South Africa’s socio-economic issues: OECD briefing; International Labour Organisation on its work

Economic Development

06 September 2016
Chairperson: Ms E Coleman
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Meeting Summary

The Organisation for Economic Co-operation and Development (OECD) briefed the Committee on the overarching priorities for strong, sustainable and inclusive growth in South Africa. They identified key problem areas in the South African economy and recommended a focus on policy implementation of the objectives in the National Development Plan, the removal of obstacles for job creation and investment in social and economic infrastructure.

A great concern for Committee Members was the issue of skills shortages that had become apparent in the survey and the shortcomings in the implementation of policies regarding education and their effects on social progress. The Members also found that transformation was lacking across sectors and questioned the OECD about the approaches taken by other nations and BRICS economies in combating these types of divides.

The OECD responded that the South African condition was unique, especially given the history and legacy of apartheid, and so it was not always easy to draw comparisons. What the OECD was able to suggest, however, was that South African policy makers should focus on the following recommendations:

  • that independent producers increase electricity capacity while ensuring, as well, that the prices reflected the costs;
  • that mediation and arbitration be introduced on a larger scale, to make wage negotiations less confrontational;
  • the establishment of a public employment service as a one-stop facility for job seekers;
  • the expansion of affordable public transport;
  • reduction of regulatory burdens and the elimination of entry barriers and regulation limiting competition in support of SMEs; and
  • broadening of tax bases by increasing taxation of high income earners to make the tax system more progressive.

The International Labour Organisation presented a report on pathways to creating sustainable jobs in South Africa. The report showed that South Africa had a lot of untapped potential in less conventional economies, such as the green and blue economies, and that despite the shortcomings in some policies, there were also considerable triumphs in the areas of labour negotiations and youth development through the expanded public works programme (EPWP).

The findings of the OECD and the ILO were both informative and largely comparable, except for some contradictions in interpretation. While the ILO said that the country ought to be commended that 283 labour negations had been settled without strike action in 2014, the OECD had criticised the approach to labour negotiations in South Africa as being too confrontational, and thereby negatively affecting investor confidence and certainty.

The main issues that came through both presentations were those of transformation across sectors, and the plight of youth as a result of under-development and unemployment. 

Meeting report

Organization for Economic Co-Operation and Development

Mr Fall, Senior Economist, Organization for Economic Co-Operation and Development (OECD) began by elaborating on the framework and objectives that informed the work of the OECD. He explained that the mission of the OECD was to promote and improve the economic and social wellbeing of people around the world. The OECD now had 35 member countries and key countries with special status such South Africa who were not member countries, but were engaged with the OECD.

He distinguished the OECD from the International Monetary Fund (IMF) and the World Bank by saying that the OECD, unlike those bodies mentioned, gave policy advice rather than financial assistance. It was an international body whose primary purpose was to assist countries with the development of their economic policies. The OECD was a council which was constituted of ambassadors of member countries and headed by the Secretary General of the OECD, Mr Angel Gurría. The work of the OECD thus involved the collection and comparison of data relating to economic policies from which the OECD then made country specific policy recommendations accordingly.

The OECD published regular outlooks, annual overviews and comparative statistics, including the OECD surveys which were conducted every two years and included a general assessment of a country’s macroeconomic and long-term issues. The surveys also included a further two special chapters on climatic issues and their effects on the economy. The OECD’s Economic Outlook survey assessed prospects for both member and non-member economies.

The last survey of South Africa had been presented last year in July 2015 to the Minister of Finance, and the next was due in 2017.

The 2015 survey had showed social progress over the last ten years. Services have been broadened and poverty alleviated through social grants. However, South Africa’s gross domestic product (GDP) had declined in comparison to the global economy over the past two years. One of the contributors to this was bottle-necking in different sectors, such as those in the electricity supply sector, which saw high volumes of power outages, as well as in the ports, road, transport and infrastructure sectors.

Another factor driving low performance was social relations and wage negotiations, which had been criticised for being too confrontational. This had resulted in working days being lost to strike action. This work had also been presented at the National Economic and Labour Council (NEDLAC) commission where there had been general consensus that it was necessary to improve at least the framework of labour-related negotiations.

Another factor contributing to slow growth was that the benefits of growth were not accruing the citizenry at large, but were rather concentrated towards the income share of the top 10% of income earners. Moreover, the majority of the working-age population (15 – 64 year olds) were unemployed, and small and medium enterprises (SMEs) were faced with barriers to entrepreneurship, which restricted their ability to contribute to the pool of employment opportunities.

Based on these findings, the OECD recommended the following:

  • that independent producers increase electricity capacity while ensuring, as well, that the prices reflected the costs;
  • that mediation and arbitration be introduced on a larger scale, to make wage negotiations less confrontational;
  • the establishment of a public employment service as a one-stop facility for job seekers;
  • the expansion of affordable public transport;
  • reduction of regulatory burdens and the elimination of entry barriers and regulation limiting competition in support of SMEs; and
  • broadening of tax bases by increasing taxation of high income earners to make the tax system more progressive.

The OECD had also embarked on a further, more comprehensive, analysis of inequality in relation to the South African labour market, which was deeply divided on the basis of ethnic background, gender, age and education. There were large and persistent disparities in unemployment by ethnic background, with the unemployment rate being the highest amongst black South Africans between the time period of 2008 and 2015. There were also fewer women than men who were paid to work in comparison to more advanced countries, such as Norway and Sweden.

Furthermore, it was found that South Africa was a young country, with the youth representing a large portion of the population. 51% percent of these young people were unemployed, however, which was comparable to the situation in Greece and Spain. One of the reasons for this high statistic was that it was found that nearly one in three young people were neither in employment, education or training (NEET). The NEET rate amongst South African youth stood at 31.4%. This number in itself asked for directed policies targeted at those who fell within NEET, to integrate them into the labour market.

Informal employment in South Africa was also found to be common, although not as high as in other emerging economies.

The labour market inequalities were also reflected in earnings, with white South Africans earning considerably more than their black, coloured and Indian/Asian counterparts, as well as in skills in relation to race.

The rationale behind the focus on inequality was that the OECD had found that inequality hindered economic growth and was particularly prejudicial for those at the bottom of the distribution, who were subjected to poverty. These persons were prevented from participating in the economy, which causally had certain implications for productivity.

What the OECD had found was that redistribution tools could be helpful in reducing these disparities. In addressing the issue of unemployment, the OECD suggested the promotion of stronger and more inclusive markets calls for appropriate macroeconomic policies, and confronting the barriers to the creation of permanent, more formal jobs. The OECD also suggested government intervention through government transfers to safeguard low-income households, and a revision of the taxation policies in relation to top-income households. Further, the OECD encouraged investment in human capital through up-skilling of the workforce and better training and education for the low-skilled.

The OECD advised that certain policy reforms needed to be implemented to boost growth and the issues plaguing the labour market. It suggested that in market areas where there were enough private companies, there needed to be less state intervention and more regulation. In addition, in deciding on the allocation of funds, it was necessary that there be a balance of considerations, meaning that state funds could not be used for less pertinent markets like telecoms at the expense of greater needs, such as that of education.

Discussion

The Chairperson said that South Africa was not yet a member of the OECD, but that at the moment it appreciated the engagement. She encouraged Members to participate and make use of the opportunity to seek responses for any of their questions relating to the report presented by the OECD.

Mr P Atkinson (DA) asked whether research had been done as to the desirability of free tertiary education. He also asked about the negative effect that tax increases may have on tax receipts and whether the OCED had considered this effect in any of its research initiatives. He questioned whether it would be appropriate to tax more and divert it into tertiary education, which was perhaps not as imperative as primary and secondary education.

Mr S Tleane (ANC) also asked what impact private schools had on development in South Africa.

Mr Fall responded by saying that OECD did not have an official view regarding the funding of higher and tertiary education. There were, however, many dimensions that could be taken into account when approaching a funding model. Many of the OECD member countries offered low cost primary and secondary education, and the global tendency was that some part of higher education had to be at a cost because it was not only expensive for government, but the return was high for those graduates, especially when they went above the attainment of a bachelors’ degree. The return was higher for individuals than it was for society, and therefore it was only logical that such persons embarking on further tertiary education should not be dependent on government at the expense of those at the lower educational levels. 

Moreover, the rise in private sector education was linked to the issue of quality. If one had poor quality public sector education and a very competitive environment, then it was no surprise that upper class and upper middle class families would push their children into private schooling systems and in so doing maintain the elitism of the two competing sectors. It had to be seen as a call for an improvement of public sector education.

Dr M Mbatha (EFF) asked whether the OECD had done studies on the impact of value added tax (VAT) on lower income households. He made the point that the poor in South Africa spent 60% of their income on two items, food and transport, and this was precisely because of the spatial apartheid development. In relation to this, he asked whether there had been studies on the relationship between rising food prices and the implications thereof on the poor.

Mr Fall responded that basic food baskets tended to have lower rates or VAT exemptions in general, so the impact was not clear cut. VAT had a negative distributional impact, since poor people were more affected, but it also had an economic advantage. It was a less distortionary taxation tool than other taxation tools, so there needed to be a trade off between the distortionary effect of other taxation tools and the distributional impact.

Mr Tleane questioned whether the increase in the production of electricity by independent power producers (IPPs), as opposed to the utilisation of state-owned entities like Eskom ,would in fact be positive.

Ms D Rantho (ANC) added that in a presentation by Eskom in the previous week, it had been said that IPPs in the South African market created uncertainty about Eskom’s future role in the energy sector. She asked whether the increase in IPPs, by implication, would mean that IPPs would serve as general energy distributors, and also mean that Eskom would have to produce less energy.

Mr Fall said that there were different bases upon which to analyse the relationship and impact of IPPs on Eskom. The analysis would have to look at the implications for production, distribution, and the role Eskom as a retailer of electricity, amongst other things. When the public sector could offer a reliable supply of power, then only then did IPPs become redundant. As it stood, however, Eskom had to do all the investment, which relied on a lot of government money. It was worthwhile looking into dividing the investment with private entities, to satisfy part of the increasing electricity needs. If IPPs produced and sold electricity to Eskom, and then Eskom to the public, the burden on Eskom would be so much less and perhaps restrict future power shortages. A regulator was necessary, however, to monitor the real cost of production and fix the prices so that entities such as Eskom were able to generate a profit while still being considerate of the costs incurred by the final consumer. If IPPs produced electricity at a higher costs than Eskom, then there would be no use for them.

The Chairperson asked what was being done to address transformation issues in the electricity sector.

Mr Fall responded that it was not Eskom doing the regulatory work. Not every entity that wanted to participate in the sector had to generate the same capacity. Different IPPs could contribute proportionally, and this way many entities could be involved in the sector.

Mr Tleane made an enquiry into the wage negotiation strategies and approaches of other countries.

Mr Fall responded by saying that at the core of South Africa’s shortcomings in this area was the issue of wage distribution. There was currently a high frequency of unequal wage distribution, which saw 10% of workers earning more than 50% of the wages. This was creating problems in many countries, and was one of the issues causing discontent in the Unites States of America. The OECD suggested that companies develop better regulation to improve wage distribution and to ease taxation.

He clarified the OECD’s stance, emphasising that they were not saying that there were no reasons for strikes, but that the way these strike actions and negotiations had played out in South Africa in comparison to other emerging countries, had been highly confrontational. This had negatively affected the economy, investor confidence and political stability. The OECD believed that there were ways to soften this approach and to resolve wage issues in alternative, less confrontational ways.

Ms Rantho made the point that it was often the case that black South Africans who may not have attained the highest qualifications were similarly, or sometimes even better, skilled than those with qualifications. She mentioned the case of Hamilton Naki, the black man who assisted Christian Barnard with the first successful heart transplant, who had often been left out of history. Mr Naki was not a medical doctor but had experience with heart transplants in horses and other animals. Had it not been for his expertise, the heart transplant performed by Mr Barnard would not have been a success. This was a recurring issue in South African society where people of colour were more skilled than those with qualifications, but by virtue of their colour were denied countless job opportunities. She asked whether this issue had been identified in the research.

Finally, Ms Rantho asked what the impact of state grants had on inequality.

Mr Fall said that grants tended to have positive effect in South Africa. However, the problem here was that while the government was also trying to offset the legacy of apartheid, demands kept growing. It was very difficult to have an education system that was following actual policies.

Dr J Cardo (DA) asked for evidence from other countries which supported the public employment service, because in South Africa only around 14 000 those people had been integrated into the labour market, which did not seem to be much of a success in South Africa in its current form. Finally, he asked if the OECD had had any formal input in the deliberations around a national minimum wage in South Africa, because some research had shown that if the minimum wage in South Africa was increased to R6 000 this could result in some 65 000 job losses and push up the country’s unemployment rate by 26% by 2020.

Mr Fall said that public employment service was a difficult policy to difficult to measure. It was especially difficult to see the impact of public employment service in areas where there was little job creation. One could have the best public employment service, but if there were no jobs, then it could not really have the impact it was intended for.

He added that the OECD did not have any specific recommendations for the level at which a minimum wage should be set. It had been suggested that policy makers should think about the objectives of the minimum wage -- whether to boost employment or to alleviate poverty -- while also taking into account the external effect when deliberating on a wage price. Moreover, a minimum wage was not a remedy for all problems in the labour marker. Often one tended to attach a negative connotation to the concept of a minimum wage, when instead it should be seen as merely setting a standard.  It was actually desirable to have people earning above this wage.

Mr M Cele (ANC) asked where the OECD got its funding.

Mr Fall said that the OECD was funded mainly by member countries, and when additional work was requested and done for those countries, they paid what was called a voluntary contribution. He categorically stated that the OECD received no private funding.

The Chairperson mentioned that it had been suggested by the OECD that South African governments abstain from capturing markets through interventionist policies, but rather focus on regulation and let markets do their own work. She asked why government assisting regulatory bodies was perceived as government capturing private sector financing.

Finally, the Chairperson said that the OECD had made mention of some interventions that had been beneficial for the country, but had harped on the negative contributions to inequality and poverty. She said it was very clear that South Africa was being compared to developed countries, which further perpetuated the perception of slow growth, and that it would perhaps be better to measure it in the correct category, with countries on a similar footing as South Africa. 

Mr Fall said that the OECD was not at all denying the progress made since 1994. South Africa had come from a unique situation, which had made the route towards progress a lot more varied and difficult, and the OECD acknowledged this. What the OECD was saying was that there was still a long way to go towards achieving the goals envisioned for the nation.

He concluded that government could not do everything, especially in a developing nation such as South Africa where there was a plethora of social needs. The OECD suggested a focus on better allocation of government resources and the efficient use of private sector contributions in combating the issues raised.

International Labour Organisation

Dr Joni Musabayana, Deputy Director: International Labour Organisation (ILO), said that the ILO was a member of the United Nations and was particularly concerned with issues related to the labour market.

It was a membership-based body which had been established in 1919. South Africa was a member but had left in 1992 because of the pressures of apartheid, but had then rejoined in 1994. The government of South Africa had since been a distinguished member of the ILO body.

Dr Musabayana said that when one talked about unemployment in the South African context, one was talking about youth unemployment. SA had a particularly acute problem when one looked at the number of young people between the ages of 15 and 24 who were not in schools, and not in employment or training (NEET) in comparison to the NEET rate in other BRICS nations. The youth of South Africa represented a large portion of the population, and if one looked at South Africa’s history it was this percentage of people that had consistently made up the majority of the unemployment rate.

It was also found that in the 25 to 34 age group, South Africa had a working pool which earned two-thirds of the minimum wage, thereby rendering them poor despite their working, 21.9% who were working excessive hours, and 4% working less than 35 hours per week. 

He emphasised that transformation was an imperative which should be integrated into sectoral and industrial policies. If there was not a shift in focus toward achieving transformation, eventually the conflicts in society would make the South African economy an unattractive destination.

There were untapped sectors that may assist in alleviating the issue plaguing the South African employment situation. These included, amongst others, the green (environment) and blue (ocean) economies which could otherwise potentially attract youth interest.

Employment must be an explicit policy directive. Most countries in the sub regions and the BRICS competitors all had national employment policies. The issue of employment mainstreaming in all policy areas needed to be looked at. The ILO was able to assist with the development of such policies and to identify good practice. It was necessary to keep in mind that there were a number of employment challenges, but despite this there were also opportunities.

In 2014, the ILO had done a study in which it was found that there had been 14 strikes and a total of 283 settlements that had not gone to strike. It was necessary to speak about the successes and not to get caught up with harping on the negative.

Discussion

Mr Tleane said that the ILO was correct in seeing the expanded public works programme (EPWP) as progressive. It was necessary to acknowledge that it was going to take a very long time to skill the youth of South Africa and that through schemes such as the EPWP, they would be much better prepared for future opportunities.

Dr Musabayana responded that the EPWP was part of a global phenomenon. All countries in the world used active labour market policies such as these when their economies were not doing well. It was an opportunity to bring those youths at the lower levels into transitional programmes. He added that the EPWP was based on a standard design, but could do with some sharpening. Overall the concept was commendable despite the challenges brought about in its implementation.

Mr Tleane also raised the issue of migration, saying that South Africa had always experienced high numbers of foreign nationals participating in its labour force. He wanted to know from the ILO what was being done to create jobs in the other African nations to prevent their nationals from coming to work in South Africa and thereby freeing up employment opportunities for South Africans.

Ms Rantho requested that, if available, the Committee be presented with information pertaining to the youth migration in Africa and its implications on our employment statistics.

Dr Musabayana responded that the ILO, together with the OECD, was doing a study aimed at identifying the advantages and disadvantages of labour migration. He added, however, that where these foreigners came from, they were coming into South Africa as skilled labourers. It needed to be kept in mind that there were many South African in foreign countries, so in developing a migration policy it was necessary to analyse the situation of labour migration both from within and beyond the country’s borders.

Mr I Pikinini (ANC) suggested that those who depended on the food market could better serve the culinary world through effective and optimal use of land. He wanted to know whether the mixture of two sectors such as food and agriculture would be equitable.

Dr Musabayana agreed that the issue of agriculture had been underplayed and would be worthwhile tapping into.

The Chairperson thanked the presenters, and apologised for the poor timing which had resulted in the scheduling of two presentations of such depth into one meeting.

The meeting was adjourned. 

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