Government of South Africa Strategies and Priorities for Economic Growth
USG Engagement in the Economic Growth Sector
South Africa has recently experienced a negative acceleration of economic growth. On the heels of global financial crisis, South Africa’s gross domestic product contracted in the first quarter, pushing Africa’s biggest economy into recession for the first time in 17 years as manufacturers and miners scaled back output and fired workers. GDP fell an annualized 6.4 %, the most since the third quarter of 1984, after declining 1.8 percent in the final quarter of 2008. The recession snaps more than a decade of economic growth, the longest period of expansion on record, putting pressure on newly installed President as he pledges to slash poverty and unemployment. Miners are firing thousands of workers, while manufacturers scale back production as exports slump.
The drop in the first half will make it difficult for the government to meet its target of cutting the unemployment in half by 2014. The jobless rate rose to 23.5 percent in the first quarter of 2009 from 21.9 percent in the previous three months, 2008.
Despite the size of the economy and recent improvements in growth, South Africa continues to face major social and economic challenges of widespread unemployment, poverty and problems with service delivery at the local level. Apartheid systematically excluded the majority of South Africans from full economic participation, and its legacy is still apparent today. It is a country of two economies, the first a modern, middle income emerging market with abundant natural resources, and well developed infrastructure, finance, legal, transport, and communications sectors. The second economy compares best to those of low-income developing countries and is informal, marginalized, and populated by the under-skilled and under-served. Unemployment remains high, officially at 23.5% (1st Quarter 2009). South Africa’s income aggregates high extreme differences in incomes and wealth between the white and non-white populations. The vast majority of the white population lives in first world conditions; while at the other extreme, non-whites live in developing country conditions.
Since 1994, the South African Government has made considerable strides in systematically tackling social and economic inequity, in part through the application of a prioritized transformation agenda. In the private sector, a strategy for broad-based Black Economic Empowerment (BEE) is the driving force. BEE has a legislative framework that addresses human resource development, employment equity, enterprise development and preferential procurement, along with increased black investment, ownership, and control of enterprises and economic assets.
Another South African Government initiative to create balanced growth, undertaken in close partnership with the private sector and civil society, is the Accelerated Shared Growth Initiative for South Africa (AsgiSA). AsgiSA recognizes the critical role of emerging small businesses in reducing unemployment and poverty, and highlights a number of actions to support their growth and development. AsgiSA emphasizes BEE along with a number of macro-economic interventions while incorporating infrastructure programs, sector and industrial investment strategies, second economy interventions, skills development and education initiatives. AsgiSA also tackles macro-economic and public administration issues as a strategy to deal with the “binding constraints” to balanced growth. Additionally, AsgiSA identifies the accelerated growth of small and medium enterprises (SMEs) as critical to ensuring balanced growth, and recognizes the role of emerging small and medium businesses in reducing unemployment and poverty.
Government of South Africa Strategies and Priorities for Economic Growth
Small Business Development and BEE (National Policies)
The South African Government has carried out a series of efficiency-enhancing policies including trade reform, competition, and small business development policies. The changes that have taken place have been driven by the macro-economic reforms that the central government embarked on soon after the dawn of democracy. Government identified the small business sector as one of the keys contributors to economic growth and employment creation. The focus now is on increasing the participation by black businesses in the formal economy. To this end, the Department of Trade and Industry (DTI) developed an Integrated Small Business Strategy. The strategy seeks to enhance support to small businesses by:
Most of these objectives will be achieved through the Small Enterprise Development Agency (SEDA), a DTI agency established in December 2004. SEDA’s main priority is to promote entrepreneurship by, in part, unlocking opportunities for small enterprises to emerge and grow through an enabling business environment and access to finance.
Other government initiatives to promote the second economy include Black Economic Empowerment (BEE) which is an explicit government policy aimed at redressing past economic imbalances. BEE is an important policy instrument designed to broaden the economic base of the country, stimulate economic growth, and create jobs while eradicating poverty. Within the framework of government policies, BEE is regarded as an integrated and coherent socio-economic process that directly contributes towards the economic transformation of South Africa. It is intended to bring about significant increases in the number of black people that manage, own, and control the country’s economic resources, as well as significant decreases in income inequalities. BEE is expected to facilitate human resource and skill development as well as investment in enterprises that are owned or managed by black people.
A number of industry-specific charters have already been developed or are due to be completed soon. Some key sectors have already adopted a charter, e.g. the Financial Sector Charter. The financial sector plays a central role in enhancing growth and development. The South African financial sector is recognized as world class but remains confronted by a number of challenges, including the inadequate response by the sector to the increasing demand for access to financial services by SMEs.
Skills Development Activities
In early 2006, South Africa launched the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) to promote economic growth. AsgiSA identified six factors that constrained growth in South Africa. One of these is the shortage of skills. The skills shortage, and the mismatch between the outputs of the education and training system and the needs of the economy, led to a call for a joint government, business, and labor initiative to accelerate the acquisition of priority skills. In light of this collaboration, AsgiSA is a national shared growth initiative and not only a government program.
To implement the strategies of AsgiSA, the Joint Initiative on Priority Skills Acquisition (JIPSA), was launched. JIPSA was to be a multi-stakeholder working group, through which government, labor and business would join forces to fast-track the “provision of priority skills required to support accelerated and shared economic growth for the country”. The measurable aim of AsgiSA is to put South Africa on a sustainable growth path of 6% per annum, which the SAG considers a necessary condition for the achievement of government’s goal of halving poverty and unemployment by 2014.
JIPSA plays a coordinating and facilitating role, and focuses on a limited number of strategic skills priorities to drive up economic growth and promote social and economic inclusion. JIPSA will confirm the job categories which urgently need more and better skills and is mandated to find quick and effective solutions. These possible solutions might include special training programs, bringing retirees or South Africans working abroad back into the labor market. JIPSA has an initial timetable of 18 months, and its first initiative, the placement of skilled workers in local government, is already well-advanced. Some private sector initiatives are also underway in several major infrastructure projects. There will be particular attention to ensuring women’s involvement throughout.
While AsgiSA and JIPSA are meant to increase the urgency of skills development activities, initiatives have been started to establish a skills-development infrastructure. The National Skills Development Strategy was initiated in order to facilitate skills training based on a well-developed National Qualifications Framework (NQF).
USG Engagement in the Economic Growth Sector
Previous USAID Economic Growth Programs
From 1996 and 2000, USAID/South Africa’s economic growth program focused on the strategic objective “Increased Access to Financial Markets for the Historically Disadvantaged Population”. This program began at the on-set of post-apartheid transition, but encompassed a number of programs begun in the past dispensation.
Important experience in providing access to finance was gained through a number of programs. The Black Integrated Commercial Support Network (BICSN) provided technical assistance in deal making, joint ventures, empowerment deals and leveraged quasi-equity for over 200 historically disadvantaged firms. The Equity Access Systems (EASY) Project aimed to improve access to long term risk capital for emerging enterprises, completing approximately 40 deals and leveraging approximately $40 million.
Loan guarantee support was provided through both the Southern Africa Enterprise Development Fund (SAEDF) and the Small Business Loan Portfolio Guarantee (LPG) Program. Neither fund experienced much up-take however. The program had little success in drawing the formal banking sector into small, medium and micro enterprise (SMME) finance, despite robust loan guaranty programs and a variety of other strategies. While a number of banks nominally participated, lending was limited. Even with guarantees and technical back-up, banks simply considered the risk level and management costs too high to deal with lower income clients and first-time borrowers.
A number of programs focused on increased access to finance for the microenterprise sector. These included: Improved Micro-enterprise Access to Liquidity (IMALI), which developed a number of rural financial service cooperatives; and the Get Ahead Foundation and Volunteers in Technical Assistance (VITA), which provided loans to micro-entrepreneurs. While the micro programs achieved some successes in implementation, they did not prove sustainable in the longer term.
From 2000 through 2006 USAID/SA broadened its economic growth strategy to encompass increasing employment through the growth of historically disadvantaged business. Access to finance for small and medium business became a sub-objective, but remained a critical tool for small and medium business growth leading to employment generation.
The major program supporting the 2000 – 2006 employment strategy has been the South African International Business Linkages (SAIBL) Program. SAIBL facilitates market linkages between black small and medium enterprises (SMEs) and South African and international companies through procurement and supply chain activities in the manufacturing, services and agribusiness sectors.
The SAIBL methodology has worked well and the program has had considerable success in helping emerging SMEs to increase their production, technologies and market share. Its challenges have been the lack of good supporting Business Development Services (BDS), and the difficulties in “untying the finance knot”. SAIBL, and indeed, the entire USAID/South Africa Economic Growth Program, has had very limited success in assisting small firms to access finance. One activity that has been very successful is the USAID/CAPITEC Development Credit Authority (DCA) loan guaranty transaction which provides a partial guaranty in support of a commercial rate loan from Futuregrowth to CAPITEC to support CAPITEC’s expansion and increase the access that low income entrepreneurs and consumers have to credit and other banking services. The USAID/South Africa Economic Growth Team is currently in discussions with a number of financial institutions to structure other DCA transactions aimed at leveraging finance for SMEs.
Sustainable Economic Growth
Since 2003, USAID’s economic growth program has generated more than 17,000 jobs and total sales of $1.7 billion and $130 million in exports.
Strengthen economic growth and analysis
USAID has supported the following activities towards this goal:
Economics training
USAID has supported the following activities towards this goal:
Success Stories (Also see the progress profiles under 'Whats New')
U.S. Senator, Barack Obama, visited an award-winning entrepreneur whom USAID supported through the South African International Business Linkages (SAIBL) project.
The client, Issy Penniken, manages the Petite Designs Factory near Soweto. Issy told the Senator that his family’s racial classification as “Colored” (mixed race) during apartheid severely restricted where his parents could open their upholstery business when setting up shop in a small room 30 years ago. Obama, the only African-American currently in the U.S. Senate, said he became involved in politics to push for divestment of U.S. interests in apartheid-era South Africa.
In democratic South Africa, Issy credits USAID’s SAIBL assistance with helping him to be a successful exporter today, designing and manufacturing high-end furniture for domestic and international customers.
SAIBL assisted the company to make strategic business and marketing improvements, attend international exhibitions, achieve high quality accreditation and benefit from the U.S. African Growth and Opportunities Act (AGOA). Issy’s business now employs 85 staff (one-third are women).
Senator Obama complimented Issy’s “very impressive” operations and said, “This is a good use of USAID support.”
Issy replied, “I wouldn’t have been here if it wasn’t for USAID.” According to Issy, “USAID didn’t give me cash. They gave me much more: mentors and technical experts who taught me how to run my business effectively.”
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