_________________________________________________________________________________________

__________________________________________________________________________________________ 10-12 September, 2001

2001 Annual Forum at Misty Hills, Muldersdrift

Policies to Promote Growth and

Employment in South Africa ___________

Jeffrey D. Lewis

World Bank

DISCUSSION PAPER

Jeffrey D. Lewis

July 2001

THE WORLD BANK INFORMAL DISCUSSION PAPERS SOUTHERN AFRICA ON ASPECTS OF THE DEPARTMENT ECONOMY OF SOUTH AFRICA

16

Policies to Promote

Growth and Employment in South Africa

POLICIES TO PROMOTE GROWTH

AND EMPLOYMENT IN SOUTH AFRICA

Jeffrey D. Lewis

July, 2001 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s). They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries that they represent and should not be attributed to them.

Foreword

This study is published by the World Bank in its informal series of Discussion Papers on the South African Economy. It draws on research supported by discussions and interaction with staff from a wide range of South African institutions.

Since 1994, South Africa has made undeniable progress across a number of critical areas. On the political front, democratic institutions are well established, and the re-invention of government that is continuing through the creation of new tiers of government (provincial and local) has changed the environment for governance and service delivery. On the economic front, the government has pursued policies that have restored and maintained macroeconomic stability in the context of a difficult global environment.

But despite these areas of success, there exists a widespread perception that South Africas economic performance since 1994 has been disappointing. Real GDP growth has been erratic, formal sector job losses have continued unabated, and the key objectives of poverty reduction and improved service delivery remain largely unmet.

This study examines the pressing challenge of generating sustainable growth, job creation, and poverty reduction in South Africa. In doing so, it draws on a broad range of analysis and research on related topics undertaken by World Bank staff over the last few years, as well as work by other researchers in South Africa and elsewhere. The underlying message is that the challenge facing South Africa will not be solved by one (or more) quick fix solutions, but instead demands concerted initiatives across a range of issues that reflect the underlying dependencies and interconnectedness of the economy. We hope that this study (and its supporting materials) can contribute to the discussions and debate that will help South Africa move forward towards a better future.

Fayez Omar Country Director for South Africa

The World Bank July 2001

Copyright 2001 The World Bank 1818 H Street, N.W. Washington, DC 20433 U.S.A. This is an informal study by World Bank staff, published for discussion purposes. It is not an official World Bank document.

Contents

Executive Summary ......................................................................................................................... i

1. South Africa Today ................................................................................................................... 1 A. Introduction ........................................................................................................................... 1 B. Successful Political Transformation...................................................................................... 2 C. The Post-Apartheid Economic Policy Environment ............................................................. 3

The RDP and GEAR ........................................................................................................... 3 Uneven Policy Implementation........................................................................................... 4

D. An Overview of Economic Performance .............................................................................. 6 The South African Economy: The Structural Legacy......................................................... 6 Stabilization Without Growth ............................................................................................. 6 Exchange Rates, Trade Flows, and External Vulnerability ................................................ 8

2. Factor Markets and Growth Performance ............................................................................... 11 A. Introduction ......................................................................................................................... 11 B. Employment, Unemployment and Labor Markets .............................................................. 11

Labor Supply and Unemployment .................................................................................... 11 Labor Market Flexibility ................................................................................................... 12

C. Capital, Investment and Financial Markets ......................................................................... 15 Savings, Investment and Capital Accumulation ............................................................... 15 Financial Markets.............................................................................................................. 17

D. Land and Land Reform........................................................................................................ 18 The Distribution of Land................................................................................................... 18 Land Reform ..................................................................................................................... 19

3. Improving the Policy Environment ......................................................................................... 20 A. Introduction ......................................................................................................................... 20 B. Changing the Investment Climate ....................................................................................... 20

Perceived Constraints to Investment and Growth ............................................................. 20 Measures to Encourage Foreign and Domestic Investment .............................................. 23

C. Small, Medium and Micro Enterprises................................................................................ 25 Features of the SMME Sector ........................................................................................... 26 Constraints to SMME Growth........................................................................................... 28 Encouraging SMMEs ........................................................................................................ 30

D. Expanding Labor Demand................................................................................................... 32 Improving Labor Market Flexibility ................................................................................. 32 Skills Shortages ................................................................................................................. 33 Subsidizing Employment Creation.................................................................................... 34

E. Rural Development .............................................................................................................. 39 The Potential Contribution of Rural Areas ....................................................................... 39 Accelerating Rural Development ...................................................................................... 40

4. Trade and Globalization .......................................................................................................... 42 A. Introduction ......................................................................................................................... 42 B. Trade Policy Reform: A Scorecard ..................................................................................... 42 C. Changing Trade Patterns ..................................................................................................... 44 D. The Impact of Regional Trade Agreements and Globalization........................................... 49

5. Looking Forward: Challenges and Prospects.......................................................................... 53 A. Introduction ......................................................................................................................... 53 B. Alternative Scenarios........................................................................................................... 53 C. The Impact of HIV/AIDS .................................................................................................... 59 D. Conclusions ......................................................................................................................... 62

References ..................................................................................................................................... 66

Annex 1: Understanding South African Unemployment .............................................................. 69 A. Introduction ......................................................................................................................... 69 B. Measurement ................................