The Unemployment Problem Is Not Due to Foreigners

By Saliem Fakir · 18 May 2015

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Picture: Brookings Institution
Picture: Brookings Institution

South Africa’s unemployment problem has been persistent since 1994 and long before the migration of Africans from elsewhere making their way south.

Foreigners do not occupy all the formal jobs that the South African economy creates because there would have to be good reasons for employing foreigners in the formal sector due to our labour laws, immigration policies and employment equity rules. Those employed in the formal sector constitute about 4% of the formal workforce.

Where there is competition for resources and jobs, is in the informal sector, where both South Africans and international migrants who are unskilled and semi-skilled are subject to precarious occupations and often pitted against each other.

South Africa’s economy is vulnerable to the pace at which government can turn its spend into growth, the extent to which large domestic multinational firms that secure profits in South Africa reinvest in the South African economy and most importantly, the regularity with which foreigners buy our goods – like minerals and manufactured goods – and also spend their money in our economy.

All of this adds up to growth and jobs. But it all depends on where the growth comes from and how the jobs are created and sustained. If the bulk of foreign spending goes into the stock market and not into the mines or directed towards manufacturing, fewer jobs will be created.

Since 1994 and well before that, shifts were already visible in the South African economy. There was a structural shift. The economy became more service orientated, whilst agriculture, mining and manufacturing shed jobs.

Services tend to employ a more skilled workforce with the financial and business services attracting the most skilled and educated human capital. More importantly, given that the South African economy is more open, private firms and government enterprises have the option of regionalising and globalising their purchasing and growth opportunities.

The post-1994 period didn’t just lead to trade liberalisation affecting certain parts of our manufacturing and agricultural sectors adversely, but also enabled domestic capital to expand investment and opened the space for off-shoring manufacturing to countries where labour costs are cheaper or where opportunities for expansion are lucrative.

Those who preferred to put savings into company stocks instead of bricks and mortar did fabulously well.

Indeed the post-1994 settlement delivered good returns for capital on South Africa’s Johannesburg Stock Exchange (JSE). The JSE’s All Share Index has been bucking the trend over the last 20 years compared to emerging market equity and the S & P 500 – at least by double the gains.

Good returns with firm stability and performance has made the South African market an attractive proposition for investors. Investors can also benefit from participating in overseas stock markets. Close to 20% of firms listed on the JSE are generating economic returns on capital above 15%.

But this must be put in context of overall foreign direct investment (FDI) – inward FDI is still low for the real economy compared to other emerging economies, despite the fact that South Africa has no capital controls for non-residents.

The political settlement as well as the removal of capital controls that existed before 1994 unquestionably favoured capital, which was able to expand its opportunities beyond South Africa.

High rates of return for capital have also been accompanied by a massive decline in the rate of employment, as demonstrated by many statistics, which show that South Africa’s labour participation rate compared to other emerging economies is low. This is partly because we had growth in the services sector where skilled employment is preferred over unskilled labour.

Increased labour participation will not only improve social welfare but also lower demand for excessive wage hikes as the social burden of supporting so many dependents will be spread to a wider group of labour participants.

Consumption growth in the black middle class has also boosted the growth and expansion of the services sector. Black constituencies were previously underserviced in terms of financial services, mobile phones, transport, ICT, insurance, education, health, private security, and so on.

One may well say that meeting this repressed demand is good and so profits should be ploughed back to support more jobs in South Africa. But we haven’t taken into account our regional geo-economy and how this has influenced the investment decisions of private domestic firms.

Consolidation, technological improvements and retaining profits enabled a more conducive environment for regional expansion. Private firms were lowering their risk exposure to the South African economy. Meanwhile big firms went looking for new ventures, which would be their natural inclination.

Underserviced demand is not only prevalent in South Africa, but is also true for the rest of Sub-Saharan Africa. Sub-Saharan Africa was also experiencing a boom with many countries showing growth rates much higher than South Africa.

The expanded market of consumers in a more open economic situation in the region makes the return on capital less dependent on domestic demand and South African economic conditions. Thus for South African companies, there was always the back up of regional consumers to keep the profits growing.

Capital has no need to do a balancing act by ensuring that labour growth and demand are in tune with each other in a domestic economy, as has been the experience elsewhere in the world and supported by conventional economic theory.

South African firms have been tapping into profits in the domestic economy to support growth in demand in the rest of the region – they still enjoy this luxury. Many entered the African market where competition was weak and where others were not so daring in taking on the lucrative African markets.

This shift has been a crucial change in the post-1994 era. The diversification of the demand base, which is transnational in nature, gives capital more choices of where and how to invest especially when the domestic market is exhausted.

These conclusions are also reinforced by the outbound FDI figures. South Africa’s FDI into Africa hovers between the third or fifth largest compared to other countries around the world. These interests extend from financial services to mining. With US$18 billion, South Africa was the fifth largest holder of FDI stock in Africa in 2011 and the second largest developing country investor globally after Malaysia.

These shifts are unlikely to change as long as Africa’s economy grows. Demand for consumer goods and services remains hungry where South African firms still enjoy some comparative and competitive advantage over other foreign firms in the services, construction, manufacturing, agricultural and mining sectors.

The burden of employment for the domestic economy has now shifted to government.

This remains a challenge for various reasons. The government is sitting with a wage bill of close to 50% of its budget - leaving, once again, little funding for it to spend elsewhere in the economy if social grants and other social expenditure is taken into account.

Even then there is no guarantee that government spend of close to R4 trillion for various proposed infrastructure initiatives will make a long-term dent on the prospects of the unskilled and semi-skilled workforce, as it depends on where the money is spent and how many jobs can be created.

Creating employment cannot be the task of government alone. South Africa’s stability and future also depends on the private sector making a contribution. We must question private capital’s commitment to job creation in the country. Taking without giving back is a calculation that private firms will have to make if they want to protect their long-term interests in South Africa and enhance co-operation with the South African government and labour unions.

Fakir is an independent writer based in Cape Town.

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Alexander Verified user
19 May

Applies to UCT Transformation Too

Good article Saliem Fakir. I fear a similar dynamic applies to the current debate on transforming higer education. The Mail and Gardian this week points out that UCT has transformed but largely through recruiting non-South African black professors and students.

The fact that these foreigners and migrants succeed in South Africa is only a testament of how little impact the government has had on reforming the education sector, thus creating a supply problem. Simply put, if South Africa cannot graduate enough numerate and skilled scholars, the economy is inherently biased to creating opportunities for migrants as the skills are simply not there. The real problem South Africa faces in terms of unemployment and transformation has nothing to do with migrants. Until the government reforms and eradicates corruption in primary and secondary education, unemployment will remain and skilled foreigners will prosper.

And, on the contrary we should be grateful for migrants for at least one thing - they illuminate that South Africa's skills shortage is real, not imagined and certainly not because of racism.

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