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OECD Survey highlights barriers to growth in South Africa
July 31, 2020, 7:37 pm

Constraints include high barriers to entry for small businesses, badly performing State-Owned Entities (SOEs) and a high public sector wage bill

South Africa responded swiftly to the COVID-19 pandemic [PPIO]

The Organisation for Economic Cooperation and Development (OECD) Survey of South Africa launched via a webinar on 31 July highlights the barriers to growth in South Africa.

These barriers mean that South Africa is amongst the worst performers if compared with the 37 OECD countries as well as BRICS peers, the Russian Federation and Brazil. It was the worst of the 40 countries surveyed in jobs, environment and life satisfaction.

The poor ranking for life satisfaction and safety are in part due to high crime rates with the latest crime data for the 1 April 2019 to 31 March 2020 period showing a reduction in 14 crime categories and an increase in 9 crime categories.

The reported cases of carjacking saw the biggest year-on-year (y/y) with a 13.3 per cent y/y rise to 18,162 cases. This was the only crime category to see double-digit growth, with the next largest increase seen in robberies at non-residential premises, which rose by 3.3 per cent to 20 651 cases.

The biggest reduction in crimes were seen in bank robberies (where no such crimes were recorded), cash-in-transit heists (down 10.4 per cent), and instances of arson (down 7.3 per cent). Murders in South Africa remain high, with a 1.4 per cent increase to 21,325 reported cases. This works out to 58 people murdered in the country every day, at a rate of 35.8 people per 100,000 population.

South Africa responded swiftly to the COVID-19 pandemic, but the sharp drop in economic activity adds to long-standing challenges and raises the urgency of structural reforms, according to the OECD survey. The nationwide lockdown enacted from 27 March 2020, a mere three weeks after the first reported case, reduced activity in mining and industry while bringing the tourism, entertainment and passenger transport sectors to a near-standstill.

As growth has collapsed with the OECD expecting a contraction of between 7.5 per cent and 8.2 per cent this year, the unemployment rate rising to the 33 per cent level, the OECD said more will need to be done to strengthen responses to the crisis and ensure that the recovery brings about sustainable and more inclusive development.

The number of monthly salaries paid in June 2020 showed a 20.7 per cent y/y decline data from the BankservAfrica Take-home Pay Index (BTPI) showed.

The OECD recommended that a wide range of measures be undertaken to improve the quality of and access to health care and support businesses and people. This includes lowering interest rates; providing temporary financial support to households and businesses; and extending financial relief in sectors hard hit by the crisis, particularly if there is a renewed virus outbreak later in the year.

OECD Economics Department Country Studies Director Alvaro Pereira said: “South Africa cannot afford to delay reforms. It is essential to undertake reforms to restore long-run fiscal sustainability and growth, while continuing to support the economy in the short run.”

He said macroeconomic and structural policies are needed to put growth on a sound footing going forward.

Bold fiscal measures are needed to curb spending pressures and restore fiscal sustainability, including taking steps to reduce the government wage bill and transfers to state-owned enterprises. Structural policy reforms to boost competition, restructure state-owned enterprises, improve the regulatory framework and improve public investment in transport infrastructure, skills and education are also called for.

The high barriers to entry are in part due to the regulatory burden or red tape, as well as the oligopolistic structure of the South African economy with only Brazil and Argentina being worse than South Africa.

Restoring fiscal sustainability will require measures that will curtail wage bill growth and SOE financing, as well as contain spending growth in higher education, raise revenue and improve the efficiency of public spending.

The general government wage bill, at 12 per cent of GDP, is one of the highest among OECD and partner countries. At 38 per cent of total consolidated government spending, the compensation of employees was the largest spending item in 2019.

Public sector wage increases are the main driver of government spending rather than increases in employment. Wage negotiations have systematically granted above-inflation increases over the past decade. Moreover, promotion policies contributed to wage bill increases.

The OECD recommended that the government could consider indexing public sector wages below inflation for three years. An inflation minus 2 percentage points in the public service could generate around ZAR 30 billion savings over three years.

Given the wage gains of recent years, the real cost to civil servants would be limited as they would still benefit from annual progression in the pay scale. Such a measure could create fiscal space for much-needed investment in infrastructure and education.

The OECD said that a sound growth strategy, which included reforming product markets, boosting investment, infrastructure development, trade policies that augment the benefits from participation in global value chains, more competitive SOEs?, could deliver quick wins in terms of job creation and increase potential growth.

Efforts to improve the business climate, sequencing and prioritisation of reform will be essential for maximising the growth impact.

It however noted that despite the fact that South African President Cyril Ramaphosa was head of the African Union this year and that a South African, Wamkele Mene, was the Secretary General of the African Continental Free Trade Area (AfCTA), progress in terms of improving regional integration had been poor since the 2017 Survey.

Cross-border restrictions due to the pandemic have delayed the implementation of the AfCTA, so exports have pivoted towards ocean freight, which meant that in June 2020, the number of full containers exported exceeded the number of full containers imported for the first time.

In response from The BRICS Post to a question on the evolution of trade, where the OECD sees a 12.5 per cent contraction in exports and a 10 per cent decline in imports this year, Falilou Fall, the senior economist on the South Africa desk responsible for the survey, said it was difficult to forecast accurately as the situation was so dynamic.

“There are lots of uncertainties nowadays, it is hard to forecast the evolution of trade given how the pandemic affects the different countries and the measures they take. Overall, trade is falling globally. South Africa has some specific minerals (such as palladium) where it can perform well but that will depend on demand from partner countries going forward. Falling imports are linked to the severity of the lockdown and the progressive recovery,” he said.

Helmo Preuss in Makhanda, South Africa for The BRICS Post

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