SA and labour market reform

By Janice Roberts

cGarrowEconomist at Lefika Securities, Colen Garrow shares his thoughts on the paper delivered yesterday at Wits Business School by the IMF’s First Deputy Managing Director David Lipton, entitled Bridging South Africa’s Economic Divide.

Garrow writes:

“Between now and December, domestic and foreign investors alike, will be on the look-out for tangible signs of progress policymakers have made on issues which appease the major credit rating agencies, and whether progress is sufficient for South Africa to keep its lower investment grade rating.

Labour market reform

“One such issue, which attention is already on, is the reform of the labour market, increasingly seen as an obstacle in achieving the objectives set out in the National Development Plan. The paper delivered yesterday has focused the spotlight once again, on the overdue need for labour market reform in South Africa. Less than two weeks ago, Finance Minister Pravin Gordhan drew attention, when he was quoted saying that the reform of the labour market was underway.

“Organized labour, however, moved quickly to rebuke the minister’s comment. Could Lipton’s paper raise speculation that the International Monetary Fund may be an entity which could broker discussion between big business and big labour, on this issue, seen as critically important in resolving, if South Africa to improve its position within the GDP-rankings of its emerging market peers?

“Lipton is obviously aware of the Article IV Consultation report on South Africa, a process which began last April and which was concluded two weeks ago, with GDP growth being revised to 0.1 percent for 2016, and 1.0 percent in 2017. Although the Fund has not expressly stated a view that the South African economy may fall into recession this year, a growth outlook this weak, makes the chances of one occurring better than even.

SA grappling with slow growth

“South Africa is grappling with growth that is too slow to raise average living standards, which according to Lipton is “deeply problematic when one-third of the working population is effectively excluded from the economy.” His message is blunt – there is a right to be concerned if economic problems – falling per capita incomes and a high unemployment rate – are not tackled soon. As is so often the case, the root of the problem contains the seed of their solution.

“By this, Lipton refers to the inclusion of the one-third of the working population which is unemployed, but could provide a dynamic contribution if engaged in the general economy. He refrains from castigating South Africa for its problems. There are many accomplishments which he highlights – strong macroeconomic policies, a diversified economy, 3.6 million people have been lifted out of poverty (defined as living on US$ 2.5/ day), access to health and infrastructure has improved, companies are world class, the financial sector is sophisticated and resilient, corporate governance is world class, National Treasury and the SARB have good reputations, and the judiciary, the Public Protector and Auditor-General are revered institutions.

“But, these are not enough if South Africa is to overcome the challenges it faces – infrastructure bottlenecks, skills mismatches, regulations that stifle competition and entrepeneurship, and keep one-third of the labour force unemployed or too discouraged to seek work. What then would a solution be? Public sector finances are stretched, Priority should therefore be on job creation by the private sector. Wages should restrained, in exchange for job retention and hiring commitments. SMMEs should be exempt from collective bargaining agreements, to create space for hiring.

IMF funding

The distinction between fixed-term and open-ended jobs should end, governance and operations of SOE should improve, the Competition Commission should be given more resources to prevent cartel-like behavour taking place, and crime should be dealt with. Budget Reviews and Medium Term Budget Policy Statements are about GDP growth. They are also ideal platforms for announcing steps to accelerate economic growth.

“The much-awaited reform of the labour market would be considered as such an event. The Minister of Finance will also be acutely aware of the audience he is speaking to when he delivers the MTBPS in October, more so as key rating agencies are expected to announce their review of South Africa early in December. Another point to consider is that with the ficsus under pressure to meet revenue targets, especially with the economy seeming increasingly to be in a pre-recessionary state, whether funds could be raised from the IMF which could accelerate the momentum at which the economy is growing. Funds raised from the IMF often come with conditions to them. Could the reform of the labour market be one such condition?”

Colen Garrow is an economist at Lefika Securities.

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