Answer to Question #316259 in Macroeconomics for Jay

Question

Write an essay in which you discuss the costs of unemployment in South Africa, and explain measures that can be implemented to combat unemployment. (15 marks)

Answer 1

The costs of unemployment in South Africa, and measures that can be implemented to combat unemployment

South Africa’s political transition is known as one of the most remarkable political feats of the past century. The ruling African National Congress (ANC) had driven the policy agenda since 1994 until August 2016, when the country held the most competitive local government election in which the ANC lost majority support in four of the metropolitan cities. Political parties negotiated coalition deals that have left the ANC unseated in Pretoria and Nelson Mandela Bay. The latest general elections were held in May 2019 and the next local government elections are scheduled for November 1, 2021.

The COVID-19 (coronavirus) pandemic is having a major impact on South Africa’s economy leading to a 6.4% contraction in 2020, as the pandemic weighed heavily on both external demand even as the government implemented containment measures. This severe contraction is estimated to increase poverty with 2 million people living below the poverty line for upper-middle income countries, on $5.5 per day in 2011 Purchasing Power Parity exchange rates, PPP.

The South African economy was already in a weak position when it entered the pandemic after a decade of low growth. In 2019, the economy grew by 0.1% partially caused by the resurgence of load shedding associated with operational and financial difficulties at the energy utility Eskom. South Africa’s economic recovery in 2021 is benefiting from the favorable global environment (trade partners’ growth and commodity prices). However, pre-existing structural constraints, such as electricity shortages, continue to be binding for the medium-term outlook. Economic growth is expected to rebound to 4.0% in 2021. Commodity prices remain important for South Africa, a major net exporter of minerals and net importer of oil, however, strengthening investment, including foreign direct investment, will be critical to propelling growth and create jobs.

Key Development Challenges

South Africa has made considerable strides to improve the wellbeing of its citizens since its transition to democracy in the mid-1990s, but progress has stagnated in the last decade. The percentage of the population below the upper-middle-income-country poverty line fell from 68% to 56% between 2005 and 2010 but has since trended slightly upwards to 57% in 2015 and is projected to reach 60% in 2020.

Structural challenges and weak growth have undermined progress in reducing poverty, which have been heightened by the COVID-19 pandemic. The achievement of progress in household welfare is severely constrained by rising unemployment, which reached an unprecedented 34.4 percent in the second quarter of 2021. The unemployment rate is highest among youths aged between 15 and 24, at around 64%.

South Africa remains a dual economy with one of the highest, persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.63 in 2015. High inequality is perpetuated by a legacy of exclusion and the nature of economic growth, which is not pro-poor and does not generate sufficient jobs. Inequality in wealth is even higher and intergenerational mobility is low meaning inequalities are passed down from generation to generation with little change over time.

The South Africa Country Partnership Framework (CPF) for 2022-2026, approved by the World Bank Board on July 22, 2021, continues the theme of the past three Country Partnership Strategies to support South Africa in its quest to complete the Post-Apartheid socio-economic transition. It is informed by the Systematic Country Diagnostic (SCD) of 2019 developed by the World Bank Group (WBG) in broad consultation with South Africans, which identifies five binding constraints to completing the socio-economic transition, reducing poverty and boosting shared prosperity. They are: (i) Insufficient skills; (ii) The skewed distribution of land and productive assets, and weak property rights; (iii) Low competition and low integration in regional and global value chains; (iv) Limited or expensive connectivity and underserviced historically disadvantaged settlements; and (v) Climate change and the transition to the low-carbon economy, as well as water insecurity.

Aligned with the Government’s National Development Plans of continued reforms to sustain economic recovery and reconstruction for a more inclusive and resilient economy, the CPF charts a clear path for collaboration with SA in the following focus areas: (i) increased competition and an improved business environment; strengthened micro, small, and medium enterprises and the supporting ecosystem to boost job creation; (ii) increased resilience to external (climate and health) shocks; and improvements in the infrastructure investment framework and selected infrastructure services. All focus areas are approached through a lens of harnessing the digital economy, empowering women and girls, strengthening public sector institutions and governance frameworks; and promoting integration and cooperation in the region and continent.

Overall, this World Bank Group’s support is driven by increased private sector investments, through the Group’s private sector arm the International Financing Corporation (IFC) and its Multilateral Investment Guarantee Agency (MIGA). Knowledge exchange remains a key cornerstone of the partnership through technical and analytical collaboration.

As of June 2021, the South Africa portfolio had four active projects comprising of two International Bank for Reconstruction and Development (IBRD) valued at $3.80 billion, and two trust-funded projects ($273 million). 

The Eskom Investment Support Project ($3.75 billion), the largest of the two-lending operations sought to enhance South Africa’s power supply and energy security in an efficient and sustainable manner. This project closed June 2021, with all six units of Medupi in commercial operation into the grid, delivering 15% of South Africa’s electricity.

The Eskom Renewables Support Project (ERSP) focuses on demonstrating the viability of clean technologies in South Africa. ERSP is a US$250 million operation, funded by the Clean Technology Fund, which also financed the first public wind power plant in the country, the 100MW Sere Wind Farm, that to date is the best performing wind plant in the country. Since 2019, ERSP is supporting the Eskom Battery Storage Program, a 300MW / 1440 MWh investment of several battery sites, aiming to integrate more wind and solar photovoltaic generation capacity into Eskom grids. The procurement process for this battery system is ongoing and the first grid-scale batteries in South Africa should be in operation in 2022.

Urban Development

The World Bank is actively providing targeted technical assistance to support the integration, implementation and institutionalization of approaches and instruments to urban management in South Africa, as part of a four-year Reimbursable Advisory Services agreement (2018-2022) for ‘Infrastructure Investment and Integrated Urban Planning’ in support of the second phase of the Treasury’s Cities Support Programme.

Aligned with South Africa’s National Development Plan and Integrated Urban Development Framework and supported by Switzerland’s State Secretariat for Economic Affairs, this program has contributed to strengthening economic incentives, improving speed of starting businesses, reforming infrastructure finance and fiscal management and promoting inclusive urban development with a focus on informal settlements.

South Africa Financial Sector Development and Reform Program

The South Africa Financial Sector Development and Reform Program Phase 2 (FSDRP 2) is a five-year World Bank technical assistance program launched in September 2018 with a contribution from the Swiss State Secretariat for Economic Affairs. Through this program, the World Bank supported the South African Reserve Bank (SARB) on the Financial Sector Law Amendment Bill which establishes a resolution regimen and enables provisions for the Corporation of Deposit Insurance. A feasibility study and cost-benefit analysis for using bail-in as a recapitalization mechanism in South Africa (the “Flac” study) was published by the World Bank in December 2020 to provide guidance to the SARB on implementing bank resolution secondary legislation.

The World Bank also supported the development of regulatory and policy response to fintech, including undertaking a landscape assessment of the fintech sector in South Africa in collaboration with the Intergovernmental Fintech Working Group (IFWG), to better inform policy and regulatory priorities. This helped enhance discussions that informed the development of the vision for South Africa to be a leading Fintech hub for Africa, promoting financial inclusion while spurring competition, digital skills, and economic growth through innovation.

Catalyzing Financing and Capacity for the Biodiversity Economy Around Protected Areas Project

The World Bank is supporting the implementation of a new, $8.9 million grant from the Global Environment Facility (GEF) to support South Africa to step up investment for its wildlife and biodiversity sectors. The Project aims to enhance South Africa’s stewardship of its rich biodiversity and expand the benefits of protected areas for local communities. It helps address high unemployment and limited livelihoods around protected areas and inequality in rural economies. The work is happening at Kruger National Park, Addo Elephant National Park, and iSimangaliso Wetland Park.

South Africa Partnership for Market Readiness

The World Bank successfully completed the Partnership for Market Readiness project in December 2020, supporting the design of South Africa’s Carbon Tax policy and helping to build and capacitate several tools to support the tax through a $3.8 million grant.

The project helped to finance the development of the Carbon Offset Administration System, a new online platform for the listing, transfer and retirement of carbon credits to offset carbon tax liabilities. It also helped design and build capacity for the South Africa Greenhouse Gas Emissions Reporting System (SAGERS), a web-based portal to register and submit GHG emissions data, to help inform liability under South Africa’s carbon tax, enacted June 1, 2019.

The South Africa Economic Update

The 13th edition of the South Africa Economic Update (SAEU), launched in July 2021, with a special focus on the COVID-19 impact on South Africa, particularly the job market, where it has exposed severe structural weaknesses. The labor market was marked by high levels of unemployment and inactivity even before the crisis; these have been exacerbated by the pandemic. The report suggests a sequenced set of interventions to strengthen job recovery, including temporary support programs, more permanent changes in government finances, and a redirection of policies to support job creation and entrepreneurship. The COVID-19 pandemic created an opportunity to accelerate much needed reforms for a higher growth trajectory and a more inclusive and resilient economy.

Digital Economy Country Diagnostic Report for South Africa

The World Bank South Africa Digital Economy Diagnostic, examined the strengths, weaknesses and opportunities for digital economy development. It forms part of the World Bank Group’s Digital Economy for Africa Initiative (DE4A), a collaboration between the African Union and the WBG. The initiative aims to ensure that every individual, business and government in Africa is digitally enabled by 2030.

South Africa has good potential to build on its strong foundations to continue to grow and expand its digital economy, including playing a regional leadership role, to boost digital infrastructure and skills in particular. Priority considerations include updating the national broadband policy in line with international best practices, fast-tracking spectrum licensing, and ensuring the independence and capacity of the Independent Communications Authority of South Africa.

Partners include the United Nations system, the African Development Bank (AfDB), the New Development Bank, the International Monetary Fund (IMF), Department for International Development (DfID) and the State Secretariat for Economic Affairs of Switzerland (SECO).