The South African economy has registered tremendous progress over the past two decades, boosting living standards and lifting millions out of poverty nationwide. Further reforms are now necessary, however, to revive economic growth and ensure that all South Africans can benefit from it, according to a new report from the OECD.

The latest OECD Economic Survey of South Africa says that wide-ranging structural reforms will be needed to put the economy on a new growth trajectory, boost job creation and improve inclusivity.    

The Survey, presented in Pretoria by OECD Secretary-General Angel Gurría and South African Minister of Finance Malusi Gigaba, identifies priority areas for future action, including continuing efforts to maintain macroeconomic stability, improve the business environment and deepen regional integration, all of which are critical for inclusive growth and job creation.

“South Africa has accomplished many great things in the past two decades, but building stronger and more inclusive growth will require bold action from policymakers,” Mr Gurría said. “Ensuring a better future for all South Africans will require increased access to higher education, a stronger and fairer labour market, deeper participation in regional markets and a regulatory framework that fosters entrepreneurship and allows small businesses to thrive. Many of the necessary reforms will be difficult, but the rewards will be worth the effort.”

Given the limited scope for monetary or fiscal policy action to boost growth, the Survey suggests a range of structural policy reforms. It encourages South Africa to open key sectors, including telecommunications, energy, transport and services, to more competition. It also says that moving forward with the planned introduction of a national minimum wage will reduce in-work poverty and inequality. Wider development of apprenticeship and internship programmes will also increase the inclusion of youth in the labour market, while streamlining the labour dispute system should increase flexibility and lower barriers to job creation.

Skills shortages and mismatches remain key bottlenecks to growth and inclusiveness, and access to higher education remains limited. Establishing a universal student loan scheme contingent on future earnings, with the participation of banks and backed by government guarantees, is a feasible solution, the Survey says. A recent OECD report, Getting Skills Right: South Africa, analyses in further detail skills mismatches and explores potential strategies for addressing them.

Boosting entrepreneurship, which is low in South Africa when compared to other emerging economies, and growing small businesses can also be crucial to economic recovery and job creation, according to the Survey. The government has taken steps to ease requirements for starting a business, but red tape remains a burden. The quality of the education system and lack of work experience contribute to gaps in entrepreneurial skills. There is scope to broaden the sources of finance and ensure that government policies provide both financial and non-financial support for entrepreneurs and small businesses, the Survey says.

The OECD points out that while regional integration offers substantial opportunities for both South Africa and its neighbours, economic integration in the sub-region has not advanced much (read the extract below). Intra-regional trade in the Southern African Development Community (SADC) is only 10% of total trade, compared to about 25% in the ASEAN region or 40% in the European Union. Better implementation of existing SADC protocols and agreements would advance integration, promote trade and create jobs. Reducing non-tariff barriers, by improving customs procedures and simplifying rules of origin, would reduce trade costs in the region. More ambitious and effective infrastructure and investment policies are also needed to improve the inter-connectivity of systems across the region, the Survey says.

During his visit to Pretoria, the OECD Secretary-General is meeting with senior South African government officials, business and labour leaders and representatives of civil society.

---

Speech by Finance Minister Malusi Gigaba at the OECD launch of South Africa’s 2017 Economic Survey

South Africa engages with the OECD through the Enhanced Engagement Programme and is a key partner to the OECD. The SA-OECD cooperation is forward-looking and mutually beneficial, hence the commitment to policy exchange and practice dialogue. The release of Economic Surveys by the OECD forms part of knowledge exchange and best practices. The OECD is positioned as a global think tank on policy advice due to its comparative benchmarking practices with other countries.

It is worth highlighting some of the interconnections between what the government is doing together with some key recommendations of the survey. The Economic Survey is launched at an opportune time in which South Africa is addressing the challenges of unemployment and inclusive growth.

Growth has disappointed in the last few years. Weak consumer demand and persistently falling business investment have become a challenge worsened by slow growth of the global economy. In this context, reviving economic growth is crucial to increasing well-being, job creation and inclusivity.

The government has developed the 14-point Action Plan which has strong support from the President and Cabinet to address the challenges of slow domestic growth.

The Action Plan aims to accelerate progress, coordinate government efforts and act as a mechanism for accountability; and it has realistic, achievable objectives set against realistic and firm timelines. In some way, the Action Plan makes a genuine attempt to respond to some of the challenges raised in the OECD Economic Survey of South Africa, to provide political and policy certainty, raise consumer and business confidence, reignite growth in the economy and thus begin the path of raising our growth levels faster, bigger, inclusively and on sustainable basis.

Ladies and gentlemen, we agree with the observations made in the 2017 Economic Survey that, among others, boosting entrepreneurship and growing small businesses will contribute to creating jobs. We also agree that, notwithstanding the above, entrepreneurship in South Africa is low compared to other emerging economies. Steps have been taken to ease starting a business and the Department of Small Business Development is currently addressing the red tape associated with starting a small business through simplification of procedures.

The government is in the process of finalising a complementary government fund aimed at financing SMMEs in start-up phase. We further agree with the observation that the quality of the education system and lack of work experience contribute to gaps in entrepreneurial skills and, in that regard, government policies will provide more support for entrepreneurs and small businesses. We have identified a significant role that could be played by State-Owned Companies (SOCs) in advancing the objectives of employment and inclusive growth, particularly targeting micro enterprises and black owned small businesses.

For example, from April 2017, 30% of every large contract must be, where feasible, sub-contracted to SMMEs. We acknowledge that more needs to be done with regards to effecting rigorous monitoring and evaluation to ensure robust implementation of this imperative. We believe that this forms part of the developmental mandate of the State Owned Companies and will be strongly integrated in their Corporate Plans, monitored and evaluated through annual performance plans and implementation. The recent digitisation of procurement processes means that these changes can be monitored closely. Lastly, we believe that further reforms in the Telecommunications sector would be supportive of entrepreneurs and small businesses through reduction of costs to do business.

Government is taking actions to issue policy directives mandating ICASA to commence the licensing processes and we would like to complete the spectrum licensing process by the end 2018. Another key initiative is to direct the Competition Commission to investigate data prices. We are also taking steps to commence with the roll-out of the broadband programme. These would further reduce the cost of doing business in line with our efforts to grow SMMEs.

Ladies and gentlemen, government recognises that the sustainable South African economic growth is intricately linked to the growth of the SADC region. Slow growth and a rise in unemployment contribute to a decline in consumer demand. It is in this context that we agree with the observations made in the Economic Survey that regional integration offers substantial opportunities for South Africa and that more efforts should be directed in the implementation of existing SADC protocols and agreements. In this regard reducing non-tariff barriers by improving customs procedures and simplifying rules of origin would strengthen intra-regional trade in SADC.

It is important for South Africa to play a leadership role in demonstrating the benefits of regional integration. Intra-trade in the SADC region remains constrained by the infrastructure bottlenecks. In this regard, we are working with the Multilateral Development Banks for co-financing of the cross-border infrastructure. South Africa prioritizes addressing the challenges associated with intra-SADC trade through the implementation of the industrialisation plans and strategies. For example, the South African government in partnership with the SADC Secretariat and the Southern African Business Forum are co-hosting the SADC industrialisation week from 31 July to 4 August 2017 in Johannesburg. This SADC industrialisation week seeks to address all the issues surrounding intra-SADC-trade.

In conclusion, we commend the OECD for its partnership with South Africa and look forward to the successful completion of the Secretary-General’s visit.

I thank you.

---

Assessment and recommendations

Deepening regional integration within the Southern African Development Community

Regional economic integration can raise potential growth and create jobs in Southern Africa, where 7 out of 15 countries are landlocked and fragmentation into many small countries is important. SADC is already the largest export market and a major investment destination for South Africa. South Africa, as the largest member of SADC, should exercise more leadership in deepening regional integration and implementing existing agreements.

SADC intra-regional trade is low but has great potential

SADC intra-regional trade has increased only modestly since the establishment of the free trade area in 2008 and at 10% of total trade is low compared to about 25% in the ASEAN or 40% in the European Union. Intra-regional trade is dominated by South Africa, the largest member, which exports more to the region than it imports from it. This makes SADC trade dependent on South Africa’s economy and interest in fostering regional integration.

SADC members have similar economic structures and endowments with exports dominated by non-processed goods such as crops, minerals and other natural resource-based products. They tend to compete with each other rather than be complementary. Manufacturing exports are also very similar. However, high barriers to trade prevent the exploitation of comparative advantages based on differences in costs. The greater diversification of the South African economy compared to other members points to potential to exploit more traditional comparative advantages in more complementary goods, or trade in services.

Greater participation in value chains could also foster intra-regional trade. Success will depend partly on the capacity of member countries to increase their sourcing in the region to create more value for exports. The origin of exported value-added in SADC is mainly domestic (80%). Better trade policies (lower tariffs and larger share of imports covered by free trade areas) could improve GVC participation of SADC countries.

Reducing tariff and non-tariff barriers would foster regional trade integration

Trade of SADC countries faces higher tariffs on external trade than many other regional trade groups. For example, for the EU, external tariffs are not detrimental to intra-trade. Low external tariffs are important for imported intermediate inputs. As most of the SADC countries have high external tariff rates, there is room to reduce these tariff rates.

Customs strategies often focus on revenue mobilisation at the expense of trade facilitation. Some SADC members have even raised import tariffs on products originating from the region to raise revenue – in flagrant violation of their regional tariff liberalisation commitments (see Shayanowako, 2015). Moreover, the incidence of custom corruption remains high. Introducing a computerised one-stop border control point between SADC members can improve co-ordination between countries and help fight corruption and unnecessary red tape. The data gathered from border control points should then be collated to provide shared trade and investment statistics for the region. Finally, accelerating the adoption by all SADC countries of legislation facilitating inter-agency co-operation, advance rulings and post-clearance audit would facilitate intra-regional trade.

SADC has adopted rather complex rules of origin, defined product by product and requiring double-stage transformation. A simpler alternative would be the across-the-board approach adopted by the Common Market for Eastern and Southern Africa (COMESA). In SADC the rules of origin were mainly designed to protect existing industries from increased intra-regional competition, in particular the textile and clothing industry in South Africa. The complex and restrictive input-sourcing requirements of the SADC rules of origin have a negative impact on trade and attractiveness for industrial investment. In the absence of simplified rules of origin, the manual by the SADC Secretariat for rules of origin should be applied by all member countries.

Broadening the scope of the trade agreements could boost regional trade and integration

SADC members adopted a Protocol on Trade in Services in August 2012 aiming to establish an integrated regional market for services. The Protocol was amended in August 2016 as the negotiations dragged on. Service trade liberalisation within the region would allow consumers and businesses to have access to better services at lower prices through competition. Services are an important part of GDP: in South Africa the services sector already represents 70% of GDP and 16% of its exports. South Africa’s services trade restrictiveness is relatively high for some services.

For the effective implementation of the SADC Protocol on services, a directive could establish a timeline and guidelines for services liberalisation and provide derogations where needed (see Cronjé, 2014). Also, services trade liberalisation should respect service regulations taking into account norms and standards. There is a need for coherent regulatory policies across member states in many regulated services and regional regulatory co-operation.

Moreover, the Southern African Customs Union (SACU) arrangement has many internal difficulties with knock-on effects on SADC regional integration. Intra-union customs border posts have not been eliminated because revenue sharing is partially based on intra-SACU trade, thus reducing benefits of trade facilitation. Second, there is a substantial income transfer from South Africa to the other members. SACU revenues now represent the main source of government revenues for SACU members, except South Africa. This has created perverse incentives across the other SACU members to resist any changes to tariffs and extension of the SACU union to new members. Reforming the SACU sharing formula and mechanism of tariff settings would ease the negotiations toward customs policy harmonisation.

Economic Partnership Agreements (EPA) were introduced by the Cotonou Agreement in 2000, marking a major change in the trade relationship between the EU and developing countries. Non-reciprocal trade preferences that existed under the previous agreements were replaced by a reciprocal trade arrangement that also offers duty-free access for EU exports in developing countries’ markets. However, the negotiations and agreement on EPAs have proved difficult. So far, agreements have been concluded with six SADC countries (Botswana, Lesotho, Namibia, South Africa, Swaziland and Mozambique), which were provisionally applied as of 10 October 2016 pending ratification by all EU Member States. Mozambique is expected to ratify in 2017.

The EPAs contain some safeguards reducing their scope. Export taxes are allowed for some exports for a period of 12 years at predetermined rates. On agricultural exports, flexible activation clauses are included, permitting to protect, when deemed necessary, local producers from large inflows of EU goods and the EU has agreed to eliminate subsidies on several exported goods.

The agreement between a fraction of SADC countries and the EU will increase the fragmentation of SADC trade agreements, which could hamper deeper SADC integration. To avoid this, members should agree to negotiate with external partners only under the SADC umbrella based on a binding and robust framework which guarantees that all countries’ concerns are taken into account.

Reforming business environments in the region can strengthen regional integration

The level of industrialisation is low across SADC countries. Even in South Africa, which has the most sophisticated industry in the region, the share of manufacturing in GDP is low. SADC countries have failed so far to increase value added in sectors such as minerals and raw materials. Therefore, regional industrialisation has become a top priority in the SADC regional strategy. Member states adopted the SADC Industrialisation Strategy and Roadmap 2015-2063 in 2015. The industrialisation strategy rests on increasing productivity through manufacturing, including agro-processing and minerals transformation.

The main barriers to the development of industry in the region are related to the business environment. Lack of proper infrastructure and institutions, skill shortages, and complex regulations are common across SADC countries, as well as regulatory barriers and monopolistic behaviours that hamper competition. To enhance the business environment, increasing the stock of human capital is necessary. More effort should be put in developing vocational and training skills, and access to higher education. A complementary policy at the regional level would be to advance the negotiations on mobility of workers and business people.

To foster investment across member countries and attract foreign investment, SADC countries signed a Protocol on Finance and Investment in 2006. Investment has risen subsequently along with the acceleration of trade between SADC members, although investment flows across and toward SADC are still low. The stock of crossregional investment is lower than in other regional economic communities in Asia and Latin America. Intra-regional investments have been mostly driven by the development of regional value chains in the services sector (supermarket, banking, etc.).

Despite the signature of the SADC Protocol on investment and financial integration, bottlenecks to investment inside the region have remained high. The SADC Regional Investment Policy Framework has been developed recently, in co-operation with the OECD and NEPAD, to accelerate the harmonisation and implementation of investment policies in the region. Incorporating the regional framework into domestic reforms is crucial for its implementation.

A SADC/OECD (2017) benchmarking exercise confirmed that reforming the framework conditions and improving infrastructure are essential to attract investment. Establishing a central point to co-ordinate and systematically gather comprehensive, up-to-date information on all laws, regulations, incentive schemes, and procedures related to investment, is necessary in the region to increase attractiveness.

The financial sector in SADC is diverse and fragmented. Currency conversion costs are high and most countries still have restrictive exchange and capital control regulations in place. Cross-border transactions face different regulatory frameworks. SADC has put in place memoranda and guidelines to improve coordination, to harmonise the systems and to establish common frameworks for foreign exchange transactions, capital controls and banking procedures.

This Survey was prepared in the Economics Department by Falilou Fall and Christine Lewis under the supervision of Piritta Sorsa.

---

Read or download the full publication here: OECD Economic Surveys: South Africa 2017