Journal Issue
Share
Article

South Africa: Selected Issues

Author(s):
International Monetary Fund
Published Date:
January 2003
Share
  • ShareShare
Show Summary Details

V. Alternative Medium-Term Scenario55

77. The staff’s medium-term scenario is based on a projection for annual real GDP growth of about 3 percent during 2003–07.56 The scenario assumes the continuation of current policies, including sound fiscal policy, with budget deficits of about 2 percent of GDP on average, the achievement of the CPIX57 inflation target, starting in 2003, and steady, but modest, progress with structural reforms. These structural reforms include the gradual removal of rigidities in the labor market along with training efforts to improve job skills, continued trade liberalization, and the restructuring and privatization of public enterprises. The scenario is based on annual world real GDP growth of 4–4½ percent through the medium term, consistent with the assumptions in the most recent World Economic Outlook.

78. Accelerating the pace of implementation of economic reform in some areas could yield higher real output growth under an alternative medium-term scenario. Structural reforms can raise real output growth through contributions from increases in labor, capital inputs, and total factor productivity (TFP). The alternative medium-term scenario assumes not only higher growth contributions from employment creation and investment than under the baseline medium-term scenario, but also in comparison with economic growth during 1994–2001, which was mainly based on strong growth in TFP as a result of trade liberalization and labor shedding.58

79. Strengthening efforts to improve the functioning of the labor market could lower the cost of labor; which could, in turn, raise employment growth and reduce the number of unemployed. In particular, further progress in lowering labor costs by streamlining arbitration and conciliation procedures and by allowing for more autonomy in setting wages—along with greater flexibility of work practices—could increase the demand for labor, Efforts to enhance job training and the development of professional skills are likely to make an equally important contribution to employment creation by increasing labor productivity and raising the employability of those who are currently unemployed.

80. Investment will also contribute to real economic growth as the profitability of investment rises with falling labor costs. However, investment that is not induced by favorable labor market conditions may substitute capital for labor, thereby contributing to growth, but not to employment creation. Increasing inflows of foreign direct investment (FDI) may also raise TFP growth as spillovers improve production technology and skill development. Furthermore, accelerating the pace of privatization and achieving the official inflation target would help to raise investor confidence. Lower inflation may also result in making prices a more reliable indicator for scarcity, which could improve the functioning of markets and possibly result in higher TFP growth.59

81. Trade liberalization largely drove TFP growth—and, thereby, real GDP growth—during the 1990s. Efforts to further lower tariffs could induce higher real GDP growth, albeit on a smaller scale. The reduction in the average (unweighted) tariff rate from 30 percent in 1990 to its present level of 7 percent was the main factor behind the TFP contribution to growth of 3 percentage points during 1994–2001. However, the impact of tariff reduction on TFP growth seems to be smaller at lower average tariff rates.60 It is important to note, however, that further trade liberalization needs to be complemented by comprehensive labor market reforms and skill enhancements to create employment along with economic growth.

82. In sum, while difficult to quantify, the growth effects resulting from the timely implementation of comprehensive reform efforts in the areas of labor markets and trade liberalization under continued sound fiscal and monetary policies are likely to increase annual real GDP growth to about 5 percent over the medium term (Table V.1). The alternative medium-term scenario assumes an additional contribution of labor to economic growth of 1–1½ percentage points over the medium term, based on timely and comprehensive labor market reforms. The scenario assumes capital accumulation will also make a contribution to real GDP growth of 1–1½ percentage points over the medium term. Additional reductions in tariff rates, as well as privatization and education efforts, are assumed to increase TFP’s contribution to real GDP growth by about ½–1 percentage point over the medium term.

Table V.1.South Africa: Selected Economic and Financial Indicators, 2000–07 (Alternative Scenario)(Annual percentage change, unless otherwise specified)
20002001200220032004200520062007
Est.Staff projections
National income and prices
Real GDP3.42.22.53.03.74.45.05.0
Real GDP per capita1.20.20.51.01.82.53.13.1
CPI (annual average)5.45.77.96.04.94.33.83.9
CPIX (annual average)8.36.98.06.05.04.54.04.0
Labor market
Unemployment rate (official definition; in percent)26.328.829.630.229.128.027.026.0
Nominal unit labor costs (formal nonagricultural)2.95.96.55.03.42.62.32.2
External sector
Exports (goods and services) volume8.32.42.21.71.82.22.42.6
Imports (goods and services) volume7.20.4-0.31.82.42.22.12.0
Current external balance (in percent of GDP)-0.4-0.10.70.40.30.0-0.3-0.8
Investment and saving
Investment (including inventories; in percent of GDP)15.915.315.115.115.215.516.016.7
Gross national saving (in percent of GDP)15.515.215.815.515.515.515.715.9
Sources; South African Reserve Bank; IMF. International Financial Statistics; and staff estimates and projections.

83. Since the increase in real growth would be largely labor-driven, it would result in lower unemployment. Investment as a share of GDP would rise earlier and more strongly than under the baseline medium-term scenario and would reach 16.7 percent by 2007. Gross national savings as a share of GDP would fall initially, reflecting strong import growth, before rising to 15.9 percent by 2007. Higher export-oriented investment would increase real growth rates of both imports and exports. Investment growth, partly stemming from capital inflows, would result in a current account deficit of 0.8 percent of GDP by 2007. The path of inflation is projected to remain unchanged under the alternative medium-term scenario, consistent with the successful implementation of inflation targeting.

References

    Ghosh, A., and S.Phillips,1998, “Warning: Inflation May Be Harmful to Your Growth,Staff Papers, International Monetary Fund, Vol. 45, pp. 672710.

    International Monetary Fund, 2000, “Trade Liberalization and Productivity in South Africa,” in South Africa—Selected Issues, IMF Staff Country Report00/42, by JoséFajgenbaum and others, Washington D.C.

Prepared by Matthias Vocke.

The impact of HIV/AIDS on medium-term economic growth is highly uncertain. Estimates of the decline in annual output growth range from ½ to 2½ percentage points. See Box 6 in the Staff Report for the 2002 Article IV Consultation, SM/02/176.

The CPIX is the consumer price index excluding interest on mortgage bonds.

See Section IV of this selected issues paper for a discussion of the sources of growth during 1980–2001 and of the medium-term outlook.

See, for example, Ghosh and Phillips (1998), “Warning: Inflation May Be Harmful to Your Growth,” Staff Papers, International Monetary Fund, Vol. 45, pp. 672–710.

See “Trade Liberalization and Productivity in South Africa” in South Africa—Selected Issues, IMF Staff Country Report No.00/42, by José Fajgenbaum and others (Washington: IMF, 2000) for details.

Other Resources Citing This Publication