2021.06.09 Rejuvenating South Africa's Economy - a World Bank and OECD perspective

INCLUSIVE SOCIETY INSTITUTE

Rejuvenating South Africa’s Economy – a World Bank and OECD perspective May 2021

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8001 South Africa Registration: 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute

DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in May 2021

Author: Mariaan Webb, Creamer Media Writer Edited by: Daryl Swanepoel

Contents Abbreviations & acronyms...........................................................4 Introduction...................................................................................5 Key considerations.......................................................................6 • Economic recovery.......................................................................................................6 • Deindustrialisation and productivity.........................................................................6 • Environmental challenges...........................................................................................7 • Infrastructure bottlenecks..........................................................................................7 • Job losses and employment.......................................................................................7 • Macroeconomic stability.............................................................................................8 • Social spending.............................................................................................................9

Suggested interventions for South Africa.............................. 10 Conclusion.................................................................................. 12 Annexure A – South Africa’s Economic Outlook, Wolfgang Fengler, lead economist southern Africa, World Bank............................................ 13 Annexure B – Reinvigorating South Africa’s Economy, Dr Arthur Minsat, head of unit for Africa and Middle East Development Centre, OECD............... 23 Reference list............................................................................. 35

3

Abbreviations & acronyms

GDP.............................................................................gross domestic product

ICT..........................................information and communications technology

ISI............................................................................Inclusive Society Institute

OECD.............. Organisation for Economic Cooperation and Development

Ters......................................Temporary Employer-Employee Relief Scheme

WCY............................................................World Competitiveness Yearbook

00 4

Introduction T

his report is a summary of discussions held between the Inclusive Society Institute (ISI) and representatives of multinational funding institutions to gain a better understanding of what policies South Africa should be pursuing to encourage welfare-enhancing growth.

Economists from the World Bank and Organisation for Economic Cooperation and Development (OECD) participated in the April 2021 webinar, providing their insights on policy interventions.

The discussion forms part of the ISI’s comprehensive research to develop a new growth-centred economic blueprint for South Africa.

This report highlights that: • South Africa is at a critical juncture, with a combination of challenges on the economic, social, environmental and fiscal fronts emerging simultaneously. These issues must be responded to at the same time, presenting development challenges.

• South Africa’s short-term economic recovery is fragile, and the country is underperforming against other emerging nations.

• For the first time in democratic South Africa, macroeconomic stability has been flagged as one of the country’s top three concerns.

• The public-sector wage bill is high by international standards and wage levels of employees in the public sector are high, compared with private-sector employees in South Africa.

• A demographic dividend is a big opportunity, although there is concern about population growth that is not supported by economic growth.

The report concludes with recommendations for policy interventions in green energy, digital transformation, skills, infrastructure investment and employment to help place South Africa on a path to sustained growth and inclusive development.

Participants included World Bank country director for Southern Africa, Marie Francoise MarieNelly; World Bank lead economist for Southern Africa, Wolfgang Fengler; and OECD Development Centre’s unit for Africa, Europe and Middle East head, Arthur Minsat.

5

Key considerations Economic recovery Against the backdrop of a deep recession in 2020, South Africa is experiencing only a mild recovery, measured against other emerging nations. Growth is forecast to resume at 3% in 2021, lower than the OECD average of 3.30% and the Brics group – Brazil, Russia, India and South Africa – average of 6.70%. Economic expansion will plateau at about 2% in 2022 – well below what is needed to aid job creation (Minsat, 2021).

Owing to the combined effect of the 7% contraction in 2020 and lingering structural constraints to growth, South Africa’s real gross domestic product (GDP) is not expected to return to prepandemic levels before the latter part of 2023 (National Treasury, 2021).

A global economic rebound of 5.60% in 2021 and 4% in 2022 presents an opportunity for South Africa to “ride the global wave” of recovery (OECD, 2021). However, as a relatively small economy with a pre-Covid GDP of $351.40-billion, global integration will be key to taking advantage of opportunities that may emerge. Thus far, South Africa’s exports have failed to follow the ‘V-shape’ recovery of foreign demand, which highlights a potential issue with their competitiveness. There is, however, an opportunity to capitalise on intra-African exports.

Further, South Africa is among a few economies that have not achieved much in terms of economic prosperity in the past ten years and has been urged not to repeat the failures of the “lost decade”. Originally coined to refer to Japan between 1991 and 2000 – a time when the economy collapsed, stock markets crashed, and unemployment and debt soared – the term has come to be applied to a wider range of economies that experienced sustained periods of low, or negative, growth rates owing to political and economic policy failures. For example, warnings were issued by US President Barack Obama that the US risked a lost decade in the wake of the Great Recession of 2007-2009 (Meckler, 2009). In the South African context, President Cyril Ramaphosa in January 2019, spoke about South Africa’s “nine lost years” resulting from the State capture and related corrupt practices that gripped the country from 2009 to 2018.

While the per-capita GDP of many other developing nations accelerated, South Africa’s stagnated and now reflects the same level as 2006. Had the country managed to replicate its pre-global financial crisis growth over the past ten years, its per-capita GDP would have been R65 000, compared with the current R50 000 (Fengler, 2021).

Deindustrialisation and productivity South Africa has suffered a major deindustrialisation pattern in the past three decades.

Manufacturing as a percentage of GDP has declined from 21.60% of GDP in 1990, to less than 12% in 2019 (World Bank, 2021). Although certain sectors are performing well, most notably automotive, the overall industry has been underperforming by global standards. This analysis

6

Key considerations is buttressed by the fact that total factor productivity – a crucial measure of efficiency in manufacturing – has declined in the past decade (Minsat, 2021).

The automotive industry is South Africa’s lead manufacturing sector. Its growth and success can be ascribed to the constructive cooperation that exists between industry and government.

Government has adopted industrial polices to support the industry. The Motor Industry Development Plan started in 1995 and was replaced by the Automotive Production and Development Programme (APDP) in 2013. The South African Automotive Masterplan 2021 to 2035, alongside amendments to the APDP, take effect in mid-2021.

The APDP is a trade-related investment measure that uses import tariffs, rebate mechanisms, including a vehicle assembly allowance, a production incentive, as well as a cash grant in the form of the Automotive Investment Scheme to incentivise investment (Lamprecht, 2021).

Environmental challenges South Africa faces many environmental challenges, the cost of which is directly affecting the country’s coffers. The welfare cost of premature death resulting from ambient particulate matter pollution is estimated to be about 5% of South Africa’s GDP. This is deemed excessively high, when compared with China’s 10%, given the disparity in levels of industrialisation.

Infrastructure bottlenecks Infrastructure weaknesses in energy, rail and ports, are chokepoints for growth and productivity.

The quality of South Africa’s infrastructure is relatively low, compared with other countries. This is underscored by the nation’s performance in the latest World Competitiveness Yearbook (WCY), which rates the ability of 63 industrialised and emerging economies to create and maintain an environment that empowers enterprises to generate value. South Africa’s ranking in 2020 fell three notches to 59 out of 63 countries rated. Of the four groups of criteria evaluated, South Africa’s weakest performance was in infrastructure, with its rating having dropped to 61 in 2020, from 60 in 2019 (Department of Employment and Labour, 2020).

Job losses and employment South Africa’s economy lost 2.20-million jobs in the second quarter of 2020, a period marked by a hard lockdown to combat the spread of Covid-19 (Stats SA, 2020). Only about 40% of the jobs lost had been recovered by the end of the year. The job losses were most severe for those living in lower income households before the Covid-19 pandemic, with a heavy burden among low skilled and less educated workers.

7

Key considerations At the end of 2020, South Africa had a labour force of 22.30-million, of which 15-million are employed and 7.20-million are unemployed. There are another 17-million who are not economically active, 2.90-million of whom are discouraged work-seekers (Stats SA, 2021).

South Africa’s working-age population is forecast to expand in the next decade, exceeding the dependent population (below 15 and above 64 years of age). This could yield a demographic dividend, although a growing workforce will need a growing economy. In the absence of economic expansion, the dividend could well convert to a liability.

Macroeconomic instability For the first time since the advent of democracy in 1994, the World Bank has identified macroeconomic stability as one of South Africa’s top three challenges – the other being inequality and a lack of jobs. Although not considered to be at a “dangerous level”, the World Bank has flagged the issue as a worry (Fengler, 2021), echoing concerns raised by local economists.

The country’s fiscal position is weak, because of low growth and rising expenditures, which have not translated into better economic prospects. The budget deficit, at 14% of GDP in 2020/21, is at its highest ever and gross debt reached 80.30% of GDP in 2020/21 (National Treasury, 2021).

South Africa is not in a more vulnerable position owing largely to the strength of the country’s financial sector, which allows for a large degree of domestic borrowing. External borrowing remains at prudent levels, limiting the degree of currency risk.

The National Treasury presented two debt scenarios in the June 2020 Supplementary Budget.

In the passive scenario, which is not deemed a viable option for South Africa and was presented for illustrative purposes only, debt will spiral upwards, exceeding 100% of GDP from 2022. The possibility that government will not be able to repay its debt leads to higher debt-service costs.

This essentially redirects money that could be spent on health, education, and other policy priorities to local and overseas bondholders (National Treasury, 2020).

In the active scenario, government stabilises debt through a combination of reforms to boost economic growth and measures to increase revenue collection and lower expenditure. The deficit would be reduced strongly starting in 2021 and the debt level would start decreasing from a peak of 87% of GDP in 2023 (National Treasury, 2020).

The OECD has presented a third, progressive consolidation scenario where government fails to implement bold economic and fiscal reforms and the reduction of the deficit is only progressive. In this scenario, the debt level will stabilise by 2028. The progressive consolidation scenario is based on a deficit reduction of 1% a year of GDP and 2% GDP growth from 2025 (Minsat, 2021).

8

Key considerations The National Treasury, in its 2021 Budget Review, announced a fiscal strategy to stabilise debt at 88.90% of GDP in 2025/26. Over time, this will reduce borrowing costs and the cost of capital (National Treasury, 2021).

Besides high debt-service costs, public-service compensation has also risen sharply. The average renumeration of public servants is high by international standards and compared with private-sector employees in South Africa. Government’s payroll costs have become increasingly unsustainable, driven largely by average increases of more than 3% a year above inflation for more than a decade (Intellidex, 2020). To safeguard public finances, Finance Minister Tito Mboweni has taken a hard stance with a proposed freeze on wage increases for 1.20-million public servants.

Indexing public-sector wages below inflation for three years (at inflation minus two percentage points) could generate about R30-billion in savings over three years. This measure, the OECD says, will have a limited real cost to civil servants as inflation has receded and given that they would still benefit from annual progression in the pay scale. Wage indexation should also be linked to productivity developments (Minsat, 2021).

Social spending South Africa allocates substantial amounts each year to roll out its social welfare programme.

The social grants programme, which is the main government instrument to reduce poverty and inequality, reaches more than 17-million beneficiaries and about half of all South African households (OECD, 2020).

The World Bank, however, warns that the social protection system cannot be a substitute for growth and jobs. The World Bank also argues that the social protection system is becoming unsustainable, owing to shrinking fiscal space (Fengler, 2021).

Meanwhile, high social spending must also be converted into better results. South Africa’s investment in health and education, as a percentage of GDP, is higher than that of Turkey, but its outcomes are worse (Fengler, 2021).

9

Suggested interventions for South Africa Suggested interventions for South Africa

Balance fiscal concerns and inclusive growth

With a tax-to-GDP ratio of 29.10%, South Africa compared well with OECD countries, but the composition of its tax is quite distinct.

According to OECD classifications, personal income and corporate tax contribute 35% and 15%, respectively, substantially higher than the OECD average of 24% and 9%, respectively. However, social security contributions are much lower (Minsat, 2021). There may be room for change here, especially for social security contributions.

Build better skills

Technology and a push for digital efficiency will require a rethink of the skills needed for the economy in the digital era. The South African education system, from basic to tertiary-level education, requires a re-engineering. Dedicated policies are needed to equip the future workforce for digital transformation.

South Africa’s social protection system is large and has the capacity to deliver, which is a positive during a pandemic. However, more people should enter the productive economy.

Going forward, the policy focus should be on recovering the jobs lost in 2020, and medium-term goals should focus on improving the labour market performance.

Encourage employment

Firms must be supported to enable employment. Entrepreneurship and self-employment, especially among the youth, should be encouraged.

The World Bank believes that a Temporary Employer-Employee Relief Scheme (Ters), such as the one introduced during the Covid-19 pandemic, served as a good measure to keep people employed. The Ters benefit provided that the Unemployment Insurance Fund assisted employers, in the form of an allowance, to mitigate the impact on employees of a loss of income during the Covid-19 pandemic.

Foster a green energy transition

A green energy transition promises to deliver socioeconomic benefits to South Africa. The country’s electricity generation continues to be reliant on coal, but efforts are ongoing to diversify the energy mix.

The Renewable Energy Independent Power Producer Procurement Programme has contributed to the introduction of clean power since its launch about a decade ago. The country’s National Development Plan envisages the decommissioning of 35 GW of coal-fired power capacity and the supply of at least 20 GW of electricity needed by 2030 from renewables and natural gas.

A stable supply of electricity is at the centre of achieving higher economic growth. Opportunities also exist for aligning industrial development and green economy policies.

10

Suggested interventions for South Africa

Suggested interventions for South Africa – continued Although digital transformation can lead to the demise of certain jobs or entire companies and brands, it will also result in the birth of many new ones and is considered a necessary disruption that will leave South Africa in a better position than before.

Increased digitisation and automation will displace 3.30-million jobs by 2030, but digital technologies could also create 1.20-million direct jobs in new information and communications technology (ICT) occupations, and another 3.30-million indirect jobs (McKinsey & Company, 2019).

Harness digital transformation To ensure the greatest benefit from digital transformation, emphasis should be on building a regional digital economy, led by South Africa. Many of the Southern African Development Community’s ICT strategies, plans, models, guidelines, and frameworks are only partially implemented and require reinvigoration.

Digital transformation is also enabling the booming of the so-called Gig economy – a labour market comprising short-term jobs – that will require additional labour regulations. Social safety nets will be important to ensure that these workers have access to health and social protection benefits.

Improve access to digital opportunities

Invest in infrastructure

Challenges relating to inclusive access to data remain to be resolved and auction of spectrum needed to unlock investment in much-needed 5G infrastructure has been deadlocked for some time with current efforts at the start of 2021 being engulfed in court challenges. One area of progress has been the implementation of recommendations made by the Competition Commission, following its inquiry into the data services market, to curb data prices. However, the telecommunications industry continues to be dominated by two large firms and competition should be encouraged.

The World Bank believes public expenditure is imbalanced. Spending on South Africa’s social protection system has been strong, compared with its peers, but capital spending on infrastructure has declined since its peak in the lead up to the hosting of the 2010 FIFA World Cup. Given the current macroeconomic situation, there needs to be a discussion about the quality and composition of spending. Smarter investments on infrastructure are required, including through increased use of public–private partnerships.

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Conclusion South Africa will ultimately have to undertake its economic planning within the confines of the global economic architecture. By providing insight on best practice, sharing comparative data, and offering recommendations, multinational funding organisations help to shape the debate around policy interventions. Further engagement among civil society, think tanks, African universities and policymakers is needed to deliver a framework for a strategy to accelerate inclusive economic growth.

It is recommended that policymakers take heed of the international thinking contained in this report and that planning is measured against it. This does not mean a wholesale copying of what international funding institutions dictate, but finding unique South African solutions capable of responding to what are universal concerns.

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Annexure A South Africa Economic Outlook Inclusive Society Institute: Panel discussion 14 April 2021

Marie Francoise Marie-Nelly, Country Director, Southern Africa, World Bank Wolfgang Fengler, Lead Economist, Southern Africa, World Bank

The South Africa Economic Update Program

13

MACRO OUTLOOK

Main messages – Macro • For 2021, the World Bank projects growth of 3 percent, a mild recovery which falls short of the recovery in other emerging markets.

• The COVID-19 crisis has put additional pressure on public finances which have been deteriorating for a decade. The fiscal position is weak because to low growth and rising expenditures which have not translated into better economic prospects thus far.

• There is an imbalance in South Africa’s public expenditures. While the social protection system is large and strong (compared to peers), capital spending has been declining for almost two decades.

• Cyclical and structural measures are needed. If we take an 18-month recovery perspective, South Africa will need to respond to the health crisis while at the same time advance economic reforms to increase private investment. With higher investment there will be higher growth, more jobs and sustainable public finances.

14

Against the background of a deep recession in 2020s South Africa is experiencing a weak recovery in 2021 – but it is not alone 2021 Recovery Weak (worse than +4) 2020 Contraction

Moderate or strong (better than +4)

Moderate or none (better than -4)

Muted impact Forging ahead Nigeria, Kenya, Saudi Arabia, Australia, China, USA, South Korea; Sub-Saharan Africa Vietnam; World average

Severe (worse than -4)

Left behind South Africa, Brazil, Canada, Germany, Italy, Japan, Russia

Sharp decline, steep recovery India, France, Spain, Mexico, UK

MACRO

South Africa needs to avoid another lost decade South Africa: GDP per capita with...

Baseline growth path

A more dynamic future path

A more dynamic historical path

Thousands

70 65 60 55 50 45 40 1993

1997

2001

2005

2009

2013

2017

2021

2025

2029

Source: Authors’ calculations based on StatSA and UN data

SOUTH AFRICA ECONOMIC UPDATE | 6

15

MACRO

Since 2010, South Africa stagnated while peers accelerated GDP per capita before and after the GFC (real terms, index) 220

South Africa

LMICs (simple average)

UMICs (simple average)

HI EMs (simple average)

200 180 160 140 120 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Authors’ calculations based on WEO data

SOUTH AFRICA ECONOMIC UPDATE | 7

MACRO

The COVID-19 crisis has put additional pressure on public finances…

Public finances dynamics % of GDP, +=deficit

SOUTH AFRICA ECONOMIC UPDATE | 8

16

Sub-Saharan Africa

Eur. & Central Asia

E.Asia & Pacific L.America & Carib. MENA

BTN PAK LKA BGD MDV NPL IND

EGY DJI JOR SAU TUN KWT LBN MAR PSE IRQ

GTM LCA CRI HND SLV URY DOM BRA PER ECU PAN MEX GRD ARG BOL NIC COL CHL

PNG LAO MMR VUT THA PHL KIR MYS CHN WSM IDN KHM VNM MHL FJI MNG TLS

LTU TJK LVA AZE ROU TUR MKD MDA ARM BGR ALB KAZ MNE RUS SRB POL SVK EST SVN BLR HUN KGZ HRV BIH UKR GEO

0.0

CIV GNB CMR COG MDG SOM TGO GAB ZMB NGA KEN ZWE TZA GHA MLI COM NER TCD COD UGA SLE ETH SEN SDN MOZ MWI RWA GIN BWA SWZ BFA BDI AGO MRT CPV SYC LBR CAF BEN NAM ZAF MUS LSO SSD

Share of GDP (%)

South Africa’s social protection system is strong and large, but it is becoming unsustainable…

M AC R O

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

S.Asia

South Africa Economic Update | 10

17

M AC R O

South Africa needs to convert its high social spending into better results Public spending on education and educational outcomes

1,000

Turkey

0,950

Harmonized test scores

Fraction of children under 5 not stunted

Public spending on health and health outcomes

Mexico

0,900

Colombia

0,850 0,800 0,750 0,700

South Africa

0,650 0,600

2,0

3,0

4,0

5,0

6,0

7,0

Public spending on health (percent of GDP)

Malaysia

450

Brazil

400

350

300 1,0

Turkey

500

South Africa 2,0

3,0

4,0

5,0

6,0

7,0

Public spending on education (percent of GDP) Source: Human Capital Project, World Bank

Source: Human Capital Project, World Bank

South Africa Economic Update | 11

JOBS

18

Main messages - Jobs • South Africa could benefit from a demographic dividend.

• South Africa saw a record 2.2m jobs lost in mid-2020, and less than 40% of these had been recovered by the end of the year.

• Since COVID hit, The average South African is worse off, and inequality between South Africans has widened.

• A suggested package of policy innovations could give the recovery a needed thrust: shifting support to firms, enabling self-employment, partnering with private sector on activation programs.

JOBS

South Africa’s demographics is looking favorable (1)

Source: Authors’ calculations based on StatSA and UN data

SOUTH AFRICA ECONOMIC UPDATE | 14

19

South Africa’s demographics is looking favorable (2) 2030 Country

Working Adults (15-64)

Children (0-14)

Seniors (65+)

South Africa

68%

25%

7%

Vietnam

68%

19%

13%

Brazil

68%

18%

14%

Egypt

65%

28%

7%

Kenya

62%

34%

4%

USA

61%

18%

21%

France

59%

17%

24%

Germany

59%

13%

27%

Dependency ratio 47% 47% 47% 53% 61% 64% 69% 69%

South Africa has a jobs challenge at several levels

20

JOBS

•

•

• • •

In terms of jobs, South Africa is experiencing ‘a weak V’?

Initial large shock in Q2 followed by a moderate & rising recovery.

By end of 2020 SA records net job loss of 1.4m (decrease of 8% from Q1>Q4).

Beyond Q2, an initial but slow job recovery of 700 000 jobs.

Only one third of the jobs have been recovered.

Key question: Strength and pace of recovery?

Number of employed Millions

Authors’ own calculations. Source: QLFS 2019Q1 – 2020Q4 (StatsSA).

Notes: [1] Estimates weighted using relevant sampling weights.

[2] Sample restricted to working-age population (15-64 years).

SOUTH AFRICA ECONOMIC UPDATE | 17

MACRO

Job losses have been more severe for lower income workers, widening inequality • Job losses most severe for those living in lower income households before the Covid-19 shock.

• Higher job loss burden among low skilled, low education workers.

• Covid-19 widening inequalities mainly through job losses.

Employment relative to 2020Q1 (%)

Authors’ own calculations.

Source: QLFS 2020Q1 – 2020Q4 (StatsSA).

Notes: [1] Estimates weighted using computed bracket weights. [2] Sample restricted to the employed (employee, employer, or self-employed) working-age population (15-64 years). [3] Wages expressed in January 2021 Rands. [4] Wage data adjusted for bracket responses and outliers. [5] Zero working hours replaced with mean working hours for a given year and quarter.

SOUTH AFRICA ECONOMIC UPDATE | 18

21

JOBS

Towards an innovative policy response Going forward… Policy Focus should be on:

So far…

4 key government relief programs Temporary Social Grant Top-Up

Temporary COVID-19 SRD Grant

TERS

Public Employment Programs

Ø Short term needs: recovering the 1.4 million jobs lost in 2020 Ø Medium term goals: improve labor market performance Policy Options: “shifting from relief to recovery” 1. Re-focus transfer system through labor market linkages (SRD, TERS, ETI).

2. Consider moratorium on specific new pieces of labor regulation.

3. Revisiting approach to self-employment.

4. Strengthen ALMPs through public/private partnerships SOUTH AFRICA ECONOMIC UPDATE | 19

Thank you Contact: Wolfgang Fengler wfengler@worlddata.io

22

Annexure B

REINVIGORATING SOUTH AFRICA’S ECONOMY: KEY CONSIDERATIONS Dr Arthur MINSAT Head of Unit for Africa and Middle East, Development Centre, Organisation for Economic Cooperation and Development (OECD)

Inclusive Society Institute 14 April 2021

A fragile short-term recovery Global demand recovered faster than South Africa’s export capacity

South Africa

BRIC

20 21 (p )

20 19

20 17

20 15

20 13

20 11

20 09

10 8 6 4 2 0 -2 -4 -6 -8 -10 20 07

% change, year-on-year

GDP expected to grow by 3.0% in 2021

Total OECD

Source: OECD Economic Outlook, December 2020 and March 2021

23

(1) Tackle the challenge of structural transformation, including through CFTA Total factor productivity in South Africa has actually declined in the last decade.

1,4

20 18

20 16

20 14

20 12

20 10

20 08

20 06

11.8%

Annual TFP growth (in log)

1,5

20 04

20 02

20 17.4% 18 16 14 12 10 8 6 4 2 0

20 00

Sectors' value added ( % of GDP)

The share of manufacturing in GDP dropped from 17.4% in 2000 down to 11.8% in 2019

1,0 0,5

0,6 0,0

0,0

0,2

0,3

-0,5 -1,0

-0,9

South Africa OECD 2000-09 2010-19

Sub-Saharan Africa

Manufacturing, value added (% of GDP)

Source: WB World Development Indicator and Conference Board’s Total Economy Database

(2) Address infrastructure bottlenecks, esp. energy Quality of infrastructure (100=Best performance)

CO L BR A ID N ZA F IND AR G CR ME I X TU R NZ L NO R ES T LV A CH L ISL IRL LT U GR C CH N SV N SV K AU S HU N CA N PO L ISR FIN PR T CZ E SW E ITA LU X DN K BE L US A GB R AU T FR A DE U ES P KO R JPN CH E NL D

100 90 80 70 60 50 40 30 20 10 0

Source: OECD Economic Surveys of South Africa, June 2020

24

(3) Balance fiscal concerns with inclusive growth Gross debt (% GDP) 160

Active scenario (Consolidation suggested by June 2020 budget) Passive scenario June 2020 (No consolidation) Progressive consolidation (Deficit reduction by 1% of GDP annually & 2% GDP growth from 2025)

140 120 100 80 60

20 30

20 29

20 28

20 27

20 26

20 25

20 24

20 23

20 22

20 21

20 20

20 19

20 18

20 17

20 16

40

Source: OECD Economic Surveys of South Africa, June 2020

Managing spending pressures: The public wage bill

% of GDP

A. Compensation of employees, general government, 2019 or latest available year

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

IDN

MEX

COL

CHL

TUR

RUS

OECD average

ZAF

BRA

0

Source: OECD Economic Surveys of South Africa, June 2020

25

Green energy is imperative for sustainable development B. Energy intensity Primary energy supply per GDP

A. CO2 intensity CO2 per GDP kg/USD,

0,8

ktoe/USD (2010 PPP)

South Africa

0,28

0,7

12%

South Africa

0,24

0,6

10%

0,16

OECD

0,3

0,12

0,2

0,08

0,1

0,04

0

0,00

OECD

8%

0,20

0,5 0,4

C. Renewable energy share % of primary energy supply

OECD

6% 4%

South Africa

2% 0%

Source: OECD Economic Surveys of South Africa, June 2020

The fiscal system plays an important role for reducing inequality in South Africa Gini coefficient of market income

Gini coefficient of final income

80 70 60 50 40

Africa

Source: CEQ Institute (2018)

26

Asia

LAC

Honduras

Colombia

Guatemala

Paraguay

Peru

Dominican…

Brazil

Bolivia

Nicaragua

Mexico

Chile

Ecuador

Costa Rica

Uruguay

El Salvador

Venezuela

Argentina

Georgia

Indonesia

Armenia

Sri Lanka

Iran

Russia

Jordan

South Africa

Ghana

Uganda

Tunisia

Tanzania

20

Ethiopia

30

Relief/Stimulus in short term, recovery on medium term • Short term: Relief and economic stimulus – Temporary financial support for households and businesses (10% of GDP) – Accommodative monetary policy (repo 300bps, T-bond purchase, R200 billion loan guarantee)

• Medium term – Economic Reconstruction and Recovery Plan – Infrastructure rollout (unlocking R1 trillion in new investments) – Energy (11 800 MW of new generation capacity by 2022; half from renewable sources) – Employment stimulus (R100 billion over the next 3 years) – Industrialization, localization and export promotion

FOSTERING A GREEN ENERGY TRANSITION

27

Gradually strengthen competition and governance in transport, telecom and electricity sector Government Involvement in transport, telecom, and electricity sectors Government involvement

5 4 3 2 1

CH LT E LUU X ZA SWF LVE N A O R FI TUN SV R N PO SV L FRK AUA T IS R IR AR L NG O ZL EC KOD D R E D U N K CZ H E U MN EX IS BEL PRL BRT A IT A G RC JP NN LD ES CA P CHN AUL G S BR

0

Source: OECD Economic Surveys of South Africa, June 2020

Infrastructure investment at 5% GDP will boost growth by 0.4% by 2025 Public infrastructure spending declined since 2009 peak

% of GDP

7

6

6

5

5

4

4

3

3

2

2

1

1

0

0

19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 20 18

7

Increasing public investment by additional 1.6% of GDP (to reach 5%) would boost potential growth by +0.4% in 2025, and 1.2% by 2040 Source: OECD Economic Surveys of South Africa, June 2020 and Stat SA (September 2020)

28

HARNESSING THE DIGITAL TRANSFORMATION FOR JOBS & STRUCTURAL TRANSFORMATION

Digital transformation can bring net job creation, despite challenges Digital transformation can create a net gain of 1.2 million in new jobs: +1.2 million direct jobs in new ICT occupations, +3.3 million job created indirectly -3.3 million jobs displaced But..

Automation threatens to displace jobs

Gig economy may not offer good jobs

Exposure of exports to automation risks (as % of total export flows to OECD countries) 30,0 25,0 20,0 15,0 10,0 5,0 he ut o S

… rn

r Af

a ic h ut So

r Af

a ic

ia As

C LA

O

D EC

Source: AUC/OECD (AfDD, 2021)

29

Support private investment + make access to digital opportunities more equal

25%

100%

20%

80%

15% 10%

As USD Billion

% of Revenue

2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0

Share of population who can afford 1GB of data monthly in Southern Africa, 2019

60% 40%

5%

20%

0%

0%

20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19

USD Billions

Private telcos lead South Africa’s investment in ICT infrastructure

As % of revenue (rhs)

i a e a o e a a d la ia ia ib fric iqu fric fric mb wan o th abw go l aw il an a n s b A z A a s b e am h A m A t a M w Z L im N ut rn za Bo S Z he t So Mo u So

Source: AUC/OECD (AfDD, 2021)

South Africa is among Africa’s leaders in digital transformation The majority of start-ups are located in few large cities Ø 49% of start-ups are located in 5 cities: Cape Town, Lagos, Johannesburg, Nairobi, Cairo

Ø Who do they do? The top10 most attractive activities for African start-ups IT and internet services

27,9

Apps and software

20,5

Audiovisual, broadcasting…

15,6

Hardware, robotics and…

14,3

Finance , lending and…

13,6

E-commerce and Shopping

12,1

Leisure, lifestyle, tourism…

9,7

Mobile industry and…

9,4

Sales, marketing and…

AI, data analysis and science

6,9 0

Source: AUC/OECD, Africa's Development Dynamics (AfDD) 2019

30

8,5

20 %

40

Implementing regional initiatives key to build regional digital economy led by South Africa • South Africa is home to about 1 200 active tech start-ups • SADC has 29 ICT strategies, plans, model laws, policy guidelines and frameworks since 2012 Key digital transformation initiatives by the Southern African Development Community Initiative

Years 2012-27

Digital SADC 2027

Analogue to Digital Migration

2009-present 2008-13

HIPSSA Model Laws Declaration on Information Communication Technologies

and 2001-present

Description The 2012 SADC Regional Infrastructure Development Master Plan’s ICT pillar whose objectives include universal, harmonised broadband frequencies, fibre-optic backbone infrastructure, spectrum allocation, harmonised ICT regulatory framework, centres of excellence Technical support to member states in meeting analogue-to-digital migration Driven by the Communications Regulatory Authority of Southern Africa (CRASA) to reduce roaming costs in the region SADC ICT policy, highlighting infrastructure and regulation

BUILD BETTER SKILLS FOR LABOUR MARKETS

31

Strengthen the education system, both in scope and quality South Africa has not reached universal K12 coverage

Quality of education system must strengthen

Expected Years of Schooling (2020)

Average harmonised learning outcome score (2015)

Eswatini Mozambique Botswana Angola Zambia Namibia Malawi Lesotho South Africa Morocco Tunisia Zimbabwe Egypt, Arab Rep. Algeria

South Africa Algeria Morocco Tunisia Egypt Botswana 0

2

4

6

8

10

12

14

360

370

380

390

400

Source: World Bank EdStat

Develop human capital to equip workers with the quality skills for digital transformation Business as usual

Source: Wittgenstein Centre Human Capital Graphic Explorer

32

Accelerated education policy (South Korea track)

410

BALANCING FISCAL CONCERNS AND INCLUSIVE GROWTH

Financing for development is improving in South Africa, but declining for the African continent General government taxes (no grants) Gross private saving, current prices

General government non-tax revenues (no grants) Total financial inflows

Africa

60

60

50

50

40

40

30 20

% of GDP

% of GDP

South Africa

30 20

10

10

0

0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Source: Minsat, A. (forthcoming)

33

South Africa relies on personal and corporate income tax, but less on social security than OECD average

30

Tax categories as % of total taxation

Tax-to-GDP ratio, 2018

35

24

29,1

9

25

20

17

16

7

28

10

20

5

12 t ) l a n li s o a o i a i a s a a o e a a r r o . d a CD lle isi fric cc LAC er de ritiu oth ibi Tog alaw eny atin and Faso gyp (30 ega itani roo Ma hana voir an and sca Nige ong Rep Cha ine ger ia s m OE yche Tun th A oro C m.

G d'I otsw Ug aga M K Esw Rw ina E frica Sen aur ame Gu Ni o V Mau Le Na M e b d e u t k B ial A r M C De S Ca So Ma Cô tor o, Bu a g u n Eq Co

30

22

8

8

OECD*

LAC

35

19

17

26

15

0

10

22 4

Africa (30)

Other taxes Value added taxes (VAT) Corporate income tax

15 23 17 9 South Africa

Taxes on G&S, Not VAT Social security contributions Personal income tax

Source: Revenue Statistics in Africa 2020

THANK YOU!

CONTACT AT ARTHUR.MINSAT@OECD.ORG https://doi.org/10.1787/5daa24c1-en-fr

https://doi.org/10.1787/9789264302501-en

https://doi.org/10.1787/c1cd7de0-en

24

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Reference list Department of Employment and Labour. 2020. South Africa hits all-time low in competitiveness ranking. June 17, 2020. [Online]. Available at http://www.labour.gov.za/ south-africa-hits-all-time-low-in-competitiveness-ranking [accessed May 10, 2021].

Fengler, W. 2021. South Africa Economic Outlook, Inclusive Society Institute panel discussion.

April 14, 2021. World Bank.

Intellidex. 2020. The Public Sector Wage Bill – an evidence-based assessment and how to address the challenge. November 2020. [Online]. Available at: https://www.intellidex.co.za/ wp-content/uploads/2020/11/Intellidex-Public-Sector-Wage-Bill-Nov-2020.pdf [accessed May 10, 2021].

Lamprecht, N. 2021. Automotive Export Manual 2021, Journey to 2035, April 2021. [Online]. Available at https://naacam.org.za/wp-content/uploads/2021/04/ AutomotiveExportManual2021.pdf [accessed May 10, 201].

McKinsey & Company. 2019. The Future of Work in South Africa: Digitisation, Productivity and Job Creation. September 4, 2019. [Online]. Available at: https://www.mckinsey.com/~/ media/mckinsey/featured%20insights/middle%20east%20and%20africa/the%20future%20 of%20work%20in%20south%20africa%20digitisation%20productivity%20and%20job%20 creation/the-future-of-work-in-south-africa.pdf [accessed May 10, 2021].

Meckler, L. 2009. Obama Warns of Lost Decade, February 10, 2009. [Online]. Available at: https://www.wsj.com/articles/SB123419281562063867?mod=djemalertNEWS [accessed May 26, 2021].

Minsat. A 2021. Reinvigorating South Africa’s Economy: Key Considerations, Inclusive Society Institute panel discussion, April 14, 2021. Organisation for Economic Cooperation and Development.

National Treasury. 2021. Budget Review 2021, February 24, 2021. [Online]. Available at http://www.treasury.gov.za/documents/National%20Budget/2021/review/FullBR.pdf [accessed May 10, 2021].

Organisation for Economic Cooperation and Development (OECD). 2020. OECD Economic Surveys: South Africa 2020, July 2020. [Online]. Available at https://www.oecd-ilibrary.org/sites/ d6bc2d63-en/index.html?itemId=/content/component/d6bc2d63-en [accessed May 10, 2021].

Organisation for Economic Cooperation and Development (OECD). 2021. OECD Economic Outlook, Strengthening the recovery: The need for speed, March 2021. [Online]. Available at https://www.oecd.org/economic-outlook/ [accessed May 10, 2021].

Statistics South Africa (Stats SA). 2020. Quarterly Labour Force Survey, Quarter 2:2020, September 29, 2020. [Online]. Available at http://www.statssa.gov.za/publications/P0211/ P02114thQuarter2020.pdf [accessed April 23, 2021].

Statistics South Africa (Stats SA). 2021. Quarterly Labour Force Survey, Quarter 4:2020, February 23, 2021. [Online]. Available at http://www.statssa.gov.za/publications/P0211/ P02114thQuarter2020.pdf [accessed April 23, 2021].

World Bank. 2021. World Bank, Data. Manufacturing, value added (percentage of GDP) – South Africa. [Online]. Available at: https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=ZA [accessed May 10, 2021].

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This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions separately from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy.

The ISI’s work is motivated by its desire to achieve non-racialism, non-sexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental State. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. www.inclusivesociety.org.za