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SA won’t take its medicine

The OECD’s smart suggestions & why SA’s govt won’t take them.

Yesterday, the Organization for Economic Co-operation and Development (OECD) released its third economic survey of South Africa. Noting that the country has failed to reach its economic potential and that income inequality and unemployment remain major problems almost 20 years after the end of apartheid, the report made several suggestions as to how South Africa could get itself on a more equitable and prosperous road.

The report’s recommendations are thoughtful and likely to be effective if implemented. They are also likely to fall on deaf ears, because adopting them would require the South African government to strip away benefits that several of its key constituencies enjoy.

1.      Get fiscally disciplined

One major suggestion was that South Africa should try to reduce its budget deficit more rapidly than it currently plans to.

In his budget speech last week, finance minister Pravin Gordhan said that the budget deficit for 2012/13 would be 5.2% of GDP, and that under his fiscal plan it would fall to 4.6% in 2014/15, to 3.9% in 2014/15 and to 3.1% in 2015/16. According to the OECD, this isn’t fast enough, and government should speed up the fiscal tightening process.

However, this is not likely to happen. As the OECD notes, much of the increase in government spending over recent years is attributable to the rapidly growing public sector wage bill, and cutting back the deficit would require “public sector wage moderation.”

And therein lies the problem. As the ANC-led government has repeatedly demonstrated, it lacks the will to cut the public sector wage bill. Almost every year, state workers demand, and receive, above-inflation salary increases. What’s more, according to research by economist Mike Schussler, about one in eight working South Africans is employed in the public sector, public sector employment represents 23% of total employment compared with 11% in 1970, and public sector workers earn 34-43% more than their private sector peers.

In short, the state has used the public sector as a tool for increasing employment and wages. In the process, it has created a powerful constituency of supporters that will fight tooth and nail to hold on to the benefits they have won. This political reality makes it extremely unlikely that government will seriously tackle public sector wages.

2.      Fix up labour markets

Noting that unemployment is a huge problem for South Africa, the OECD made three primary recommendations: changing the rules that require the within-sector extension of wage agreements; creating special measures to help fight youth unemployment through subsidies and age-differentiated wages; and keeping some flexibility when revising laws around temporary employment.

On the subject of wage agreements, the report notes that South Africa is characterised by a “relatively small formal private sector in which large unions bargain with large firms, setting high wages that in many cases are extended to other firms in the sector by bargaining councils.” This process “tends to put smaller firms at a disadvantage and deter entry”; one study estimated that sectoral bargaining “decreases employment in affected industries by 8-13%, with losses concentrated among small firms.”

To combat this, the OECD recommends changing the rules to allow outsiders, especially the unemployed, to give more input into the collective bargaining process, and to end the automatic extension of wage agreements.

This is another reasonable suggestion that will not be implemented because it (along with the suggestions about measures to promote youth employment and maintain flexibility in temporary employment laws) would directly challenge groups that are doing very well under the current system: unionised workers and the big corporations that employ them. As the report notes, in South Africa, “large incumbent firms earn rents which are shared with the labour market insiders fortunate enough to have those jobs.”

In other words, because of the lack of competition in South Africa (a subject the report deals with extensively) big companies produce high profits, which they share with the unionised workers they employ through the mechanism of collective bargaining. These workers and their employers thus form another constituency with a vested interest in the current system, just like public sector workers, and like those workers they will fight to keep the system unchanged.

The bottom line

The OECD report makes a number of sensible suggestions. However, the current political realities of South Africa mean that these suggestions will never be implemented. Until other constituencies emerge to challenge the current system – for example, the unemployed banding together to lobby against the wage agreements that keep small firms from hiring – the only changes that South Africa will see will be on the margin. Government may try to keep public sector wage increases in line with inflation, or it may introduce subsidies to promote youth employment, but the basic inefficiencies in the system will remain as long as political realities remain unaltered.

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