ECONOMIC GROWTH AND EMPLOYMENT IN SOUTH AFRICA: A CRITICAL POLICY ANALYSIS by N.A. CHILI submitted in partial fulfilment of the requirements for the degree of Masters of Arts in Economics in the Faculty of Economics and Management Sciences at the Rand Afrikaans University November 2000 Supervisor: Prof. Lorraine Greyling
90
Embed
Economic growth and employment in South Africa : a ...
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
ECONOMIC GROWTH AND EMPLOYMENT IN SOUTH AFRICA: A CRITICAL POLICY ANALYSIS
by
N.A. CHILI
submitted in partial fulfilment of the requirements for the degree of
Masters of Arts in Economics
in the
Faculty of Economics and Management Sciences
at the
Rand Afrikaans University
November 2000
Supervisor: Prof. Lorraine Greyling
TABLEMELQUIENES
Page
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES vi
ABBREVIATIONS vii
ACKNOWLEDGEMENT viii
CHAPTER ONE PROBLEM STATEMENT, METHODOLOGY
AND DEPLOYMENT OF STUDY 1
1.1 Introduction 1
1.2 Problem statement 3
1.3 Methodology 4
1.4 Deployment of study 5
CHAPTER TWO ECONOMIC GROWTH THEORIES 7
2.1 Introduction 7
2.2 Adam Smith 7
2.3 David Ricardo 9
2.4 Malthus 9
2.5 Mill 10
2.6 Karel Marx 11
2.7 Schumpeter 12
TABLE OF CONTENTS
11
2.8 Solow 12
2.9 Harrod-Domar Model 14
2.10 Kenneth Arrow 17
2.11 Paul Romer 18
2.12 Conclusion 18
CHAPTER THREE THE HUMAN RESOURCE DEVELOPMENT
AND THE LABOUR MARKET POLICIES 22
3.1 Introduction 22
3.2 Inequality 22
3.3 Human resource development 25
3.3.1 Overview of the current industrial training systems
in South Africa 25
3.3.2 Green paper on skills development strategy for
economic and employment growth in South Africa 26
3.4 Presidential job summit 28
3.5 Labour market policy 30
3.5.1 NEDLAC Act 31
3.5.2 Labour Relations Act 32
3.5.3 Basic conditions of Employment Act 32
3.5.4 Employment Equity Act 32
3.5.5 Skills Development Act and Skills Development Levies Act 33
3.6 Conclusion 35
TABLE OF CONTENTS
iii
CHAPTER FOUR SOUTH AFRICAN MACRO ECONOMIC
POLICY 36
4.1 Introduction 36
4.2 Reconstruction and Development Programme 37
4.3 The growth employment and redistribution strategy 38
4.3.1 Background 38
4.3.2 Objectives 39
i Labour market structures and reform challenges 40
ii Enhancing productivity 42
iii Industrial support measures 43
iv Small and medium-sized enterprise development 43
4.4 GEAR outcomes and shortcomings 44
4.5 Medium term expenditure framework 48
4.5.1 Goals of the MTEF 49
4.6 Conclusion 50
CHAPTER FIVE INTERNATIONAL COMPARISON 52
5.1 Introduction 52
5.2 Indonesia 53
5.2.1 Employment and labour market characteristics 53
5.2.2 Macro economic development 54
5.2.3 Labour policy and industrial relations 54
5.3 Chile 55
5.3.1 Employment and labour market characteristics 55
5.3.2 Macro economic policies 56
TABLE OF CONTENTS
iv
5.3.3 Labour policy 57
5.4 Korea 58
5.4.1 Introduction 58
5.4.2 Factors behind Korea's economic success 58
5.4.3 Labour issues 61
5.5 Lessons for South Africa 62
5.6 Conclusion 63
CHAPTER SIX RECOMMENDATIONS 65
6.1 Introduction 65
6.2 Land reforms and tourism 66
6.3 Arts and culture 67
6.4 Special employment programmes 68
6.5 Small, medium and micro enterprises 69
6.6 Conclusion 71
CHAPTER SEVEN CONCLUSION 73
BIBLIOGRAPHY 77
TABLE OF CONTENTS
V
LIST OF TABLES
Page
Table 3.1 Composite measures of inequality in selected countries 23
Table 4.1 GEAR scenario projections 40
Table 4.2 GEAR job creating initiatives 41
Table 4.3 Total number of employees 47
(salary and wage earners)
Table 4.4 Macro economic projections 50
Table 5.1 Income distribution indicators 56
Table 5.2 Key economic indicators (1962-1997) 61
Table 5.3 Trend in long term economic development
(comparison) 63
Table 6.1 Travel and tourism industry 66
Table 6.2 Key objectives of the national small business stategy 70
LIST OF TABLES
vi
LIST OF FIGURES
Page
Figure 4.1 GEAR GDP growth rates projections
compared with the actual results 45
Figure 5.1 Population below poverty line (percentage) 57
LIST OF FIGURES
vi i
ABBREVIATIONS
ANC African National Congress
BCEA Basic Condition of Employment Act
EEA employment Equity Act
GEAR Growth employment and redistribution
ILO International Labour Organisation
LRA Labour Relations Act
MTEF Medium Term Expenditure Framework
NEDLAC National Economic Development and Labour Council
NGO Non-Governmental Organisation
OECD Organisation for Economic Co-operation and Development
PAYE Pay As You Earn
RDP Reconstruction and Development Programme
SDA Skills Development Act
SMME Small, Medium and Micro Enterprises
ABBREVIATIONS
viii
ACKNOWLEDGEMENT
I wish to express my sincere appreciation to the following persons:
My supervisor, Professor Lorraine Greyling, for her assistance,
expert advice and for always being a model of perseverance.
My husband, Goody, for his loving patience during this time and my
children, Andile and Luyanda, for always being there for me.
Ilsette Parsons, for her support and excellent creativity
in processing and printing this work.
ACKNOWLEDGEMENT
PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF
STUDY
1.1 INTRODUCTION
The economic growth in South Africa during the period 1994 to 1999 has
failed to create new jobs. The broad issues constraining employment
creation includes persistent low economic growth and a lack of historical
investment in human resource development. At least a six percent
economic growth is essential and such growth must be strongly labour
absorbing. The current economic performance is not encouraging in this
regard.
This study examines job creation and focuses mainly on economic growth
as the driving force for job creation. Training and development of skills are
important components in creating jobs. Not only education has become a
major government priority, but also a new skill enhancement strategy has
been developed which seeks to identify the training needs. The department
of labour in consultation with national training board in 1997 prepared the
green paper on human resource development (Nedlac, 1997:1). The green
paper covers industry based training, but also takes on board the need of the
target groups such as the unemployed, youth, women, people in rural areas,
people with disabilities and retrenched workers.
Labour regulations have been formed with a view of allowing a sufficient
CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF STUDY PAGE 1
degree of labour market adaptability, while also providing a measure of
employment security. The lack of workers rights in some sectors increases
the desire to extend, rather than to reduce the ambit of labour regulations.
The perception in business is that labour policies are pulling to the wrong
direction and therefore affect the output and employment growth.
The government legislative programme stems from consistent approach to
labour market reforms. Various labour legislations have been passed by
parliament in the period of 1994 to 1999. According to the department of
labour (1999:4) the labour market policy has been guided by the following
objectives:
The need to ensure that labour market policies contribute to the
realisation of the vision of the government.
The need to ensure that labour market policies promote economic
growth in a manner that contributes to a greater protection and security
of the workforce.
The need to broaden, deepens and upgrade the formation and
utilisation of skills throughout the economy.
The primary objective of the economic policy is to provide growth and
development in order to create jobs, sustain employment, alleviate poverty
and reduce inequality. In pursuing these objectives, government had to
develop and implement a wide range of economic and social programmes.
In 1994 the government adopted Reconstruction and Development
Programme (RDP) which sets out its commitment the elimination of
poverty in the rapid growing economy (Department of fmance, 1997:1).
Subsequently the government introduced the Growth Employment and
Redistribution (GEAR) in 1996. Its main objective is to create an
CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF STUDY PAGE 7
economic system that will ensure the rapid economic growth and
development of the people. The government believes that GEAR will
change South African economic path of slow growing and non job creating
to a development oriented economy. In 1998 the Medium Term
Expenditure Framework was introduced as an additional instrument to
achieve the objective set out in GEAR and RDP programmes.
GEAR enumerates, among other objectives, the following targets by the
year 2000 (Bown, 1997:9):
6 percent growth in real GDP;
409 000 new jobs per annum;
an inflation rate in the region of 7.6 percent;
a real interest rate of 3 percent;
a fiscal deficit at 3 percent of GDP;
10 percent real growth in non-gold exports, and
real private sector investment growth of 17 percent and US$ 800
million in additional foreign direct investment.
GEAR failed to meet the projected results. A review of different
international countries show that the economic policy plays an important
role in economic growth and creating jobs but the policy need to be
reviewed at least after every five years. GEAR, as a policy is important, the
government need to review it and adjust the numerical targets.
1.2 PROBLEM STATEMENT
The objective of this study is to examine the economic growth and job
CHAPTER ONE: PROBLEM . STATEMENT, METHODOLOGY AND DEPLO)MENT OF STUDY PAGE 3
creation in relation to macro economic policies in South Africa since 1994
to date. Economic growth theories help to explain the economic growth
problem as well as the possibility to create jobs.
Since 1994, the government has introduced three economic policy
programmes namely the RDP, GEAR and MTEF. However, the
unemployment rate is increasing and the economic growth is still low. The
aim of this study is to:
demonstrate that economic growth is the driving force to job creation;
analyse the human resource development;
examine the international experience in relation to South Africa;
critically analyse labour market development and macro economic
policies;
provide recommendations to employment creation.
1.3 METHODOLOGY
This study is mainly based on the existing literature about economic growth
and job creation. Empirical analyses were conducted using the existing and
historical data from various quarterly bulletins of the South African reserve
bank, the Internet, publications, and the department of finance. The data
was used to determine trends of key economic variables. The methodology
comprises of three steps. Firstly, each chapter begins with a brief
introduction that gives a hypothetical statement. Secondly, the hypothesis
is analysed. Lastly, a short concluding statement is made, which emphasise
the major fmdings of the chapter.
CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF STUDY PAGE 4
1.4 DEPLOYMENT OF STUDY
The study is divided into seven chapters. Chapter one is an introduction to
the topic. It provides background, problem statement, methodology and
deployment of study.
Chapter two analyses the theories of economic growth. These theorists are
important in explaining the problem of economic growth and the
possibilities of job creation. A selection of economic growth theories will
be reviewed, starting from classical era to the new economic growth
theories.
Chapter three focuses on South Africa's labour market development, and
the measures taken to develop human capital. Various labour policies have
emerged and passed by parliament from 1994 to 1999. The Acts include
labour relations Act, the Employment Equity Act, Skills Development Act
and Skills Development Levies Act. The job summit held in 1998 is also
discussed in this chapter. The summit believes that the continued
investment in education will increase the number of school leavers with
improved skills.
Chapter four provides a theoretical overview of the policy framework
implemented by the government. The main strategies and programmes
aimed at improving growth and creating employment in South Africa are
evaluated in this chapter. These strategies and development programmes
are: Reconstruction and Development Programme (RDP), Growth,
Employment and Redistribution (GEAR) strategy, and the Medium Term
CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOYMENT OF STUDY PAGE 5
Expenditure Framework (MTEF).
The RDP sets out the government commitment to the elimination of
poverty.
With GEAR the government aim is to achieve a macro economic
stability through a range of structural changes in the economy.
MTEF is an additional policy instrument to achieve the objectives set
out in RDP and GEAR.
The outcome of the macro economic policy will be analysed in order to
evaluate whether the objectives were achieved.
Chapter five reviews three international countries in order to identify the
main lessons for South Africa in pursuing the objectives of full
employment and sustainable economic growth. Unemployment and
economic growth are an international problem. Countries may differ in
their strategies but all share the basic objectives of economic growth and
creation of employment.
Chapter six provides the recommendations to the employment problem in
South Africa. Macro economic policies are indispensable for job creation,
but they are themselves not sufficient in accelerating the pace of
employment growth.
Chapter seven is a summary of the main findings of the study. It draws
some tentative conclusion on job creation and economic growth in South
Africa.
CHAPTER ONE: PROBLEM STATEMENT, METHODOLOGY AND DEPLOIMENT OF STUDY PAGE 6
ECONOMIC GROWTH THEORIES
2.1 INTRODUCTION
Economic growth theories help to explain the economic growth problem as
well as the possibility to create jobs. In classical era, economic growth
theory was dominated ley the role of investment in increasing labour
productivity. Where steady economic growth was observed, a portion of it
could not be fully explained by investment. Neo-classical economist
explained this portion as technical innovation. They came to the conclusion
that innovation is the basis for economic growth. As a reaction to the neo-
classical model, new growth theories evolved. Their analysis incorporated
technological progress and emphasised the endogenous resources such as
ideas. In this chapter a selection of economic growth theories will be
reviewed, starting from the classical to the new economic growth theories.
2.2 ADAM SMITH
Adam Smith formed the basis for all subsequent growth theories, which
contains at least parts of his model (Greiner, 1998:8). According to
Adelman (1964:25), Smith primary concern was eventually with the
dynamic question of growth and development. The main strand of his
theory was the investigation of capital accumulation, population growth and
labour productivity. Smith argued that growth was self-reinforcing as it
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 7
exhibited returns to scale. Economies of scale will be realised in
production and in marketing owing to a division of labour and to general
improvement in machinery (Adelman, 1964:26). As division of labour
increases output, it then induces the possibility of further division of labour
and thus further growth. Changes in productivity are therefore never
impended by lack of appropriate technological knowledge. Instead
improvement can only be introduced to the extent that there is sufficient
capital available (Adelman, 1964:27).
Smith's idea that growth is rooted in the increasing division of labour relates
primarily to the specialisation of the labour force (Dhamee, 1995:1). Each
worker becomes an expert in one isolated area of production, thus
increasing efficiency. The fact that labourers do not have to switch tasks
during the day further saves time and money. Smith recognised the
potential problems of this development. He pointed out that forcing
individuals to perform repetitious task would lead to a dissatisfied force
(Dhamee, 1995:1). As a result he believed that the government has an
obligation to provide education for workers. This was based on the fact
that education could combat the deterious effect of factory life. Despite
increasing returns, Smith did not see growth as eternally rising; he posited a
ceiling in the form of stationary state where population growth and capital
accumulation was zero.
Smith stressed a limitation to the division of labour. When the market is
very small, no person can have any encouragement to dedicate himself
entirely to one employment (Meier, 1963:21). His point is that although
division of labour can increase labour productivity this may not be
profitable unless market demand is sufficiently large. The expansion of
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 8
international trade is beneficial in this respect.
2.3 DAVID RICARDO
Ricardo's work contains ideas on how economic growth can be achieved.
He modified Smith model by including diminishing marginal productivity
of land because land is variable in quantity and fixed in supply. Ricardo
believed that economic progress hinged upon capital formation and capital
formation on the productivity of labour (Brenner, 1966:36).
The economic growth in his theory starts with a growing population and
high food prices (Greiner, 1998:8). With every increase of capital and
population, food will generally rise. The consequence of a rise of food will
be a rise in wages and every rise in wages will have a tendency to determine
the saved capital in a greater proportion than before to the employment of
machinery (Brenner, 1996:45). Machinery and labour are in constant
competition and the former can frequently not be employed until labour
rises.
2.4 MALTHUS
According to Malthus population growth is connected with economic
growth. He observed that production required land as well as labour.
Population growth increases the labour supply but not the supply of land.
Labour is the variable input and land is a fixed input. He introduced the
concept of diminishing marginal productivity. According to this principle,
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 9
as the quantity of the variable input increases, the marginal productivity of
the variable input declines. The marginal productivity of labour determines
the wage. As population grows, the marginal productivity of labour and the
wage declines (O'Brein, 1975:215). This would continue until the wage is
pushed down to subsistence. Working people would be able to earn only
enough to support their families. The only possible way out will be an
improvement in agricultural technology that could offset the falling wage.
Agricultural technology will make it possible to feed more people with the
given supply of land.
Education to Malthus was the key to the solution of the working class
economic problem (Brenner, 1966:54). Once workers are educated, they
think rationally about public problems such as that of population. They
become aware that poverty sprang from the excess supply over the demand
for labour and they would refrain from early marriages (Brenner, 1966:54).
Few children will improve economic conditions. The advance of modem
technology will then not only help to reduce their misery but contribute
towards society's prosperity.
2.5 MILL
Mill's analysis was greatly influenced by Adam Smith. They both agree on
the significance of the division of labour and the role of government in
promoting economic growth (Brenner, 1966:57). Knowledge was very
important in determining the power to make provision for the future
(O'Brien, 1975:220). Mill saw capital as a stock of previously accumulated
products of labour affording a means to future production. Industry was
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 10
limited by capital but not all capital was necessarily employed at any one
time. Capital, the result of savings, was demand for labour. To Mill, the
division of labour meant that capital equipment could be utilised more fully
and so its returns would be gathered more quickly. He accepted that
division of labour was to some extent the result of invention and capital
accumulation (O'Brien, 1975:221).
2.6 KARL MARX
Marx modified the classical picture. He saw profits as the determinant of
savings and capital accumulation (Fonsenca, 1999:3). The declining of
profits is brought about not by competition increasing wages as in Smith,
nor by diminishing marginal productivity of land as in Ricardo, but rather
by the rise in the ratio of fixed capital to variable capital. Marx claimed
that profits are derived from surplus value and surplus value is only
generated by variable capital.
Technological progress in the form of machinery or division of labour was
not wholly beneficial way of improving growth (Fonsenca, 1999:3).
Technological improvement is also ways capitalists can increase their
leverage over labour by threatening it with mechanisation. Marx contended
that division of labour was a way of generating the alienation of working
classes and thus ties them more dependently to the production process.
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 11
2.7 SCHUMPETER
Schumpeter substantially improved upon the classical theory of growth
(Fonsenca, 1999:3). Like classical economists, his system was supply
driven. The main element of growth was the increase in factor supply. His
starting point was a smoothly expanding economy. Unlike Smith, his
population growth was exogenous and his savings rate was rather constant
and not a driver of growth. In his view, the driver of development was
discontinuous punctuated changes in the economic environment. These
were brought about by a variety of things, but entrepreneurial innovation
was the central one (Fonsenca, 1999:3).
Technical innovation by a single entrepreneur opens up new profitable
avenues. As a result more entrepreneurs are induced to innovate, thereby
improving growth. As the supply of entrepreneurs in any generation is
numerically exhausted, capitalists turn upon each other and compete away
existing profits. Profits begin to decline and the economy slows down.
However, the decline in profit will eventually again, induces those with
entrepreneurial inclination to once again innovate. Schumpeter claimed that
there were no diminishing returns to innovation (Fonsenca, 1999:4). He
also did not believe that the scarcity of land as a factor which bring
economic growth to a standstill (Greiner, 1998:10).
2.8 SOLOW
Solow's model formed the basis for a complete group of models, which
belong to the neo-classical (Greiner, 1998:15). He assumes a classical
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 12
economy in which one homogeneous good Y(t) is produced, which gives
the national income. According to this model the long run growth cannot
be influenced by government intervention (Greiner, 1998:17).
Solow concentrated on technological progress and omitted increasing
returns to scale (Solow, 1970:34). He assumed that each point in time all
labour and capital were readily available on the market so to say. Secondly,
those profit and wage rates are adjusting themselves automatically and
without time interval (Brenner, 1966: 190). Both full employment and the
expectations of entrepreneurs could continually be maintained and satisfied.
The growth would follow an even path if the balance between profits and
wages were not disturbed. Solow also assumed that production is a
function of both capital and labour as well as of technology.
Continuous growth requires a continually rising capital output ratio
(Brenner, 1966:191). If the capital-labour ratio can be varied so that more
capital is combined with relatively less labour, growth can be maintained
without causing unemployment. The capital-output ratio must increase
rather more than the rate of growth to make up for the diminishing returns
from capital. There is a time when it must reach a maximum. This is when
the proportion of income saved reaches close to unity (Brenner, 1966:191).
Since the rate of growth depends on savings and capital-output ratio,
eventually what will happen is that, either growth will cease or
unemployment will begin. In order to avoid this, a change in the technical
determinants will be necessary. Without technological improvement
capital-output ratio must remain equal to the rate of growth of the labour
force.
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 13
The resolution proposed by Solow was to assume that technology had an
exogenously determined rate of growth, which increases the productivity of
labour. If one were to replace physical labour units with effective labour
units, then the natural rate of growth of effective labour is no longer the
biological rate of population growth alone but rather that rate plus the rate
of technological progress (Fonsenca, 1999:13).
The empirical predictions of the Solow model are that countries with low
capital labour-ratios, below the steady state, should grow faster than those
with capital labour-ratios higher than the steady state. Fonsenca (1999:12)
stated that this argument which is called "convergence hypothesis" is
patently wrong as poor countries rarely grow faster than rich countries. The
convergence hypothesis only applies to countries that are compared, having
the same savings habits and population growth.
2.9 HARROD-DOMAR MODEL
Harrod led in the work of the theory of economic growth. He tried to
provide a theory, which explained how steadily growth occurred in the
economy (Ackley, 1966:518). Harrod wrote about two concepts of the rate
of economic growth, that is investment and increasing labour productivity.
He treated investment and labour productivity as independent limits on
economic growth. Harrod observed that the rate of economic growth
would depend on the growth of capital and thus on the proportion of
income saved and invested. On the other hand the supply and productivity
of labour also set a limit to the rate of growth. In Harrod thinking the sum
of the rate of growth of population and the rate of growth of labour
CHAPTER TWO. ECONOAIIC GROH/7"H THERIES PAGE 14
productivity is the natural rate of growth. In order to keep unemployment
from increasing, it would be necessary for demand to grow as fast as the
population, plus any increases in labour productivity.
Harrod believed that it would only be a coincidence if the two limits on the
rate of growth should agree. If the natural rate should happen to be greater
than the warranted rate, investment would limit growth of the economy and
the growth of the economy in turn would limit employment. If the
warranted rate were greater than the natural rate, businessmen would have
difficulty in finding enough opportunities to invest. Either way, an
imbalance between the natural and the warranted rate of growth would
cause economic problems.
An understanding of one fundamental relationship between capital
accumulation and growth stems most clearly from the work of Domar
(Ackley, 1966:513). Domar starts from Keynes recognition that today's
investment competes, at.least potentially, not only with yesterdays but with
tomorrow's investment. It provides new productive capacity, which if it is
not adequately used, will discourage further investment tomorrow. If
investment declines tomorrow this will increase the surplus of idle capital,
making problem more difficult. On the other hand if investment increase
whilst having full employment, it will mean more unused capacity. In this
situation one of the two things can happen; either substitution of capital for
labour or distribution of capital (Brenner, 1966:181). But unlike Keynes,
Domar saw that there was nothing inevitable about this outcome
(Ackley, 1966:513). His argument was that, if the total demand tomorrow
should be sufficiently greater than today's demand, the newly added
productive capacity could be fully employed and there would be room for
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 15
new investment again tomorrow, creating productive capacity that might in
turn fmd full outlet if only demand would continue for grow after
tomorrow.
Domar's problem was to find the condition needed for the maintenance of
full employment over a period of the time or more exactly, the rate of
growth of national income which the maintenance of full employment
requires (Brenner, 1996:181). If full employment is to be maintained
national income must grow at a combined rate with labour force
(Sen, 1970:67).
Domar's theory was of the same kind with that of Harrod and was known as
Harrod-Domar growth theory. They were concerned with unemployment
and treated growth as a remedy for it (Arndt, 1978:33). They examined the
requirement for full employment in an economy whose productive capacity
is increasing overtime as a result of capital accumulation. They both came
to an answer that full employment was possible only in conditions of steady
growth in which the rate of growth of all the variables, for example,
income, labour, investment etc. is equal to and remains constant overtime
(Arndt, 1978:33). Their analysis is essentially Keynesian in the sense that
savings is assumed to be a function of income and national income
equilibrium occurs when savings equal investment (Barret, 1972:297). To
maintain full employment of labour in the face of increasing productive
capacity, the rate of growth of real aggregate demand must equal the rate of
growth of labour force plus the rate of growth of labour productivity.
According to Allen (1967:197) this model is constructed in the form that is
both the simplest and the more inflexible. The labour force is assigned to
grow overtime at a constant rate and to be fully taken up by the demand
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 16
from the product market. Full employment of capital is matched by full
employment of labour. Neo-classical critics of the Harrod-Domar model
argue that, inherent in the market mechanism are stabilising forces, which
will automatically move the economy to a steady state growth path
(Barret, 1972:303). This growth path is compatible with a dynamic full
employment equilibrium, with a growth rate equal to the natural rate of the
Harrod-Domar analysis. As growth occurs at the warranted rate labour
forces, unemployment becomes increasingly more serious
(Barret, 1972:304). The workers will settle for lower wages, thereby
causing firms to substitute labour for capital when producing.
2.10 KENNETH ARROW
Arrow sought to associate the learning function not with the rate of growth
but with the absolute level of knowledge already accumulated
(Fonsenca, 1999:18). He introduced the learning by doing concept into
economic thinking. The more people practice in doing a particular job, the
better they get at the job and labour productivity increase as a result.
Arrow proposed that knowledge might accumulate as firms engage in new
activities. In the course of manufacturing capital goods these firms cannot
prevent this knowledge from flowing freely into the public domain
(Grossman & Helpman, 1997:35). The knowledge then contributes to the
productivity of recourses.
CHAPTER TWO: ECONOMIC GROWTH THER1ES PAGE j 7
2.11 PAUL ROMER
Romer took up the approach of learning by doing and spill over effects. In
contrast to Arrow, he does not consider physical capital in his model, but
exclusively focuses in knowledge as the basic form of capital
(Greiner, 1998:23). Another important aspect in Romer's model lies with
investment in the new knowledge. This hold because the creation of new
knowledge cannot be kept completely secrete despite the fact that it may be
patented. As a consequence there exist a positive spill over effects, which
makes firms benefit from their rival's effort to generate new combinations
and positively affects their production possibilities. Given the positive
external effect of investment, it becomes clear that there is a role for fiscal
policy.
Romer went to great lengths to disqualify the restriction imposed by Arrow
(Fonsenca, 1999:18). In Snowdon & Vane (1999:4), Romer stated that "as
soon as you think about technology you have to confront the fact that there
is a built in form of increasing returns - technically a non convexity". One
has to think of technology as a key input, which is fundamentally different
from traditional inputs. Without technological change, growth would come
to a stop. On the question of convergence, he argued that there is little
evidence of overall convergence. Countries will tend to converge only if
everything else is the same (Snowdon & Vane, 1999:4). In order to
develop, successfully countries must be open to new ideas and capture the
benefits of the latest technologies (Rankin, 1998:3). The higher the level of
disembodied knowledge, the more environments exist upon which
innovation can work and the higher the rate of technical progress.
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 18
2.12 CONCLUSION
In this chapter the economic growth theories were reviewed. To smith
economic growth is the result of division of labour. Division of labour
leads to specialisation and induces the possibility of further division of
labour. This improves productivity and efficiency. Changes in
productivity are never impended by lack of appropriate technological
knowledge. He believed that the government has an obligation to provide
education for workers. Smith did not see growth as eternally rising; he
posited a ceiling in the form of stationary state where population growth
and capital accumulation was zero.
The economic growth in Ricardo's theory starts with a growing population
and high food prices. With every increase of capital and population, foods
will generally rise, so will be the wages. Ricardo's theory does not reflect
the reality of what is happening in the world. As the population grows, the
higher is the unemployment.
Malthus also reiterated the idea that population growth is positively related
to economic growth. Population growth increases labour supply. He
introduced the concept of diminishing marginal productivity. As
population grows, the marginal productivity of labour and wages decline.
One could see that during Malthus' time the labour unions were not active.
The unions, through bargaining could lead to a situation where the wages
increase even if the marginal productivity of labour diminishes. With
education, the labour is able to think rationally about public problems such
as population. Modem technology to Malthus is important in contributing
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 19
towards society's prosperity.
Mill, as Adam Smith, agrees on the significance of the division of labour
and the role of government in promoting economic growth. He regards
knowledge as very important n determining the power to make provision of
the future. Increasing capital could solve the problem of unemployment.
Marx had a different view to Mill. Technological progress or division of
labour was not fully beneficial way of improving growth. Firm owners are
more concerned with profits. To get more profits they will use more
machinery and less labour.
To Schumpeter technical innovation was the key to job creation and
economic growth. He claimed that there are no diminishing returns to
innovation. As profits start to decline and the economy slows down,
entrepreneurs will be induced to innovate once again.
Solow saw the continually rising capital-output ratio as a requirement for
continuous growth. In order to improve the capital output ratio technology
has to improve. Technology increases the productivity of labour.
Harrod-Domar model was concerned with unemployment and treated
growth as a remedy for it. Arrow introduced the learning by doing concept
to economic thinking. Romer took up the approach of learning by doing
and its spillover effects.
Different theories have different models and view regarding economic
growth and job creation. Several factors were stated such as division of
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 0
labour, technological change, innovation, education, knowledge and the
role of government. The emphasis being move on learning and knowledge.
With all these theories in place it is still not easy to create jobs and
improve growth.
CHAPTER TWO: ECONOMIC GROWTH THERIES PAGE 21
THE HUMAN RESOURCE DEVELOPMENT AND THE LABOUR
MARKET POLICIES
3.1 INTRODUCTION
The challenge facing labour market policy is to promote dynamic
efficiency, skill enhancement and job creation. Labour policies have an
impact on high incidence of unemployment. Since 1994 the South African
government has embarked on programme of labour reforms aimed at
addressing unemployment problem. The most common form of
government intervention in the labour market is regulation. Taxes and
subsidies may also be used to provide incentives for the training of the
workforce. This chapter briefly indicates the scope of labour market
policies in South Africa. The measures taken to develop human capital will
also be discussed.
3.2 INEQUALITY
Inequality in South Africa is rooted in the labour market: Partly in low
wages and partly in very high unemployment rates (Nedlac, 1997:8). Until
1970's inequality was determined largely by the gap between white and
black incomes. It is now driven (a) by inequality within the distribution of
income and (b) by the fact that 30% of households have no wage income at
all.
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 22
os
F-1 "O
GNP per capita US$ 2410 2410 3520
Human development index (1993)
0.832 0.819 0.822
Gini Coefficient 0.43 0.27 0.58
Sout
h A
fric
a
OS ela
3040 2970 3480 2760
0.649 0.796 0.826 0.859
0.61 0.63 0.51 0.44
A key requirement of economic and employment growth in South Africa is
a reduction in the level of inequality (Nedlac, 1997:9). South Africa is not
a particularly poor country. Its' GNP per capita in 1997 of US$3040 places
it in the rank of the upper middle income developing countries. However,
this aggregate measure disguises an extremely skewed distribution of
income.
The Gini coefficient is a widely accepted measure of inequality, which
takes values between 0 and 1. The 0 represents absolute equality and 1
representing absolute inequality (Department of Labour, 1994:4). In global
terms, the degree of income inequality in South Africa is among the highest
in the world. This implies that economic policy needs to aim not for much
higher rate of economic growth but also for the type of growth that
increases the demand for labour and reduces the gap in earning among
those who are employed. Table 3.1 indicates that South Africa has the
second highest Gini coefficient among countries, which have similar level
of per capital income.
Table 3.1: Composite measures of inequality in selected countries
Source: Nedlac (1997:9)
CHAPTER THREE: THE LABOUR M4RICET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 23
South Africa's skewed income distributions is also reflected in the fact that
the bottom 20% of income earners capture 1.5% of the national income
while the wealthiest 10% of household receive fully 50% of national
income (Department of Labour, 1996:4). The fmdings by the Presidential
Commission to investigate labour market policy were that, between 36 &
53% of South Africans are estimated to live below the poverty line
(Department of Labour, 1996:5). Poverty is overwhelmingly concentrated
in the African and coloured population. 65% of the Africans are poor,
followed by 33% of the coloured community, then 2.5% for Asian and
0.7% for whites. The racial form that characterised poverty and inequality
in South African is the product of the past discrimination in employment
related fields like education and training.
The recommendations provided by the Presidential Commission were that
strong economic growth is essential to reduce inequality and such growth
must be strongly labour absorbing (Department of Labour, 1996:8). The
success of a labour absorbing growth strategy rest on three fundamental
requirements:
Firstly, macro economic, industrial and trade policies must promote
employment.
Secondly, reforms in the labour market must promote flexibility.
Third, labour absorbing growth is more likely to occur when labour
market policies and outcomes are co-ordinated with macro economic
policies by means of a National Accord for Employment & Growth
involving social partners.
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 24
3.3 HUMAN RESOURCE DEVELOPMENT
Training and development of skills and productivity improvement are the
important components of job creation. The new growth theories posit a
positive association between the quantity and quality of human capital and
the rate of economic growth. Major changes have taken place in the system
of human resource development in South Africa.
3.3.1 OVERVIEW OF THE CURRENT INDUSTRIAL TRAINING
SYSTEMS IN SOUTH AFRICA
Central to addressing the challenges of Growth Employment And
Redistribution, training structures for skill development were created.
The current training structures as outlined by National Economic
Development and Labour Council (Nedlac) in 1997, are as follows:
0 Regional training centres
The Department of Labour runs nine regional training centres.
They provide training for the upgrading of unskilled and semi-
skilled workers as well as training for the unemployed.
o Industry training boards
There are presently 27 industry training boards serving specific
sectors. Equal proportions of employers and trade unions
generally govern them. The main focus of these boards is on
CHAPTER THREE: THE LABOUR MARKET POLICIES HUMAN RESOURCE DEVELOPMENT PAGE 25
apprenticeships and training for artisans. The vast majority of
trainers are in formal employment with only 12% unemployed.
o Private training centres
There are presently 1365 private training centres recognised by
the Department of Labour. They provide training for industry
training boards, private companies and projects run by
universities, parastatals and NGO's (non-governmental
organisations). Training at these centres includes semi-skilled
operations as well as artisans.
3.3.2 GREEN PAPER ON SKILLS DEVELOPMENT STRATEGY
FOR ECONOMIC AND EMPLOYMENT GROWTH IN
SOUTH AFRICA
The Department of Labour in consultation with the National Training
Board in 1997 prepared the green paper on human resource
development (Nedlac, 1997:1). The green paper covers industry based
training, but also takes on board the need of target group such as the
unemployed, retrenched workers, youth, women, people with
disabilities and people in rural areas.
o Learnerships
The new skill development strategy would be implemented
through a system of learnership in order to overcome the present
lack of co-ordination between theoretical education and skills
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 26
training. The decline in apprenticeships, which have traditionally
aimed to combine structured learning with work experience, has
resulted in an increase in students at technical colleges. Once
these students have completed their theoretical component, they
are frequently unable to find work experience. The provision of
theoretical education without consideration of the needs of
industry and the job training is not appropriate. Learning by
doing as stipulated by Arrow (Fonsenca, 1999) and Romer
(Greiner, 1998) growth models, is necessary for gaining
experience. Adam Smith (Greiner, 1998) has also pointed out
that increasing division of labour means more practice and thus
more learning.
0 Co-ordination and structure
In order to create an environment suitable to the skill
development strategy, a new institutional framework is necessary.
Sectored education and training organisation would build on the
present industry training boards but would broaden their
functions significantly. These organisations would cover a
greater range than those covered by existing industry-training
boards, which include:
Primary agriculture
Retail and services
Defence, security, justice and correctional services
Post, telecommunication, broadcasting and information
technology
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 27
o Public sector
o Education
On the national level the present National Training Board would be
structured to form a national skill authority which would play a co-
ordinating role (Nedlac, 1997:4). This board would make proposals to
the Minister of Labour on skills development targets, policy and
funding. It would also establish research and strategic planning unit to
produce, collect and analyse labour market.
3.4 PRESIDENTIAL JOB SUMMIT
The Presidential Job Summit was held in 30 October 1998. It was a major
and concrete step towards broader job creation in a growing economy
(Department of Finance,. 1999:50). The summit realised that resolving
unemployment is not a simple task. It believes that continued investment in
education will increase the number of school leavers with improved skills.
This makes Presidential Job Summit to be inline with the new growth
theories. The National Skills Development Act, passed by Parliament in
1998, will contribute to retraining of workers.
According to Department of Finance (1999:52) the Job Summit detailed
agreements in five categories:
o Job creation in sector of the economy
Growth in niche sectors and clusters of industry, particularly those
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 28
with high propensity for creating jobs, is encouraged. Activities
identified include summits; a "buy South African goods" campaign;
strengthening customs and excise to stem illegal imports; small
business promotion; tourism promotion; and social housing
programmes which aim at delivering between 50 000 and 150 000
units for low income households.
Labour market and human resource development for job creation.
A social plan framework was agreed comprising a three-stage strategy
towards managing employment changes. As a primary objective, the
plan aims to prevent job losses, but will also manage unavoidable
losses in the most humane manner and provide training so as to
reabsorb workers in other sectors.
Special employment programmes
Existing special employment programmes will be expanded and
several new initiatives launched. These include the clean and green
cities campaign; labour intensive housing projects; community-based
public works and income generating welfare programmes.
Job creation in integrated provincial projects.
Integrated projects will take advantage of synergy between labour-
intensive community works, small business and large spartial
development initiatives. Projects being considered to take advantage
of such synergy include large-scale tourism around the Greater St.
CHAPTER THREE: THE LABOUR MARKET P OLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 29
Lucia area in Kwa Zulu Natal, and the Wild Coast-Emonti area.
0 Financing.
Agreed fmancial mechanism include a pledge from organised labour
to contribute an equivalent of one day's output towards job creation as
well as a R1 billion contribution from businesses.
The Job Summit also identified a number of post summit processes that
include the implementation, co-ordination and monitoring of the job
creation strategy agreed to at the Summit.
3.5 LABOUR MARKET POLICY
The governments' legislative programme stems from consistent approach to
labour market reforms. Various pieces of legislation have been passed by
parliament in the period of 1994 to 1999. The Acts includes the National
Economic Development and Labour Council Act, Labour Relations Act,
the Basic Conditions of Employment Act, the Employment Equity Act and
the Skills Development & Skills Development Levies Act. The Department
of Labour recognises that many of the problems in the labour market, such
as high rate of unemployment cannot be addressed by labour market
policies alone (Department of Labour, 1999). However, the Department is
responsible for the effective functioning of labour market. According to
the Department of Labour (1999:4) the labour market policy has been
guided by the following objectives:
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 30
The need to ensure that labour market policies contribute to the
realisation of the vision of government and that they are aligned with
the broader policies of the government.
The need to ensure equity in the context of an increasing number of
atypical work relationships.
The need to ensure that labour market policies promote economic
growth in a manner that contributes to greater protection and security
for the workforce.
The need to resolve inequalities in the labour market and promote
representatively of previously disadvantaged groups especially with
respect to skills training and improved work conditions.
The need to broaden, deepens and upgrade the formation and
utilisation of skills throughout the economy, including small, medium
and large-scale enterprises.
3.5.1 NEDLAC ACT
Shortly after the 1994 elections the Department of Labour pioneered
the National Economic Development and Labour council (NEDLAC)
Act. NEDLAC is a national tripartite body comprising representatives
of business, labour and the government (Nedlac, 1997:8). It ensures
that the significant civil society partners are not excluded from policy
making process by allowing consensus on important issues of social
and economic legislation before they are presented to parliament.
NEDLAC was successful in negotiating the Labour Relation Act of
1995.
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 31
3.5.2 LABOUR RELATIONS ACT
The Labour Relations Act (LRA) was implemented in 1995. It has
enhanced organisational rights for trade unions, entrenched the
constitutional rights to strike, simplified dispute resolution procedures,
promoted sectorial collectives bargaining and codified dismissal
procedures (Department of Labour, 1995).
It is therefore aimed at giving effect to the economic and social rights.
LRA improves the industrial relations system by establishing
improved mechanisms for the resolution of disputes between
employers and employees.
3.5.3 BASIC CONDITIONS OF EMPLOYMENT ACT
The Basic Conditions of Employment Act (BCEA) was promulgated
in 1997. It is primarily aimed at improving the working conditions of
unorganised and vulnerable workers, while also attempting to undo
inherited rigidities of the Old Act (Department of Labour, 1997).
The BCEA therefore represents an attempt to give effect to the rights
of workers, reduce poverty (especially the so-called working poor) and
address some of the inequalities resulting from the differentiated
treatment of workers.
3.5.4 EMPLOYMENT EQUITY ACT
An important factor that accounts for the inefficiencies in our
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 32
economy generally and the labour market in particular have been the
policy of discrimination, which was enforced in the past. White males
were in positions of leadership whereas black males, disabled and
women were confined to marginal roles. In the light of this reality the
labour department introduced a new Employment Equity Act (EEA) in
1998 (Department of Labour, 1998).
The aim of the Act is to reduce the labour market inequalities. It
assumes that the , removal of discriminatory laws will not be sufficient
to overcome existing disparities. Therefore, the Act prescribes
positive measures to assist designated groups: the disabled, women
and black males. The main provision of the Act is that all private and
public entities employing more than 50 workers or producing an
annual turnover exceeding a set amount should formulate an
employment equity plan (Department of Labour, 1998). This plan
should contain targets for the hiring and advancement of designated
groups and narrowing excessive earnings differentials between
occupational groups. The EEA requires an annual report to the
Department of Labour as well as an indication of progress in the
entity's annual fmancial statement. Heavy fines are prescribed for first
and repeated contravention of the Act.
3.5.5 SKILLS DEVELOPMENT ACT AND SKILLS
DEVELOPMENT LEVIES ACT
According to the Department of Labour (1999:7) the skills shortage
which exists in our country reflects that only 20% of the economically
active population is skilled or highly skilled, while about 80% is
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 33
semiskilled, unskilled or unemployed. South Africa has about 4%
professionals in its labour force, compared with about 8% for other
middle income countries. General schooling requires national
intervention to strengthen the link between workplace, education &
training and economic growth & employment opportunities. To
address these problems the skills Development and Skill Development
Levies Act were passed by Parliament in 1998 and 1999 respectively.
The Skills Development Act (SDA) aims to address the skills shortage
by a two fold approach:
o Measure to improve the links between the education and training
system of the labour market.
o Measure to improve training within industries, including a new
leamership to replace the ailing apprenticeship system of skill
formation. The introduction of a national training levy to fmance
training activities.
Developing skills is a responsibility that the Government shares with
its social partners. The levy takes effect in April 2000 at a rate of
0.5% to be collected by the South African Revenue Services as part of
employer's monthly pay as you earn (PAYE) returns (Budget
Review, 2000:5). The rate increases to 1% in April 2001. The skills
development levy is payable by private sector employers who are, in
turn, entitled to draw on the funds of sectorial training authorities to
recover approved education and training expenses. The fund is also to
be used in assisting the unemployed from disadvantaged groups by
way of leamership, training programmes for the unemployed and
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUMAN RESOURCE DEVELOPMENT PAGE 34
training support for small and medium enterprises.
3.6 CONCLUSION
In this chapter the scope of labour market policies in South Africa and the
measures taken to develop the human capital were discussed.
The upgrading of skills is a long-term process. The new labour policy
framework does not seem to be conclusive to rapid solution of
unemployment and economic growth. Instead these new laws might
exacerbate the lack of demand for unskilled labour in South Africa.
The gap in educational levels between the unemployed and the kind of high
tech job available is too wide that no retraining program could hope to
adequately upgrade the educational performance of workers to match the
kind of limited professional opportunities that exist. The tough processes
and initiatives that are necessary to manage the machines and make them
work are beyond the large majority of people's grasp. Even if re-education
and retraining on a mass scale were implemented, not enough high tech
jobs will be available in the economy to absorb the vast numbers of
dislocated and unemployed workers.
CHAPTER THREE: THE LABOUR MARKET POLICIES AND HUVAN RESOURCE DEVELOPMENT PAGE 35
SOUTH AFRICAN MACRO ECONOMIC POLICY
4.1 INTRODUCTION
The primary objective of the economic policy is to provide growth and
development in order to create jobs, sustain employment, alleviate poverty
and reduce inequality. In pursuing these objectives, government has to
develop and implement a wide range of economic and social programmes.
In 1994 the government adopted the Reconstruction and Development
Programme (RDP) which sets out its commitment to the elimination of
poverty in a rapidly growing economy (Department of Finance, 1997:1).
Subsequently, the government introduced the Growth Employment And
Redistribution (GEAR) as one of its principal instruments for the realisation
of the policy objectives contained in RDP. The government aim in
introducing GEAR was to achieve a macro economic stability through a
range of structural changes in the economy (ANC, 1997:19). In 1998 the
Medium Term Expenditure Framework (MTEF) was implemented to
describe the government's goals and objectives.
The overall macro economic policy framework is set out in RDP and
GEAR programmes. MTEF was introduced as an additional policy
instrument to achieve the objectives set out in RDP and GEAR. This
chapter reviews the South African macro economic framework and its role
in ensuring growth and stability.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 36
4.2 RECONSTRUCTION AND DEVELOPMENT PROGRAMME
The White Paper on Reconstruction and Development Programme was
published in 1994. It sets out the governments' commitment to the
elimination of poverty in a rapidly growing and more equitable economy
and in a context of an open, peaceful and democratic society (Department
of Finance, 1997:1). The RDP established a programme for orienting the
activities of government fully and effectively towards reconstruction and
development goals, within a sound fiscal and macro economic framework.
It provides an integrated vision for meeting:
the basic needs
developing human resources
building economy, and
democratisation of society.
According to the Department of Finance (1997:1.2) the following strategies
for the RDP were identified:
investing in people through education and training
creating employment in the context of a competitive and rapidly
growing economy
investing in household and social infrastructure
preventing crime
improving social security provision to eliminate absolute poverty, and
ensuring an efficient and effective public service.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 37
The government cannot achieve all its goals immediately, because there are
constraints on the capacity to deliver and on resources available
(Department of Finance, 1997:1). It is the responsibility of government to
determine priorities among the nation's goals. The RDP provides clear
guidance on these choices.
4.3 THE GROWTH EMPLOYMENT AND REDISTRIBUTION STRATEGY
4.3.1 BACKGROUND
Towards the end of 1995, it became apparent that if the economy
continued to grow at around 3%, government would not be able to
deliver what it said it would in the Reconstruction and Development
Programme. Two alternatives for South Africa were described as
"Low Road" and the "High Road" (Brown, 1997:9).
The low road suggest that if the new government maintained the old
economic system with the continuing trend of about 3% growth rate
per year, the long term outcome would be rising unemployment;
limited scope for social spending and at the end of the day the
increasing social discontent.
The high road suggest a strategy for economic growth and
development which targets 6% economic growth and creation of
400 000 new jobs annually in the year 2000. For the government to
deliver on its promises to the people, it needed to implement a strategy
that would take South Africa along the "High Road" of economic
CI-L4PTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 38
growth and development. It is within this context that the Minister of
Finance, Trevor Manual presented a macro-economic framework,
GEAR to parliament on 14 June 1996 (ANC, 1997).
4.3.2 OBJECTIVES
The GEAR strategy seeks to get South Africa economy into a new
path (Brown, 1997:10). This path will ensure:
a competitive and fast growing economy which creates enough
jobs for all work seekers;
a redistribution of income and opportunities in favour of the
poor;
a society in which sound health, education and other services are
available to all; and
environments in which homes are secured and place of work are
productive.
These are the same, objectives as the one that underlies the RDP, what
GEAR does, is to set out clear, the key economic plans for achieving
these goals. The entire integrated GEAR scenario projections are
summarised in Table 4.1.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 39
Table 4.1: GEAR scenario projections
Model Characteristics Project
1996 1997 1998 1999 2000 Avg.
Fiscal deficit (% of GDP) fiscal year 5.11 4.0 3.5 3.0 3.0 3.7 Real Government consumption (% of GDP)
19.9 19.5 19.0 18.5 18.1 19.0
Average tariff (% of import) 10.0 8.0 7.0 7.0 6.0 7.6 Average real wage growth private sector
-0.5 1.0 1.0 1.0 1.0 0.7
Average real wage growth, Government sector
4.4 0.7 0.4 0.8 0.4 1.3
Real effective exchange rate (% change)
-8.5 -0.3 0.0 0.0 0.0 -1.8
Real bank rate 7.0 5.0 4.0 3.0 4.0 4.4 Real government investment growth 3.4 2.7 5.4 7.5 16.7 7.1 Real parestetal investment growth 3.0 5.0 10.0 10.0 10.0 7.6 Real private sector investment growth 9.3 9.1 9.3 13.9 17.0 11.7 Real non-gold export growth 9.1 8.0 7.0 7.8 10.2 8.4 Additional foreign direct investment 155 365 504 716 804 508 RESULT 1996 1997 1998 1999 2000 AVG. GDP growth 3.5 2.9 3.8 4.9 6.1 4.2 Inflation (CPI) 8.0 9.7 8.1 7.7 7.6 8.2 Employment growth 1.3 3.0 2.7 3.5 4.3 3.0 New jobs per year (000) 126 252 246 320 409 270 Current account deficit (% GDP) 2.2 2.0 2.2 2.5 3.1 2.4 Gross private saving (% GDP) 20.5 21.0 21.1 21.5 21.9 21.2 Government disserving (% GDP) 3.1 2.3 1.7 0.7 0.6 1.7 Source: Department of Finance (1996:13)
The means by which these objectives were to be achieved
encompasses a wide range of macro and micro economic policies.
These include:
i LABOUR MARKET STRUCTURES AND REFORM CHALLENGES
The GEAR strategy envisages employment growth accelerating
to 400 000 jobs per year in year 2000. The total numbers
employed in the economy would rise from 10 261 million in
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 40
1995 to 11 094 million in 2000. The GEAR identifies specific
initiatives that would be required to raise the job creating capacity
of the economy to reach even the moderate total employment
targets for the year 2000 (Brown, 1997:24). Table 4.2
summarises the measures proposed in GEAR to create some of
the above jobs over the next few years.
Table 4.2: GEAR job creating initiatives
STRATEGY OBJECTIVE PERCENTAGE OF NEW JOBS
CREATED Raise economic growth rate from 3% to 6% (real GDP)
Raise formal and semiformal employment opportunities
30
Government and public sector employment initiatives
Labour based infrastructure development and public works programs
25
Institutional reforms in labour market
o Greater labour intensity o Skill development of productivity
enhancement o Wage moderations o Strategies to enhance labour
flexibility through collective bargaining
30
Source: Brown (1997:25)
The government has a responsibility for ensuring that labour
market rules are fair and that there are appropriate mechanisms
for dispute resolution. Accelerated job creation and improved
productivity are direct goals of a wide range of government
policies and programmes. Harrod-Domar model treated growth
as a remedy for unemployment (Arndt, 1978:33). As indicated
by Mill's theory (Brenner, 1966:57), government programmes
can add a further quarter of the new jobs mainly through
accelerated labour-based infrastructural development and
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 41
maintenance of public works in urban and rural areas. GEAR
policy identified that stronger growth of more labour-intensive
component of industry, facilitated by shifts in industrial policy is
vital. These reforms are needed to bring about the increased
responsiveness of labour demand to output growth, and are
essential ingredients of a sustainable labour-absorbing growth
path.
ii ENHANCING PRODUCTIVITY
Government also recognises that job creation and improved
living standards require a substantial increased commitment by
the business sector to industrial investment and productivity-
enhancing training. In many sectors, there is scope for both
increased employment and training of the unskilled and improved
productivity at higher skill levels.
International indicators show that South African investment in
human resources development is inadequate (Department of
Finance, 1996:17). An enhancement of the level effectiveness of
training across all employment sectors is central to growth
strategy as indicated by Arrow and Romer learning by doing
being associated with economic growth. Regulated flexibility of
the labour market must permit employees to increase their
productivity overtime. A refocusing of curricula and the
organisation of formal learning is currently in progress of
education authorities.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 4,
iii INDUSTRIAL SUPPORT MEASURES
Industrial innovation support programmes will be enhanced. This
includes the incentive provided in terms of the Special
Programme for industrial innovation (Department of
Finance, 1996:11). This is in line with Schumpeter growth model
that emphasised innovation as the basis of economic growth
(Fonsenca, 1999:4). Competitive and labour absorbing industrial
development are to be stimulated. The tax allowance programme
will apply to qualifying plant and equipment which is acquired
and brought into use for the first time during the period 1 July
1996 to 31 September 1999. Approved projects will get tax
exemptions (Department of Finance, 1996:12) for a period of
time determined by three factors:
regional location,
job creation, and
priority industries.
iv SMALL AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT
The promotion of small, medium and micro enterprises
(SMJVIE' s) is a key element in the government's strategy for
employment creation and income generation (Department of
Finance, 1996:12). A major effort will be made to operationalise
and implement the policies outlined in the white paper on small
business promotion. Various programmes and institutions have
been established to give effect to the strategy generation
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 43
(Department of Finance, 1996:12). These include:
the small business centre attached to the Department of trade
and Industry,
Ntsika Enterprise Finance Limited for wholesale loans,
Khula Credit Guarantee Limited for loan guarantees,
a pre-shipment export finance guarantee facility to expand
access to working, capital, and
the Competitiveness Fund for consultancy advice on
technology and marketing.
The Simplified Regional Industrial Development programme will
be continued in a modified form as a great programme tailored to
the needs of small and medium sized firms.
4.4 GEAR OUTCOMES AND SHORTCOMINGS
It was clear from the outset that the growth and unemployment targets were
highly optimistic. It is quite unrealistic to expect a dramatic turnaround in
economic fortunes within five years. Figure 4.1 shows a summary of the
GEAR projected GDP growth rate compared with the actual attained
figures.
The government seems to realise its unrealistic forecast as can be seen in
their revised forecast for the year 2000. GEAR projections showed an
expected growth rate of 6.1% in year 2000 and yet the revised forecast
shows a lower rate of 3.5%.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 44
Figure 4.1: GEAR GDP growth rates projections compared with the actual results
Projected
Actual
1996
1997
1998
1999
2000
* forecasted growth rate. Source: Department of Finance (1996:13 & 2000:30)
GEAR has translated into low growth, which has produced a small number
of new jobs. Increasing outsourcing subcontracting and mergers means that
companies may close or get smaller and become micro producers
(Haffajee, 1998:1). In October 1996 the private sector shed about 95 000
jobs, while the state created 40 000 jobs (Wackemagel, 1996:1).
Employment in the formal sector in South Africa is not keeping pace with
the growth in the economy. While the private sector has been concentrating
on capital-intensive investment, it is left to the state to take the labour
intensive route. The department of Public works role in job creation is
important because it is targeted at the unskilled and low skilled, who often
suffer the highest unemployment rates (Wackernagel, 1996:1).
The emphasis on capital-intensive industry is a hangover from the apartheid
era; machines were less trouble than people (Wackernagel, 1996:2). The
labour also proved to be expensive relative to capital. Progress in
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 45
education shows up consistently in comparative studies as a key
determinant of long run economic performance and income distribution
(Business & Economy, 1999:8). Sustained improvement in the quality of
public schooling available to the poor and greater equity in flow of students
through secondary and tertiary education is central to government approach.
Despite near universal enrolment in primary education only about 40%
children currently complete secondary schooling successfully. Inadequate
pass rate in science and mathematics are a cause of concern.
Accelerated economic growth associated with stronger employment
creation is the key to continued progress towards an equitable distribution
of income. According to Nel (1997:2) the history of those countries that
have transformed their economics shows that the appropriate macro
economic policy is only necessary, and not sufficient condition for
economic success. GEAR provides a facility framework within which
growth can take place. It may turn out to be no different from a number of
failed structural adjustment programmes.
South African employment levels could be deteriorating with the number of
people employed in the formal non-agricultural sectors dropping sharply
(Grawitzky, 1999:3). Employment figures released by statistics South
Africa on the 28 th September 1999 showed that the number of jobs in the
formal non-agricultural sector fell by 55 2393 from March to June 1999.
The public service accounted for the largest number of job losses (19 413)
followed by manufacturing (18 134) and construction (11 254). Job losses
in the public service were largely a result of a decline in jobs in the
provinces. The provinces accounted for 13 451 of job lost. Forecast
released by Wharton Econometric Forecasting warned that if the trend of
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 46
jobless growth continued, the number of unemployment could rise to 6.7
million over the next four years from 2000 to 2004 (Grawitzky, 1999:3).
According to Thomasson (1991:1) the current labour legislation has
contributed to the loss of some 500 000 jobs since 1995.
Table 4.3: Total number of employees (salary and wage earners)
Year and Quarter
Actual
Percentage change from
preceding quarter
Percentage change from corresponding quarter of previous
year
Full-time tim e Total Total Total
1996 Jun - - 5 238 572 -0.1 +1.9
Sep - - 5 241 852 +0.1 +2.2
Dec - - 5 224 987 -0.3 +0.7
1997 Mar - - 5 189 178 -0.7 -0.9
Jun - - 5 161 285 -0.5 -1.5
Sep - - 5 139 321 -0.4 -2.0
Dec - - 5 090 551 -0.9 -2.6
1998 Mar 4 765 262 219 438 4 984 700 -2.1 -3.9
Jun 4 657 975 301 510 4 959 485 -0.5 -3.9
Sep 4 616 985 329 193 4 946 178 -0.3 -3.8
Dec 4 554 891 366 671 4 921 562 -0.5 -3.3
1999 Mar 4 535 364 384 556 4 919 920 -0.0 -1.3
Jun 4 500 702 368 159 4 868 861 -1.0 -1.8
Sep 4 467 125 373 013 4 840 138 -0.6 -2.1
Source. Central Statistics Services (1999:8).
Note: As from March 1998, full-time and part-time employees are published
separately.
Table 4.3 shows that on year to year basis the increase in employment was
last recorded in December 1996. From March 1997 to September 1999
CHAPTER FOUR: SOUTH AFRIC4N MACRO ECONOMIC POLICY
PAGE 47
only a decline has been experienced. The employment performance turned
out to be totally out of line with the GEAR projections.
Increasing capital intensity and the shift to microelectronics in all sectors
has resulted in growing demand for highly skilled professionals.
Technicians and managers required to develop, implement, operate and
maintain new technology. At the same time this technology is replacing the
unskilled and low skilled labourers (Fraser, 1999:5). In the longer run,
economic growth will crucially depend on increasing investment in human
capital. It will also require a market oriented, innovative and dynamic
private sector (McCarthy, 0 al. 1992:5).
Some of the blame for lack of growth and unemployment can be attributed
to exogenous factors beyond the control of South Africa's policy makers.
These include the sharp fall in 1997 in the international gold price, adverse
climatic factors, the Asian Crises and the Reserve Bank's policy of
maintaining high real interest rates (Gouws & Roy, 1997:1). The
competitive pressures generated by South Africa's reintegration into the
world economy have created some casualties although compensated by new
export opportunities.
4.5 MEDIUM TERM EXPENDITURE FRAMEWORK
MTEF is the next logical step in a process of policy formulation, which
started in 1994 with the publication of RDP and continued in 1996 with the
publication of GEAR. It sets out the government objectives, together with
an assessment of the resources that are available over the next three years
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 48
(Department of Finance, 1997:10). The first three year MTEF was
published in 1998. It takes RDP as its point of departure and acknowledges
that neither the economy nor the public sector has the capacity of financial
resources, therefore emphasises reprioritising (Department of Finance,
1997:1). The MTEF commits the government to the kind of fiscal policy
path, which can help to improve South Africa's economic performance
over the long term.
4.5.1 GOALS OF THE MTEF
According to Alexander Forbes (1998:1) the MTEF has the following
goals:
to strengthen political decision making in the budget process;
to strengthen co-operative governance and decision making;
to make sure that every rand goes further: to deliver better
services, more infrastructure, more poverty relief and more
construction;
to create environment where public services can plan over
medium term, in the knowledge of how their budget is likely to
evolve, and
it makes an important contribution to the transparency and
openness of budget policy making.
The following table summarises the macro economic projections in
which the MTEF is based.
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 49
Table 4.4: Macro economic projections
1998/1999 1999/2000 2000/2001
Real GDP growth 3% 4% 5%
Real private consumption growth
3% 3.6% 3.7%
Real GDFI 5% 7% 9%
GDP inflation 7.5% 6.5% 6% Source: Gouws & Roy (1997:2)
Table 4.4 shows that the assumed growth rates have been scaled down
from those used in GEAR. According to Gouws & Roy (1997:2) The
RDP represents the point of departure. GEAR is a principal
instrument for meeting the RDP objectives. MTEF is the operational
plan in the sphere of the national budget.
4.6 CONCLUSION
In this chapter, the South African macro economic policy and its role in
ensuring growth and stability was reviewed. The RDP, GEAR and MTEF
constitute a complete strategy that the government has formulated to
achieve its objectives of improving and accelerating social and economic
progress. There are no conflicting ideas on these strategies as their goals
complement one another.
It was apparent from the onset that the GEAR, growth and employment
targets were highly optimistic. The dramatic expectations of the economic
CHAPTER FOUR: SOUTH AFRICAN MACRO ECONOMIC POLICY PAGE 50
fortunes to turnaround within five years were quite unrealistic. GEAR
failed to spell out the way in which greater labour market flexibility was to
be achieved. The transmission mechanism whereby the assumed increases
in the labour absorption capacity of the various sectors of the economy
were to be effected was not explained. Labour market reform was a key
success factor, but did not receive the appropriate attention.
Through GEAR it is widely acknowledged that the government has made
significant strides towards delivering improved macro economic balance
although the targets were not achieved. It is on the labour market policy
front that GEAR's shortcomings have been most evident. South Africa's
employment is exceptionally complex and not susceptible to simple
solutions or quick fixes.
Although the need to invest in human capital is recognised in GEAR, the
implications of modern growth theory is that it should be accorded much
higher priority. Such theory posits a positive association between the
quantity and quality of human capital and the rate of economic growth,
with the implied effect being of a significant magnitude. The benefits that
GEAR had brought in terms of improved market confidence in the thrust of
government policy are still in evidence.
CIL4PTER FOUR: SOUTH AFRICAN :MACRO ECONOMIC POLICY
PAGE 51
INTERNATIONAL COMPARISON
5.1 INTRODUCTION
Unemployment and economic growth is an international problem.
Developing countries in all regions of the world, in their quest for higher
growth and employment, have adopted programmes of economic reform
(ILO, 1996:3). Strategies differ but all share the basic objectives, which are
economic growth and job creation. There is no single ideal prescription for
economic reform or single policy environment that holds a monopoly for
economic success (ILO, 1996:3). The essential point of difference in the
choice of a strategy for reform concerns the role of the state.
Different countries have different specific objectives as regards to the goal
of full employment and sustainable economic growth. The ILO (1996:2)
attributes much popular theorising about the jobless growth to unwarranted
extrapolation from dramatic episodes of corporate downsizing, ignoring
compensatory job creation elsewhere in the economy. One of the
requirements for reversing the rise in unemployment is to improve the
design and implementation of labour market policies (ILO, 1996:3).
Nations need to invest in skill development and training of their workforce.
Training and education have provided an economic miracle in some
developing countries and could well provide a way out of
underdevelopment and poverty for millions of workers in other parts of the
world (ILO, 1998:2). In this chapter a review of selected countries is drawn
CHAPTER FIVE: INTERNATIONAL COMPARISON PAGE 52
in order to identify the main lessons for South Africa in pursuing the
objective of full employment and sustainable economic growth.
5.2 INDONESIA
Indonesia's policy mix has benefited from a very secure fiscal position,
which has allowed resources to be spent on anti-poverty programmes, and
on rural infrastructure (ILO, 1997:5). This has contributed in achieving a
balanced growth. Promotion of equality of opportunity based on gender
was encouraged.
5.2.1 EMPLOYMENT AND LABOUR MARKET CHARACTERISTICS
The performance of Indonesia in reducing poverty and generating
employment has been substantial (ILO, 1997:5). Growth has been
high and income distribution has remained broadly constant. The
proportion of the population below a nutritionally determined poverty
line fell from 60% in 1970 to 14% in 1993 (ILO, 1997:6). This was
achieved through labour-intensive growth and the overall results have
been a general improvement in living standards.
Despite this, Indonesia remains a low-income country with a large
concentration of people around and just above poverty line. The
remaining poor are those who have been left behind in the labour-
intensive growth process because of their geographical location. Even
if wage employment continues to grow, it will not benefit many of the
existing poor (ILO, 1997:6).
CHAPTER F7VE: INTERNATIONAL COMPARISON PAGE 53
The increasing education attainment of the workforce has contributed
to rising productivity and higher wages. According to ILO (1997:6) in
1970 up to 70% of the workforce has incomplete primary education or
less. Following the massive investment in basic education by 1986 the
proportion of the workforce with less than a primary education had
fallen to under half and by 1994 it had come down to one third
5.2.2 MACRO ECONOMIC DEVELOPMENT
A major factor explaining the rapid growth of the economy and of
employment has been the economic reforms, which began in the early
1980's (ILO, 1997:7). Macro economic reforms led to a massive
foreign and domestic investment, mainly in export oriented, labour
intensive manufacturing, especially textiles garments and footwear,
Agricultural sector played an important role in poverty alleviation.
Indonesia was able to absorb productively large amounts of labour in
rural areas as a result of public investment in agriculture.
5.2.3 LABOUR POLICY AND INDUSTRIAL RELATIONS
More than one third of workers are wage earners and this proportion is
expected to increase overtime (ILO, 1997:7). This results to a need to
revise the labour policies especially the trade union recognition and
job security regulations. From 1994 changes have been introduced to
raise labour standards and increase workers rights (ILO, 1997:7).
These changes included increasing workers statutory rights and
removing obstacles for setting up the enterprise unions. The greater
CHAPTER EWE: INTERNATIONAL COMPARISON PAGE 54
use of minimum wage has benefited the very low paid workers. The
strong expansion of labour intensive manufactured exports has created
a large number of opportunities for women, providing them with an
important source of income and a degree of independence
(ILO, 1997:7).
5.3 CHILE
In an international context, Chile joined the small number of takeoff
countries that have been able to break away from the past by reaching
sustained rates of high growth (Schmidt-Hebbel, 1998:1).
Chile is economically successful but combined with the high degree of
social exclusion. The social exclusion is the challenge that the leaders and
opinion makers are faced with.
5.3.1 EMPLOYMENT AND LABOUR MARKET CHARACTERISTICS
Chile has a high rate of job creation but the quality of jobs is
unsatisfactory. Only half of all the workers have regular, protected
jobs and this has direct implications for labour conditions
(ILO, 1997:19). The economic performance has improved but
distribution of income has remained relatively unchanged. While the
lowest quintile's share in total income is around 4.5%, the richest 20%
receive just over 56%. Table 5.1 illustrates the income distribution in
Chile.
CHAPTER FIDE: INTERNATIONAL COMPARISON PAGE 55
Table 5.1: Income distribution indicators
Gini Coefficient Income Distribution Shares by Quintiles
Year Gini Year Lower Middle Upper Coefficient 40% 40% 20%
1968 45.6 1969 11.7 31.3 57.0
1971 46.0 1978 9.7 29.5 60.8
1980 53.2 1987 7.5 24.0 68.5
1989 57.9 1991 10.1 28.8 61.0
1994 56.5 1994 10.5 30.6 58.9
1998 10.0 30.5 59.5
Source: Schmidt -Hebbel (1998:21)
5.3.2 MACRO ECONOMIC POLICIES
After decades of inadequate macroeconomic management, the military
regime started a program of macroeconomic stabilisation and
structural reform in1974-75. The process of economic reform has
been completed and there is a widespread satisfaction with the macro
economic setting (ILO, 1997:20). The incidence of poverty fell from
44.6% to 24.0% over 1987 to 1996 period as indicated by Table 5.2.
This was achieved through continued economic growth, employment
generation and increased social expenditure targeted to the most
vulnerable groups (World Bank, 1996:3).
CHAPTER FIVE: INTERNATIONAL COMPARISON PAGE 56
Figure 5.1: Population below poverty line (percentage)
45 40 35 30 25 20 15 10
5 0
1987
1990
1992
1994
1996
Source: Schmidt-Hebbel (1998:21)
5.3.3 LABOUR POLICY
The restoration of democracy in 1990 introduced wider union rights,
higher levels of protection against discrimination and safeguard
against dismissal (ILO, 1997:21). This led to the increase in
employment. Output was largely based upon the expansion of
employment. Lack of human resources and the institutions to develop
them makes productivity to fall below international standards. This is
attributed to a weakness of the public education system. Chile has a
highly decentralised education system (World Bank, 1996:2). Only
8% of the poor study in higher education institutions whereas with the
rich families, it's around 55% (ILO, 1997:21). In addition to
education, training is an essential component of Chile's strategy to
become competitive. The government has specifically designed and
fmanced programmes to reach those with special difficulties in
integrating into the labour market.
Steps to improve the situation of the poor through labour market
CHAPTER FIVE: INTERNATIONAL COMPARISON PAGE 57
policies were taken predominantly through changes in the minimum
wages (ILO, 1997:20). Unemployment in Chile is around 6% but the
rate of unemployment is higher for the poorer household and the
women suffered the most (ILO, 1997:20).
5.4 KOREA
5.4.1 INTRODUCTION
Korea was a typical underdeveloped Country until the turn of the
1960's where it was transformed into a modern industrialised country.
This was attributed to the rapid growth, which averaged over 8% per
annum for more than 30 years. Its GDP volume soared form only
2.1 billion US dollars in 1961 to 484.4 billion US dollars by 1996
(Bank of Korea, 2000). As a result of this remarkable development,
Korea emerged on the world stage as the front-runners among the
newly industrialising economies so that it was able to become a
member of Organisation of Economic Co-operation and Development
(OECD) in 1996. Education explains a substantial part of Korea
economic growth (Pillat, 1994:90). The most important ultimate
cause of Korea's success has probably been government policy
(Pillat, 1994:99). The government allowed market forces to do its
work.
5.4.2 FACTORS BEHIND KOREA'S ECONOMIC SUCCESS
In the early 1960's the Korean economy remained locked in poverty.
CHAPTER RV E: INTERNATIONAL COMPARISON PAGE 58
In order to escape from this, the government launched an ambitious
five year economic plan in 1962 (Bank of Korea, 2000). No single
factor can account for Korea's economic success (Leipziger, 1988:1).
In the early stage of economic development, the government fostered
import-substitutions industries, which produced such basic
intermediate materials as cement and fertilisers. After that, it
promoted labour-intensive export industries such as textiles and
plywood, which had international competitiveness because of cheap
labour costs and were capable of absorbing the unemployed and
underemployed human resources.
In order to support export industries, extensive export promotion
measures were taken. Low interest rate policy loans were granted to
help export firms facing difficulties. Various forms of preferential tax
treatment, such as tax exemption and tariff rebates were given to
export industries (Bank of Korea, 2000).
The government also focused on the efficient mobilisation and
allocation of investment resources. Several banks were established to
finance such underdevelopment strategic sectors as small and medium
sized enterprises and housing construction. To encourage foreign
capital inflow, the Foreign Capital Inducement Act was passed in 1966
and foreign banks were allowed to open branches from 1967
(Bank of Korea, 2000). Throughout the 1960's, the Korean economy,
in a rapid process of industrialisation, under the firm guiding hand of
the government, exhibited impressive performance. Exports, the
engine of growth, expanded by almost 40% annually and as a result
CHAPTER FIVE: INTERNATIONAL COMPARISON PAGE 59
Korea was able to register high average growth rates of above 8.5% a
year. Per Capita GNP increased dramatically from 87 US dollars in
1962, when the first economic plan commenced to 10 307 US dollars
in 1997.
In the early 1970's, Korea experience dramatic changes and challenges
both at home and abroad. Labour intensive industries, whose
competitiveness was gradually weakening as a result of rapid wage
increases, faced fierce competition from other developing countries.
These circumstances forced the Korean economy to modify its
strategic objectives. By 1980, Korea faced many difficulties as a
result of the second oil crisis and domestic political turmoil
(Bank of Korea, 2000). To cope with these difficulties the
government undertook a series of structural adjustment measures to
enhance economic efficiency. Firstly it shifted the priority in its
economic policy from growth to stability. The opening up of the
economy and deregulation were persued on a stage-by-stage basis.
Table 5.2 shows the key economic indicators of Korea from 1962 to
1997.
The high level of education contributed to economic development.
Korea achieved a literacy rate of nearly 80% by the early 1960's, the
highest of any country at a similar level of development
(Leipziger, 1988:2). As a result of increasing income, the demand for
education has continued to grow, and enrolment in the nation's
colleges and universities rose from less than 140 000 in 1966 to over
one million by 1986. Without this continuum improvement in the
level of education, it would not have been possible for Korea to
CHAPTER FIVE.' INTERNATIONAL COMPARISON PAGE 60
upgrade its labour force in line with the growing sophistication of its
industries or sustain increases in productivity (Leipziger, 1988:3).