The Financial Mail (24 Feb 2012) on the myths that we base our development hopes on

On 24 February the Financial Mail published an interesting article by Claire Bisseker in which they claim that although South Africans believe we can solve our problems and become a “winning nation” through reaching certain goals or implementing certain methods, some of these goals and methods are based on “wishful thinking rather than sound Economic theory”.  We have summarised these myths (according to FM) below for the benefit of our trustees (you can access the full article here):

“MYTH 1: With the right economic policies, SA can eradicate unemployment.

A large proportion of SA’s working-age population is unemployable given the modern, capital- and skills-intensive nature of SA’s growth path: they have the wrong skills, inadequate qualifications, weak basic schooling, cannot afford tertiary study or live far from work opportunities.  Without the following key areas being addressed, economic policies will not have a significant impact:

Education – our new graduates will continue to swell the ranks of the unemployed — with or without economic growth, because of the following:

  1. poor management of the education system,
  2. under skilled teachers and
  3. declining standards of maths and science

Regulation of the labour market:

Low-skilled jobs for anyone prepared to work in them. After a while, skills acquisition would take place and workers would progress to semi-skilled jobs at better wages and then later still to skilled jobs at good wages. S.A. cannot compete at the lower, less skilled end at current wage rates and with current labour market practices.

MYTH 2: Halving unemployment would halve poverty, solving most of SA’s problems.

According to the Human Science s Research Council (HSRC), even if unemployment were solved, most people would be working in low- and semi-skilled service jobs that are inherently uncertain and relatively low paid.

It will remain essential, therefore, to reduce the cost of living and improve the quality of public services, especially of education and health care. It also means that social grants will continue to claim a large share of the budget indefinitely. “Widespread poverty and structural unemployment are not, and nowhere have they been, self-correcting,” says Abedian. “They require effective public-sector operations. Together, poverty and unemployment will continue to pose a political economic risk and a fiscal risk, to SA.”

MYTH 3: The private sector, not government, should be creating all the jobs.

Though the private sector is and should remain the main source of job creation, the backlog of unemployment and the numbers of new entrants into the labour market each year are simply too large for a private sector the size of SA’s to absorb.

MYTH 4: SA is plagued by jobless growth.

Over the past decade, there has been a strong correlation between economic growth and job creation in SA. Though the unemployment rate remains unacceptably high, it has in fact fallen dramatically — from 30% in 2003 to 23,9% now. The SA economy created 3.4m jobs last year, according to Stats SA’s Quarterly Labour Force Survey, but shed about 1m jobs during the global economic crisis. These employment losses have still not been recovered and future employment prospects remain uncertain because of the dismal economic outlook. For government to meet its goal of halving unemployment by 2020, SA must create 500 000 new jobs each year on average. The economy must therefore grow faster to achieve this goal.

MYTH 5: If interest rates were a bit lower, firms would invest more and the economy would grow much faster.

The World Bank and many other economists believe worsening risk perceptions and structural barriers are the real impediment. “SA’s problem is not that the cost of capital is too high but that the cost of running a business is too high,” echoes Reserve Bank governor Gill Marcus.

Four key issues holding back S.A’s competitiveness and growth: high industrial concentration; significant skills gaps (linked to quality of education); contentious labour relations (including relatively high wages) and work stoppages; and SA’s low savings rate.

Other key constraints identified, include: crime and violence, access to reliable electricity, corruption, access to finance by small and medium enterprises, and anticompetitive practices. Policy uncertainty, and the problems associated with a volatile and overvalued exchange rate are also frequently cited.

MYTH 6: SA’s public finances are in much better shape than most other major economies, so government still has plenty of resources available to stimulate the economy and address poverty.

Though SA’s gross debt and budget deficit to GDP ratios may be much better than key developed economies (where they are dreadful), SA has experienced a sharper deterioration in its fiscal position since 2008 than its developing country peers. SA has been spending on the wrong things. Government has allowed wage increases and entitlement spending to cannibalise more than 50% of the budget, crowding out productive economic investment.

There will be little room for new growth-supportive spending. And if the wage bill continues to balloon, infrastructure spending could be curbed. This would undermine SA’s longer-term growth prospects.

Conclusion:

Rising domestic inflation and slower global growth is suppressing the outlook for the economy. Growth is now expected to slow to about 2,8% this year (2012)— too little to dent high unemployment. In this low-growth environment, unemployment and poverty will remain insurmountable. Even with the economy growing at 5,2% on average for four years (2004- 2007), unemployment failed to dip below 22%. SA is appears to be stuck with a high unemployment rate — maybe even as high as 20%.

SA has long been plagued by deep-seated structural inefficiencies that are thwarting its growth ambitions: the rate of saving and investment is too low; productivity growth is too slow; and what growth there is, is not labour-intensive enough. These are the main levers that government needs to adjust in trying to put SA on the high road to faster, more inclusive growth.

The message is that SA has drifted off course but lacks the political will to make the really hard choices that could turn it into a winning nation”.

While the DG Murray Trust acknowledges that the article may be somewhat depressing, we remain positive and focused on addressing some of the key areas of concern mentioned, through our strategies, while trying to avoid chasing myths.

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