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A new World Bank economic analysis for South Africa finds that young entrepreneurs are one of the country’s best hopes of solving the jobs crisis, which has been worsened by the global pandemic in an environment of weakened economic growth.
It argues that if South Africa were to match the self-employment rates of its peers, it could potentially half its unemployment rates. In South Africa self-employment represents only 10% of all jobs, compared to 30% in most upper middle-income countries such as Turkey, Mexico and Brazil.
The report suggests that an emerging start-up sector in South Africa could help close this gap, and that simultaneously implementing policies that preserve macroeconomic stability, revitalise the jobs market and improve the investment climate to build a more inclusive economy after the pandemic.
In 13th edition of the South Africa Economic Update, Building back better from COVID-19, with a special focus on jobs report from the World Bank, it examines how supporting young entrepreneurs could be one of the ways the country could address, unemployment, among its other pressing social challenge in an environment of weakened economic growth.
The Economic Update expects South Africa’s growth to rebound to 4% in 2021, the fastest pace in over a decade, bouncing back from last year’s deep contraction of 7%.
However, medium-term prospects for higher and more inclusive growth remain constrained. Growth is expected to slow down to 2.1% in 2022 and to 1.5% in 2023.
This report reviews the impact of COVID-19 on South Africa’s labour market, which has been marked by high levels of unemployment and inactivity, even at the best of times. The report finds that South Africa entered the COVID-19 pandemic with low levels of employment and a decade of weak job creation, far below the standards of most upper middle-income countries. It finds that despite the government’s solid response to the pandemic, jobs have been severely impacted, and recovery is slow.
By the end of 2020, despite two quarters of employment growth, the number of employed people had fallen by nearly 1.5 million, and the wages of workers who still had jobs had fallen by 10 – 15%. At the time of releasing this report, only 40% of employment losses had been recovered.
The report finds that job losses in COVID-19 times are disproportionally concentrated among low income earners, worsening already severe inequalities despite the government’s decisive and pro-poor response with transfer programs that partially cushioned the negative impacts of the pandemic. Low-wage workers suffered almost four times more job losses than high-wage earners.
In addition, the report shows that the COVID-19 pandemic crisis has exposed structural weaknesses in the job market. Young people, in particular face acute unemployment rates, with incidence twice as high as among older age groups. Among 15–24-year-olds, 63% are unemployed and looking for work, whereas among 25–34-year-olds, this rate reaches 41%. When discouraged workers are included, unemployment rates are as high as 74% for 15–24-year-olds and 51% for 25–34-year-olds.
The report suggests that entrepreneurship and self-employment offer the biggest opportunity to create jobs in South Africa, particularly with the increasing number of start-ups, especially in the digital sector, which could become an engine of jobs growth in the future.
Cape Town alone, the ‘tech capital of Africa’, has over 450 tech firms and employs more than 40,000 people.
In 2020, a total of $88 million (R1.2 billion) disclosed investments went into its tech start-ups.
“If South Africa were to match the self-employment rate of its peers, it could potentially halve its unemployment rates,” said Wolfgang Fengler, World Bank Program Leader.
“In South Africa, self-employment including own-account workers with own businesses, freelancers, only represents 10% of all jobs, compared to around 30% in most upper-middle income economies such as Turkey, Mexico, or Brazil.”
“To generate employment, South Africa would have to address three chronic labour market challenges:
– extremely high rates of inactivity,
– high rates of unemployment, and
– low levels of self-employment,”
said Marie Francoise Marie-Nelly World Bank Country Director for South Africa, Botswana, Eswatini, Lesotho and Namibia.
“By improving the business climate, the entrepreneurship ecosystem and access to financing, as well as investing in skills, the government can encourage self-employment and support the growth of micro-and small enterprises.”
The report also suggests that South Africa consider policies that target labour market outcomes and that can make a difference in the pace of employment recovery.
It offers four sets of interventions that would combine time-bound emergency support for poorer workers with reforms to increase the size of the labour market:
Strengthening labour market linkages of the social transfer system.
Strengthen the labour market linkages of temporary government programs. First, expand and deepen the employment tax incentive to enhance access to jobs particularly for those facing more constraints to integration into the labour market, such as young people and women. Second, continue the Temporary Employee/Employer Relief Scheme (TERS) for lockdown-damaged sectors until a sizeable share of firms are once again operational. Both measures should be time-bound.
Considering a negotiated moratorium on specific pieces of labour regulation
Consider a moratorium on measures that have negative employment implications. The government and its National Economic Development and Labour Council (NEDLAC) partners could consider a temporary suspension of regulations that increase the real cost of labour and make job recovery more difficult. The moratorium should be linked to the pandemic and its economic consequences. It should be used primarily to benefit vulnerable people, who have disproportionately lost their jobs during the last year.
Relaxing constraints to entrepreneurship and self-employment
Revisit the approach to entrepreneurship, self-employment, and micro and small businesses. First, relax legal constraints and rules that prevent the development of these economic activities. Second, scale up programs that provide both entrepreneurial training and start-up grants to address other barriers to entry. Partly for historical reasons, South Africa has stringent regulations that constrain entrepreneurs and freelance and own-account workers more than in other upper-middle-income countries. As noted, self-employment in South Africa constitutes just 10% of total employment, as against about 30% in
the average upper-middle-income country. Thus, if South Africa were to raise its self-employment ratios to the average of upper-middle-income countries, unemployment rates could potentially be halved.
Improving the effectiveness of active labour market programs through broader public-private partnerships and system enhancements.
Improve the governance of active labour market programs.
First, systematically incorporate job search and training modules into active labour market programs, such as the Expanded Public Works Programme and the Presidential Employment Stimulus, to help prepare beneficiaries for entering the labour market.
Second, incentivize labour intermediation services to help firms re-engage workers and quickly resume business.
Third, give employers access to funds in the Unemployment Insurance Fund to supplement the wages of part-time workers.
Fourth, develop institutions for active labour market programs, especially monitoring and evaluation systems to improve the targeting and efficiency of the currently fragmented system.
A sequenced set of policy measures aimed at preserving macroeconomic stability, revitalizing the jobs market, and improving the investment climate is needed to build a better and more inclusive economy after the pandemic. There is a risk that the recovery leaves behind most of the potential economically active population, particularly young job seekers, which would mean that the pandemic permanently impaired the country’s long-term development prospects. Conversely, if South Africa were to engineer a broad-based recovery, this decade could bring new prosperity.
Addressing structural constraints to growth behind and at the border could support exports and higher growth, and so preserve the sustainability of public finances.
The experience of major emerging economies, including South Africa, shows that the two most potent factors for reducing public debt-to-GDP ratios are economic growth and primary surpluses.
The implied priorities are self-evident: a better climate for investment and trade, and prudent fiscal policy.
To generate employment, South Africa would have to address three chronic problems in its labour market: extremely high rates of inactivity, high rates of unemployment, and low levels of self-employment. Along with enacting carefully chosen regulations to improve the business climate and investing in the workforce through better education, the government can implement reforms to encourage self-employment and support the growth of micro- and small enterprises. Moreover, active labour market polices could help match job seekers with employment opportunities aligned with their abilities.
Download the full report by clicking on this link: