Johannesburg - South Africa is not attracting enough foreign investment to tackle high unemployment and poverty, the World Bank said on Thursday, citing high labour costs as a key deterrent.
"South Africa is attracting far less foreign direct investment and exporting less industrial output than many countries in the same peer group," a report said.
The investment climate report compared the country with other emerging economies such as Brazil, India and China.
High labour costs and low manufacturing productivity were holding back to the economy, it said, in a country where unions demand salary hikes more than double the rate of inflation.
"The growth of manufactured exports is constrained by relatively high labour costs, including benefits and wages paid to employees," said the report.
South African labour costs outstrip similar emerging markets like Brazil, Chile and Argentina, it said.
Employees of the state-owned logistics and transport company Transnet were earlier this year given an 11% wage hike after a lengthy strike. In June, inflation was at 4.2%.
Government employees are also preparing for a potentially bruising strike next month over salary increases.
While South Africa ranks highly in ease of doing business, unemployment and poverty remain widespread.
"We understand the need for structural changes in the economy to address constraints," Trade Minister Rob Davies said at the release of the report.
"Even during the time of economic boom, unemployment was around 22%, now it is at 25%," Davies said.
Earlier this month, the Organisation for Economic Cooperation and Development urged the government to lower the obstinately high unemployment rate.