Structural Reforms are Needed in South Africa

Last month (May 2014), the African National Congress (ANC), as expected, won its fifth consecutive general elections victory in South Africa with more than 62 percent of the votes despite a 25.2 percent unemployment rate, growing inequality, and sluggish economic growth. Even though Nelson Mandela’s party continues to enjoy strong supports due to its historical role during Apartheid, crucial reforms are needed to combat income inequality and insistent high unemployment rate.

Since the end of Apartheid and white minority rule in 1994, South Africa adopted several key economic and political reforms to reintegrate itself back into the world economy after years of political isolation and opprobrium due to its strict racial segregation laws. Current and capital accounts, for instance, were liberalized following the creation of a unity government and Nelson Mandela’s election victory. In addition, quantitative trade restrictions and tariffs were reduced as part of the country’s commitment in the Uruguay Round and World Trade Organization (WTO).

As a result, the South African economy has grown at an average annualized real rate of 3.2 percent since 1994. The black middle class has  doubled from 7 percent of the African population in 1993 to 14 percent in 2008. However, 85 percent of the African population remains stuck in poverty while 87 percent of the white minority population is in the middle and upper income bracket. Consequently, it is imperative for the Zuma administration to implement structural reforms to undo this lingering income inequality and lackluster growth.

Although South Africa has improved its education system within the last two decades, there continues to be a need for reforms. For instance, 89 percent of the population aged over 15 years was literate in 2004. Education is a powerful tool in assisting a country benefits from economic liberalization and improve democratic principles. A well-educated workforce is attractive to foreign investors eager to tap into this human capital. According to the Organization for Economic Cooperation and Development (OECD)’s 2013 Economic Survey of South Africa, education is a critical problem in the Rainbow Nation.

The quality of primary and secondary education remains poor. According to the South African Department of Basic Education, for instance, only 57 percent of African students passed the national high-school graduation examination in 2010 compared to 99 percent of their white counterparts. In addition, there continues to be a wide gap in education attainment between rural and urban communities. Thus, it is important to adopt critical reforms to improve education quality to decrease racial income inequality.

Education is the key

First, the ANC-led government should provide alternative school programs such as vouchers and charter schools to increase competition within the system. Delivering coupons or vouchers to parents, for example, would allow poor students to attend better independent (private) schools, which will ultimately improve their future opportunities and create much needed competition. School voucher programs have been successfully tried in the United States and other parts of the world (see here). Therefore, it is important for South Africa to experiment with alternative school programs and empower parents by with the option to send their children to the best schools.

Second, there should be an increase in teacher’s accountability to improve quality and responsibility. For instance, according to the Department of Basic Education’s Action Plan to 2014, only 17 percent of schools maintain updated daily educator attendance. South Africa has the highest teacher absenteeism in the southern Africa region, with teacher missing more than 19 days per year. Third, given South Africa’s high youth unemployment rate of 50 percent, vocational and trade schools should be improved to better prepare students for the workforce. Improving vocational schools would also benefit students who dropped out of the education system and equip them with marketable skills, something Germany does very well (see here).

Fourth and finally, the South African government should increase spending on education, especially in rural communities lacking basic infrastructures such as computers, water, and electricity. According to the National Education Infrastructure Management System (NEIMS), for example, 42% of schools are overcrowded, 3,152 are without water, 1,532 are without toilets, 4,297 are without electricity, and 79% are without libraries. This lack of basic equipment impedes the overall quality of education in South Africa.

Key Labor reforms

My second policy recommendation is regarding South Africa’s rigid labor sector. Due to their significant role during the fight against the Apartheid regime, trade unions remain powerful institutions in South Africa. According to the World Economic Forum’s Global Competitiveness Report, South Africa has one of the most restrictive labor sectors, especially the cost of hiring and firing workers. As a result, companies have stayed away from South Africa contributing to its persistent high unemployment rate. In addition, high minimum wage laws also hurts employment chances for the youth. As acknowledged by William W. Olney’s (Williams College) paper

As employment protection rules become less strict, the cost of operating a foreign affiliate falls, and thus multinationals will shift production activities to that country. Taking this prediction a step further, the response of multinationals to employment protection rules likely depends on the type of FDI.

Another policy suggestion is regarding South Africa’s collective bargaining laws. According to the Industrial Conciliation Act as amended in 1930, the ministry of labor can extend a Collective Bargaining Agreement (CBA) between employers and unions in the rest of the sector. Consequently, big businesses and trade unions impose strict and costly standards on small companies that are unable to cope with such byzantine rules. Therefore, it is imperative for South Africa to reform its collective bargaining laws to provide small and medium companies the opportunity and flexibility to grow and create jobs.

Within the last twenty years, South Africa has made some progress on several fronts to reintegrate itself back into the world economy. The country’s nominal Gross Domestic Product (GDP), for instance, has almost tripled while income inequality, on the other hand, remained high. As a result, the recently re-elected ANC government of president Jacob Zuma should adopt critical reforms in education and labor sectors to alleviate persistent high unemployment rate and high racial income inequality. This recent ANC election victory is an opportunity to tackle these issues and lead the Rainbow nation toward a prosperous future. Let’s see whether the ANC and the Zuma administration have the right vision to jumpstart the South African economy and meet its national development goals.

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