South Africa - progress made but step up economic reforms: OECD

Priorities include a growth-enhancing macroeconomic policy-mix, and better implementation of structural reforms, notably to improve education.

The Survey, presented in Pretoria by OECD Secretary-General Angel Gurría and South African Minister of Finance Pravin Gordhan, recognises also the important advances South Africa has made in recent years. “South Africa has recorded tremendous success in a number of economic and social policies” Mr Gurría said. “Per capita income is rising, public services are expanding, health indicators are improving and public finances are in better shape than in many OECD countries.”

However, the country is growing at a slower pace than other leading emerging economies, according to the Survey. “A high proportion of the population is out of work; offering people a brighter future by creating jobs is a policy priority,” Mr Gurría said. “Income inequality remains high, educational outcomes should be improved and access to education needs to be inclusive. Environmental challenges like climate change and water scarcity need to be tackled to make economic growth green and sustainable. There is unfinished business that will require additional reform efforts.”

The OECD identifies several priority areas for action:

Make better use of macroeconomic policy to support growth. The deficit expanded rapidly during the crisis and has been brought down only gradually since. Much of the increase in spending came through large increases in the public sector wage bill, while public investment has fallen as a share of total expenditure. With core inflation remaining well contained, monetary policy has been eased cautiously. The rand has fluctuated with international sentiment, and has been overvalued for extended periods.Implement reforms to boost competition and improve the functioning of labour markets. Most industries are highly concentrated, with network industries dominated by state owned enterprises. Large firms are able to share excess returns with their employees via collective bargaining, and in some sectors the collective agreements are extended to other firms, creating a barrier to entry for small enterprises. This results in a sharply dualised labour market, with a well-paid formal sector covered by collective bargaining and a secondary market where pay is low and conditions poor. Many South Africans are excluded from work altogether, contributing to poverty, inequality, and ill health. Strengthening product market competition and improving the functioning of labour market institutions should be high priorities.Improve education to give people better prospects and opportunity. Skill mismatches are a key element of the persistently high unemployment rate, especially for youth: the education system is not producing the skills needed in the labour market. The benefits of obtaining a high school diploma – as concerns the probability of finding a job and the earnings premium when employed – are mediocre, whereas the shortage of skilled workers is reflected in a high premium for university graduates. Shortages of learning materials, teachers, support staff and well-trained principals across most of the school system contribute to the poor outcomes. If South Africa is to achieve full employment, the quality of basic and vocational education must be improved.Work towards a greener and cleaner economy. Greater use of market instruments can help the authorities deal with long-term environmental challenges. In most respects the policy framework for addressing green issues, including climate change and water scarcity, is sound, but implementation has been inadequate. Similar problems are seen in the electricity and water sectors, where supply struggles to keep up with demand in a setting where prices – when they exist – do not cover total costs. The policy challenge is to explain the necessary increases in the relative price of energy and water and then bring them about in a manner that minimises adjustment costs to protect the poor, by applying appropriate social policy instruments.

www.oecd.org/eco/surveys/southafrica2013.htm

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