BUSINESS SOUTH AFRICA PROPOSALS TOWARDS AN AGENDA

INTRODUCTION

Tackling unemployment is arguably South Africa’s most urgent priority. It is the cause of poverty and hardship for many millions of South Africans, and a major source of the inequality of income and opportunity that persists in South Africa today. It is also a constraint on South Africa’s future economic development.

Business South Africa (BSA) is unequivocally committed to employment growth in South Africa. The Job Summit provides an opportunity to examine the causes of unemployment and to propose sustainable solutions. The dire circumstances of the groups most affected by unemployment need urgent attention, and BSA proposes that special measures be taken for these groups. Important as short-term remedies are, however, there is in the end no substitute for addressing structural impediments to employment growth in South Africa. It is difficult to imagine this happening without a measure of agreement between the social partners. BSA hopes that the Summit can achieve the former and prepare the ground for the latter.

BSA is equally committed to a society, and workplace, built on fair remuneration systems and the labour standards of civilised countries. Indeed, rising wages and labour standards are possible, and desirable, in an economy experiencing swift improvements in productivity.

In forming expectations around the Job Summit, it is necessary to accept that painless, "quick fix" solutions to South Africa’s employment challenges are not available. This is partly due to structural elements in our economy, and partly due to the historical and global context in which we find ourselves.

THE CONTEXT

In May 1994, the new government inherited a distorted economy on the verge of a debt trap and characterised by a strong inward and therefore uncompetitive bias. Such policies had become counterproductive in the modern global economy, and were clearly not capable of delivering higher growth and increased labour absorption. The policies adopted by the new government, in contrast, have been broadly appropriate for re-integrating South Africa into the global economy, though significant further progress is required in some key areas. Government’s GEAR document was an important milestone in this respect.

Other countries that have re-entered the global economy have found that employment and growth benefits do not accrue immediately, but only after the first few years. In South Africa’s case, a number of factors have aggravated the situation. These include the decline in gold mining and the over-staffed bureaucracy inherited by the new government. The recent set-back to the global economy emanating from East Asia has also not helped.

It is hardly surprising, then, that projections of employment growth in South Africa have been over-optimistic.

In these circumstances, some have claimed that a policy of renewed inward orientation coupled with higher public deficits will lead to increased employment. In fact, any fundamental policy reversal now would have the opposite consequences, hitting poorer South Africans particularly hard.

Instead, a comprehensive agenda is required which addresses the systemic constraints on new employment and cumulatively sets the ground rules for future success. Macro-economic stability, human capital development, labour market policy and targeted assistance measures all need to be contemplated in a necessary process of transformation. Government has already made important strides in elements of this agenda.

A SPECIAL ROLE FOR SMALL BUSINESSES AND THE INFORMAL SECTOR

In many countries, most employment growth has come from new and small enterprises. If we are to create jobs, the policy framework should reflect the needs of these businesses. In some respects, smaller businesses have special needs. Mostly, however, small businesses require the same kind of environment as required by larger businesses, just more so. In particular, small businesses require a high degree of flexibility in the operation of their businesses in order to ensure their survival in rapidly changing circumstances.

The concerns of small businesses find resonance in every point of the agenda we propose for the Job Summit, but it would nevertheless be appropriate for the agenda to be structured in a way which ensures that such concerns are fully considered. Small firms are particularly vulnerable to macro-economic volatility, depend heavily on the productivity of their workers, and are hardest hit by labour market rigidities.

In South Africa, such concerns are of particular importance given the need to encourage emerging Black businesses and to spread the benefits of the wealth creating process more equitably. These observations apply equally to the informal sector, which should be encouraged not only because it provides a livelihood for millions of people, but also because it is a breeding ground for small, medium and large-scale enterprises.

The encouragement of an enterprise culture, which cuts across all of the specific issues referred to in this submission and some which have not, should receive appropriate emphasis in the final agenda for the Summit.

ELEMENTS OF A HIGH GROWTH – HIGH EMPLOYMENT ECONOMY

The following elements form part of a vision for a high-employment economy:

• A sound policy of macro-economic stability that attracts rising private domestic and foreign fixed investment.
• A growing private sector as the primary engine for the creation of wealth and employment in the society.
• An open market that permits free competition and prohibits abuse of dominance and other anti-competitive practices.
• Effective deracialisation of patterns of ownership and control, and accelerated upward mobility in the workplace through focused education and training.
• A labour market policy that lowers entry barriers to formal sector employment and encourages new employment.
• A system of acceptable minimum labour standards that, inter alia, permit rising standards in line with improvements in productivity and performance.
• A productive sector in which all sections of business play an important part, and small business in particular thrives as a source of employment, innovation and empowerment.

Of course, even the most compelling vision remains only that if it is not translated into concrete actions and policies. Hence the need for a concrete programme.

A PROGRAMME FOR JOB-CREATION

BSA proposes the following programme for job-creation, stated in terms of a number of steps. The steps are printed in shaded rectangles, and further explanation follows in each case. Some of the steps refer to areas where policies are already significantly or at least partly in place; others deal with areas where a new initiative would be appropriate. Similarly, some steps would require substantial preparative or investigative work, while others would be amenable to faster action.

Apart from being a prerequisite for sustained growth, the level of macroeconomic stability affects employment levels directly. Hence our first agenda point:

It is important for the purposes of the Summit to focus on the two direct links between stability and employment. Firstly, the absence of stability, namely a stop-start economic cycle, imperils existing jobs and increases long-term unemployment. Commonly, workers who have lost their jobs in a recession have difficulty finding another one, despite the eventual occurrence of an upturn. ‘Temporary’ cyclical unemployment hardens into permanent, structural unemployment. Therefore it is in the interest of currently employed workers that economic stability is ensured by the managers of the economy.

Secondly, remarkable strides have been made in the campaign against inflation, and the costs of those achievements have already been paid. Now the benefits must be reaped. But those benefits will only happen if policies are such that their continuation is probable and believable. For macro-economic policies to be effective and not costly, they need to be credible.

If policy is not credible in terms of future inflation, for example, the public will plan for higher inflation, leading to higher long-term interest rates and excessive inflation adjustments for wages. Together, the higher employment costs and higher long-term rates lead to a fall in employment.

This scenario is in the interests of no-one. The outlook for employment is better when policies are credible. Wage adjustments are more accurate, real interest rates are lower, and there is less inflationary pressure in the economy. For policy credibility (and overall stability) to be enhanced, two things are essential:

It is widely accepted that one of the key underpinnings for stability and growth is fiscal prudence. In South Africa’s circumstances this requires:

• continued deficit reduction;
• reduction in the debt burden;
• containment of the tax burden (this point is returned to below);
• reprioritisation of expenditure; and
• increased efficiency in the use of public resources.

(Spending priorities and the efficient use of public resources would not necessarily be on the job summit agenda, but are nevertheless important for employment. For example, the more effective management of the agencies of law and order leading to lower crime levels would not only encourage greater foreign and domestic investment generally, but also provide an added boost to the labour-intensive tourist industry in particular. Effective administration of Customs entry points is another example of an area where increased efficiencies would yield considerable benefits).

(b) Institutional arrangements that add to the credibility of the central bank must be confirmed. In particular the independence of the Reserve Bank – a critical contributor to its credibility – needs to be maintained.

Though stability is a necessary requirement for sustained growth, other elements are also needed. This becomes clear when one focuses on the critical role of investment in expanding the productive capacity of the economy.

Investment. Private investment is the driver of growth and employment-creation around the world, and South African levels need to increase further (despite an increase of over 80% since the election). In particular, privatisation ought to be an urgent priority as it brings in its wake further private investment and increased efficiency. Well-targeted public investment is an important complement to private investment. Government spending needs to shift from current to capital expenditure. Public-private partnerships ought to be used extensively to leverage levels of public investment.

Foreign inflows are needed. To fund the increased investment, savings and foreign capital inflows need to increase. Higher domestic savings are most directly achieved by reducing government dissaving (i.e. borrowing to fund consumption expenditure). Even with increased domestic savings, substantial foreign capital inflows will be necessary to fund a level of investment adequate for growth and job-creation. Dependable foreign inflows, in turn, demand stable macro-economic policies (see above).

Foreign inflows, particularly highly desirable foreign direct investment (FDI), will only occur if there are sufficient returns to cover the risk adjusted cost of capital employed. This is equally true for domestic investors. No matter how high the rate of savings, investment cannot occur without suitable business opportunities. To ensure capital in the global economy flows towards South Africa, the returns to projects in this country need to be competitive. Competitive returns require:

(c) a competitive tax environment; and

(d) cost-competitive inputs.

Ultimately, South Africa will only attract investment in labour-absorptive sectors if it is competitive in those sectors in terms of its unit labour costs. This suggests that raising the productivity of South Africa’s managers and workers in the global economy should be a major focus of the Job Summit. BSA fully supports this approach, and the proposals below highlight four areas critical to an attack on low productivity.

The first two productivity measures – improved schooling and training, respectively – will achieve world-class investment in the human capital of our people.

Schooling is of critical importance in equipping citizens with a broad range of capabilities, not least of which is the ability continually to learn complex new skills on the job. Adult basic education only partially substitutes for a good schooling, and at vastly greater expense to society and the individual concerned. Two major international surveys recently confirmed that, compared to the international norm, the quality of schooling in South Africa remains abysmal. Hence it is vitally important for South Africa to:

This matter is of such pressing importance that a declaration of intent on its own will not suffice. Concrete steps for improving the quality of schooling must be agreed on.

Education helps the future employed and unemployed. Training helps those who already have a job remain valuable in the global economy. It is necessary therefore to:

Much work has been done on training recently, not least in the discussions leading to the finalisation of the Skills Development Bill. The Job Summit should nevertheless be used as an opportunity to review progress in this critically important area, and to address weaknesses where these exist.

Creating strong incentives for managers and workers to be productive is as important as training and education.

Complacent or incompetent management can cause low levels of productivity of capital and labour and poor innovation. Because it punishes incompetence with failure, increased domestic and foreign competition is an extraordinarily effective lever for improving management performance. To this end, South Africa’s policy-makers should:

Much progress has already been made towards implementation of the necessary policies in this respect. Benefits of considerably stronger competitive forces are already evident, and these should grow in the years ahead.

The right incentives are also essential for the productivity of workers. This requires changing the structure of wages by making a significant part of it dependent on individual and team performance. The so-called Japan Bonus System, which links pay to productivity, has been central to the productivity advances in virtually all high-growth Asian economies since World War II.

Conventional wage bargaining is frequently accused of pegging wage increments regardless of productivity, causing unit labour costs to rise faster than in comparative systems. New bargaining conventions that link pay awards, in part, to productivity and performance will permit rising wages and declining unit labour costs, providing both incentives for employees and a competitive advantage for the economy as a whole. The Job Summit should consider an initiative to:

Because labour market rules and regulations can either help or hinder the better utilisation of labour resources, an effective labour market and labour relations system is a central requirement for growth and employment. Other social considerations do bear upon the structuring of the labour market, but these have to be finely balanced against economic imperatives that have their own social consequences. This necessitates institutional mechanisms responsive to the needs of the parties.

The need for the right rules and institutions is made more pressing by the far reaching change in the structure and organisation of production. Here and elsewhere such changes now seem to be a continuous ever-present reality. In this scenario universally accepted basic labour rights still need to be protected. However, this needs to occur in a system which permits reasonable variation in conditions of employment to account for local, regional, and product and operational realities including business size. In the absence of variation, some firms will fail and others not get off the ground, and employment will fall or grow less rapidly.

The BSA proposal is that a comprehensive system of free collective bargaining must stand at the centre of labour market regulation. It should be free in two important senses; firstly, free to find the level(s) at which collective bargaining should take place; and, secondly, free to agree such terms and conditions as the parties might decide in their own particular circumstances (subject, of course, to the basic floor of rights referred to earlier). Where collective bargaining does not take place an independent and expert body should be similarly charged to define applicable minimum conditions. In sum, the proposal is that South Africa should:

The right structure of collective bargaining in South Africa is as important as the right style. South African collective bargaining continues to be characteristically adversarial and distributive. New processes need to emerge, more suited to the integration of stakeholders into strategic alliances, without diminishing the importance of differences that might exist.

An important part of labour market regulations are those regulations governing entry and exit from employment. High entry or exit barriers will reduce demand for labour and/or lead to labour substitution, aggravating high unemployment. This is a controversial, and highly contested area. The overall system has to make it worth the while of firms to create employment. Lowering, or selectively lowering, entry and exit levels need not be at the expense of labour standards.

This area needs investigation. Arguments and evidence needs to be tendered and weighed against results and realities. Experimentation needs to be encouraged and monitored, and international precedent gathered. BSA submits that:

The areas mentioned possibly indicate changes to the law, practice and knowledge about South African labour markets. These might best be addressed in terms of short, medium and longer term goals. Sustainable and effective reforms of labour markets to secure new levels of job creation will, in the end, require common purpose among the major players concerned.

Unemployment is concentrated in highly vulnerable groups. The unskilled of all ages, black youth and rural women tend to suffer disproportionately from unemployment. Because of the high levels of poverty found amongst these groups, they are particularly ill-equipped to withstand the social and personal hardships imposed by a lack of wage income. Even at modest employment, their chances of gradually improving their position are much higher than before.

Because of the severity of their situation, it is necessary to provide these groups with a special dispensation to ease their entry into formal employment. Harnessing the dynamic of the private economy is the only way to address a problem of this magnitude successfully. This can be effected in a number of ways. Special training schemes, exemption from certain forms of regulation and special treatment in collective agreements are examples of how this can occur. The experience of other countries can be of assistance in this regard. The Job Summit should seek to:

Finally, within the boundaries of fiscal prudence space may be made for direct government action for helping vulnerable groups gain skills:

A well designed and managed public works programme that is funded in a fiscally responsible manner (based essentially on existing allocations) can play a valuable role in addressing short-term poverty alleviation. Projects can be designed to form a relief programme to counter seasonal and cyclical unemployment – supplementing normal incomes through rapid provision of temporary jobs. They provide interim relief. But the critical element is an opportunity for skills development for the structurally unemployed. Such programmes create a more stable environment for a longer-term growth and employment strategy that addresses structural unemployment to take affect.

ANNEXURE

A Summary of the Business South Africa Proposals for an Agenda for the Job Summit

1. Stability and growth

• Continue to create an environment for economic stability and growth by:

- maintaining fiscal discipline throughout government;

- maintaining Reserve Bank independence;

- ensuring inputs are cost-competitive; and

- a competitive tax environment.

2. Enhancing productivity

• Achieve world-class primary and secondary schooling through effective teaching and creation of a culture of learning.
• Create the right incentives for firms and employees to enhance worker skills through continuing training.
• Increase managerial efficiency and firm innovation through low trade barriers and enhanced product market competition.

- Promote the linking of pay to productivity and performance, among other ways through bargaining protocols.

3. Modernising bargaining architecture

• Promote free collective bargaining as the primary regulator of labour market rules.
• Investigate the barriers to new employment creation, and recommend such steps as may be necessary to encourage labour absorption.

4. Helping ultra-high unemployed groups

• Provide ultra-high unemployment groups (youth, rural women, unskilled) with a special dispensation to ease their entry into employment.
• Develop a public works programme which establishes local level projects with the objective of transferring skills.