Economic growth and employment in South Africa : a

ECONOMIC GROWTH AND EMPLOYMENT IN SOUTH AFRICA: A CRITICAL POLICY ANALYSIS

by

N.A. CHILI

submitted in partial fulfilment of the requirements for the degree of

Masters of Arts in Economics

in the

Faculty of Economics and Management Sciences

at the

Rand Afrikaans University

November 2000

Supervisor: Prof. Lorraine Greyling

TABLEMELQUIENES

Page

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES vi

ABBREVIATIONS vii

ACKNOWLEDGEMENT viii

CHAPTER ONE PROBLEM STATEMENT, METHODOLOGY

AND DEPLOYMENT OF STUDY 1

1.1 Introduction 1

1.2 Problem statement 3

1.3 Methodology 4

1.4 Deployment of study 5

CHAPTER TWO ECONOMIC GROWTH THEORIES 7

2.1 Introduction 7

2.2 Adam Smith 7

2.3 David Ricardo 9

2.4 Malthus 9

2.5 Mill 10

2.6 Karel Marx 11

2.7 Schumpeter 12

TABLE OF CONTENTS

11

2.8 Solow 12

2.9 Harrod-Domar Model 14

2.10 Kenneth Arrow 17

2.11 Paul Romer 18

2.12 Conclusion 18

CHAPTER THREE THE HUMAN RESOURCE DEVELOPMENT

AND THE LABOUR MARKET POLICIES 22

3.1 Introduction 22

3.2 Inequality 22

3.3 Human resource development 25

3.3.1 Overview of the current industrial training systems

in South Africa 25

3.3.2 Green paper on skills development strategy for

economic and employment growth in South Africa 26

3.4 Presidential job summit 28

3.5 Labour market policy 30

3.5.1 NEDLAC Act 31

3.5.2 Labour Relations Act 32

3.5.3 Basic conditions of Employment Act 32

3.5.4 Employment Equity Act 32

3.5.5 Skills Development Act and Skills Development Levies Act 33

3.6 Conclusion 35

TABLE OF CONTENTS

iii

CHAPTER FOUR SOUTH AFRICAN MACRO ECONOMIC

POLICY 36

4.1 Introduction 36

4.2 Reconstruction and Development Programme 37

4.3 The growth employment and redistribution strategy 38

4.3.1 Background 38

4.3.2 Objectives 39

i Labour market structures and reform challenges 40

ii Enhancing productivity 42

iii Industrial support measures 43

iv Small and medium-sized enterprise development 43

4.4 GEAR outcomes and shortcomings 44

4.5 Medium term expenditure framework 48

4.5.1 Goals of the MTEF 49

4.6 Conclusion 50

CHAPTER FIVE INTERNATIONAL COMPARISON 52

5.1 Introduction 52

5.2 Indonesia 53

5.2.1 Employment and labour market characteristics 53

5.2.2 Macro economic development 54

5.2.3 Labour policy and industrial relations 54

5.3 Chile 55

5.3.1 Employment and labour market characteristics 55

5.3.2 Macro economic policies 56

TABLE OF CONTENTS

iv

5.3.3 Labour policy 57

5.4 Korea 58

5.4.1 Introduction 58

5.4.2 Factors behind Korea's economic success 58

5.4.3 Labour issues 61

5.5 Lessons for South Africa 62

5.6 Conclusion 63

CHAPTER SIX RECOMMENDATIONS 65

6.1 Introduction 65

6.2 Land reforms and tourism 66

6.3 Arts and culture 67

6.4 Special employment programmes 68

6.5 Small, medium and micro enterprises 69

6.6 Conclusion 71

CHAPTER SEVEN CONCLUSION 73

BIBLIOGRAPHY 77

TABLE OF CONTENTS

V

LIST OF TABLES

Page

Table 3.1 Composite measures of inequality in selected countries 23

Table 4.1 GEAR scenario projections 40

Table 4.2 GEAR job creating initiatives 41

Table 4.3 Total number of employees 47

(salary and wage earners)

Table 4.4 Macro economic projections 50

Table 5.1 Income distribution indicators 56

Table 5.2 Key economic indicators (1962-1997) 61

Table 5.3 Trend in long term economic development

(comparison) 63

Table 6.1 Travel and tourism industry 66

Table 6.2 Key objectives of the national small business stategy 70

LIST OF TABLES

vi

LIST OF FIGURES

Page

Figure 4.1 GEAR GDP growth rates projections

compared with the actual results 45

Figure 5.1 Population below poverty line (percentage) 57

LIST OF FIGURES

vi i

ABBREVIATIONS

ANC African National Congress

BCEA Basic Condition of Employment Act

EEA employment Equity Act

GEAR Growth employment and redistribution

ILO International Labour Organisation

LRA Labour Relations Act

MTEF Medium Term Expenditure Framework

NEDLAC National Economic Development and Labour Council

NGO Non-Governmental Organisation

OECD Organisation for Economic Co-operation and Development

PAYE Pay As You Earn

RDP Reconstruction and Development Programme

SDA Skills Development Act

SMME Small, Medium and Micro Enterprises

ABBREVIATIONS

viii

ACKNOWLEDGEMENT

I wish to express my sincere appreciation to the following persons:

My supervisor, Professor Lorraine Greyling, for her assistance,

expert advice and for always being a model of perseverance.

My husband, Goody, for his loving patience during this time and my

children, Andile and Luyanda, for always being there for me.

Ilsette Parsons, for her support and excellent creativity

in processing and printing this work.

ACKNOWLEDGEMENT

PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF

STUDY

1.1 INTRODUCTION

The economic growth in South Africa during the period 1994 to 1999 has

failed to create new jobs. The broad issues constraining employment

creation includes persistent low economic growth and a lack of historical

investment in human resource development. At least a six percent

economic growth is essential and such growth must be strongly labour

absorbing. The current economic performance is not encouraging in this

regard.

This study examines job creation and focuses mainly on economic growth

as the driving force for job creation. Training and development of skills are

important components in creating jobs. Not only education has become a

major government priority, but also a new skill enhancement strategy has

been developed which seeks to identify the training needs. The department

of labour in consultation with national training board in 1997 prepared the

green paper on human resource development (Nedlac, 1997:1). The green

paper covers industry based training, but also takes on board the need of the

target groups such as the unemployed, youth, women, people in rural areas,

people with disabilities and retrenched workers.

Labour regulations have been formed with a view of allowing a sufficient

CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF STUDY PAGE 1

degree of labour market adaptability, while also providing a measure of

employment security. The lack of workers rights in some sectors increases

the desire to extend, rather than to reduce the ambit of labour regulations.

The perception in business is that labour policies are pulling to the wrong

direction and therefore affect the output and employment growth.

The government legislative programme stems from consistent approach to

labour market reforms. Various labour legislations have been passed by

parliament in the period of 1994 to 1999. According to the department of

labour (1999:4) the labour market policy has been guided by the following

objectives:

The need to ensure that labour market policies contribute to the

realisation of the vision of the government.

The need to ensure that labour market policies promote economic

growth in a manner that contributes to a greater protection and security

of the workforce.

The need to broaden, deepens and upgrade the formation and

utilisation of skills throughout the economy.

The primary objective of the economic policy is to provide growth and

development in order to create jobs, sustain employment, alleviate poverty

and reduce inequality. In pursuing these objectives, government had to

develop and implement a wide range of economic and social programmes.

In 1994 the government adopted Reconstruction and Development

Programme (RDP) which sets out its commitment the elimination of

poverty in the rapid growing economy (Department of fmance, 1997:1).

Subsequently the government introduced the Growth Employment and

Redistribution (GEAR) in 1996. Its main objective is to create an


economic system that will ensure the rapid economic growth and

development of the people. The government believes that GEAR will

change South African economic path of slow growing and non job creating

to a development oriented economy. In 1998 the Medium Term

Expenditure Framework was introduced as an additional instrument to

achieve the objective set out in GEAR and RDP programmes.

GEAR enumerates, among other objectives, the following targets by the

year 2000 (Bown, 1997:9):

6 percent growth in real GDP;

409 000 new jobs per annum;

an inflation rate in the region of 7.6 percent;

a real interest rate of 3 percent;

a fiscal deficit at 3 percent of GDP;

10 percent real growth in non-gold exports, and

real private sector investment growth of 17 percent and US$ 800

million in additional foreign direct investment.

GEAR failed to meet the projected results. A review of different

international countries show that the economic policy plays an important

role in economic growth and creating jobs but the policy need to be

reviewed at least after every five years. GEAR, as a policy is important, the

government need to review it and adjust the numerical targets.

1.2 PROBLEM STATEMENT

The objective of this study is to examine the economic growth and job

CHAPTER ONE: PROBLEM . STATEMENT, METHODOLOGY AND DEPLO)MENT OF STUDY PAGE 3

creation in relation to macro economic policies in South Africa since 1994

to date. Economic growth theories help to explain the economic growth

problem as well as the possibility to create jobs.

Since 1994, the government has introduced three economic policy

programmes namely the RDP, GEAR and MTEF. However, the

unemployment rate is increasing and the economic growth is still low. The

aim of this study is to:

demonstrate that economic growth is the driving force to job creation;

analyse the human resource development;

examine the international experience in relation to South Africa;

critically analyse labour market development and macro economic

policies;

provide recommendations to employment creation.

1.3 METHODOLOGY

This study is mainly based on the existing literature about economic growth

and job creation. Empirical analyses were conducted using the existing and

historical data from various quarterly bulletins of the South African reserve

bank, the Internet, publications, and the department of finance. The data

was used to determine trends of key economic variables. The methodology

comprises of three steps. Firstly, each chapter begins with a brief

introduction that gives a hypothetical statement. Secondly, the hypothesis

is analysed. Lastly, a short concluding statement is made, which emphasise

the major fmdings of the chapter.


1.4 DEPLOYMENT OF STUDY

The study is divided into seven chapters. Chapter one is an introduction to

the topic. It provides background, problem statement, methodology and

deployment of study.

Chapter two analyses the theories of economic growth. These theorists are

important in explaining the problem of economic growth and the

possibilities of job creation. A selection of economic growth theories will

be reviewed, starting from classical era to the new economic growth

theories.

Chapter three focuses on South Africa's labour market development, and

the measures taken to develop human capital. Various labour policies have

emerged and passed by parliament from 1994 to 1999. The Acts include

labour relations Act, the Employment Equity Act, Skills Development Act

and Skills Development Levies Act. The job summit held in 1998 is also

discussed in this chapter. The summit believes that the continued

investment in education will increase the number of school leavers with

improved skills.

Chapter four provides a theoretical overview of the policy framework

implemented by the government. The main strategies and programmes

aimed at improving growth and creating employment in South Africa are

evaluated in this chapter. These strategies and development programmes

are: Reconstruction and Development Programme (RDP), Growth,

Employment and Redistribution (GEAR) strategy, and the Medium Term


Expenditure Framework (MTEF).

The RDP sets out the government commitment to the elimination of

poverty.

With GEAR the government aim is to achieve a macro economic

stability through a range of structural changes in the economy.

MTEF is an additional policy instrument to achieve the objectives set

out in RDP and GEAR.

The outcome of the macro economic policy will be analysed in order to

evaluate whether the objectives were achieved.

Chapter five reviews three international countries in order to identify the

main lessons for South Africa in pursuing the objectives of full

employment and sustainable economic growth. Unemployment and

economic growth are an international problem. Countries may differ in

their strategies but all share the basic objectives of economic growth and

creation of employment.

Chapter six provides the recommendations to the employment problem in

South Africa. Macro economic policies are indispensable for job creation,

but they are themselves not sufficient in accelerating the pace of

employment growth.

Chapter seven is a summary of the main findings of the study. It draws

some tentative conclusion on job creation and economic growth in South

Africa.

CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOIMENT OF STUDY PAGE 6

ECONOMIC GROWTH THEORIES

2.1 INTRODUCTION

Economic growth theories help to explain the economic growth problem as

well as the possibility to create jobs. In classical era, economic growth

theory was dominated ley the role of investment in increasing labour

productivity. Where steady economic growth was observed, a portion of it

could not be fully explained by investment. Neo-classical economist

explained this portion as technical innovation. They came to the conclusion

that innovation is the basis for economic growth. As a reaction to the neo-

classical model, new growth theories evolved. Their analysis incorporated

technological progress and emphasised the endogenous resources such as

ideas. In this chapter a selection of economic growth theories will be

reviewed, starting from the classical to the new economic growth theories.

2.2 ADAM SMITH

Adam Smith formed the basis for all subsequent growth theories, which

contains at least parts of his model (Greiner, 1998:8). According to

Adelman (1964:25), Smith primary concern was eventually with the

dynamic question of growth and development. The main strand of his

theory was the investigation of capital accumulation, population growth and

labour productivity. Smith argued that growth was self-reinforcing as it

CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 7

exhibited returns to scale. Economies of scale will be realised in

production and in marketing owing to a division of labour and to general

improvement in machinery (Adelman, 1964:26). As division of labour

increases output, it then induces the possibility of further division of labour

and thus further growth. Changes in productivity are therefore never

impended by lack of appropriate technological knowledge. Instead

improvement can only be introduced to the extent that there is sufficient

capital available (Adelman, 1964:27).

Smith's idea that growth is rooted in the increasing division of labour relates

primarily to the specialisation of the labour force (Dhamee, 1995:1). Each

worker becomes an expert in one isolated area of production, thus

increasing efficiency. The fact that labourers do not have to switch tasks

during the day further saves time and money. Smith recognised the

potential problems of this development. He pointed out that forcing

individuals to perform repetitious task would lead to a dissatisfied force

(Dhamee, 1995:1). As a result he believed that the government has an

obligation to provide education for workers. This was based on the fact

that education could combat the deterious effect of factory life. Despite

increasing returns, Smith did not see growth as eternally rising; he posited a

ceiling in the form of stationary state where population growth and capital

accumulation was zero.

Smith stressed a limitation to the division of labour. When the market is

very small, no person can have any encouragement to dedicate himself

entirely to one employment (Meier, 1963:21). His point is that although

division of labour can increase labour productivity this may not be

profitable unless market demand is sufficiently large. The expansion of


international trade is beneficial in this respect.

2.3 DAVID RICARDO

Ricardo's work contains ideas on how economic growth can be achieved.

He modified Smith model by including diminishing marginal productivity

of land because land is variable in quantity and fixed in supply. Ricardo

believed that economic progress hinged upon capital formation and capital

formation on the productivity of labour (Brenner, 1966:36).

The economic growth in his theory starts with a growing population and

high food prices (Greiner, 1998:8). With every increase of capital and

population, food will generally rise. The consequence of a rise of food will

be a rise in wages and every rise in wages will have a tendency to determine

the saved capital in a greater proportion than before to the employment of

machinery (Brenner, 1996:45). Machinery and labour are in constant

competition and the former can frequently not be employed until labour

rises.

2.4 MALTHUS

According to Malthus population growth is connected with economic

growth. He observed that production required land as well as labour.

Population growth increases the labour supply but not the supply of land.

Labour is the variable input and land is a fixed input. He introduced the

concept of diminishing marginal productivity. According to this principle,


as the quantity of the variable input increases, the marginal productivity of

the variable input declines. The marginal productivity of labour determines

the wage. As population grows, the marginal productivity of labour and the

wage declines (O'Brein, 1975:215). This would continue until the wage is

pushed down to subsistence. Working people would be able to earn only

enough to support their families. The only possible way out will be an

improvement in agricultural technology that could offset the falling wage.

Agricultural technology will make it possible to feed more people with the

given supply of land.

Education to Malthus was the key to the solution of the working class

economic problem (Brenner, 1966:54). Once workers are educated, they

think rationally about public problems such as that of population. They

become aware that poverty sprang from the excess supply over the demand

for labour and they would refrain from early marriages (Brenner, 1966:54).

Few children will improve economic conditions. The advance of modem

technology will then not only help to reduce their misery but contribute

towards society's prosperity.

2.5 MILL

Mill's analysis was greatly influenced by Adam Smith. They both agree on

the significance of the division of labour and the role of government in

promoting economic growth (Brenner, 1966:57). Knowledge was very

important in determining the power to make provision for the future

(O'Brien, 1975:220). Mill saw capital as a stock of previously accumulated

products of labour affording a means to future production. Industry was


limited by capital but not all capital was necessarily employed at any one

time. Capital, the result of savings, was demand for labour. To Mill, the

division of labour meant that capital equipment could be utilised more fully

and so its returns would be gathered more quickly. He accepted that

division of labour was to some extent the result of invention and capital

accumulation (O'Brien, 1975:221).

2.6 KARL MARX

Marx modified the classical picture. He saw profits as the determinant of

savings and capital accumulation (Fonsenca, 1999:3). The declining of

profits is brought about not by competition increasing wages as in Smith,

nor by diminishing marginal productivity of land as in Ricardo, but rather

by the rise in the ratio of fixed capital to variable capital. Marx claimed

that profits are derived from surplus value and surplus value is only

generated by variable capital.

Technological progress in the form of machinery or division of labour was

not wholly beneficial way of improving growth (Fonsenca, 1999:3).

Technological improvement is also ways capitalists can increase their

leverage over labour by threatening it with mechanisation. Marx contended

that division of labour was a way of generating the alienation of working

classes and thus ties them more dependently to the production process.


2.7 SCHUMPETER

Schumpeter substantially improved upon the classical theory of growth

(Fonsenca, 1999:3). Like classical economists, his system was supply

driven. The main element of growth was the increase in factor supply. His

starting point was a smoothly expanding economy. Unlike Smith, his

population growth was exogenous and his savings rate was rather constant

and not a driver of growth. In his view, the driver of development was

discontinuous punctuated changes in the economic environment. These

were brought about by a variety of things, but entrepreneurial innovation

was the central one (Fonsenca, 1999:3).

Technical innovation by a single entrepreneur opens up new profitable

avenues. As a result more entrepreneurs are induced to innovate, thereby

improving growth. As the supply of entrepreneurs in any generation is

numerically exhausted, capitalists turn upon each other and compete away

existing profits. Profits begin to decline and the economy slows down.

However, the decline in profit will eventually again, induces those with

entrepreneurial inclination to once again innovate. Schumpeter claimed that

there were no diminishing returns to innovation (Fonsenca, 1999:4). He

also did not believe that the scarcity of land as a factor which bring

economic growth to a standstill (Greiner, 1998:10).

2.8 SOLOW

Solow's model formed the basis for a complete group of models, which

belong to the neo-classical (Greiner, 1998:15). He assumes a classical


economy in which one homogeneous good Y(t) is produced, which gives

the national income. According to this model the long run growth cannot

be influenced by government intervention (Greiner, 1998:17).

Solow concentrated on technological progress and omitted increasing

returns to scale (Solow, 1970:34). He assumed that each point in time all

labour and capital were readily available on the market so to say. Secondly,

those profit and wage rates are adjusting themselves automatically and

without time interval (Brenner, 1966: 190). Both full employment and the

expectations of entrepreneurs could continually be maintained and satisfied.

The growth would follow an even path if the balance between profits and

wages were not disturbed. Solow also assumed that production is a

function of both capital and labour as well as of technology.

Continuous growth requires a continually rising capital output ratio

(Brenner, 1966:191). If the capital-labour ratio can be varied so that more

capital is combined with relatively less labour, growth can be maintained

without causing unemployment. The capital-output ratio must increase

rather more than the rate of growth to make up for the diminishing returns

from capital. There is a time when it must reach a maximum. This is when

the proportion of income saved reaches close to unity (Brenner, 1966:191).

Since the rate of growth depends on savings and capital-output ratio,

eventually what will happen is that, either growth will cease or

unemployment will begin. In order to avoid this, a change in the technical

determinants will be necessary. Without technological improvement

capital-output ratio must remain equal to the rate of growth of the labour

force.


The resolution proposed by Solow was to assume that technology had an

exogenously determined rate of growth, which increases the productivity of

labour. If one were to replace physical labour units with effective labour

units, then the natural rate of growth of effective labour is no longer the

biological rate of population growth alone but rather that rate plus the rate

of technological progress (Fonsenca, 1999:13).

The empirical predictions of the Solow model are that countries with low

capital labour-ratios, below the steady state, should grow faster than those

with capital labour-ratios higher than the steady state. Fonsenca (1999:12)

stated that this argument which is called "convergence hypothesis" is

patently wrong as poor countries rarely grow faster than rich countries. The

convergence hypothesis only applies to countries that are compared, having

the same savings habits and population growth.

2.9 HARROD-DOMAR MODEL

Harrod led in the work of the theory of economic growth. He tried to

provide a theory, which explained how steadily growth occurred in the

economy (Ackley, 1966:518). Harrod wrote about two concepts of the rate

of economic growth, that is investment and increasing labour productivity.

He treated investment and labour productivity as independent limits on

economic growth. Harrod observed that the rate of economic growth

would depend on the growth of capital and thus on the proportion of

income saved and invested. On the other hand the supply and productivity

of labour also set a limit to the rate of growth. In Harrod thinking the sum

of the rate of growth of population and the rate of growth of labour

CHAPTER TWO. ECONOAIIC GROH/7"H THERIES PAGE 14

productivity is the natural rate of growth. In order to keep unemployment

from increasing, it would be necessary for demand to grow as fast as the

population, plus any increases in labour productivity.

Harrod believed that it would only be a coincidence if the two limits on the

rate of growth should agree. If the natural rate should happen to be greater

than the warranted rate, investment would limit growth of the economy and

the growth of the economy in turn would limit employment. If the

warranted rate were greater than the natural rate, businessmen would have

difficulty in finding enough opportunities to invest. Either way, an

imbalance between the natural and the warranted rate of growth would

cause economic problems.

An understanding of one fundamental relationship between capital

accumulation and growth stems most clearly from the work of Domar

(Ackley, 1966:513). Domar starts from Keynes recognition that today's

investment competes, at.least potentially, not only with yesterdays but with

tomorrow's investment. It provides new productive capacity, which if it is

not adequately used, will discourage further investment tomorrow. If

investment declines tomorrow this will increase the surplus of idle capital,

making problem more difficult. On the other hand if investment increase

whilst having full employment, it will mean more unused capacity. In this

situation one of the two things can happen; either substitution of capital for

labour or distribution of capital (Brenner, 1966:181). But unlike Keynes,

Domar saw that there was nothing inevitable about this outcome

(Ackley, 1966:513). His argument was that, if the total demand tomorrow

should be sufficiently greater than today's demand, the newly added

productive capacity could be fully employed and there would be room for


new investment again tomorrow, creating productive capacity that might in

turn fmd full outlet if only demand would continue for grow after

tomorrow.

Domar's problem was to find the condition needed for the maintenance of

full employment over a period of the time or more exactly, the rate of

growth of national income which the maintenance of full employment

requires (Brenner, 1996:181). If full employment is to be maintained

national income must grow at a combined rate with labour force

(Sen, 1970:67).

Domar's theory was of the same kind with that of Harrod and was known as

Harrod-Domar growth theory. They were concerned with unemployment

and treated growth as a remedy for it (Arndt, 1978:33). They examined the

requirement for full employment in an economy whose productive capacity

is increasing overtime as a result of capital accumulation. They both came

to an answer that full employment was possible only in conditions of steady

growth in which the rate of growth of all the variables, for example,

income, labour, investment etc. is equal to and remains constant overtime

(Arndt, 1978:33). Their analysis is essentially Keynesian in the sense that

savings is assumed to be a function of income and national income

equilibrium occurs when savings equal investment (Barret, 1972:297). To

maintain full employment of labour in the face of increasing productive

capacity, the rate of growth of real aggregate demand must equal the rate of

growth of labour force plus the rate of growth of labour productivity.

According to Allen (1967:197) this model is constructed in the form that is

both the simplest and the more inflexible. The labour force is assigned to

grow overtime at a constant rate and to be fully taken up by the demand


from the product market. Full employment of capital is matched by full

employment of labour. Neo-classical critics of the Harrod-Domar model

argue that, inherent in the market mechanism are stabilising forces, which

will automatically move the economy to a steady state growth path

(Barret, 1972:303). This growth path is compatible with a dynamic full

employment equilibrium, with a growth rate equal to the natural rate of the

Harrod-Domar analysis. As growth occurs at the warranted rate labour

forces, unemployment becomes increasingly more serious

(Barret, 1972:304). The workers will settle for lower wages, thereby

causing firms to substitute labour for capital when producing.

2.10 KENNETH ARROW

Arrow sought to associate the learning function not with the rate of growth

but with the absolute level of knowledge already accumulated

(Fonsenca, 1999:18). He introduced the learning by doing concept into

economic thinking. The more people practice in doing a particular job, the

better they get at the job and labour productivity increase as a result.

Arrow proposed that knowledge might accumulate as firms engage in new

activities. In the course of manufacturing capital goods these firms cannot

prevent this knowledge from flowing freely into the public domain

(Grossman & Helpman, 1997:35). The knowledge then contributes to the

productivity of recourses.

CHAPTER TWO: ECONOMIC GROWTH THER1ES PAGE j 7

2.11 PAUL ROMER

Romer took up the approach of learning by doing and spill over effects. In

contrast to Arrow, he does not consider physical capital in his model, but

exclusively focuses in knowledge as the basic form of capital

(Greiner, 1998:23). Another important aspect in Romer's model lies with

investment in the new knowledge. This hold because the creation of new

knowledge cannot be kept completely secrete despite the fact that it may be

patented. As a consequence there exist a positive spill over effects, which

makes firms benefit from their rival's effort to generate new combinations

and positively affects their production possibilities. Given the positive

external effect of investment, it becomes clear that there is a role for fiscal

policy.

Romer went to great lengths to disqualify the restriction imposed by Arrow

(Fonsenca, 1999:18). In Snowdon & Vane (1999:4), Romer stated that "as

soon as you think about technology you have to confront the fact that there

is a built in form of increasing returns - technically a non convexity". One

has to think of technology as a key input, which is fundamentally different

from traditional inputs. Without technological change, growth would come

to a stop. On the question of convergence, he argued that there is little

evidence of overall convergence. Countries will tend to converge only if

everything else is the same (Snowdon & Vane, 1999:4). In order to

develop, successfully countries must be open to new ideas and capture the

benefits of the latest technologies (Rankin, 1998:3). The higher the level of

disembodied knowledge, the more environments exist upon which

innovation can work and the higher the rate of technical progress.


2.12 CONCLUSION

In this chapter the economic growth theories were reviewed. To smith

economic growth is the result of division of labour. Division of labour

leads to specialisation and induces the possibility of further division of

labour. This improves productivity and efficiency. Changes in

productivity are never impended by lack of appropriate technological

knowledge. He believed that the government has an obligation to provide

education for workers. Smith did not see growth as eternally rising; he

posited a ceiling in the form of stationary state where population growth

and capital accumulation was zero.

The economic growth in Ricardo's theory starts with a growing population

and high food prices. With every increase of capital and population, foods

will generally rise, so will be the wages. Ricardo's theory does not reflect

the reality of what is happening in the world. As the population grows, the

higher is the unemployment.

Malthus also reiterated the idea that population growth is positively related

to economic growth. Population growth increases labour supply. He

introduced the concept of diminishing marginal productivity. As

population grows, the marginal productivity of labour and wages decline.

One could see that during Malthus' time the labour unions were not active.

The unions, through bargaining could lead to a situation where the wages

increase even if the marginal productivity of labour diminishes. With

education, the labour is able to think rationally about public problems such

as population. Modem technology to Malthus is important in contributing


towards society's prosperity.

Mill, as Adam Smith, agrees on the significance of the division of labour

and the role of government in promoting economic growth. He regards

knowledge as very important n determining the power to make provision of

the future. Increasing capital could solve the problem of unemployment.

Marx had a different view to Mill. Technological progress or division of

labour was not fully beneficial way of improving growth. Firm owners are

more concerned with profits. To get more profits they will use more

machinery and less labour.

To Schumpeter technical innovation was the key to job creation and

economic growth. He claimed that there are no diminishing returns to

innovation. As profits start to decline and the economy slows down,

entrepreneurs will be induced to innovate once again.

Solow saw the continually rising capital-output ratio as a requirement for

continuous growth. In order to improve the capital output ratio technology

has to improve. Technology increases the productivity of labour.

Harrod-Domar model was concerned with unemployment and treated

growth as a remedy for it. Arrow introduced the learning by doing concept

to economic thinking. Romer took up the approach of learning by doing

and its spillover effects.

Different theories have different models and view regarding economic

growth and job creation. Several factors were stated such as division of


labour, technological change, innovation, education, knowledge and the

role of government. The emphasis being move on learning and knowledge.

With all these theories in place it is still not easy to create jobs and

improve growth.


THE HUMAN RESOURCE DEVELOPMENT AND THE LABOUR

MARKET POLICIES

3.1 INTRODUCTION

The challenge facing labour market policy is to promote dynamic

efficiency, skill enhancement and job creation. Labour policies have an

impact on high incidence of unemployment. Since 1994 the South African

government has embarked on programme of labour reforms aimed at

addressing unemployment problem. The most common form of

government intervention in the labour market is regulation. Taxes and

subsidies may also be used to provide incentives for the training of the

workforce. This chapter briefly indicates the scope of labour market

policies in South Africa. The measures taken to develop human capital will

also be discussed.

3.2 INEQUALITY

Inequality in South Africa is rooted in the labour market: Partly in low

wages and partly in very high unemployment rates (Nedlac, 1997:8). Until

1970's inequality was determined largely by the gap between white and

black incomes. It is now driven (a) by inequality within the distribution of

income and (b) by the fact that 30% of households have no wage income at

all.

CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 22

os

F-1 "O

GNP per capita US$ 2410 2410 3520

Human development index (1993)

0.832 0.819 0.822

Gini Coefficient 0.43 0.27 0.58

Sout

h A

fric

a

OS ela

3040 2970 3480 2760

0.649 0.796 0.826 0.859

0.61 0.63 0.51 0.44

A key requirement of economic and employment growth in South Africa is

a reduction in the level of inequality (Nedlac, 1997:9). South Africa is not

a particularly poor country. Its' GNP per capita in 1997 of US$3040 places

it in the rank of the upper middle income developing countries. However,

this aggregate measure disguises an extremely skewed distribution of

income.

The Gini coefficient is a widely accepted measure of inequality, which

takes values between 0 and 1. The 0 represents absolute equality and 1

representing absolute inequality (Department of Labour, 1994:4). In global

terms, the degree of income inequality in South Africa is among the highest

in the world. This implies that economic policy needs to aim not for much

higher rate of economic growth but also for the type of growth that

increases the demand for labour and reduces the gap in earning among

those who are employed. Table 3.1 indicates that South Africa has the

second highest Gini coefficient among countries, which have similar level

of per capital income.

Table 3.1: Composite measures of inequality in selected countries

Source: Nedlac (1997:9)

CHAPTER THREE: THE LABOUR M4RICET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 23

South Africa's skewed income distributions is also reflected in the fact that

the bottom 20% of income earners capture 1.5% of the national income

while the wealthiest 10% of household receive fully 50% of national

income (Department of Labour, 1996:4). The fmdings by the Presidential

Commission to investigate labour market policy were that, between 36 &

53% of South Africans are estimated to live below the poverty line

(Department of Labour, 1996:5). Poverty is overwhelmingly concentrated

in the African and coloured population. 65% of the Africans are poor,

followed by 33% of the coloured community, then 2.5% for Asian and

0.7% for whites. The racial form that characterised poverty and inequality

in South African is the product of the past discrimination in employment

related fields like education and training.

The recommendations provided by the Presidential Commission were that

strong economic growth is essential to reduce inequality and such growth

must be strongly labour absorbing (Department of Labour, 1996:8). The

success of a labour absorbing growth strategy rest on three fundamental

requirements:

Firstly, macro economic, industrial and trade policies must promote

employment.

Secondly, reforms in the labour market must promote flexibility.

Third, labour absorbing growth is more likely to occur when labour

market policies and outcomes are co-ordinated with macro economic

policies by means of a National Accord for Employment & Growth

involving social partners.


3.3 HUMAN RESOURCE DEVELOPMENT

Training and development of skills and productivity improvement are the

important components of job creation. The new growth theories posit a

positive association between the quantity and quality of human capital and

the rate of economic growth. Major changes have taken place in the system

of human resource development in South Africa.

3.3.1 OVERVIEW OF THE CURRENT INDUSTRIAL TRAINING

SYSTEMS IN SOUTH AFRICA

Central to addressing the challenges of Growth Employment And

Redistribution, training structures for skill development were created.

The current training structures as outlined by National Economic

Development and Labour Council (Nedlac) in 1997, are as follows:

0 Regional training centres

The Department of Labour runs nine regional training centres.

They provide training for the upgrading of unskilled and semi-

skilled workers as well as training for the unemployed.

o Industry training boards

There are presently 27 industry training boards serving specific

sectors. Equal proportions of employers and trade unions

generally govern them. The main focus of these boards is on

CHAPTER THREE: THE LABOUR MARKET POLICIES HUMAN RESOURCE DEVELOPMENT PAGE 25

apprenticeships and training for artisans. The vast majority of

trainers are in formal employment with only 12% unemployed.

o Private training centres

There are presently 1365 private training centres recognised by

the Department of Labour. They provide training for industry

training boards, private companies and projects run by

universities, parastatals and NGO's (non-governmental

organisations). Training at these centres includes semi-skilled

operations as well as artisans.

3.3.2 GREEN PAPER ON SKILLS DEVELOPMENT STRATEGY

FOR ECONOMIC AND EMPLOYMENT GROWTH IN

SOUTH AFRICA

The Department of Labour in consultation with the National Training

Board in 1997 prepared the green paper on human resource

development (Nedlac, 1997:1). The green paper covers industry based

training, but also takes on board the need of target group such as the

unemployed, retrenched workers, youth, women, people with

disabilities and people in rural areas.

o Learnerships

The new skill development strategy would be implemented

through a system of learnership in order to overcome the present

lack of co-ordination between theoretical education and skills


training. The decline in apprenticeships, which have traditionally

aimed to combine structured learning with work experience, has

resulted in an increase in students at technical colleges. Once

these students have completed their theoretical component, they

are frequently unable to find work experience. The provision of

theoretical education without consideration of the needs of

industry and the job training is not appropriate. Learning by

doing as stipulated by Arrow (Fonsenca, 1999) and Romer

(Greiner, 1998) growth models, is necessary for gaining

experience. Adam Smith (Greiner, 1998) has also pointed out

that increasing division of labour means more practice and thus

more learning.

0 Co-ordination and structure

In order to create an environment suitable to the skill

development strategy, a new institutional framework is necessary.

Sectored education and training organisation would build on the

present industry training boards but would broaden their

functions significantly. These organisations would cover a

greater range than those covered by existing industry-training

boards, which include:

Primary agriculture

Retail and services

Defence, security, justice and correctional services

Post, telecommunication, broadcasting and information

technology


o Public sector

o Education

On the national level the present National Training Board would be

structured to form a national skill authority which would play a co-

ordinating role (Nedlac, 1997:4). This board would make proposals to

the Minister of Labour on skills development targets, policy and

funding. It would also establish research and strategic planning unit to

produce, collect and analyse labour market.

3.4 PRESIDENTIAL JOB SUMMIT

The Presidential Job Summit was held in 30 October 1998. It was a major

and concrete step towards broader job creation in a growing economy

(Department of Finance,. 1999:50). The summit realised that resolving

unemployment is not a simple task. It believes that continued investment in

education will increase the number of school leavers with improved skills.

This makes Presidential Job Summit to be inline with the new growth

theories. The National Skills Development Act, passed by Parliament in

1998, will contribute to retraining of workers.

According to Department of Finance (1999:52) the Job Summit detailed

agreements in five categories:

o Job creation in sector of the economy

Growth in niche sectors and clusters of industry, particularly those


with high propensity for creating jobs, is encouraged. Activities

identified include summits; a "buy South African goods" campaign;

strengthening customs and excise to stem illegal imports; small

business promotion; tourism promotion; and social housing

programmes which aim at delivering between 50 000 and 150 000

units for low income households.

Labour market and human resource development for job creation.

A social plan framework was agreed comprising a three-stage strategy

towards managing employment changes. As a primary objective, the

plan aims to prevent job losses, but will also manage unavoidable

losses in the most humane manner and provide training so as to

reabsorb workers in other sectors.

Special employment programmes

Existing special employment programmes will be expanded and

several new initiatives launched. These include the clean and green

cities campaign; labour intensive housing projects; community-based

public works and income generating welfare programmes.

Job creation in integrated provincial projects.

Integrated projects will take advantage of synergy between labour-

intensive community works, small business and large spartial

development initiatives. Projects being considered to take advantage

of such synergy include large-scale tourism around the Greater St.

CHAPTER THREE: THE LABOUR MARKET P OLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 29

Lucia area in Kwa Zulu Natal, and the Wild Coast-Emonti area.

0 Financing.

Agreed fmancial mechanism include a pledge from organised labour

to contribute an equivalent of one day's output towards job creation as

well as a R1 billion contribution from businesses.

The Job Summit also identified a number of post summit processes that

include the implementation, co-ordination and monitoring of the job

creation strategy agreed to at the Summit.

3.5 LABOUR MARKET POLICY

The governments' legislative programme stems from consistent approach to

labour market reforms. Various pieces of legislation have been passed by

parliament in the period of 1994 to 1999. The Acts includes the National

Economic Development and Labour Council Act, Labour Relations Act,

the Basic Conditions of Employment Act, the Employment Equity Act and

the Skills Development & Skills Development Levies Act. The Department

of Labour recognises that many of the problems in the labour market, such

as high rate of unemployment cannot be addressed by labour market

policies alone (Department of Labour, 1999). However, the Department is

responsible for the effective functioning of labour market. According to

the Department of Labour (1999:4) the labour market policy has been

guided by the following objectives:


The need to ensure that labour market policies contribute to the

realisation of the vision of government and that they are aligned with

the broader policies of the government.

The need to ensure equity in the context of an increasing number of

atypical work relationships.

The need to ensure that labour market policies promote economic

growth in a manner that contributes to greater protection and security

for the workforce.

The need to resolve inequalities in the labour market and promote

representatively of previously disadvantaged groups especially with

respect to skills training and improved work conditions.

The need to broaden, deepens and upgrade the formation and

utilisation of skills throughout the economy, including small, medium

and large-scale enterprises.

3.5.1 NEDLAC ACT

Shortly after the 1994 elections the Department of Labour pioneered

the National Economic Development and Labour council (NEDLAC)

Act. NEDLAC is a national tripartite body comprising representatives

of business, labour and the government (Nedlac, 1997:8). It ensures

that the significant civil society partners are not excluded from policy

making process by allowing consensus on important issues of social

and economic legislation before they are presented to parliament.

NEDLAC was successful in negotiating the Labour Relation Act of

1995.


3.5.2 LABOUR RELATIONS ACT

The Labour Relations Act (LRA) was implemented in 1995. It has

enhanced organisational rights for trade unions, entrenched the

constitutional rights to strike, simplified dispute resolution procedures,

promoted sectorial collectives bargaining and codified dismissal

procedures (Department of Labour, 1995).

It is therefore aimed at giving effect to the economic and social rights.

LRA improves the industrial relations system by establishing

improved mechanisms for the resolution of disputes between

employers and employees.

3.5.3 BASIC CONDITIONS OF EMPLOYMENT ACT

The Basic Conditions of Employment Act (BCEA) was promulgated

in 1997. It is primarily aimed at improving the working conditions of

unorganised and vulnerable workers, while also attempting to undo

inherited rigidities of the Old Act (Department of Labour, 1997).

The BCEA therefore represents an attempt to give effect to the rights

of workers, reduce poverty (especially the so-called working poor) and

address some of the inequalities resulting from the differentiated

treatment of workers.

3.5.4 EMPLOYMENT EQUITY ACT

An important factor that accounts for the inefficiencies in our


economy generally and the labour market in particular have been the

policy of discrimination, which was enforced in the past. White males

were in positions of leadership whereas black males, disabled and

women were confined to marginal roles. In the light of this reality the

labour department introduced a new Employment Equity Act (EEA) in

1998 (Department of Labour, 1998).

The aim of the Act is to reduce the labour market inequalities. It

assumes that the , removal of discriminatory laws will not be sufficient

to overcome existing disparities. Therefore, the Act prescribes

positive measures to assist designated groups: the disabled, women

and black males. The main provision of the Act is that all private and

public entities employing more than 50 workers or producing an

annual turnover exceeding a set amount should formulate an

employment equity plan (Department of Labour, 1998). This plan

should contain targets for the hiring and advancement of designated

groups and narrowing excessive earnings differentials between

occupational groups. The EEA requires an annual report to the

Department of Labour as well as an indication of progress in the

entity's annual fmancial statement. Heavy fines are prescribed for first

and repeated contravention of the Act.

3.5.5 SKILLS DEVELOPMENT ACT AND SKILLS

DEVELOPMENT LEVIES ACT

According to the Department of Labour (1999:7) the skills shortage

which exists in our country reflects that only 20% of the economically

active population is skilled or highly skilled, while about 80% is


semiskilled, unskilled or unemployed. South Africa has about 4%

professionals in its labour force, compared with about 8% for other

middle income countries. General schooling requires national

intervention to strengthen the link between workplace, education &

training and economic growth & employment opportunities. To

address these problems the skills Development and Skill Development

Levies Act were passed by Parliament in 1998 and 1999 respectively.

The Skills Development Act (SDA) aims to address the skills shortage

by a two fold approach:

o Measure to improve the links between the education and training

system of the labour market.

o Measure to improve training within industries, including a new

leamership to replace the ailing apprenticeship system of skill

formation. The introduction of a national training levy to fmance

training activities.

Developing skills is a responsibility that the Government shares with

its social partners. The levy takes effect in April 2000 at a rate of

0.5% to be collected by the South African Revenue Services as part of

employer's monthly pay as you earn (PAYE) returns (Budget

Review, 2000:5). The rate increases to 1% in April 2001. The skills

development levy is payable by private sector employers who are, in

turn, entitled to draw on the funds of sectorial training authorities to

recover approved education and training expenses. The fund is also to

be used in assisting the unemployed from disadvantaged groups by

way of leamership, training programmes for the unemployed and


training support for small and medium enterprises.

3.6 CONCLUSION

In this chapter the scope of labour market policies in South Africa and the

measures taken to develop the human capital were discussed.

The upgrading of skills is a long-term process. The new labour policy

framework does not seem to be conclusive to rapid solution of

unemployment and economic growth. Instead these new laws might

exacerbate the lack of demand for unskilled labour in South Africa.

The gap in educational levels between the unemployed and the kind of high

tech job available is too wide that no retraining program could hope to

adequately upgrade the educational performance of workers to match the

kind of limited professional opportunities that exist. The tough processes

and initiatives that are necessary to manage the machines and make them

work are beyond the large majority of people's grasp. Even if re-education

and retraining on a mass scale were implemented, not enough high tech

jobs will be available in the economy to absorb the vast numbers of

dislocated and unemployed workers.

CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUVAN RESOURCE DEVELOPMENT PAGE 35

SOUTH AFRICAN MACRO ECONOMIC POLICY

4.1 INTRODUCTION

The primary objective of the economic policy is to provide growth and

development in order to create jobs, sustain employment, alleviate poverty

and reduce inequality. In pursuing these objectives, government has to

develop and implement a wide range of economic and social programmes.

In 1994 the government adopted the Reconstruction and Development

Programme (RDP) which sets out its commitment to the elimination of

poverty in a rapidly growing economy (Department of Finance, 1997:1).

Subsequently, the government introduced the Growth Employment And

Redistribution (GEAR) as one of its principal instruments for the realisation

of the policy objectives contained in RDP. The government aim in

introducing GEAR was to achieve a macro economic stability through a

range of structural changes in the economy (ANC, 1997:19). In 1998 the

Medium Term Expenditure Framework (MTEF) was implemented to

describe the government's goals and objectives.

The overall macro economic policy framework is set out in RDP and

GEAR programmes. MTEF was introduced as an additional policy

instrument to achieve the objectives set out in RDP and GEAR. This

chapter reviews the South African macro economic framework and its role

in ensuring growth and stability.

CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 36

4.2 RECONSTRUCTION AND DEVELOPMENT PROGRAMME

The White Paper on Reconstruction and Development Programme was

published in 1994. It sets out the governments' commitment to the

elimination of poverty in a rapidly growing and more equitable economy

and in a context of an open, peaceful and democratic society (Department

of Finance, 1997:1). The RDP established a programme for orienting the

activities of government fully and effectively towards reconstruction and

development goals, within a sound fiscal and macro economic framework.

It provides an integrated vision for meeting:

the basic needs

developing human resources

building economy, and

democratisation of society.

According to the Department of Finance (1997:1.2) the following strategies

for the RDP were identified:

investing in people through education and training

creating employment in the context of a competitive and rapidly

growing economy

investing in household and social infrastructure

preventing crime

improving social security provision to eliminate absolute poverty, and

ensuring an efficient and effective public service.


The government cannot achieve all its goals immediately, because there are

constraints on the capacity to deliver and on resources available

(Department of Finance, 1997:1). It is the responsibility of government to

determine priorities among the nation's goals. The RDP provides clear

guidance on these choices.

4.3 THE GROWTH EMPLOYMENT AND REDISTRIBUTION STRATEGY

4.3.1 BACKGROUND

Towards the end of 1995, it became apparent that if the economy

continued to grow at around 3%, government would not be able to

deliver what it said it would in the Reconstruction and Development

Programme. Two alternatives for South Africa were described as

"Low Road" and the "High Road" (Brown, 1997:9).

The low road suggest that if the new government maintained the old

economic system with the continuing trend of about 3% growth rate

per year, the long term outcome would be rising unemployment;

limited scope for social spending and at the end of the day the

increasing social discontent.

The high road suggest a strategy for economic growth and

development which targets 6% economic growth and creation of

400 000 new jobs annually in the year 2000. For the government to

deliver on its promises to the people, it needed to implement a strategy

that would take South Africa along the "High Road" of economic

CI-L4PTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 38

growth and development. It is within this context that the Minister of

Finance, Trevor Manual presented a macro-economic framework,

GEAR to parliament on 14 June 1996 (ANC, 1997).

4.3.2 OBJECTIVES

The GEAR strategy seeks to get South Africa economy into a new

path (Brown, 1997:10). This path will ensure:

a competitive and fast growing economy which creates enough

jobs for all work seekers;

a redistribution of income and opportunities in favour of the

poor;

a society in which sound health, education and other services are

available to all; and

environments in which homes are secured and place of work are

productive.

These are the same, objectives as the one that underlies the RDP, what

GEAR does, is to set out clear, the key economic plans for achieving

these goals. The entire integrated GEAR scenario projections are

summarised in Table 4.1.


Table 4.1: GEAR scenario projections

Model Characteristics Project

1996 1997 1998 1999 2000 Avg.

Fiscal deficit (% of GDP) fiscal year 5.11 4.0 3.5 3.0 3.0 3.7 Real Government consumption (% of GDP)

19.9 19.5 19.0 18.5 18.1 19.0

Average tariff (% of import) 10.0 8.0 7.0 7.0 6.0 7.6 Average real wage growth private sector

-0.5 1.0 1.0 1.0 1.0 0.7

Average real wage growth, Government sector

4.4 0.7 0.4 0.8 0.4 1.3

Real effective exchange rate (% change)

-8.5 -0.3 0.0 0.0 0.0 -1.8

Real bank rate 7.0 5.0 4.0 3.0 4.0 4.4 Real government investment growth 3.4 2.7 5.4 7.5 16.7 7.1 Real parestetal investment growth 3.0 5.0 10.0 10.0 10.0 7.6 Real private sector investment growth 9.3 9.1 9.3 13.9 17.0 11.7 Real non-gold export growth 9.1 8.0 7.0 7.8 10.2 8.4 Additional foreign direct investment 155 365 504 716 804 508 RESULT 1996 1997 1998 1999 2000 AVG. GDP growth 3.5 2.9 3.8 4.9 6.1 4.2 Inflation (CPI) 8.0 9.7 8.1 7.7 7.6 8.2 Employment growth 1.3 3.0 2.7 3.5 4.3 3.0 New jobs per year (000) 126 252 246 320 409 270 Current account deficit (% GDP) 2.2 2.0 2.2 2.5 3.1 2.4 Gross private saving (% GDP) 20.5 21.0 21.1 21.5 21.9 21.2 Government disserving (% GDP) 3.1 2.3 1.7 0.7 0.6 1.7 Source: Department of Finance (1996:13)

The means by which these objectives were to be achieved

encompasses a wide range of macro and micro economic policies.

These include:

i LABOUR MARKET STRUCTURES AND REFORM CHALLENGES

The GEAR strategy envisages employment growth accelerating

to 400 000 jobs per year in year 2000. The total numbers

employed in the economy would rise from 10 261 million in


1995 to 11 094 million in 2000. The GEAR identifies specific

initiatives that would be required to raise the job creating capacity

of the economy to reach even the moderate total employment

targets for the year 2000 (Brown, 1997:24). Table 4.2

summarises the measures proposed in GEAR to create some of

the above jobs over the next few years.

Table 4.2: GEAR job creating initiatives

STRATEGY OBJECTIVE PERCENTAGE OF NEW JOBS

CREATED Raise economic growth rate from 3% to 6% (real GDP)

Raise formal and semiformal employment opportunities

30

Government and public sector employment initiatives

Labour based infrastructure development and public works programs

25

Institutional reforms in labour market

o Greater labour intensity o Skill development of productivity

enhancement o Wage moderations o Strategies to enhance labour

flexibility through collective bargaining

30

Source: Brown (1997:25)

The government has a responsibility for ensuring that labour

market rules are fair and that there are appropriate mechanisms

for dispute resolution. Accelerated job creation and improved

productivity are direct goals of a wide range of government

policies and programmes. Harrod-Domar model treated growth

as a remedy for unemployment (Arndt, 1978:33). As indicated

by Mill's theory (Brenner, 1966:57), government programmes

can add a further quarter of the new jobs mainly through

accelerated labour-based infrastructural development and


maintenance of public works in urban and rural areas. GEAR

policy identified that stronger growth of more labour-intensive

component of industry, facilitated by shifts in industrial policy is

vital. These reforms are needed to bring about the increased

responsiveness of labour demand to output growth, and are

essential ingredients of a sustainable labour-absorbing growth

path.

ii ENHANCING PRODUCTIVITY

Government also recognises that job creation and improved

living standards require a substantial increased commitment by

the business sector to industrial investment and productivity-

enhancing training. In many sectors, there is scope for both

increased employment and training of the unskilled and improved

productivity at higher skill levels.

International indicators show that South African investment in

human resources development is inadequate (Department of

Finance, 1996:17). An enhancement of the level effectiveness of

training across all employment sectors is central to growth

strategy as indicated by Arrow and Romer learning by doing

being associated with economic growth. Regulated flexibility of

the labour market must permit employees to increase their

productivity overtime. A refocusing of curricula and the

organisation of formal learning is currently in progress of

education authorities.

CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 4,

iii INDUSTRIAL SUPPORT MEASURES

Industrial innovation support programmes will be enhanced. This

includes the incentive provided in terms of the Special

Programme for industrial innovation (Department of

Finance, 1996:11). This is in line with Schumpeter growth model

that emphasised innovation as the basis of economic growth

(Fonsenca, 1999:4). Competitive and labour absorbing industrial

development are to be stimulated. The tax allowance programme

will apply to qualifying plant and equipment which is acquired

and brought into use for the first time during the period 1 July

1996 to 31 September 1999. Approved projects will get tax

exemptions (Department of Finance, 1996:12) for a period of

time determined by three factors:

regional location,

job creation, and

priority industries.

iv SMALL AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT

The promotion of small, medium and micro enterprises

(SMJVIE' s) is a key element in the government's strategy for

employment creation and income generation (Department of

Finance, 1996:12). A major effort will be made to operationalise

and implement the policies outlined in the white paper on small

business promotion. Various programmes and institutions have

been established to give effect to the strategy generation


(Department of Finance, 1996:12). These include:

the small business centre attached to the Department of trade

and Industry,

Ntsika Enterprise Finance Limited for wholesale loans,

Khula Credit Guarantee Limited for loan guarantees,

a pre-shipment export finance guarantee facility to expand

access to working, capital, and

the Competitiveness Fund for consultancy advice on

technology and marketing.

The Simplified Regional Industrial Development programme will

be continued in a modified form as a great programme tailored to

the needs of small and medium sized firms.

4.4 GEAR OUTCOMES AND SHORTCOMINGS

It was clear from the outset that the growth and unemployment targets were

highly optimistic. It is quite unrealistic to expect a dramatic turnaround in

economic fortunes within five years. Figure 4.1 shows a summary of the

GEAR projected GDP growth rate compared with the actual attained

figures.

The government seems to realise its unrealistic forecast as can be seen in

their revised forecast for the year 2000. GEAR projections showed an

expected growth rate of 6.1% in year 2000 and yet the revised forecast

shows a lower rate of 3.5%.


Figure 4.1: GEAR GDP growth rates projections compared with the actual results

Projected

Actual

1996

1997

1998

1999

2000

* forecasted growth rate. Source: Department of Finance (1996:13 & 2000:30)

GEAR has translated into low growth, which has produced a small number

of new jobs. Increasing outsourcing subcontracting and mergers means that

companies may close or get smaller and become micro producers

(Haffajee, 1998:1). In October 1996 the private sector shed about 95 000

jobs, while the state created 40 000 jobs (Wackemagel, 1996:1).

Employment in the formal sector in South Africa is not keeping pace with

the growth in the economy. While the private sector has been concentrating

on capital-intensive investment, it is left to the state to take the labour

intensive route. The department of Public works role in job creation is

important because it is targeted at the unskilled and low skilled, who often

suffer the highest unemployment rates (Wackernagel, 1996:1).

The emphasis on capital-intensive industry is a hangover from the apartheid

era; machines were less trouble than people (Wackernagel, 1996:2). The

labour also proved to be expensive relative to capital. Progress in


education shows up consistently in comparative studies as a key

determinant of long run economic performance and income distribution

(Business & Economy, 1999:8). Sustained improvement in the quality of

public schooling available to the poor and greater equity in flow of students

through secondary and tertiary education is central to government approach.

Despite near universal enrolment in primary education only about 40%

children currently complete secondary schooling successfully. Inadequate

pass rate in science and mathematics are a cause of concern.

Accelerated economic growth associated with stronger employment

creation is the key to continued progress towards an equitable distribution

of income. According to Nel (1997:2) the history of those countries that

have transformed their economics shows that the appropriate macro

economic policy is only necessary, and not sufficient condition for

economic success. GEAR provides a facility framework within which

growth can take place. It may turn out to be no different from a number of

failed structural adjustment programmes.

South African employment levels could be deteriorating with the number of

people employed in the formal non-agricultural sectors dropping sharply

(Grawitzky, 1999:3). Employment figures released by statistics South

Africa on the 28 th September 1999 showed that the number of jobs in the

formal non-agricultural sector fell by 55 2393 from March to June 1999.

The public service accounted for the largest number of job losses (19 413)

followed by manufacturing (18 134) and construction (11 254). Job losses

in the public service were largely a result of a decline in jobs in the

provinces. The provinces accounted for 13 451 of job lost. Forecast

released by Wharton Econometric Forecasting warned that if the trend of


jobless growth continued, the number of unemployment could rise to 6.7

million over the next four years from 2000 to 2004 (Grawitzky, 1999:3).

According to Thomasson (1991:1) the current labour legislation has

contributed to the loss of some 500 000 jobs since 1995.

Table 4.3: Total number of employees (salary and wage earners)

Year and Quarter

Actual

Percentage change from

preceding quarter

Percentage change from corresponding quarter of previous

year

Full-time tim e Total Total Total

1996 Jun - - 5 238 572 -0.1 +1.9

Sep - - 5 241 852 +0.1 +2.2

Dec - - 5 224 987 -0.3 +0.7

1997 Mar - - 5 189 178 -0.7 -0.9

Jun - - 5 161 285 -0.5 -1.5

Sep - - 5 139 321 -0.4 -2.0

Dec - - 5 090 551 -0.9 -2.6

1998 Mar 4 765 262 219 438 4 984 700 -2.1 -3.9

Jun 4 657 975 301 510 4 959 485 -0.5 -3.9

Sep 4 616 985 329 193 4 946 178 -0.3 -3.8

Dec 4 554 891 366 671 4 921 562 -0.5 -3.3

1999 Mar 4 535 364 384 556 4 919 920 -0.0 -1.3

Jun 4 500 702 368 159 4 868 861 -1.0 -1.8

Sep 4 467 125 373 013 4 840 138 -0.6 -2.1

Source. Central Statistics Services (1999:8).

Note: As from March 1998, full-time and part-time employees are published

separately.

Table 4.3 shows that on year to year basis the increase in employment was

last recorded in December 1996. From March 1997 to September 1999

CHAPTER FOUR: SOUTH AFRIC4N MACRO ECONOMIC POLICY

PAGE 47

only a decline has been experienced. The employment performance turned

out to be totally out of line with the GEAR projections.

Increasing capital intensity and the shift to microelectronics in all sectors

has resulted in growing demand for highly skilled professionals.

Technicians and managers required to develop, implement, operate and

maintain new technology. At the same time this technology is replacing the

unskilled and low skilled labourers (Fraser, 1999:5). In the longer run,

economic growth will crucially depend on increasing investment in human

capital. It will also require a market oriented, innovative and dynamic

private sector (McCarthy, 0 al. 1992:5).

Some of the blame for lack of growth and unemployment can be attributed

to exogenous factors beyond the control of South Africa's policy makers.

These include the sharp fall in 1997 in the international gold price, adverse

climatic factors, the Asian Crises and the Reserve Bank's policy of

maintaining high real interest rates (Gouws & Roy, 1997:1). The

competitive pressures generated by South Africa's reintegration into the

world economy have created some casualties although compensated by new

export opportunities.

4.5 MEDIUM TERM EXPENDITURE FRAMEWORK

MTEF is the next logical step in a process of policy formulation, which

started in 1994 with the publication of RDP and continued in 1996 with the

publication of GEAR. It sets out the government objectives, together with

an assessment of the resources that are available over the next three years


(Department of Finance, 1997:10). The first three year MTEF was

published in 1998. It takes RDP as its point of departure and acknowledges

that neither the economy nor the public sector has the capacity of financial

resources, therefore emphasises reprioritising (Department of Finance,

1997:1). The MTEF commits the government to the kind of fiscal policy

path, which can help to improve South Africa's economic performance

over the long term.

4.5.1 GOALS OF THE MTEF

According to Alexander Forbes (1998:1) the MTEF has the following

goals:

to strengthen political decision making in the budget process;

to strengthen co-operative governance and decision making;

to make sure that every rand goes further: to deliver better

services, more infrastructure, more poverty relief and more

construction;

to create environment where public services can plan over

medium term, in the knowledge of how their budget is likely to

evolve, and

it makes an important contribution to the transparency and

openness of budget policy making.

The following table summarises the macro economic projections in

which the MTEF is based.


Table 4.4: Macro economic projections

1998/1999 1999/2000 2000/2001

Real GDP growth 3% 4% 5%

Real private consumption growth

3% 3.6% 3.7%

Real GDFI 5% 7% 9%

GDP inflation 7.5% 6.5% 6% Source: Gouws & Roy (1997:2)

Table 4.4 shows that the assumed growth rates have been scaled down

from those used in GEAR. According to Gouws & Roy (1997:2) The

RDP represents the point of departure. GEAR is a principal

instrument for meeting the RDP objectives. MTEF is the operational

plan in the sphere of the national budget.

4.6 CONCLUSION

In this chapter, the South African macro economic policy and its role in

ensuring growth and stability was reviewed. The RDP, GEAR and MTEF

constitute a complete strategy that the government has formulated to

achieve its objectives of improving and accelerating social and economic

progress. There are no conflicting ideas on these strategies as their goals

complement one another.

It was apparent from the onset that the GEAR, growth and employment

targets were highly optimistic. The dramatic expectations of the economic


fortunes to turnaround within five years were quite unrealistic. GEAR

failed to spell out the way in which greater labour market flexibility was to

be achieved. The transmission mechanism whereby the assumed increases

in the labour absorption capacity of the various sectors of the economy

were to be effected was not explained. Labour market reform was a key

success factor, but did not receive the appropriate attention.

Through GEAR it is widely acknowledged that the government has made

significant strides towards delivering improved macro economic balance

although the targets were not achieved. It is on the labour market policy

front that GEAR's shortcomings have been most evident. South Africa's

employment is exceptionally complex and not susceptible to simple

solutions or quick fixes.

Although the need to invest in human capital is recognised in GEAR, the

implications of modern growth theory is that it should be accorded much

higher priority. Such theory posits a positive association between the

quantity and quality of human capital and the rate of economic growth,

with the implied effect being of a significant magnitude. The benefits that

GEAR had brought in terms of improved market confidence in the thrust of

government policy are still in evidence.

CIL4PTER FOUR: SOUTH AFRICAN :MACRO ECONOMIC POLICY

PAGE 51

INTERNATIONAL COMPARISON

5.1 INTRODUCTION

Unemployment and economic growth is an international problem.

Developing countries in all regions of the world, in their quest for higher

growth and employment, have adopted programmes of economic reform

(ILO, 1996:3). Strategies differ but all share the basic objectives, which are

economic growth and job creation. There is no single ideal prescription for

economic reform or single policy environment that holds a monopoly for

economic success (ILO, 1996:3). The essential point of difference in the

choice of a strategy for reform concerns the role of the state.

Different countries have different specific objectives as regards to the goal

of full employment and sustainable economic growth. The ILO (1996:2)

attributes much popular theorising about the jobless growth to unwarranted

extrapolation from dramatic episodes of corporate downsizing, ignoring

compensatory job creation elsewhere in the economy. One of the

requirements for reversing the rise in unemployment is to improve the

design and implementation of labour market policies (ILO, 1996:3).

Nations need to invest in skill development and training of their workforce.

Training and education have provided an economic miracle in some

developing countries and could well provide a way out of

underdevelopment and poverty for millions of workers in other parts of the

world (ILO, 1998:2). In this chapter a review of selected countries is drawn

CHAPTER FIVE: INTERNATIONAL COMPARISON PAGE 52

in order to identify the main lessons for South Africa in pursuing the

objective of full employment and sustainable economic growth.

5.2 INDONESIA

Indonesia's policy mix has benefited from a very secure fiscal position,

which has allowed resources to be spent on anti-poverty programmes, and

on rural infrastructure (ILO, 1997:5). This has contributed in achieving a

balanced growth. Promotion of equality of opportunity based on gender

was encouraged.

5.2.1 EMPLOYMENT AND LABOUR MARKET CHARACTERISTICS

The performance of Indonesia in reducing poverty and generating

employment has been substantial (ILO, 1997:5). Growth has been

high and income distribution has remained broadly constant. The

proportion of the population below a nutritionally determined poverty

line fell from 60% in 1970 to 14% in 1993 (ILO, 1997:6). This was

achieved through labour-intensive growth and the overall results have

been a general improvement in living standards.

Despite this, Indonesia remains a low-income country with a large

concentration of people around and just above poverty line. The

remaining poor are those who have been left behind in the labour-

intensive growth process because of their geographical location. Even

if wage employment continues to grow, it will not benefit many of the

existing poor (ILO, 1997:6).

CHAPTER F7VE: INTERNATIONAL COMPARISON PAGE 53

The increasing education attainment of the workforce has contributed

to rising productivity and higher wages. According to ILO (1997:6) in

1970 up to 70% of the workforce has incomplete primary education or

less. Following the massive investment in basic education by 1986 the

proportion of the workforce with less than a primary education had

fallen to under half and by 1994 it had come down to one third

5.2.2 MACRO ECONOMIC DEVELOPMENT

A major factor explaining the rapid growth of the economy and of

employment has been the economic reforms, which began in the early

1980's (ILO, 1997:7). Macro economic reforms led to a massive

foreign and domestic investment, mainly in export oriented, labour

intensive manufacturing, especially textiles garments and footwear,

Agricultural sector played an important role in poverty alleviation.

Indonesia was able to absorb productively large amounts of labour in

rural areas as a result of public investment in agriculture.

5.2.3 LABOUR POLICY AND INDUSTRIAL RELATIONS

More than one third of workers are wage earners and this proportion is

expected to increase overtime (ILO, 1997:7). This results to a need to

revise the labour policies especially the trade union recognition and

job security regulations. From 1994 changes have been introduced to

raise labour standards and increase workers rights (ILO, 1997:7).

These changes included increasing workers statutory rights and

removing obstacles for setting up the enterprise unions. The greater

CHAPTER EWE: INTERNATIONAL COMPARISON PAGE 54

use of minimum wage has benefited the very low paid workers. The

strong expansion of labour intensive manufactured exports has created

a large number of opportunities for women, providing them with an

important source of income and a degree of independence

(ILO, 1997:7).

5.3 CHILE

In an international context, Chile joined the small number of takeoff

countries that have been able to break away from the past by reaching

sustained rates of high growth (Schmidt-Hebbel, 1998:1).

Chile is economically successful but combined with the high degree of

social exclusion. The social exclusion is the challenge that the leaders and

opinion makers are faced with.

5.3.1 EMPLOYMENT AND LABOUR MARKET CHARACTERISTICS

Chile has a high rate of job creation but the quality of jobs is

unsatisfactory. Only half of all the workers have regular, protected

jobs and this has direct implications for labour conditions

(ILO, 1997:19). The economic performance has improved but

distribution of income has remained relatively unchanged. While the

lowest quintile's share in total income is around 4.5%, the richest 20%

receive just over 56%. Table 5.1 illustrates the income distribution in

Chile.

CHAPTER FIDE: INTERNATIONAL COMPARISON PAGE 55

Table 5.1: Income distribution indicators

Gini Coefficient Income Distribution Shares by Quintiles

Year Gini Year Lower Middle Upper Coefficient 40% 40% 20%

1968 45.6 1969 11.7 31.3 57.0

1971 46.0 1978 9.7 29.5 60.8

1980 53.2 1987 7.5 24.0 68.5

1989 57.9 1991 10.1 28.8 61.0

1994 56.5 1994 10.5 30.6 58.9

1998 10.0 30.5 59.5

Source: Schmidt -Hebbel (1998:21)

5.3.2 MACRO ECONOMIC POLICIES

After decades of inadequate macroeconomic management, the military

regime started a program of macroeconomic stabilisation and

structural reform in1974-75. The process of economic reform has

been completed and there is a widespread satisfaction with the macro

economic setting (ILO, 1997:20). The incidence of poverty fell from

44.6% to 24.0% over 1987 to 1996 period as indicated by Table 5.2.

This was achieved through continued economic growth, employment

generation and increased social expenditure targeted to the most

vulnerable groups (World Bank, 1996:3).


Figure 5.1: Population below poverty line (percentage)

45 40 35 30 25 20 15 10

5 0

1987

1990

1992

1994

1996

Source: Schmidt-Hebbel (1998:21)

5.3.3 LABOUR POLICY

The restoration of democracy in 1990 introduced wider union rights,

higher levels of protection against discrimination and safeguard

against dismissal (ILO, 1997:21). This led to the increase in

employment. Output was largely based upon the expansion of

employment. Lack of human resources and the institutions to develop

them makes productivity to fall below international standards. This is

attributed to a weakness of the public education system. Chile has a

highly decentralised education system (World Bank, 1996:2). Only

8% of the poor study in higher education institutions whereas with the

rich families, it's around 55% (ILO, 1997:21). In addition to

education, training is an essential component of Chile's strategy to

become competitive. The government has specifically designed and

fmanced programmes to reach those with special difficulties in

integrating into the labour market.

Steps to improve the situation of the poor through labour market


policies were taken predominantly through changes in the minimum

wages (ILO, 1997:20). Unemployment in Chile is around 6% but the

rate of unemployment is higher for the poorer household and the

women suffered the most (ILO, 1997:20).

5.4 KOREA

5.4.1 INTRODUCTION

Korea was a typical underdeveloped Country until the turn of the

1960's where it was transformed into a modern industrialised country.

This was attributed to the rapid growth, which averaged over 8% per

annum for more than 30 years. Its GDP volume soared form only

2.1 billion US dollars in 1961 to 484.4 billion US dollars by 1996

(Bank of Korea, 2000). As a result of this remarkable development,

Korea emerged on the world stage as the front-runners among the

newly industrialising economies so that it was able to become a

member of Organisation of Economic Co-operation and Development

(OECD) in 1996. Education explains a substantial part of Korea

economic growth (Pillat, 1994:90). The most important ultimate

cause of Korea's success has probably been government policy

(Pillat, 1994:99). The government allowed market forces to do its

work.

5.4.2 FACTORS BEHIND KOREA'S ECONOMIC SUCCESS

In the early 1960's the Korean economy remained locked in poverty.

CHAPTER RV E: INTERNATIONAL COMPARISON PAGE 58

In order to escape from this, the government launched an ambitious

five year economic plan in 1962 (Bank of Korea, 2000). No single

factor can account for Korea's economic success (Leipziger, 1988:1).

In the early stage of economic development, the government fostered

import-substitutions industries, which produced such basic

intermediate materials as cement and fertilisers. After that, it

promoted labour-intensive export industries such as textiles and

plywood, which had international competitiveness because of cheap

labour costs and were capable of absorbing the unemployed and

underemployed human resources.

In order to support export industries, extensive export promotion

measures were taken. Low interest rate policy loans were granted to

help export firms facing difficulties. Various forms of preferential tax

treatment, such as tax exemption and tariff rebates were given to

export industries (Bank of Korea, 2000).

The government also focused on the efficient mobilisation and

allocation of investment resources. Several banks were established to

finance such underdevelopment strategic sectors as small and medium

sized enterprises and housing construction. To encourage foreign

capital inflow, the Foreign Capital Inducement Act was passed in 1966

and foreign banks were allowed to open branches from 1967

(Bank of Korea, 2000). Throughout the 1960's, the Korean economy,

in a rapid process of industrialisation, under the firm guiding hand of

the government, exhibited impressive performance. Exports, the

engine of growth, expanded by almost 40% annually and as a result


Korea was able to register high average growth rates of above 8.5% a

year. Per Capita GNP increased dramatically from 87 US dollars in

1962, when the first economic plan commenced to 10 307 US dollars

in 1997.

In the early 1970's, Korea experience dramatic changes and challenges

both at home and abroad. Labour intensive industries, whose

competitiveness was gradually weakening as a result of rapid wage

increases, faced fierce competition from other developing countries.

These circumstances forced the Korean economy to modify its

strategic objectives. By 1980, Korea faced many difficulties as a

result of the second oil crisis and domestic political turmoil

(Bank of Korea, 2000). To cope with these difficulties the

government undertook a series of structural adjustment measures to

enhance economic efficiency. Firstly it shifted the priority in its

economic policy from growth to stability. The opening up of the

economy and deregulation were persued on a stage-by-stage basis.

Table 5.2 shows the key economic indicators of Korea from 1962 to

1997.

The high level of education contributed to economic development.

Korea achieved a literacy rate of nearly 80% by the early 1960's, the

highest of any country at a similar level of development

(Leipziger, 1988:2). As a result of increasing income, the demand for

education has continued to grow, and enrolment in the nation's

colleges and universities rose from less than 140 000 in 1966 to over

one million by 1986. Without this continuum improvement in the

level of education, it would not have been possible for Korea to

CHAPTER FIVE.' INTERNATIONAL COMPARISON PAGE 60

upgrade its labour force in line with the growing sophistication of its

industries or sustain increases in productivity (Leipziger, 1988:3).

Table 5.2: Key economic indicators (1962-1997)

Per Capita GNP (US$) Real GNP Growth rate (%)

1962 87 2.1 1969 210 13.8 1970 253 8.8 1979 1 647 7.1 1980 1 597 -2.7 1986 2 568 11.6 1989 5 210 6.4 1990 5 886 9.5 1993 7 811 5.5 1996 11 380 6.8 1997 10 307 5.0

Source: Bank of Korea (2000)

5.4.3 LABOUR ISSUES

The abundant supplies of highly educated and motivated human

resources have been the prime movers in the development of the

Korean economy (Leipziger, 1988:99). Korea started in the early

1960's as a typical labour-surplus economy with a scarce endowment

of natural resources and small domestic market. By taking the

advantage of the abundant supply of labour, especially to spur the

growth of labour-intensive manufacturing export industries, Korea has

achieved a tremendously rapid economic expansion well beyond the

potential of its limited domestic market.

CI-LAPTER PIPE: INTERNATIONAL COMPARISON PAGE 61

5.5 LESSONS FOR SOUTH AFRICA

The main lesson arising from the countries reviewed is that, in order to

achieve continued economic growth of the type that make good use of the

asset that the poor own; i.e. labour; investing in human capital, removing

distortion that discriminate against the poor and the unemployed are the

proven ways of promoting employment. In order to remove discrimination

in the labour market and promote gender equality in access to jobs, an equal

opportunity policy is needed.

The general level of education and of technical competence of the labour

force has a vital bearing on increasing productivity, efficiency and

international competitiveness. Since high unemployment is heavily

concentrated among the unskilled workers, education, training and active

labour market policies are needed to increase their employment prospects.

Education is highly important because countries are able to learn from

others only if they have a minimum stock of well-educated workers.

In Indonesia, the labour intensive growth has improved poverty. Exports

were labour intensive manufacturing, textile and garments. Although the

economic growth has improved in Chile and Indonesia, the distribution of

income has remained constant. Korea, in contrast the improvement in

economic growth was accompanied by improvement in the level of income.

The overall macro economic policies should be accompanied by efforts to

improve the functioning of labour markets and to increase equality. Behind

any strategy for unemployment lies a sound macro economic framework.

Table 5.3 shows the trend in long-term economic development of the three

countries together with South Africa.

CIL4PTER FIT E: INTERNATIONAL COMPARISON PAGE 62

Table 5.3: Trend in long-term economic development (comparison)

Gross National Product Average annual % growth

Unemployment % of total labour

force Country Total Per Capita

1965-98 1965-98 1994-97

Chile 3.6 1.9 5.3

Indonesia 6.8 4.7 4.0

Korea 8.1 6.6 2.6

South Africa 2.4 0.1 5.1

Source: World Bank indicators (2000)

5.6 CONCLUSION

In this chapter, three countries were reviewed in order to identify their

experience in pursuing the objectives of full employment and sustainable

economic growth. This review shows that, behind any strategy for

employment generation and economic growth lays a sound macroeconomic

framework.

There is no single factor that can account for economic success, but a high

level of education has a tremendous contribution to economic development.

The high and sustained economic growth rate is required to reverse the

deterioration in employment conditions. Countries need to adjust their

policies continuously.

There are no once-off solutions to the South African or any other country's

labour market problem. Although there is considerable value in

understanding the approaches adopted in other countries, it is difficult and


often inappropriate to simply replicate approaches from these countries.

On the other hand, it is pernicious to assume that nothing can be done to

remedy unemployment.


RECOMMENDATIONS

6.1 INTRODUCTION

Macroeconomic policies are indispensable for creating employment

growth, but they are themselves not sufficient for either accelerating the

pace of job creation nor generating sufficient employment to supply

pressure of fast growing labour force (Amjad, 1990:3). Macroeconomic

policies need to be supplemented with strategies that promote employment

creation and eventually draw more people into the mainstream of economic

activity.

Resolving unemployment problem is not an easy task. A balance need to

be struck between encouraging high productivity employment and the

expansion of lower wage jobs in order to reduce unemployment. Sufficient

job creation to reverse deteriorating unemployment trend can be achieved if

appropriate labour market reforms and public sector development

initiatives are adopted. Several measures to create jobs were suggested by

the South African labour movement in its report, social equity and job

creation, and by the labour market commission (Nel, 1997:2). The

measures were: provision of public housing, public expenditure on

infrastructure, reduction in overtime, review of tariff reduction,

encouragement of labour intensive industries and land reforms

(Nel, 1997:3). This chapter looks at recommendations to the problem of

unemployment.

CHAPTER SIX: RECOMMENDATIONS

PAGE 65

6.2 LAND REFORMS AND TOURISM

Land reforms combined with the promotion of small-scale farming can

promote economic activity and employment very substantially. The World

Bank has calculated that two million full time jobs would be created in

agriculture and related activities through land reforms (Nel, 1997:3).

Tourism is one of the few industries in South African economy not

paralysed by unions which grows consistently and which remains an

attractive option for the private sector to invest in (Alant, 1998:2).

Table 6.1 shows the employment created by travel and tourism industry in

relation to the total jobs, together with the future projections of jobs to be

created by this industry.

Table 6.1: Travel and tourism industry

EMPLOYMENT

Year Total Visitors Direct Jobs Total Jobs

1995 4 488 272 220 329 550 451 1996 4 944 340 243 600 627 912 1997 4 976 340 263 013 627 860 1998 5 732 039 287 150 737 617

PROJECTIONS

1999 2000 2001 2002

6 4 7 8

253 918 657 480

452 496 984 947

314 347 385 426

439 880 063 444 1

801 387 981 087

852 127 949 474

Source: Ludski (2000:6)

Tourism is poised to overtake mining as South Africa's second largest

foreign exchange earner following the manufacturing (Ludski, 2000:6). By

CHAPTER SIX: RECatafENDATIONS

PAGE 66

the year 2002 the number of visitors to South Africa is expected to increase

to more than eight million and creating more than four hundred thousand

jobs out of the expected one million total jobs. Tourism can create great

opportunities for emerging entrepreneurs (Mkosi, 1999:8). It can foster

rural community development although destination in rural areas often

lacks infrastructure.

6.3 ARTS AND CULTURE

The focus on culture is part of a significant international trend towards the

recognition of the ability of creative industries to create jobs

(Ngubane, 1999:15). South African business seems to be unaware of this

trend and offers small support for arts and culture. Encouraging cultural

industries in South Africa is one of the most powerful means of enhancing

the country's identity and distinctiveness, while simultaneously creating

employment, developing skills and generating social capital and cohesion.

In a globalising world where every place begins to look and feel the same,

it is cultural products and activities that differentiate out one country from

another. A difference in this sense creates competitive advantage.

South Africa's unique cultural and heritage attraction together accounted for

46% of foreign tourists' reasons for visiting this country

(Ngubane, 1999:15). Craft production provides one of the few income

generation opportunities for people in rural areas especially women. The

example of Kwa Jobe Cultural Village in the Mkuze Game reserve in

Kwazulu Natal was build at a cost of less than R20 000

(Ngubane, 1999:15). The labour intensive beehive huts were erected. A

CHAPTER SIX: RECOMMENDATIONS PAGE 67

number of people from the surrounding. area sell their craft to tourists in

this holiday resort and earn between R200 and R700 a month.

6.4 SPECIAL EMPLOYMENT PROGRAMMES

The government's infrastural and special employment programmes enables

quick job creation, particularly for the most vulnerable groups in the labour

market. The development of skills in South Africa was given a major boost

in October 1999 following the European union R300 million fund to be

used for implementation of Skills Development Act (Grawitzky, 1999:3).

The funding will be used to investigate setting up learnership programmes

in different sectors and look at their implementation in small businesses.

Learnership is a new approach to training that will see an employer contract

new entrants into the labour market and provide practical experience to

them, that is in line with the new growth models. At the same time the

entrants will be allowed to attend education and training courses.

From April 2000, employers are required to pay an initial 0.5% of the total

payroll for skills training and 1% from the following year. The bulk of

levies will be given to the sector authorities. They will in turn be required

to reimburse employers for specific training in the form of grants

(Grawitzky, 1993:3). The Presidential Job Summit's interim governing

body called for proposals for a R2 billion labour intensive housing pilot

projects (Sukazi, 1999:3). The pilot project is aimed at delivering 50 000

housing units. This project will stimulate jobs and promote economic

development.

CHAPTER SIX: RECOMITENDATIONS PAGE 68

The case for greater education expenditure is naturally strong given South

Africa's skills shortage (McCarthy, et al. 1992:13). It takes a long time

before the benefits of education are felt. As a result of the delayed effect of

education, it may be beneficial to increase expenditure on housing and

special employment programmes.

6.5 SMALL, MEDIUM AND MICRO ENTERPRISES

A particular problem concerning productivity improvement in South Africa

is the shortage of entrepreneurs who can take the initiative and employ

readily available resources. Education can do much to develop

entrepreneurs. Statistics indicate that SMME's in the United States of

America account for 99.7% of employers, 47% of sales and 52% of jobs

(Schwenke, 2000:2). In Japan SMME's account for more than half of the

manufacturing output and more than 80% of industrial employment

(Walker, 2000:2).

The challenge in South Africa lies not so much in fmancing SMME's but in

cultivating the required expertise to bring about growth in this sector, South

African government is trying to create a platform for SMME's to get of the

ground. SMME's represent an important tool to address the challenges of

job creation, economic growth and equity in South Africa (Department of

Trade and Industry, 1995:13). Throughout the world the SMME's play a

critical role in absorbing labour, penetrating new markets and generally

expanding economies in creative and innovative ways. The government is

of the view that with the appropriate enabling environment, SMME's in

South Africa can follow these examples and make an indelible mark on this

CHAPTER SLV: RECOA/LAIENDATIONS PAGE 69

economy. Table 6.2 summarises the broad objectives, goals and principles

underlying the government involvement in the support and promotion of

SMME's.

Table 6.2: Key objectives of the national small business strategy

Create an enabling environment for small enterprises.

Facilitate greater education of income, wealth and earning

opportunities.

Address the legacy apartheid in business sectors.

Create log-term jobs.

Stimulate sector-focused economic growth.

Strengthen cohesion between small enterprises.

Level the playing fields between rural and urban and small business as

well as between rural and urban businesses.

Prepare small business to comply with the challenges of an

internationally competitive economy.

Source: Department of Trade and Industry (1995)

Core sourcing rather than outsourcing has to be encouraged. Core sourcing

encourages partnership rather than a cynical sink and swim attitude. It also

facilitates a joint learning and development. Seeing that the private

industries unable to absorb the labour force, SMME's need to be developed

and supported because of the following advantages:

They are legislatively addressed.

They are internationally proven to be job creators.

They have an operational instead of passive shareholding focus.

They ensure skill transfer.

CHAPTER SIX: RECOMMENDATIONS

PAGE 70

o Economic value adding because they focus on new and possibly

innovative start-ups instead of parcelling off old and mature

operations.

o They create a culture of entrepreneurship.

Although the statistical base of the SMME's in South Africa is still poor

there can be little doubt about their relative significance. There are more

than 800 000 SMME's in the country, absorbing about a quarter of the

labour force of 15 million people (Department of Trade and

Industry, 1995:7). Given South Africa's legacy of big business domination,

constrained competition and unequal distribution of income and wealth, the

SMME's are seen as an important force to generate employment and more

equitable income distribution. While the importance of large enterprises

for the growth of the economy cannot be denied, there is ample evidence

that the labour absorptive capacity of SMME's is high. The average capital

cost per job created is usually lower than in big business and its role in

technical and other innovation is vital for many of the challenges facing

South African economy.

6.6 CONCLUSION

In this chapter the recommendations to the problem of unemployment were

analysed. There is no simple solution to the employment problem. The

major challenge facing South Africa is the development of a skilled and

educated workforce. As a result of the delayed effect of education, it may

be beneficial to increase expenditure on housing and special employment

programmes. Changes in the global economy need the country to look at


the new avenues. New ideas have to be initiated to improve employment.

The focus should also be more on tourism and SMME's as they can also

absorb the labour force.


CONCLUSION

The main objective of this study was to provide a critical policy analysis in relation

to job creation and economic growth in South Africa.

CHANSit Cia provided an introduction to job creation and economic growth by

defining the problem statement. The study was conducted by using the existing data

and literature.

In CHAPTER TwO a selection of economic growth theories was reviewed, from the

classical era to the new growth theories. Economic growth theories help to explain

the economic growth problem as well as the possibility to create jobs. According to

the classical theories the economic growth was the result of investment and division

of labour. Neo-classical theories improved upon classical theory by bringing

entrepreneurial innovation as a factor that improves growth therefore employment.

They recognised the possibility of the substitution of capital for labour, which

implies that an economy can accumulate capital without the necessity of increasing

labour. Endogenous growth theories evolved and provided mechanism through

which changes in economic policies and accumulation of human and private

physical capital stock could generate sustained economic growth even in the absence

of exogenous technological change and population growth. They also emphasised

the endogenous resources such as ideas to have contribution towards economic

growth. With all these theories in place it is still not easy to create jobs and improve

economic growth.

CHAPTER 7: CONCLUSION PAGE 73

In aimeitivan, the scope of the labour market policies and the measures taken to

develop human capital were discussed. Since 1994 the South African government

embarked on programme of labour reforms aimed at addressing the unemployment

problem. Various pieces of legislation have been passed by Parliament from 1994

to 1999, which includes the labour relation Act, the Basic Conditions of

Employment Act, the Employment Equity Act and the skills Development and

Skills Development Levies Act. The challenge facing labour market policies is to

promote dynamic efficiency, skill enhancement and job creation. The upgrading of

skills is a long-term process. The new labour policy framework does not seem to be

conclusive to the rapid solution of unemployment and economic growth. Instead

these policies might exacerbate the lack of demand for unskilled labour in South

Africa. The gap in education levels between the unemployed and the kind of high

tech job available is too wide that no refraining program could hope to adequately

upgrade the educational performance of workers to match the kind of limited

professional opportunities that exist. Even if re-education and retraining on a mass

scale were implemented, not enough high-tech jobs will be available in the economy

to absorb the vast number of dislocated and unemployed workers.

In MANTA FOUR the South African macroeconomic framework and its role in

ensuring growth and stability was reviewed. Three programmes and strategies

namely the RDP, GEAR and MTEF were introduced in 1994, 1996 and 1997

respectively, in an attempt to restore the economy. The positive element of these

three strategies is that they complement each other rather than competing. Through

GEAR it is widely acknowledged that the government has made significant strides

towards delivering improved macroeconomic balance although the targets were not

achieved.

111P FIVE draws and review three international countries in order to identify the


main lessons for South Africa in pursuing the objective of full employment and

sustainable economic growth. Unemployment and economic growth is an

international problem. Countries might differ in their strategies but all share the

basic objectives of economic growth and job creation. The findings in this chapter

were that, there is no single ideal prescription for economic reform or single policy

environment that holds a monopoly for economic success. Behind any strategy for

employment generation and economic growth lies a sound macroeconomic

framework. Countries need to adjust their policies continuously.

In CRAMER SEX recommendations to the problem of unemployment in South Africa

were provided. Resolving unemployment is not an easy task. Macroeconomic

policies are indispensable for creating employment growth, but they are themselves

not sufficient in accelerating the pace of job creation. Policies need to be

supplemented with stiategies that will promote employment creation. Land reforms

combined with the promotion of small-scale farming can promote economic activity

and employment substantially. Tourism is one of the few industries in South Africa

not yet affected by unions, which grows consistently and remains an attractive

option for the private sector to invest in. Culture is part of the significant

international trend towards the recognition of the ability of creative industries to

create jobs. Encouraging cultural industries in South Africa is one of the most

powerful means of enhancing the country's identity and distinctiveness, while

simultaneously creating employment and developing skills.

The government's infrastural and special employment programmes enable quick job

creation, particularly for the most vulnerable groups in the labour market. Small,

medium and micro enterprises represent an important tool to address the challenges

of job creation and economic growth. Throughout the world the SMME's has

played a critical role in absorbing labour. While the importance of large enterprises


for the growth of the economy cannot be denied, there is ample evidence that the

labour absorptive capacity of SMME's is high.

In CONCLUSION, there are no once off solutions to the South African or any other

country's economic growth and job creation issues. Although there is considerable

value in understanding the approaches adopted in other countries, it is difficult to

simply replicate approaches from these countries. On the other hand, it is pernicious

to assume that nothing can be done to remedy the problem.


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