South Africa after COVID-19: light at the end of a very long tunnel

In this time of crisis, a famous quote attributed to Winston Churchill during World War II is often remembered: “If you are going through hell, keep going. While South Africa is not in the midst of a physical war, it is battling the COVID-19 crisis head-on. Like most other countries, South Africa has not been able to escape the pandemic. He suffered loss of life and livelihood. As of this writing, in early July 2021, more than 64,000 South Africans have lost their lives. The third wave is hitting the country very hard and infections continue to rise every day. But there is also light at the end of a very long tunnel.

The government responded quickly and vigorously to the crisis while leading a international alliance for the distribution of vaccines in Africa. If the South African government conducts long-standing economic reform with the same determination as it battles the pandemic, COVID-19 could be a turning point in revitalizing the South African economy and labor market. While South Africa is expected to emerge from the crisis weaker than it was, the World Bank South Africa Economic Update argues that the reasons for weak growth and high unemployment do not lie in the government’s response to the crisis. Instead, the pandemic revealed long-standing structural weaknesses that have gradually worsened since the 2008-09 global financial crisis.

For 2021, World Bank forecasts gross domestic product (GDP) growth of 4%, followed by 2.1% in 2022 and 1.5% in 2023. The weak recovery in South Africa is putting pressure on public finances. For the first time ever, public debt has now reached almost 80% of GDP and, on the current trajectory, debt levels will not stabilize until 2026. However, the current global recovery is helping South Africa, by particularly the strong rebound in China and the United States. —Two of its main trading partners. While other emerging markets are recovering more quickly, the South African economy could have benefited more in 2021 if integration with the rest of the world were stronger (Figure 1).

Figure 1. South Africa’s contraction in 2020 was deep and the recovery in 2021 will be moderate

The crisis has exposed South Africa’s biggest challenge: its labor market. Even in the best of circumstances, the labor market has been marked by high levels of unemployment and inactivity. Out of a working-age population of nearly 40 million people, only 15 million South Africans are employed, of which 3 million are in the public sector. The COVID-19 crisis has exacerbated a predicament, as low-wage workers suffered nearly four times as many job losses as high-wage workers. In 2021, we have seen a modest recovery in employment, but it is under threat due to the third wave.

Against all expectations, there are also positive developments in the labor market, and young entrepreneurs are one of South Africa’s best hopes for solving the jobs crisis. There are more and more startups, especially in the digital sector, which are developing rapidly and could become an engine of job growth in the future. Cape Town alone, “Technological capital of Africa», Has more than 450 technology companies and employs more than 40,000 people. In 2020, a total of $ 88 million (1.2 billion rand) of disclosed investments went to its tech startups.

Focusing on young entrepreneurs would also help South Africa close its large gap in self-employment (self-employed with their own businesses, self-employed), which accounts for only 10 percent of all jobs, compared to around 30 percent in most of the upper middle classes. -income economies such as Turkey, Mexico or Brazil (Chart 2). If South Africa were to equal the self-employment rate of its peers, it could potentially cut its unemployment rate in half.

Figure 2. Self-employment: the biggest job creation opportunity for South Africa

Figure 2. Self-employment: the biggest job creation opportunity for South Africa

The South African economy would benefit from measures aimed at preserving macroeconomic stability, revitalizing the labor market by improving the investment climate to build a better and more inclusive economy after the pandemic. There is a risk that the recovery will leave behind the bulk of the potential economically active population, especially young job seekers, which would mean that the pandemic would definitely jeopardize the country’s long-term development prospects. Conversely, if South Africa were to organize a large-scale recovery, this decade could bring new prosperity.

Addressing structural constraints to growth behind and at the border could support exports and higher growth, and thus preserve the sustainability of public finances. The experience of large emerging economies shows that the two most powerful factors in reducing public debt-to-GDP ratios are economic growth and primary surpluses. The implicit priorities are obvious: a better climate for investment and trade, and prudent fiscal policy.

To generate jobs, South Africa would need to tackle three chronic issues in its labor market: extremely high inactivity rates, high unemployment rates and low levels of self-employment. In addition to adopting carefully chosen regulations to improve the business climate and investing in the workforce through better education, the government can implement reforms to encourage self-employment and support the growth of micro and small enterprises.

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