business in South Africa is still too high; and skills
shortages continue to act as a brake on growth.
Skills shortage is a major constraint on growth. In 2007, there was an estimated shortage
of 300,000 skilled workers.28 The unintended consequences of affirmative action have
decreased the pool of skills, as skilled minorities have emigrated. In addition, the education
sector is still not producing the type of skills the economy needs. The skills crisis is
exacerbated by an inept Home Affairs department, which inhibits the global recruitment
of skills. This ineptitude undermines South Africa's competitiveness, and leads to an
exaggerated "brain drain" and missed opportunities for "brain gain".
The Sector Education Training Authorities (SETAs), which absorb 1% of the total wage bill
(estimated at no less than R6 billion for 2008 and expected to rise to R9 billion by 2011)29,
have only been able to train 7,000 new workers per annum.30 The SETAs have thus not
sufficiently developed or upgraded the skills needed in the country. In addition, they do not
adequately address the problem of those outside the labour market. They are generally
bureaucratic, inefficient and too often corrupt. As a tripartite institution set up by business,
government and organised labour, the SETAs have not been held accountable for developing
the skills of the South African working population, nor has business been sufficiently insistent
and specific about their skills requirements. The private sector has also not sufficiently
committed itself to training for the skills it needs. The lack of coordination between the
labour and education departments further exacerbates the problem.
There is a general malaise in producing the skills essential to a modern competitive
economy. The SETAs have become 'convenient' vehicles to demonstrate business
compliance in contributing to the skills levy, but little serious apprenticeship and technical
training have taken place. The SETAs have disarticulated job training from the shop floor
which is the virtue of apprenticeship training. The number of apprentices trained has
dropped significantly compared with the apartheid period. In 1975, there were 33,000
apprentices registered in South Africa; by 2000 there were only 3,000. The Joint Initiative
on Priority Skills Acquisition (JIPSA) unit estimated in 2007 that South Africa produced
about 5,000 artisans a year, which will have to rise to 12,500 a year for the next four
years to meet the demand for a projected increase of 30,000 over the period 2007 to
2010.31 The culpability of government for the closure of 100 technical colleges and 14
tertiary institutions for the amalgamation of universities and technikons in 2001, matches
the culpability of organised business and labour for failing to collectively address the
The failure of the tertiary sector to produce the requisite skills for a growing modern
economy is fuelled by the poor quality of matriculants, weak management and poor
academic performance at senior levels, and weak linkages between tertiary institutions
and the private sector.
Despite the reduction of unemployment from 31% in 2003 to 23% in 2008, unemployment
is still unacceptably high. Nearly a quarter of the working-age population looking for work
is unsuccessful. Unemployment will be further exacerbated by the global economic crisis,
which has led to a drop in demand for primary exports in the resources sector.
The problem is particularly concentrated among the young, among women, among the
unskilled and among Africans. There is a very high association between poverty and
unemployment; most of the unemployed are concentrated in the poorest households.
Unemployment in the lowest-income quintile (fifth) is 72%, compared with just 7% in the
Unemployment is closely linked to a lack of skills and education. The unemployment rate
among those with university degrees is only 3%, for those with matric it is 28%, but for
those without matric it is over 60%.34
Overall, there is an extremely high rate of unemployment among the youth. Over 50% in
the 20 - 24 age category are unemployed. The demographic "youth bulge" indicates that
it will pose even more severe problems later on, in terms of labour market supply and
social cohesion, as the generation of unskilled, unemployed youth grows older.35
One of the most undesirable outcomes of youth unemployment is the rapid rise of petty
crime and drug abuse in South Africa. This is further exacerbated by the high levels of
violence inflicted on the youth. A study by the HSRC indicates that 38% of youth have
experienced violence at home and 15% at school, and that 57% of youth have considered
committing a crime.36 This is further underscored by the Poverty Hearings, conducted by
the African Monitor in 2008, linking youth unemployment and an increase in crime.37
Perversely, there are numerous vacancies in the economy for skilled positions. This is
testimony of the failure of our education and skills development systems to provide
meaningful opportunities to our burgeoning youth.
Deep structural flaws, going beyond 1994, constrain our model of economic
development. The economy is not generating sufficient jobs for youth, women, unskilled
and African people. Unemployment is closely linked to a lack of skills and education.
Unless the root causes of youth unemployment are urgently addressed, we are
reproducing a bleak generation with little hope in the future; a ticking time bomb.
Poverty and inequality
While 13 million people have now been included in the safety net of social grants, poverty
remains a deep and daunting challenge.
About 40% of households still live below a poverty line estimated by the Treasury to be
about R480 per person per month. Poverty is closely linked to the structural problems of
unemployment and the lack of skills; unemployment affects poor households most severely.38
Hunger remains a common denominator among poor people in South Africa. Testimonies
from the African Monitor's 2008 Poverty Hearings consistently highlight that poor people
still struggle with hunger and lack of nutrition. This affects their health and educational
prospects, as well as reducing their chances of finding jobs.
Inequality has increased among African people and apartheid racial patterns have remained
roughly the same. The rapid growth of the black middle class has meant that inequality,
as measured by the Gini co-efficient, has risen among black people, from 0.55 in 1994 to 0.59 in 2008. Inequality between white and black people has remained roughly the
same, increasing slightly from 0.67 in 1994 to 0.68 in 2008.39
Although poor people are better off due to targeted spending on the poorest two fifths of
the population, and inequality is often a consequence of economic growth, the inequalities
that continue to exist threaten social cohesion. Racial inequality also undermines our efforts
to build a non-racial society.
Above all, poverty seriously inhibits citizenship and participation in civic life.
"Democracy is being blocked by the basics. For
people to be able to participate, they need to feel
secure, to know where their next meal is coming
from, and to have dignity and health. You can't
participate in the economy or in politics if you are
concerned with survival."
Increased internal and external migration to the cities has put extreme pressure on poor
urban areas. The proliferation of poorly serviced and overcrowded informal settlements
was a key factor in the inter-ethnic and xenophobic violence that erupted in 2008.
A study by the Department of Housing showed that about one million people a year migrate
to the cities. This has resulted in about 3,000 new informal settlements since 1996. The
migration rate is likely to grow, particularly from our neighbouring countries, as economic
prospects in the region diminish.40
Although the government has built about 2.6 million low-cost houses since 1994, the
backlog, according to the Department of Housing, currently still stands at about 2 million.
In the larger metropolitan areas, economic and class segregation has replaced racial
segregation. Working class and mainly black areas are situated far from the CBD, and as
a result people spend a disproportionate amount of their income and time on public
transport. Government has not yet provided adequate affordable public transport, placing
commuters at the mercy of taxi companies who compromise their safety. It has recently
introduced plans to provide more efficient public transport systems in some of the bigger
cities, but this has met with the wrath of some of the taxi associations.
The lack of skills at local government level, coupled with political patronage and corruption,
has compounded the problem of poor service and infrastructural delivery. In some
municipalities in Limpopo and Mpumalanga, the cholera epidemic has reached serious
proportions. This is not only due to the influx of refugees from Zimbabwe, but also to the
collapse of water and sewerage systems in some towns. It is also testimony to the
inadequacy of public health clinics to contain the epidemic.
Apartheid development planning created grossly inadequate and distorted urban
environments. Today, the conditions of peri-urban poverty and squalor, worsened
by unchecked migration, create a powder keg of civil violence and unrest waiting
The competitive demands on commercial agriculture, the uneven pace of land redistribution
and slow development of successful black commercial or subsistence farming has impeded
the pace of rural development.
Although 74,000 out of 79,000 land claims have been processed, about half of the new
land schemes have not materially benefited their supposed beneficiaries. "To be
competitive, agri-businesses usually need to operate on a much larger scale. Being a
small farmer usually means being at the least profitable end of the value chain."41
The last 5,000 large and complicated claims have been bogged down in disputes and
court processes, effectively freezing productive commercial land.
A number of BEE deals have been struck by agri-business companies, such as in timber
and sugar, and in the Western Cape, farmers have extended housing and equity schemes
to farm workers. But the Land Bank has failed to help develop a class of commercial or
subsistence black farmers, mainly due to incompetence and corruption.
The Department of Land Affairs has faltered, unable to spend its budget and unable to
assist small landowners to farm productively, or access markets, finance and training.42
In some areas farmers struggle to convert state leaseholds into freehold tenure; communal
land does not raise the capital needed to turn them into productive assets. Rural poverty
cannot be alleviated so long as land remains an unproductive asset.
The failure of effective land reform, coupled with its detrimental effect on the security of
commercial farmers, has contributed to South Africa becoming a net importer of food,
compared to the exporter it was in previous years.43
The Departments of Land Affairs and of Agriculture, as well as institutions such as the
Land Bank have not risen to the challenges of rural and agricultural development, at
a time when food security is becoming more imperative than ever.
|VOICES OF DINOKENG
Perspectives from members of
the Dinokeng Scenario Team.
We need to focus on the centrality
of economic growth and the
necessity for tough and difficult
decisions to get and sustain the
kind of growth we need.
We need to address the high costs
of doing business in South Africa
and the inefficient spatial
organisation of the economy.
There are deep structural
impediments to growth that must
be removed if we are effectively
and sustainably to address poverty
which requires faster and more
job-intensive growth than we have
In 1994, I don’t think any of us
understood the number of people
with good skills we needed to
populate all three levels of
government, NGOs, business,
civics, parastatals. For the three
tiers of government we needed
a few million well-skilled people.
We have failed dismally to up-skill
for the last 15 years. Two percent
of black kids in high school are
passing mathematics. We are
falling behind every day. It is
crippling our private and
With regards to skills training,
we should be in jail for wasteful
expenditure. One percent of
payroll has gone to this and we
are in even more of a skills
decline. Why are the unions and
business not jumping up and
down and challenging the SETAs?
We cannot create jobs when we
have no skills.
How do we responsibly and
sustainably grow our economy,
in order to deal with
unemployment and poverty?
The job-creating sectors of the
future will be in services and
finance, but also in areas like
retail, repairs, restaurants, the
informal sector and public works.
There is no magic bullet. Jobs will
need to come from a diversity of
sectors and subsectors.
Youngsters are being left out.
In the townships the level of
unemployment and poverty
among our youth is alarming.
We see the poor choices the youth
are making, such as teenage
pregnancies to access social
grants. This is a terrible choice
to make. Where will they be in
five, 10, 20 years?
We should institute a national
service programme for our youth.
They could participate for one year
and be deployed at local,
provincial and central
Business also needs to look closely
at the role it has (or has not)
played in generating employment
in South Africa.
We have never had the tough
A key issue is that of the working
poor. Working people can’t make
ends meet. Simply halving
unemployment won’t halve
poverty. We’re going to see poverty
in South Africa for many
generations. We need to stop
thinking about social grants as a
short-term solution. We need to
expand the social grants system
and the EPWP, which needs to be
multiples of the size it currently is.
Too many South Africans feel
excluded, debased and insecure,
especially in terms of food security.
If we fail to address poverty, we
will have failed to build and
defend democracy in South Africa.
If we want to sustain democracy,
we must address poverty.
During the Poverty Hearings,
people told their stories with
dignity. They said, “go to the
corridors of power and tell them:
we have brains, simply give us the
wherewithal to eke out a living.”
We are a society of take, take, take;
a society that wants to receive
rather than to take initiative.
People say “Mr. Mandela promised
us houses, and we want houses
and food”, which was not the
attitude of their grannies. I have
been part of the land access
movement, and I tell people “don't
kick the farmers off the land; let
them teach you.”
We see worse poverty than what we
grew up with. In the past the fields
were ploughed. Now we are
dependent on shops.