Faster Growth to Boost Jobs Is South Africa's Priority

South Africa's strong performance blemished by high unemployment level

Bolder action needed to enhance efficacy of labor, product markets

Faster growth would require major changes to incentives for firms, workers

The authorities have taken advantage of the fairly robust macroeconomic position at the eve of the global financial crisis and vigorously responded with expansionary macroeconomic policies. Absent a major change in the external environment, the recovery should continue, the economists said in their regular review of Africa’s biggest economy.

The report cautioned, however, 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.

Jobless picture worsens

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 1 million jobs lost since end-2008. As of June 2010, unemployment stood at some 25 percent. 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. After contracting by 1¾ percent in 2009, South Africa’s economy has turned the corner and is expected to expand by around 3 percent in 2010. 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.

• Raising potential economic growth. The growth rates considered most probable under a baseline scenario (4–4½ percent over the medium term) are unlikely to quickly reverse the sharp cyclical increase in unemployment, much less make inroads into reducing the high structural unemployment level. That would instead require growth rates in the range of 6 percent. And this in turn would require major changes to the incentives facing firms and employees.

Case for reforming now

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...