Overview OECD Economic Survey South Africa 2010

A strong macroeconomic policy framework has helped to improve growth performance over the past two decades, but the 2008-09 downturn highlighted the limitations of the domestic-demand-led growth path which has characterised South Africa in recent years. Unemployment, which had remained very high, if declining, throughout the boom years, turned up again in the recession. There is now a need both to ensure a rapid recovery from the downturn and to boost trend growth and thereby create the millions of jobs required to make full use of South Africa’s large supply of underutilised human resources. The global downturn struck South Africa when it had already passed the boom, and the economy slowed sharply, experiencing its first recession in 17 years. The decline in output was moderated by a countercyclical policy response, made possible by past fiscal prudence, and by the resilience of the banking system, which did not experience a crisis. Growth has resumed and is projected to accelerate, but macroeconomic policy stimulus should be removed only gradually, as a self-sustaining recovery, led by the private sector, takes hold. Evidence suggests several ways to improve South Africa’s trend growth performance. Notably, all economies experiencing successful rapid economic development in recent decades have had much higher savings and investment rates and stronger export growth than South Africa, and policy action to increase saving and strengthen export performance are therefore warranted. South Africa should do more to resist waves of real appreciation of the rand associated with surges in private capital inflows, which are largely driven by investor sentiment towards emerging markets in general, and commodity plays in particular. Tighter and more countercyclical fiscal policy, verbal and foreign exchange intervention, and liberalisation of capital outflows all have a role to play. Another key to better trend growth is reform of the regulatory environment. South Africa has low levels of competition and relatively restrictive product market regulation, which hampers more broad based innovation. OECD research suggests that lowering barriers to entrepreneurship could substantially boost South Africa’s long-term growth rate. The macroeconomic framework is strong, but can be improved. South Africa has a good track record of fiscal prudence, but, as in other countries, fiscal discipline was eroded in the cyclical upswing.