Going for Growth 2021 – South Africa

South Africa

The COVID-19 pandemic caused millions of workers to lose their jobs, while the number of discouraged workers increased. Investment has been on a downward path already prior to the crisis, marred by policy uncertainty, lack of infrastructure leading for example to electricity shortages and lacklustre government financial prospects. Regulatory restrictions in many areas, including network industries, are a threat to the recovery. Stronger growth is needed to place the government debt trajectory on a sustainable path and to finance large unmet needs in education, health and social spending.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs).

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality. The latest available data for South Africa is 2015.

Environment: A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

Source: Economy: OECD, National Accounts, Productivity and Labour Force Statistics Databases; Inequality: OECD, Income Distribution Database and World Bank, World Development Indicators Database; Environment: OECD, Environment and Energy Databases.

Unleashing investment to boost productivity and job creation

To improve its resilience and growth potential, as well as to recover from the COVID-19 crisis in a more dynamic and sustainable way, South Africa will need to improve the allocation of resources and create job opportunities. Removing barriers to competition and lifting regulatory restrictions in many sectors (Panel A), but in particular more competition in network industries would bring down prices, increase the accessibility of services, stimulate downstream firms’ competitiveness and raise productivity growth. Competition and good governance should be safeguarded by giving the energy and telecommunication regulators greater independence and encouraging closer and better collaboration between the competition authorities and sector regulators.

Entrepreneurship in South Africa is weak compared to other emerging economies, and the slowing growth and COVID-19 crisis have compounded an already difficult environment for new and small businesses before the pandemic. Reducing red tape and barriers to entrepreneurship should aim at further reducing the bureaucratic procedures and licensing, which remain a burden on small firms. Improving access to finance should be prioritised by increasing financial and non-financial government support for entrepreneurs and small businesses.

Public infrastructure investment has dropped in recent years in addition to declining private investment. The speed, quality and efficiency of many public investment projects also have been low. High quality, accessible infrastructure investment should be increased, by accelerating the operations of the infrastructure fund with the private sector, development finance institutions and multilateral development banks. The fund should aim to increase the number of blended-finance projects, enhance oversight, improve the speed and quality of spending, and reduce costs in public infrastructure. Developing well- structured public-private partnerships could also boost infrastructure investment, and in particular participation of private capital in ports and rail.

Vulnerabilities and areas for reforms

The low quality of the education system, high drop-out rates and the lack of work experience contribute to gaps in entrepreneurial skills. Improving the quality of education would boost human capital accumulation and reduce the high levels of inequality.

South Africa is a heavy greenhouse gas emitter. Coal is the major energy source for electricity and industrial processes, contributing to air pollution with impacts on premature mortality rates and child development. Greener energy policy can bolster growth and limit environmental impact through investment in renewable energy (Panel B) and other low-carbon technologies. Building on recent progress in carbon pricing, a more ambitious carbon tax over the medium-term should be combined with the regulatory reforms to increase the responsiveness to such price signals and revenue recycling to shield low income households from adverse effects.

South Africa: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

Progress on structural reforms has been slow mainly due to a lack of political consensus. After five years of low growth, declining investment and rising unemployment, the country needs a bold implementation of reforms to face mounting challenges and restore the economy’s growth potential.

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