IMF warns SA on labour costs

2011-11-16 14:31

High labour costs carried more blame for the country’s decline in exports than the strong rand, an International Monetary Fund (IMF) official said today.

“On the whole, it is labour cost rather than rand appreciation that has contributed to the loss of competitiveness,” IMF deputy director for Africa Abebe Aemro Selassie said.

He was briefing Parliament’s portfolio committee on finance. Selassie said rising wage costs also contributed markedly to job losses in South Africa.

“One of the features of the labour market that we think has aggravated the scale of job losses is that you have had wage increases well ahead of productivity increases, then you have competitiveness issues, rising costs,” he told MPs.

“If you look at those sectors where wage increases have been in excess of productivity increases, then you see that those are also the sectors where you’ve had the highest job losses ... manufacturing, construction, mining, it is very much evident. This of course is an outcome of the bargaining councils that you have and may need to be looked at.”

Selassie made these points in explaining the slow pace of the country’s recovery from the global economic crisis compared to those of other emerging markets.

Since those economies were subject to the shocks that battered South Africa, barring the country’s electricity supply woes, one would have to look at local policies for an answer, he said. The IMF believed that government’s fiscal policy response to the crisis had been appropriate.

“Our take is that as the crisis hit the government did the right thing ... the policy support provided by the government through the budget really is among the most robust relative to other equated market countries.”

Likewise, the South African Reserve Bank’s monetary policy response has “also been fairly strong in our view”, he added.

The IMF saw a lack of competition in local product markets and lack of flexibility in labour market institutions as the real reasons for South Africa’s slow recovery and shedding of competitiveness.

Selassie said instability of the rand was a contentious issue but when economists examined the real impact of the exchange rate on labour costs per unit, it paled next to rising production costs.

“When you unpack this appreciation in terms of its components, how much was contributed by the nominal changes in the exchange rate – the rand-dollar, the rand-euro exchange rate – versus how much on account of ... the domestic cost of production, what you see is a far greater source of the loss of competitiveness has been the increase in the cost of production.”

He said an increase had been unavoidable, in part because of higher electricity prices, but the country could and should act to remove product market barriers, particularly in the telecommunications industry.

“You have a few companies dominating in many cases large sectors of the economy, so competition is limited,” he said.

“Part of this reason why competition is limited however is for policy-induced reasons, by design, because entry is restricted for one reason or another. South Africa is one of the worst in terms of being an overly regulated product market. You really are at the wrong end of the spectrum.”

Selassie confirmed that the IMF had downgraded its growth projections for South Africa to three percent for this year and the next, and could review these again in case of further global financial turbulence.

“New financial stress is building up in the global financial system, something akin to what was happening in the run-up to the global financial crisis of 2008/09,” he said.

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