Better education and spatial integration crucial for reduced inequality, job creation

In an environment of accelerating but still modest growth, government policies that stimulate competition and create the fiscal space needed to build a skilled labor force from the poor population of South Africa, would create jobs and help reduce inequality, according to the latest South Africa Economic Update released by the World Bank today.

The number of South Africa’s poor could be reduced by more than half by 2030 through various combined policy interventions that reduce inequality by creating skilled jobs for the poor and ignite growth by increasing competition, policy certainty and promote skilled migration, the report says.

The World Bank expects real growth in gross domestic product (GDP) to accelerate from 1.3 percent in 2017 to 1.4 percent in 2018, supported by a rise in confidence, global growth and benign inflation. For 2019, the forecast is 1.8 percent and 1.9 percent in 2020. But despite this modest rebound, growth in South Africa remains constrained and continues to lag behind its peers. Overall, South Africa is projected to remain largely below the average growth rate of 4.5 percent in 2018 and 4.7 percent in 2019 in emerging markets and developing economies.

“This outlook calls for fundamental policy action to turn the economy around through policies that can foster inclusive growth and reduce inequality,” said Paul Noumba Um, World Bank Country Director for South Africa. “Creating labor demand and fiscal space to finance improved education as well as reinforcing spatial integration will enhance the ability of the poor people of South Africa to participate meaningfully in the economy”.

The special focus section of this 11th edition of the South Africa Economic Update reviews the evolution and nature of South Africa’s inequality – among the highest in the world – arguing that it has increasingly been driven by labor market developments that demand skills the country’s poor currently lack. It suggests that significantly raising South Africa’s economic potential will require breaking away from the equilibrium of low growth and high inequality in which the country has been trapped for decades, discouraging the investment needed to create jobs.

Simulations assessing the potential impact of a combination of various policy interventions on jobs, poverty, and inequality suggest a scenario in which the number of poor people could be brought down to 4.1 million by 2030, down from 10.5 million in 2017. This would be driven by increasing the skilled labor supply among poor households through improved education and spatial integration as well as increasing labor demand through strengthened competition.

In this scenario, the Gini index of inequality would be reduced from 63 today to 56 in 2030. An additional 800,000 jobs would be created with higher wages for workers from poor households, and cheaper goods and services contributing to these outcomes with the economy increasing at an annual rate of 2.2% as a result of these interventions, according to the report.

“We see from this report that reducing South Africa’s high inequality will require improving education and spatial integration to provide the poor with skills that are required to meaningfully participate in a capital and skills intensive economy such as South Africa,” said Paul Noumba Um. “This would need to be complemented by policy intervention that spur additional growth and provide the fiscal space to finance these reforms.”

“In the short term, these policy interventions would include, getting the implementation of the recently granted free higher education right, continuing to address corruption, improving the competitiveness of strategic state-owned enterprises, restoring policy certainty in mining, further exposing South Africa’s large conglomerates to foreign competition and facilitating skilled immigration,” said Sebastien Dessus, World Bank Program Leader.

In the longer term, the report suggests that improving the quality of basic education delivered to students from poor backgrounds and reinforcing the spatial integration between economic hubs, where jobs are located, and underserviced informal settlements, would reduce poverty and inequality and support job creation.

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South Africa Economic Update: Focus on Jobs and Inequality

The economic update reviews the evolution and nature of South Africa’s inequality – among the highest in the world – arguing that it has increasingly been driven by labor market developments that demand skills the country’s poor currently lack. It draws from the forthcoming World Bank’s Systematic Country Diagnostic, and the recently-released Poverty and Inequality Assessment.

Without the policy interventions modelled in the economic update, South Africa would on current trajectory not be able to attain its development targets outlined in the country’s National Development Plan of creating sufficient jobs, eradicating poverty and reduce inequality. In the baseline scenario of an average gross domestic production (GDP) growth of 1.4% annually, the number of poor would drop to 8.3 million in 2030 from 10.5 million in 2017.

In addition, a modest 215,000 jobs would be created every year, mostly skilled and semi-skilled and the poverty rate would reduce to 12.7% in 2030 from 18.6% in 2017. The Gini coefficient would drop to 59.5 in 2030 from 62.8 in 2017 and the unemployment rate would move slightly from 27.2 in 2017 to reach 26.7% in 2030.

“Despite the slow growth environment that South Africa is currently facing, ongoing improvements in education among poor is slowly paying off as they gain skills and get an increasing share of skilled labor income,” said Sebastien Dessus, World Bank project leader. “As a consequence, we project income inequalities to be lower in 2030 than in 1996.”

The report argues that the gains in improving education would be boosted by increasing teachers’ capacity, accountability and financial support for poor university students. This would raise the number of poor students getting a tertiary degree to 4.6% in 2030, against 2.2% in the baseline scenario.

Furthermore, with respect to reinforcing spatial integration, investing an additional 1% of GDP every year into collective transportation systems and social housing would reduce their price, and accelerate GDP growth through higher labor supply. This would lift an additional 0.5 million people out of poverty. The Gini index of inequality would lower further by 0.7 point with vulnerable households and transient poor being the main beneficiaries.

The report also argues that the impact of these interventions would be diminished in a slow growth environment and put a strain to public finance. Domestic factors such as policy uncertainty, low business and consumer confidence, and supply constraints are noted as having held back growth in South Africa since 2015.

The report suggests that reducing policy uncertainty could increase investment in mining by 25% and further increase GDP level by 3% in 2030. It suggests as well that increased competition could lift up GDP levels by 5% in 2030 and alone create 400 thousand jobs.

Lastly, the report reveals that accelerated skilled migration would help relax the skills constraint in the short term and help create more semi-skilled and unskilled jobs. It suggests that each additional skilled migrant conservatively could create 0.5 semi-skilled or unskilled job and that 150 thousand additional skilled migrants would further increase GDP level by 2% in 2030.