South Africa its own worst enemy

South Africa’s high barriers to entry prevent effective competition in the local economy and inhibit the creation of new businesses. 

This not only negatively impacts the consumer as there is a lack of competition to drive down prices and increase innovation, but also limits the creation of new jobs. 

As a result, these barriers are one of the key reasons why the country has failed to make progress in tackling its unemployment crisis. 

This is feedback from the International Monetary Fund (IMF), which outlined some reasons South Africa has failed to create new jobs. 

The institution’s analysis of the country’s labour and product markets was part of its recent report on South Africa following annual consultations with members of the National Treasury and the Reserve Bank. 

South Africa’s unemployment crisis is worse than it seems on the surface as the private sector continues to shed jobs, with employment from companies being lower than its pre-pandemic levels. 

The labour force participation rate remained broadly unchanged in South Africa at 60.6%. However, the labour absorption rate – the percentage of the working-age population (15 to 64 years) who are employed – decreased to 40.3%. 

This effectively means that the South African economy cannot absorb a growing number of people looking for work. As the working-age population increases, employment has declined.

Worryingly, despite improved economic growth forecasts, the IMF said South Africa’s economy is unlikely to grow fast enough to make any real dent in unemployment. 

The institution forecasts growth of 1.5% for South Africa in 2025, which will rise gradually to around 1.8% annually by 2029. 

This lacklustre growth, albeit more than double the average of the past decade, will not be enough to create new jobs on the scale necessary to reduce unemployment in South Africa. 

For that to occur, growth would need to be consistently above 3% on an annual basis. 

However, the IMF said that economic growth is not the only problem for South Africa. 

The institution explained that high barriers to entry in the country’s markets prevent competition and stifle the creation of new businesses. 

These barriers include the complexity of regulatory procedures, extremely high numbers of licences and permits needed to operate, and poor infrastructure. 

State involvement in the economy and subsequent distortions in key markets exaggerate these high barriers to entry.

The graph below shows just how high the barriers to entry are in South Africa compared with the Organisation for Economic Co-operation and Development average. 

The IMF is the latest institution to warn that South Africa’s unemployment crisis is deeper than initially feared, with structural issues preventing the creation of new jobs. 

This is most apparent in the country’s private sector employment figures, which are significantly lower than they were pre-pandemic. 

The lack of recovery has also been broad-based, with only the trade, catering, and accommodation services sector getting near pre-pandemic levels. 

Despite increased business confidence among retailers, some of the largest private employers in South Africa, the sector’s employment remains 4.4% below pre-pandemic levels.

Standard Bank chief economist Goolam Ballim describes private company capital allocation in recent years as ‘subsistence investing’.

This investment focuses solely on maintaining current operations, not on growth or increased employment.

South Africa’s weak economy has caused this trend, as businesses are reluctant to invest in a country with sub-1% average GDP growth over the last ten years.

Only a sustained increase in confidence above the neutral 50-point level of business confidence, together with improved consumer demand, is needed to stimulate meaningful employment gains.

Particularly worrying for South Africa is that much of its employment crisis has been masked by a strong performance from the agricultural sector in recent years. 

This sector is vital for the country’s employment dynamics as it is rapidly able to absorb a large number of unskilled workers. 

It has performed remarkably well in recent years, offsetting declines in manufacturing and mining. 

However, just as quickly as this sector can absorb workers, it can also lose them, making it an unreliable source of employment for an economy. As this sector comes under pressure, jobs are likely to be shed. 

South Africa’s two other largest employers, the mining industry and the manufacturing sector, have been sources of widespread job cuts in recent years. 

Mining companies, in particular, have come under increasing pressure from lower commodity prices and increased operating costs.