5.1 Recent policy developments
The unreliability of raw material exports in the 1980s persuaded policy-makers that the central thrust of trade and industrial policy had to be the pursuit of employment creating international competitiveness. This entails a shift away from demand-side interventions, such as tariffs and subsidies, which raised prices received by producers, to supply-side measures designed to lower unit costs and expedite progress up the value chain.
While long-term survival strategies have had to be developed for certain sensitive sectors, general progress towards an outward-oriented stance is reflected in a number of achievements:
Another critical policy thrust has been the expansion of market access through preferential trade arrangements with industrial countries and pursuit of regional economic integration. In the area of concessionary industrial finance, several schemes have been introduced by the Industrial Development Corporation (IDC) and the Regional Industrial Development Programme (RIDP) has been expanded to include a simplified scheme applicable to smaller enterprises.
The impact of trade restructuring is not easily measured. Many firms have been under intense pressure, compounded by the real appreciation of the exchange rate in 1995. Nevertheless, exports and employment in manufacturing have increased, taking advantage of the international cyclical upswing. The most positive sign, also evident in sectors sensitive to the lowering of trade barriers, has been the significant increase in new foreign and domestic fixed investment in the manufacturing sector.
5.2 Compensating tariff reductions
Based on the foundations which have been laid over the past two years, trade and industrial policies will seek to enhance the competitive capacity and employment absorption of manufacturing, alongside continued promotion of tourism as an export sector and appropriate growth-oriented policies in other sectors.
As a result of the real depreciation, a compensating lowering of tariffs is desirable, within the context of an orderly implementation of agreed tariff realignments. The mid-1996 real effective exchange rate is some 12 percent below the January value, which should permit a significant acceleration of the tariff reductions to which South Africa is committed in terms of World Trade Organisation agreements. These reforms will be structured to lower prices for industrial inputs and low-income households, to avoid job losses in sensitive sectors, and to remove price distortions in domestic markets. The overall effect will be to minimise the negative effects of the depreciation on consumer prices and maximise the positive effects on industrial production. It will also encourage additional investment and job creation in competitive sectors, including priority industries.
5.3 Industrial support measures
Industrial innovation support programmes will be enhanced. This includes the incentive provided in terms of the Special Programme for Industrial Innovation, which has had some positive impact on domestic innovation, as well as the matching grants under the Technology and Human Resources For Industry Programme, designed to strengthen the relationship between educational institutions and industry. The technology transfer programme of the Department of Trade and Industry, which serves to police and advise on licensing and royalty agreements, will be converted into an agency dedicated to facilitating access by firms to needed technologies.
Several programmes have already been introduced to promote productivity, such as the IDC's Multi Shift and World Player schemes. A major investigation is now being undertaken under the auspices of NEDLAC to develop a programme to encourage the adoption of best practice work organisation.
To stimulate competitive and labour absorbing industrial development, an accelerated depreciation scheme will be introduced for all new investments in manufacturing. 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. In addition, the current Regional Industrial Development Programme will be replaced by a tax holiday available to completely new pre-approved projects initiated during a window of three years, beginning in the last quarter of 1996. Approved projects will get tax exemptions for a period of time determined by three factors: regional location, job creation, and priority industries. The tax holiday, of a maximum of six years, will come into effect as soon as the project becomes liable for tax, and may not be used beyond the tenth year after the initial investment is undertaken.
Closely related are the twelve industrial priority industry investigations as well as the regional industrial locations studies. These major initiatives are intended to identify mechanisms to enhance the competitiveness of selected industrial sub-sectors. While the clusters may be eligible for the proposed tax holiday, specific interventions will also be considered where necessary. These studies involve constant interaction with both owners and workers.
The review of competition policy which is presently under way will be reflected in strengthened new legislation. The main objectives of competition policy are to encourage competition among firms, protect consumers and downstream firms from restrictive practices, and to open up new opportunities for investment.
Ongoing efforts to improve the access of South African firms to foreign markets will concentrate on exploring special arrangements with major trading blocs and continuing participation in the multilateral World Trade Organisation process, as well as other initiatives such as the Cairns Group. A further key element of the strategy is the gradual integration of the economies of Southern Africa through the trade and investment protocols of SADC.
The reform of the system of industrial finance is well advanced. The IDC will continue to provide loan finance, equity, and credit guarantee facilities, and will adapt its programmes to satisfy new needs. The institutional capacity to support small business is also largely in place. The various regional development corporations, however, still need to be integrated more fully into the new investment promotion effort. Other support institutions such as the Board of Tariffs and Trade, the Competition Board, the South African Bureau of Standards, and the National Productivity Institute are also receiving attention to meet the challenge of global competition and employment creation.
5.4 Small and medium-sized enterprise development
The promotion of small, medium and micro enterprises (SMMEs) is a key element in the Government's strategy for employment creation and income generation. Due to obstacles of the past, the SMME sector is severely under-developed. A major effort will be made to operationalise and implement the policies outlined in the White Paper on small business promotion. The relevant legislation is under consideration and various programmes and institutions have been established to give effect to the strategy, including:
The Simplified Regional Industrial Development programme will be continued in a modified form as a grant programme tailored to the needs of small and medium-sized firms.
The past two years have witnessed an energetic review of social and sectoral policies in keeping with RDP objectives. Public policies which affect women have come under scrutiny, programmes of action for children have been developed and a strategy for the disabled has been put forward. Land reform, agricultural development, protection of the environment, programmes in arts and culture, technology enhancement, crime prevention, national defence, urban infrastructure and housing, water and sanitation and primary health services are just some of the areas in which detailed analysis and extensive public discussion have led to major policy revision.
The focus of this document is the overall macroeconomic environment. Social and sectoral policy development cannot be outlined comprehensively here, but a few key linkages between growth, redistribution and new policy directions are highlighted below.
6.1 Education
Progress in education shows up consistently in comparative studies as a key determinant of long-run economic performance and income redistribution. Sustained improvements in the quality of public schooling available to the poor and greater equity in the flow of students through secondary and tertiary education are central to the Government's approach. Despite near-universal enrolment in primary education, only some 40 per cent of children currently complete secondary schooling successfully. Inadequate pass rates in science and mathematics are cause for concern.
Reform initiatives under way, aimed at qualitative improvements in the educational system, include restructuring and decentralising of school governance and management, overhauling school curricula, establishing a national qualifications framework, addressing the culture of learning in schools, building and refurbishment of classrooms, rationalising and renewing teacher education, enhancing educational administration, and expanding further education. Suitable norms, together with quality enhancing rewards, are under review. With spending on education at nearly 7 percent of GDP there is a need to contain expenditure through reductions in subsidisation of the more expensive parts of the system and greater private sector involvement in higher education. This will concentrate public resources on enhancing the educational opportunities of historically disadvantaged communities.
6.2 Health and welfare services
The systematic restructuring of health services, with a strong emphasis on universal and free access to comprehensive primary care, represents a clear commitment to improving the health conditions of the poor. Within the public health system resources are shifting from tertiary services in metropolitan areas towards overcoming the inadequacies of hospitals and clinics in rural areas and townships.
Partnerships between the state and voluntary organisations centred on developmental welfare services will focus attention on the vulnerable, especially in under-serviced areas, while freeing resources from expensive institutionally-based services. By far the greater part of welfare spending is devoted to social grants, which assist some 3 million elderly or disabled persons or needy children. These transfers play a vital role in poverty alleviation, especially in rural areas. Affordable alternatives to support families and children in need are being investigated.
6.3 Housing, land reform and infrastructure
The implementation of the housing and infrastructure programmes has been slow, with continuous refinements to the policy framework. Since late 1995, an acceleration in housing delivery has been evident. A continuation of this trend will see the provision of housing and related services on a substantial scale. This will have several beneficial distributional effects. Construction is largely labour intensive and provides jobs and training, while improvements in housing and infrastructure enhance the productivity of labour and the quality of urban life.
Improved water and sanitation is typically the first priority of rural communities. Some 500 projects costing R1.5 billion have been committed. Rapid progress with the supply of potable water to the 12 million people without adequate access will be a major contribution to poverty relief. These initiatives have been complemented by new policies regarding sanitation systems.
The land reform programme, combining asset redistribution with enhancement of tenure has an important role in improving the long-term prospects for employment and income generation in the rural economy. Progress has been made to finalising procedures for the rapid release of land and the introduction of a settlement grant. Complementary initiatives include emergent farmer support programmes. As these gain momentum, emphasis will shift to marketing support, appropriate technological interventions and streamlined extension services. Over time, agricultural development associated with land reform will play a key role in improving the distribution of income and economic activity.
7.1 Investment in infrastructure
Investment in social and economic infrastructure will play an important role in increasing the productivity of labour and business and thus the achievement of higher growth rates. The National Infrastructure Investment Report indicated that South Africa currently faces a backlog in infrastructure of at least R170 billion, and that innovative financing strategies and careful prioritisation will be needed if sufficient progress is to be made.
This strategy envisages a substantial acceleration in government investment spending, together with improved maintenance and operation of public assets. Higher growth is clearly critical in this regard, as is a thorough restructuring of the responsibilities of relevant public corporations, development finance institutions and local and provincial authorities.
Public infrastructure needs include domestic and industrial grid electricity and other energy projects; domestic, industrial and agricultural water supplies; sanitation, wastewater and stormwater; roads, railways, airports, harbours and pipelines; telecommunications and postal services; urban housing-related infrastructure; rural development; and hospitals, clinics and educational facilities. Progress in all these areas adds to the quality of life in communities, while simultaneously building productive economic capacity. The provision of basic household infrastructure, in particular, is a relatively low cost and effective form of public intervention in favour of the poor and consistent with the reduction of income inequalities.
Four basic sources of finance are potentially available: fiscal transfers, concessional finance from multilateral institutions and other international sources, development finance channeled through development finance institutions, and loans raised on commercial terms. The nature of projects, including cost recovery potential and the risks involved, determine the appropriate funding mix. Recognising the limited capacity of the fiscus, Government is committed to the application of public-private sector partnerships based on cost recovery pricing where this can practically and fairly be effected.
7.2 Corporate governance and asset restructuring
Government has prepared a protocol on corporate governance of all state entities which ensures decisive leadership by government and includes the following :
Within the context of government policy and in accordance with the procedures agreed in the National Framework Agreement with organised labour, the process of restructuring state assets is now proceeding. Detailed sectoral consultation, planning and preparation are taking place. The telecommunications sector plans to complete negotiations in this year with a view to finding strategic equity partners and addressing other restructuring issues in this sector. In addition all stakeholders are united by a common vision to double the network rollout by four millions lines and deliver a range of services to our people to implement the RDP. A similar process will unfold in the course of this financial year in other sectors, including minerals and energy, agriculture, forestry and water, leisure and transport. In order to free the airwaves and encourage competition Cabinet has approved the sale of six major regional radio stations.
The nature of restructuring, as outlined in the framework agreement, may involve the total sale of the asset, a partial sale to strategic equity partners or the sale of the asset with government retaining a strategic interest. Work is in progress to address the outstanding issues on the restructuring of the remaining state enterprises. The restructuring will take place in a phased manner so as to ensure maximum value and adequate regulatory frameworks. Specific policy issues and further elaboration will be dealt with by the responsible Ministers.
8.1 Present trends in the labour market
South Africa's labour market is extremely fragmented. Employment growth in the formal sector of the economy has stagnated over the past decade and private sector employment has fallen. It is apparent that unregulated low wage employment has increased significantly since the 1970s, now accounting for an estimated one-third of all job opportunities. In addition, a large pool of unemployed men and women, who earn no income or derive sporadic earnings from informal self-employment, make up about a third of the potential labour force.
Irregular, sub-contracted, out-sourced or part-time employment on semi-formal contractual terms is becoming the preferred source of labour for many employers. This is resulting in a growing gap between the wages and benefits in the regulated and unregulated parts of the labour market. Where regulations raise the costs of job creation, employers turn to unregulated forms of employment.
The major development in the primary segment of the labour market over the past two years has been the new Labour Relations Act. This has four key features. It establishes a single industrial relations system for all employees, promotes collective bargaining by providing certain organisational rights for trade unions, establishes new procedures and institutions for resolution of disputes and provides for workplace forums to facilitate a shift from conflictual employer-employee relations towards joint problem-solving with employee participation. The reduced incidence of industrial unrest in recent years attests to the considerable progress made in this regard.
Present trends in the economy lead to employment growth of 100 000 to 130 000 per year, with unemployment rising to 37 percent by the year 2000 and an increased casualisation of the labour force. On this trajectory, poorly rewarded employment in survival activities grows nearly twice as fast as formal sector job opportunities. Weakening employment opportunities for the poor imply that income distribution is likely to worsen, impacting particularly severely on the rural poor, young work-seekers and those without education or skills.
8.2 Labour market reform challenges
The fragmented character of the South African labour market, conflictual labour relations and poor productivity have tended to undermine competitiveness and hence investment. Appropriate balances have to be struck in the labour market in respect of job creation, between regions and sectors and between maintaining existing jobs, protecting those in employment, and creating opportunities for new entrants. In a context of approximately 33 percent unemployment, the challenges are immense.
Government has a responsibility for ensuring that labour market rules are fair and that there are appropriate mechanisms for dispute resolution. Government is also an important employer and the main investor in human resource development in the economy. It influences, through its industrial and other policies, the sectoral growth trend of the economy. Accelerated job creation and improved productivity are direct or indirect goals of a wide range of government policies and programmes, some of which are noted elsewhere in this document.
In this integrated macroeconomic strategy, employment growth accelerates, reaching 409 000 jobs annually in the year 2000 and reversing the upward tendency in the unemployment rate. Over the next five years some 833 000 more jobs are created in the higher growth strategy than would otherwise be possible.
In this strategy there are two broad thrusts relating to labour market policy. The first is the pursuit of regulated flexibility aimed in part at extending the protection and stability afforded by this regulatory framework to an increased numbers of workers. The second is the promotion of continued productivity improvements aimed at bolstering the development of skills across the full spectrum of the workforce in both the formal and non-formal sectors. These points of departure are the basis of Government's labour market policies and will be further elaborated in response to the report of the Comprehensive Labour Market Commission.
The Government will pursue a policy of regulated flexibility in managing the labour market. This entails the regulation of the labour market in a manner that allows for flexible collective bargaining structures, variable application of employment standards and voice regulation.
The appropriate determination of wages is a critical component of the medium term macroeconomic strategy. It is a precondition for sustaining the competitive advantage of the currency depreciation, and it is the key to ensuring the maintenance of industrial competitiveness in the longer term. A sudden upsurge in nominal wage demands would either unleash a wage-price spiral that would soon erode any semblance of a real depreciation or force a severe tightening of monetary policy leading to higher interest rates and economic contraction. It is therefore important that wage and salary increases do not exceed average productivity growth.
Analysis of employment prospects indicates that accelerated job creation can be achieved in broadly three ways. Growth itself could account for about one-third of the increased job creation envisaged under an integrated strategy, some of which would be in informal or other unregulated activities. 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. Some 30 percent of the increased employment, however, and more than half of the new formal private sector opportunities, will have to arise from institutional reforms in the labour market, employment enhancing policy shifts and private sector wage moderation. Stronger growth of more labour-intensive components of industry, facilitated by shifts in industrial policy, is vital. It is these reforms that are needed to bring about the increased responsiveness of labour demand to output growth, and are the essential ingredients of a sustainable, labour-absorbing growth path.
Furthermore, the general direction of economic policy is towards greater openness and competitiveness. The economy will thus become increasingly subject to global forces. The challenge then facing labour market policy is to promote dynamic efficiency, skill enhancement and the expansion of reasonably remunerated employment - while at the same time supporting a labour-intensive growth path which generates jobs for the unemployed, many of whom are unskilled and have never had previous employment. The Government intends to promote collective bargaining while simultaneously pursuing an appropriate balance between productivity enhancement and employment creation.
8.3 A more flexible labour market
Government recognises that industrial agreements which reach across diverse firms, sectors or regions should be sufficiently flexible to avoid job losses and should be extended to non-parties only when this can reasonably be assured. The Minister of Labour's discretion to extend or not to extend agreements should be broadened to permit the Minister to bring labour market considerations into play. Wage agreements must be sensitive to regional labour market conditions, the diversity of skills levels in firms of varying size, location or capital intensity and the need to foster training opportunities for new entrants to the labour market.
Other labour market policies should be negotiated by labour, business and government constituencies at appropriate levels in terms of a national framework. Reforms consistent with accelerated access of new entrants to employment and training opportunities might include a less onerous wage schedule for young trainees, increased incentives for more shifts, job-sharing and other measures to support greater employment flexibility. Variations on norms set through collective bargaining must be an integral aspect of a system of regulated flexibility building on the safeguarding of employment standards and worker's rights implicit in existing policies.
The determination of minimum wages remains, in certain sectors of the economy, to protect the vulnerable and the weak. The approach will not be to set one minimum wage across the whole economy but to determine appropriate standards by sector and area. The determination of these minimum wages must follow proper hearings, investigations and consideration of relevant economic conditions, the potential for employment creation and the alleviation of poverty.
The Department of Labour will encourage, through the mechanisms provided in the Labour Relations, Act, the rationalisation of collective bargaining arrangements to meet the challenges of the new economic environment while recognising the diversity of the domestic labour market.
8.4 Enhancing productivity
Government also recognises that job creation and improved living standards require a substantially increased commitment by the business sector to industrial investment and productivity-enhancing training. Accelerated investment is a principal thrust of this strategy, and must be promoted across a broad sectoral front, including export-oriented manufacturing and agro-industrial projects, tourism-related industries and improved transport and communication services, and with a particular focus on smaller firms. 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 resource development is inadequate. An enhancement of the level and effectiveness of training across all employment sectors is central to this growth strategy. Training underpins productivity improvement by enhancing human capability - across all labour market segments and product lines - to exploit technological flexibility and add value on competitive terms. Regulated flexibility of the labour market, discussed above, must permit employees to increase their productivity over time. Improved management training, modernisation of work practices, appropriate job grading and better utilisation of working time are also key aspects of enhanced efficiency.
A refocusing of curricula and the organisation of formal learning is currently in progress under the auspices of the education authorities. Coordination of standards and quality assurance will be the responsibility of the newly established South African Qualifications Authority.
The Department of Labour has embarked on the development of a new human resource development strategy, in partnership with all major stakeholders, which is planned to culminate in new legislation in 1997. Central to this strategy is a new financing mechanism and governance framework which aims to increase the aggregate level of effective investment in training. Towards this end the government is investigating the feasibility of introducing a mandatory levy on payroll. The matter is currently under negotiation with the social partners represented in NEDLAC. The strategy includes the following:
In addition, there will be deliberate campaigns to enrich human resource development programmes within government departments and agencies, aimed at effective service delivery. Management training initiatives are already underway in several key departments.
Government recognises that it has an important role to play in financing education and training activities aimed at the unemployed and the small business sector and in enhancing the quality of technical and vocational education and training. Sustained improvements in the quality of general schooling are also largely the responsibility of the fiscus. Industrial training must remain mainly the responsibility of employers. Government seeks to facilitate the development of financing mechanisms that will enjoy broad support from both the business sector and organised labour.
A strong tradition of collective bargaining characterises the South African industrial and social environment. Sectoral and regional agreements are likely to contribute to structuring future growth and development. There is an important role also for a broad national agreement, to create an environment for rapid growth, a brisk investment trend and accelerated delivery of public services based on equity and universal access. The challenge facing the government and its social partners is to ensure that a national agreement underpins rapid growth, job creation, and development.
The immediate objective of the agreement would be to ensure that the recent depreciation of the currency does not translate into a vicious circle of wage and price increases leading to instability in the financial markets and a decline in competitive advantage. For this reason it is important that wage and salary increases do not rise more than productivity growth. It is equally important that price restraint should be maintained, facilitated through an effective competition policy and continued trade liberalisation.
In the longer term, a broad social agreement might address a wider range of issues related to economic restructuring, income distribution and social policies. Orderly collective bargaining between organised labour and employers must remain the foundation of industrial relations.
For its part, the government commits itself to an accelerated increase in its contribution to social and community living standards. Most of the policy frameworks and institutional systems are now in place, including through enhanced public sector investment, to ensure the following:
Equally important, the government will provide a combination of real exchange rate management and tax incentives aimed at encouraging private sector investment. For workers, this will give certainty that wage moderation will contribute towards growth, job creation and social benefits. For the business sector, this strategy creates an environment in which investments can be made confidently, competitiveness is enhanced and public policies are clear. The objective is to address the income inequalities which characterise the South African economy and which mitigate against sustainable growth and job creation in the long run.
As a result of political stability and sound policies, economic growth has revived, bringing to an end the stagnation that characterised the 1980s. Our strategy will build firmly on the foundations established since 1994, leading to accelerated growth, increased job creation and a significantly improved distribution of income and opportunities.
The higher growth path depends in part on attracting foreign direct investment, but also requires a higher domestic saving effort. Greater industrial competitiveness, a tighter fiscal stance, moderation of wage increases, accelerated public investment, efficient service delivery and a major expansion of private investment are integral aspects of the strategy. An exchange rate policy consistent with improved international competitiveness, responsible monetary policies and targeted industrial incentives characterise the new policy environment.
A strong export performance underpins the macroeconomic sustainability of the growth path. Private sector employment creation is reinforced by small business promotion, land reform and emergent farmer support, greater labour market flexibility and labour-based public sector infrastructural development projects.
Accelerated economic growth associated with stronger employment creation is the key to continued progress towards an equitable distribution of income and improved standards of living for all. Employment creation provides a powerful vehicle for redistribution, supported by government housing, water supply and sanitation, health, education, welfare and social security services.
Success in a more open and complex economic environment requires consistent and integrated policies. Timing, sequencing, and packaging of reforms are important, as is the clear commitment of social partners to an agreed policy framework. World competitiveness nowadays depends as much on comparative advantage in the public policy arena as it relies on technology, human resources and physical capital.
Government has a clear policy coordination role. There are trade-offs amongst policy options and competing claims by different interest groups which need to be nationally resolved. Whilst institutions have been developed to aid this process, and Government is committed to an open and consultative approach, the ultimate responsibilities for a credible and coherent policy framework lies with Government. As a first step in this process, Government calls for a clear commitment by both business and labour to the broad principles set out in this document.
Within Government, especially in the fields of monetary, fiscal, trade, industrial and labour policies, there is also a critical need for coordination. Inconsistent approaches in any of these areas have the potential to destabilise the credibility of the overall macroeconomic framework. Effective coordination of economic policy at Cabinet level has accordingly been given the highest priority by Government, together with supporting arrangements within key administrations and between Government, the Reserve Bank, the business sector, organised labour and other key constituencies. The strategy set out in this document seeks to remove uncertainty, give clear direction to the economic course on which South Africa is headed, and invite Government's social partners to join in the building of a competitive fast-growing economy.
GROWTH , EMPLOYMENT AND REDISTRIBUTION
A MACROECONOMIC STRATEGY
List of Appendices
The Minister of Finance, Trevor Manuel, the Deputy Finance Minister Gill Marcus and the Acting Director General, Maria Ramos , wish to acknowledge the contribution of the technical team comprising the following individuals:
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