Possible Effects and Analysis of the New Growth Path

Written by Siyaduma Biniza* South Africa is facing many socioeconomic challenges as the world recovers from the 2008 global recession. The New Growth Path (NGP) proposed by government is primarily aimed at solving unemployment and income inequality which are amongst the most pressing of these challenges. The NGP is a set of policies proposed by government in order to change the growth path of the South African economy and address these socioeconomic challenges. This essay analyses the job creation strategies outlined in the NGP and their possible effects to the South African economy using the AD-AS economic model. Firstly, a short description of the South African economy is necessary to understand what motivates the NGP. South Africa is still challenged by the legacy of Apartheid which was the foundation of its socioeconomic inequality. The South African economy is relatively narrow due to the relatively small population, low employment levels and deep inequalities (Patel, 2011a). The challenges faced by South Africa, which are residuals of the Apartheid South Africa, are high levels of income inequality and spatial inequality. This is further exacerbated by high unemployment. This is why creation of employment is the most important priority outlined in the NGP. Government acknowledges that, South Africas unemployment rate of 25%, by strict definition, is crisis (Mantashe, 2011). South Africas unemployment problem is largely due to a largely unskilled labour force. This is worsened by the domestic economys shift from a dependence on labour intensive mining and agriculture sectors to a dependence on the tertiary and service sectors. For example, the manufacturing industrys contribution to gross domestic product (GDP) fell from 23% in the 80s to

15% (McCarthy, 2011). This has led to increased unemployment which further ameliorates the income inequality. This situation has been exacerbated by the global recession of 2008. Currently, less than half of all working-age South Africans had income-earning employment, compared to an international norm of almost two thirds (Patel, 2011a). These levels of unemployment, which rank amongst the worst globally, are what further ameliorate the inequality. The challenges of inequality and unemployment are worsened by the fact that many South Africans do not have decent work. The definition for decent work is a contentious issue. However, when we consider the statistics, there is little disagreement that most South Africans have disconcerting employment conditions. According to Statistic South Africa, in 2008, half of all employed people earned less than R2500 a month and over a third earned under R1000 a month (Patel, 2011a). This brings perspective to the governments concerns about not only employment but employment conditions as well. Such working conditions are what strengthens the income inequality and keep South Africa under the legacy of Apartheid. These are some of the domestic conditions that inform governments decision on a new economic growth path. The NGP is therefore a set of policies and strategies by government to restructure the economy and set it on an employment and growth generating path (COSATU 2010). The NGP is thus primarily aimed at curbing unemployment, income and spatial inequality and quality of work. The emphasis of the NGP is employment growth but the NGP also has policies that target competitiveness, interest rates and other strategic economic proposals which drive at the same end. The NGP also plans to create a developmental state with all parties in a national consensus on wages, prices and savings in order to ensure a significant increase in the number of jobs in the economy

while addressing the concerns of vulnerable workers and reducing income inequality (Patel, 2011a). Therefore, government hopes that it can bring all stakeholders in the South African economy to a consensus that will see the economy take a different growth path. Thus the NGP aspires at a paradigm shift in growth to so that the economy will increase its employment ability to solve the socioeconomic problems. So how will government do this? The NGP states governments plans to channel resources into areas of the economy that create employment on a large scale [and] encourage stronger investment by the private and public sectors to grow employment-creating activities rapidly while maintaining and incrementally improving South Africas core strengths in sectors (Patel, 2011a). In this regard, government identifies a few job drivers which have the capacity to meet its job creation goals, one of these being infrastructure development. Infrastructure and skills development is vital for any developing economy. Government claims that public investment can create 250 000 jobs a year in energy, transport, water and communications infrastructure and in housing in the next five years (Patel, 2011a). Furthermore, the assertion is that infrastructure development will improve efficiency across all sectors allowing for further growth and employment opportunities (Patel, 2011a). Therefore government plans to invest in infrastructure development to create large-scale employment in the hope that this will result in a multiplier effect that will be felt throughout the economy. Thus not only will infrastructure development create employment opportunities but further growth will result which be doubly effective. Government also plans to maintain its public investment with a sustainable step change backed by investment in skills development and measures to prevent noncompetitive pricing by contractors (Patel, 2011a). These have been the areas where

government is criticised for its economic prudence. Government has been riddled with much corruption and tender scamming resulting in slow service delivery. Therefore government promises a strict fiscal policy to slow inflation despite easier monetary policy [and] a more competitive currency while achieving critical public spending goals (Patel, 2011a). Government thus plans to stimulate private investment through the cost of borrowing capital, the interest rate, while stimulating competition with the global economy through the exchange rate. Thus, governments Macroeconomic Package is aimed at lowering the interest and exchange rates which have a substantial influence on the production and investment decisions of firms (McCarthy 2011). On the issue of inequality, government has coined a term, decent work which merely points at better working conditions and adequate pay. Government asserts that this will not only help against the inequality, but contribute to skills enhancement, small enterprise development, wage and productivity gain-sharing policies, addressing the excessive pay gap between top and bottom, progressive taxation and support for the wage (Patel, 2011a). Here government emphasises the importance of unions in determining the quality of jobs [and] the legislative framework the sets minimum standards in the protection of the rights of workers (Mantashe 2011). The possibly effects of the Macroeconomic Package and working condition policies are illustrated, using the AD-AS framework, below.

Possible Effects of NGP Employment Strategies

The proposed strategies we discussed above have are illustrated in the diagram above, with a short description of the mechanisms on the right. Governments planned strategy provide effective inducements to private investment in targeted sectors (Patel, 2011a) of the economy and its proposals contained in the Macroeconomic Package are displayed by the fiscal and monetary changes denoted in the graphs. Firstly, the effects of the 2008 global recession are shown by the leftward shift in the IScurve caused by a decrease in in aggregate demand. Thus, we are on the AD-curve AD1, with output decreased from Yn to Y2. Therefore, governments proposed spending in sectors with high employment capacity would increase the fiscal spending which is denoted by rightward shift of the IS-curve to IS3. At this point, with a given money supply, the interest rate is higher. Furthermore, price levels have increased from P0 to P2 due to government spending.

This is why government proposes expansionary monetary policy as provision for this. Thus government hopes to maintain a low enough interest so that private investments are not affected. Furthermore, government proposes a competitive exchange rate which would ensure South Africa maintains its levels of foreign direct investment while still being globally competitive. This allows a decrease in the price levels from P2 to P1. It is worth noting that even with these interventions, South Africa would still experience inflation. The inflationary pressure would not be fully controlled through these mechanisms since the effect of lowering interest rates has a less direct impact on the economy than government spending. However, without these monetary interventions to maintain low interest and exchange rates, South Africas private investment would diminish, resulting in lower output. Therefore, if government is to maximise its job creation it needs to maintain low interest rates to stimulate private investment while still spending and investing prudently. This would result in some inflation and higher output and lower unemployment. However, this does not fully address income inequality. This is why government proposes emphasis on decent work as described above. However, the proposed strategies along with the inflation would cause a shift in the South African labour market, which is denoted by the upward shift in the AS-curve from AS1 to AS2. This is caused by worker expectations on prices which are lower than actual prices. Thus workers would increase their expectations and the proposed employment security strategies would further improve workers bargaining power which would result in higher wages. This would decrease employment as firms would have to lay-off workers as the cost of this input increases. This would also decrease output. This is a challenge government is aware of, which is can solve by maintaining union commitment to policies that support employment creation and equity even

when it requires some sacrifice from union members [by] reward any sacrifice by members with real gains for the working class as a whole (Patel, 2011a). This has raised many contentions and given the NGP a negative outlook amongst economics scholars. McCarthy aptly notes that South African firms will have waning ability to compete in the global market and grow their market share and capacity to create jobs if their unit cost of production is driven to levels that further exceed those of their competitors (2011). This is an obvious problem however; government proposes a competitive exchange rate to overcome this hurdle. However, this may not be enough unless all stakeholders in the economy are committed to change the NGP. Unless the proposals on decent work and higher employment come with increases in efficiency and productivity in the economy, the NGP will not be realised. As McCarthy states, a scenario of a falling rand, rising inflation and wage demands unrelated to productivity performance will be a welfare-destructive race to the bottom (2011). However, the context of the South African economy should not evade us when making these economic considerations. Because the socioeconomic atmosphere requires

some of the interventions proposed in the NGP. Much of the contention amongst labour and management, which causes inequality and leads to higher wage demands, aside from inflation, is the contended question of executive pay, which has now become an ethical issue. Amidst the persistent inequality in South Africa, executive pay still remains exorbitant. Thus the NGP makes provisions for wage agreements. In this regard, government proposes a settlements for workers earning between R3000 and R20 000 a month, possibly to inflation plus a modest real increase, with inflation-level increases for those earning over R20 000 a month (Patel, 2011a). Furthermore, government also plans to cap pay and bonuses for senior

managers and executives earning over R550 000 a year (Patel, 2011a). These are amongst the proposals put forth by government to deal with income inequality. However, this has been critised with the assertion that falling increments as one moves up the income ladder is not conducive to incentivising the development of skills in an economy recognised to suffer from a severe skill shortage (McCarthy, 2011). This argument seems very plausible; however, we should not accept the force of sound arguments without considering the socioeconomic conditions. With that in mind, it seems the NGP proposal on diminishing increments is a necessary corrective measure to reverse the effects of Apartheid and growing inequality. Many workers with lowincome jobs often work to send remittances relatives in former Bantustans, where over half of all households [depend] mostly on remittances or grants (Patel, 2011a). Furthermore, inflationary effects in the price of goods affects lower incomes more; added to this are exploitative working conditions and pay. Thus low-income employees are amongst the worst in the South African labour market, which is what informs the NGP proposals regarding wages. In conclusion, we have considered the socioeconomic background informing the New Growth Path (NGP) then examined some of the employment creation policies proposed. Then we analysed these policies using the AD-AS framework to show their possible effects. Thus, the NGP policies aspire to achieve two seemingly divergent goals, namely increasing unemployment and improve the quality of employment in attempt to solve concerning inequality. The socioeconomic conditions motivate these moves. However, these goals cannot be fully accomplished without sacrifices on either of the two priorities unless a national consensus is reached to change the adversarial relationship between workers and employers so as to improve working conditions along with productivity.

Bibliography COSATU 2011, Appendix 2: Economic Policy Contestation in Government. Retrieved September 5, 2011, from http://www.cosatu.org.za/docs/discussion/2010/econpolicycontest.pdf Mantashe, G. 2011, ANC NEC Bulletin: National Executive Lekgotla. Retrieved September 5, 2011, from [URL] McCarthy, C. 2011, Comment on some fundamentals of the New Growth Path as an Industrial Policy. Retrieved September 5, 2011, from http://www.econex.co.za/index.php?option=com_docman&task=doc_download&gid= 82&Itemid=60 Patel, E. 2011, The New Growth Path: The Framework. Retrieved September 5, 2011, from http://www.info.gov.za/view/DownloadFileAction?id=135748

* Siyaduma Biniza is currently a secondl-year student at the University studying towards a B.Soc.Sci in Politics, Philosophy and Economics.