achieving shared growth: some ideas on how to advance the goals of asgi-sa international growth...
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Achieving shared growth:some ideas on how to advance the goals of ASGI-SA
International Growth Advisory Panel
June, 2008
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A Busy Two Years 4 Visits to South Africa Met with various government departments, labor, private
sector, and academics throughout South Africa Pursued research in teams focused on :
Research outputs: 20+ papers Seminars, conferences and presentations to cabinet
Macroeconomics Labor
Trade Competition Problems
Industrial Policy BEE
Crime Procurement
Small enterprise development
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The team
The core team Philippe Aghion, Harvard University Matthew Andrews, Harvard University Abhijit Banerjee, MIT Jeffrey Frankel, Harvard University Sebastian Galiani, Washington U. Lawrence Harris, LSE Ricardo Hausmann, Harvard University Steven Kelman, Harvard University Asim Khwaja, Harvard University Bailey Klinger, Harvard University Robert Lawrence, Harvard University Jonathan Leape, LSE Jim Levinsohn, University of Michigan Roberto Rigobon, MIT James A. Robinson, Harvard University Dani Rodrik, Harvard University Christopher Stone, Harvard University Federico Sturzenegger, Harvard Lynn Thomas, LSE
Other international co-authors Daron Acemoglu, MIT Matias Braun, UCLA Alberto Ortiz, Boston University South African Authors Stanley du Plessis, University of
Stellenbosch Lawrence Edwards, University of Cape
Town Johannes Fedderke, University of Cape
Town Stephen Gelb, The EDGE Institute Ben Smit, University of Stellenbosch Ingrid Woolard, University of Cape Town
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The fundamental question in 2004 The country underwent a very successful political
transition It had benefited from improved relations with the rest
of the world From sanctions to role model
It had drastically improved macro performance Inflation, credit ratings, reserves
It had carried out substantial economic reform After 10 years, what did it have to show for it?
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Disappointing growth
4.2
4.2
54
.34
.35
4.4
LY
PC
LC
UK
1960 1970 1980 1990 2000year
Log
GD
P p
er c
apita
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High and rising unemployment
About 4 million people are unemployed
.1.1
5.2
.25
.3Oct9
5
Oct96
Oct97
Oct98
Oct99
Feb00
Sep00
Feb01
Sep01
Feb02
Sep02
Mar
03
Sep03
Mar
04
Sep04
Mar
05
15 to 65 - Male - UrbanUnemployment Rate
.2.2
5.3
.35
Oct95
Oct96
Oct97
Oct98
Oct99
Feb00
Sep00
Feb01
Sep01
Feb02
Sep02
Mar
03
Sep03
Mar
04
Sep04
Mar
05
15 to 65 - FemaleUnemployment Rate
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Inequality on the rise
1991 1996 2001
African 0.62 0.66 0.72
White 0.46 0.50 0.60
Coloured 0.52 0.56 0.64
Asian 0.49 0.52 0.60
Total 0.68 0.69 0.77
Source: Human Sciences Research Council
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As we arrived in the country, the situation appeared to change Growth accelerated since 2004 Unemployment started to come down Had the long-lost check-in-the-mail finally
arrived? Was the market anticipating the success of
our study?
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However, since 2004 growth has improved
Did the market anticipate our effectiveness?
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Growth accelerated
-6
-4
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
% c
han
ge
Ave 1985-93:0.6% pa
Ave 1994-05:3.2% pa
2004H2/ 05:5.1%
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South Africa Current Account
-9.0%
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
20
03
20
04
20
05
20
06
…but with a widening current account deficit
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The boom…
Had been driven by an investment boom in nontradables…
Total investment
Investment in tradables and nontradables
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and a consumption boom in durables
Consumption of non durables
Consumption of durables
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In conclusion
The growth acceleration was temporary Growth was based on a boom in domestic spending
financed by foreign borrowing The money borrowed was not used to increase
future exports so as to have increased resources to pay back
Eventually, borrowing would slow down, cooling off domestic spending
When this happens, export growth will be key to sustain GDP growth
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We tried to develop a fresh look at the facts
Here are a few that we found surprising
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Some not so well known facts
Participation and employment rates in South Africa are very low
The tradable sector has been shedding jobs in a massive way, while employment growth has been concentrated in non-tradables
The tradable sector is unskilled-labor intensive This aggravates the skills constraint …and makes Keynesian policies ineffective Long run export performance has been dismal
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Participation and employment rates in South Africa are very low
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Employment is unusually low, unemployment unusually high
Lesotho
Egypt
South Africa
Namibia
Tunisia
BotswanaAfrica average
Ethiopia
Poland
Cameron
Mauritius
GreeceSpainFranceLatin America
United StatesUnited Kingdom
01
02
03
04
0U
nem
ploy
me
nt
40 50 60 70 80Employment
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This is problematic for shared growth Unused productive potential
Bad for growth Many families not participating in the growth
process Bad for equity If South Africa had Latin American employment
ratios, over 6.6 million more South Africans would be working today
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Full employment of highly skilled, low employment even of those with Matric
Particip. Employ Unemp
Less than Matric 49.2 34.2 30.4
Matric 69.2 49.7 28.2
Post-Matric 86.2 76.1 11.7
University 88.5 85.6 3.3
Matric is equivalent to a high school diploma
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Unemployment rate by race in South Africa, 2005
Unemployment Rate
0
5
10
15
20
25
30
35
White Indian Colored African
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Unemployment affects disproportionately the young
0
10
20
30
40
50
60
70
80
16-19 20-24 25-29 30-34 35-39 40-49 50-64
Participation
Employment
Unemployment
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Conclusion
The South Africans excluded from the labor market are predominantly less skilled, black, young and female
If South Africa had “normal” employment rates, these groups would be the main beneficiaries
Increasing employment ratios productively would achieve shared growth
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The tradable sector has been shedding jobs in a massive way, while employment growth has been concentrated in non-tradables
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Massive losses in employment in the tradables sectorEmployment shares: all skill categories
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Tradable
Private non-tradable
Public non-tradable
Tradable
Private non-tradable
Public non-tradable
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Absolute employment losses across all tradable sectors
500
000
100
0000
150
0000
em
ploy
me
nt n
umb
er
1970 1980 1990 2000 2010year
employment number employment numberemployment number
Manufacturing
Agriculture
Mining
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The tradable sector happens to be less skill intensive
Low skill intensity by sectors: Shares of low and unkilled workers in sectoral employment
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
TradablePrivate non-tradablePublic non-tradableManufacturing
Tradable
Manufacturing
Public non-tradable
Private non-tradable
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What does this mean?
The sectors that have been shedding jobs have been intensive in unskilled labor
The sectors that have been growing have been intensive in skilled labor
This has aggravated the skills constraint
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One uncomfortable implication: in this context, Keynesian policies do not work Keynesian policies increase the demand for (skill-
intensive) non-tradables But there is full employment of high skilled workers …so they have to be taken out of the tradable sector But for every skilled person you take out of
tradables, you loose more non-skilled jobs in tradables than those that you make up in non-tradables
So, unemployment may very well rise!!
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Long run export performance has been dismal
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The real purchasing power of exports per capita is at 1960s levels
500
100
01
500
200
0X
PC
KU
S
1960 1970 1980 1990 2000year
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A rather unusual performance
0
50
100
150
200
250
300
350
400
450
500
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
ARG
AUS
CAN
MYS
ZAF
South Africa
Malaysia
Canada
Australia
Argentina
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The pattern of South African low growth
1000
1500
2000
2500
3000
3500
4000
1960 1965 1970 1975 1980 1985 1990 1995 2000
500
700
900
1100
1300
1500
1700
1900
2100
2300
GDPPCKUS
CPCKUS
XPCKUS
GDP per capita
Consumption per capita
Exports per capita
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…driven in large part by declining mining per capita
23
45
6M
ININ
GP
ER
CA
PIT
A
1960q1 1965q1 1970q1 1975q1 1980q1 1985q1 1990q1 1995q1 2000q1 2005q1Period in Stata format: 1960q1=0
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..not compensated by manufacturing
11
.52
2.5
3M
AN
UF
PE
RC
AP
ITA
1960q1 1965q1 1970q1 1975q1 1980q1 1985q1 1990q1 1995q1 2000q1 2005q1Period in Stata format: 1960q1=0
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Implication
Whatever is holding back economic growth seems to affect differentially the tradable sector
We need to search for binding constraints that could explain this outcome
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Camels & Hippos
Why are there so few animals in the Sahara? It is informative to know that the few animals
you do find tend to be camels and not hippos The successful / surviving sectors are least
intensive in the binding constraint You can infer binding constraints by the
revealed structure of production
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The Heart of the Matter
New export jobs aren’t being created quickly enough to replace contracting tradable industries Unemployment
or quickly enough to keep up with growing import demand Current Account Deficit
‘Exporting for jobs’ is the key
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The Heart of the Matter
With the export dynamism you have, you cannot achieve the ASGI-SA targets
Export jobs are the harder to create Need to compete with other countries
They are needed to make the other jobs possible If you got more jobs in exports, you would get more
demand for the other jobs. The reverse is not true. Therefore, export jobs are the binding constraint.
Good jobs (of any kind) are the key to shared growth
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In conclusion
Achieving shared growth is about creating jobs for those who are currently not working, i.e. the lesser skilled
To do it in an externally sustainable way the tradable sector must expand
…but that happens to be the sector that hires mostly low-skilled people
…which are the people who are currently out of jobs In synthesis: export for jobs
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Explaining the binding constraint It has been relatively unprofitable to invest in
tradeables This is related to the level and volatility of the real
exchange rate How to achieve this?
Structural transformation Market failures in changing what you produce: the chicken and
egg problem Specific and complementary public inputs
Costs that the non-tradable sector can pass on to consumers but the tradable sector cannot
New activities require new public inputs that are hard to identify
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Achieving shared growth has not been the only goal of the government An additional goal has been empowerment (BEE) …and this has implied mainly ownership and control
Equity participation Senior management Preferential procurement
There may be a virtuous circle between empowerment and employment
…but there may also be important trade-offs
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The trade-offs of BEE
BEE is creating many opportunities at the top …but it is exacerbating the skills constraint,
making it harder to create jobs at the bottom It attempts to redistribute ownership and
control over capital …but may be taxing new investments Two goals that may collide:
Making the top black Making the bottom better
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What did we suggest South Africa should do?
Increase the speed limit
Drive at the speed limit
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How to increase the speed limit?
Eliminate the binding constraints that have been identified
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The components
Macro policy The level and volatility of the real exchange rate The sustainability of growth Creating the space for needed infrastructure spending
Labour market policies Easing the skills constraint
Industrial Policy Allowing faster structural transformation
Trade and competition policy Creating more competitive input markets
BEE and Public Administration Rebalancing the scorecard Making political decentralization compatible with administrative
efficiency
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Achieving a competitive and stable real exchange rate The real exchange rate is an outcome
It depends on a stable balance between domestic savings and investment
A more competitive exchange rate requires higher domestic savings A tighter fiscal policy can contribute Needed given current account deficit and inflation For any given inflation target, it is compatible with a lower interest rate …and hence a more competitive exchange rate
A more stable exchange rate requires a less volatile evolution of supply and demand To achieve stability the government must shift from targeting the fiscal
balance Which is pro-cyclical
…to targeting a cyclically adjusted balance Monetary policy needs to pay more attention to the exchange rate
And announce that it will do so
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Easing the skills constraint
High skill and low skill are complements Like coffee and sugar, not like coffee and tea You want more of one if you have more of the other
If you do not have enough supply of high skilled, you will have lower demand for low skilled And greater wage inequality
The skills constraint is going to get even tighter as the continues to grow
What to do about it?
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Proposals to relax the skills constraint Immigration policy
Liberalize work visas for those with higher education …and work to retain those you have
Reform of the training system Allow SETAs to self-organize Allow firms to affiliate to the SETAs of their choice
Targeted wage subsidy to accelerate school to work transition and encourage firms to experiment Subsidize approximately a year’s worth of employment
6 monthly minimum wages over the course of 12 working months
Coupled with a probation period with no-questions-asked dismissal
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Obstacles to structural transformation Countries grow rich by changing what they produce But new products require new inputs This poses a chicken and egg problem
Why accumulate the inputs if there is not demand for them? How to produce if the inputs are not there?
In practice, countries move from the products they are in to products that require similar inputs
Publicly provided inputs are part of what needs to be provided But governments don’t know what is important
Information, incentives, resources How can the government find out?
“Industrial Policy”
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Four Principles for Public / Private Cooperation
Four principlesTransparenc
yDemands,
evaluations and decisions should
be public knowledge
Open Architecture
Whenever possible, elicit
information about required public inputsCo-financing
Self-Organizatio
nAllow self-
organization around critical
inputs. Imposing “industry”
definitions / requiring
agreement is inefficient
Experimentation and
EvaluationBold moves, tolerance for
failures, frequent
monitoring, correction over
time
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Some policy initiativesCode of Dialogue
Open architecture Self-organization Co-financing Transparency Gov: only public goods
Google-likeSearch
Mechanisms Create search mechanisms Focus them on space of
possibilities Empower them to eliminate
obstacles E.g., Development banks,
Industrial parks
VirtualInter-Ministry
Market Budgetary mechanism
to create an internal market within the government for public inputs
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Beneficiation is not the right way to think about transformation One stylized example – Finland Follow the capabilities, not the products Beneficiation already benefits from lower
transportation costs It limits the search to a set of processes that
are neither the most valuable nor the “nearest” to the current set of capabilities
No justification for special treatment
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Improve the performance of key public sector functions Impose ISO standards on government
services Home affairs: work visa Medicine Certification Customs DME licensing
Allow (require) (200) weak municipalities to use external providers for water, sanitation, roads, electricity and housing
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Tariff structure complex and poorly grounded Explain this:
Mangoes 35%, Pineapples 15%, Pears 5 %, Strawberries 15%, Cranberries 0%, Apples 5%.
100 different tariff rates! Costly way to protect jobs: R2 million per protected
job Costs fall disproportionately on the poor Protects industries of the past not the future Discourages exports We proposed a dramatic simplification
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Trade and competition policy initiatives: create a competitive input market A radical simplification of the tariff structure with the
aim of liberalizing input tariffs in order to create a competitive input base
Move from a complaints-driven to a more proactive competition policy
The SACU revenue sharing formula needs to be renegotiated with distinct revenue sharing and development components
African integration should focus on free trade areas and institutional and infrastructure issues but should not move towards a customs union
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BEE
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Appendix
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South Africa has surprisingly low participation and employment ratios
LesothoEgypt
South AfricaNamibia
TunisiaBotswanaAfrica average
EthiopiaPoland
CameronMauritiusGreece
SpainFranceLatin America
United StatesUnited Kingdom
40
50
60
70
80
40 50 60 70 80Participation
Employment Participation
Labor Force / Working age population
Em
ploy
men
t /
Wor
king
age
pop
ulat
ion
Full employment
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Recent participation trends are not rising
Year
Male Female
Participation Employment Unemployment Participation Employment Unemployment
1995 62.1 54.5 12.3 41.1 32.7 20.5
1997 57.9 47.7 17.7 39.2 28.2 28.1
1999 63.3 50.2 20.7 48.1 33.8 29.7
2001 66.5 48.7 26.7 53.0 34.8 34.4
2003 64.2 47.7 25.6 50.3 34.2 31.9
2005 65.2 50.5 22.6 49.8 34.0 31.7
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Why are employment rates lower in South Africa than in Latin America?
Rural UrbanYear (15-19) (20-24) (25-34) (35-49) (50-64) (15-19) (20-24) (25-34) (35-49) (50-64)
South Africa 2004 3.9 16.5 38.3 52.3 36.3 4.0 25.3 55.4 65.8 49.4Latin America 2000- 43.1 60.8 68.6 72.0 65.7 24.0 53.1 70.9 75.7 60.7and the Caribbean 2004
•South Africa has a higher share of rural population•South Africa’s 15-19 year old do not work•South Africa’s 20-24 year old work very little•But there is a lower participation rate in all cells
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Why are South African’s not working?
Age NHome-
maker StudentRetired /
Age Health
Lack of Skill
s
Cannot find ANY work Other
15 – 19 67,564 0.8 81.33 0.56 1.05 2.03 10.65 3.59
20 – 24 45,906 2.08 29.16 0.19 2.37 7.43 51.01 7.75
25 – 29 27,342 5.1 4.29 0.15 4.59 9.12 67.98 8.78
30 – 34 20,173 9.5 1.14 0.15 7.27 8.12 64.12 9.69
35 – 39 15,629 14.26 0.48 0.46 11.48 7.14 56.87 9.31
40 – 44 14,311 15.54 0.2 1.71 17.44 6.19 48.96 9.94
45 – 49 12,063 18.9 0.2 3.64 22.96 5 39.72 9.59
50 – 54 11,916 18.4 0.15 16.21 27.42 3.07 26.49 8.26
55 – 59 10,622 15.24 0.07 31.3 26.92 1.77 17.65 7.05
60 – 64 12,641 6.1 0.06 76.12 10.82 0.28 3.97 2.67
65 – 69 11,000 3.2 0.1 89.87 4.6 0.1 1.22 0.92
Total 249,167 6.54 27.77 9.5 7.63 5.04 36.79 6.74
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Why are South African’s not working?
Age NHome-
maker StudentRetired /
Age Health
Lack of Skill
s
Cannot find ANY work Other
15 – 19 67,564 0.8 81.33 0.56 1.05 2.03 10.65 3.59
20 – 24 45,906 2.08 29.16 0.19 2.37 7.43 51.01 7.75
25 – 29 27,342 5.1 4.29 0.15 4.59 9.12 67.98 8.78
30 – 34 20,173 9.5 1.14 0.15 7.27 8.12 64.12 9.69
35 – 39 15,629 14.26 0.48 0.46 11.48 7.14 56.87 9.31
40 – 44 14,311 15.54 0.2 1.71 17.44 6.19 48.96 9.94
45 – 49 12,063 18.9 0.2 3.64 22.96 5 39.72 9.59
50 – 54 11,916 18.4 0.15 16.21 27.42 3.07 26.49 8.26
55 – 59 10,622 15.24 0.07 31.3 26.92 1.77 17.65 7.05
60 – 64 12,641 6.1 0.06 76.12 10.82 0.28 3.97 2.67
65 – 69 11,000 3.2 0.1 89.87 4.6 0.1 1.22 0.92
Total 249,167 6.54 27.77 9.5 7.63 5.04 36.79 6.74
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Unions have been able to create rising wage premia, especially for unskilled Africans OLS – Union interacted with skill level
Unskilled Semi-Skilled Skilled
Year Coef. t Coef. t Coef. t
1995 0.21 12.43 0.15 5.37 -0.05 -0.58
1998 0.26 9.45 0.26 5.69 -0.28 -1.49
2000 0.36 17.08 0.28 8.3 -0.08 -0.8
2004 0.37 16.08 0.33 10.95 -0.35 -3.92
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The tradable sector is less skill-intensive in most countries
ARG
BOL
CHL
COLCRI
DOMGUA MEX
PANPER
SAF
SLV
URYVEN
0.0
5.1
.15
.2
.04 .06 .08 .1 .12 .14per_labor
per_trad per_nontradper_labor
SAF nt
Proportion with post-Matric degrees, tradable
Pro
port
ion
with
pos
t-M
atric
deg
rees
, no
n tr
adab
le
Red, non-tradables, blue, tradables
Average of labor force
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Manufacturing employment (as share of labor force)
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
ZAF
MYS
And here is the crux of the matter: a premature de-industrialization … Employment losses in manufacturing appear premature
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Unimpressive tourism sector
AGO
ALB
ARG
ARM
AUS
AUT
AZE
BDI
BEL
BGD
BGR
BHR
BIHBLR
BOL BRA
BRB
CAN
CHE
CHL
CHNCOL
CPV CRI
CYP
CZE DEU
DZA
ECU
EGY
ESPEST FINGBR
GEOGHA
GRC
GTM
HKG
HND
HRV
HUN
IDN
IRLISL
ISRITAJAM
JORJPN
KAZ
KENKGZ
KHM
KORKWT
LKA
LTU
LUX
LVAMAR
MDA
MEX
MKD
MLT
MNG
MOZ
MUS
MWI
NIC
NOR
NPL
OMN
PAK
PAN
PERPHL
POL
PRT
PRYROM
RUSSLV
SVK
SVN SWE
THA
TJK
TUN
UGA
UKR
URY
USA
UZB
VEN
ZAF
ZMB
-50
510
LTO
UR
ISM
PC
6 7 8 9 10 11LYPPPK
Log of income per capita
Log
of t
ouris
m r
ecei
pts
per
cap
ita
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Tourism income not very impressive
Algeria
Argentina
Australia
Austria
Azerbaijan
Belgium
Brazil
Bulgaria Canada
Chile
ChinaColombia
Czech Republic
Denmark
Ecuador
Egypt
FinlandFrance
Germany
GreeceHong Kong
Hungary
India
IndonesiaIran
Ireland
IsraelItaly
Japan
KazakhstanMalaysia
Mexico
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
Poland
Portugal
RomaniaRussia
Saudi Arabia
Singapore
Slovakia
South AfricaSouth Korea
Spain
Sri Lanka
Sweden
Switzerland
TaiwanThailand
Turkey
Ukraine
United Kingdom
United States
VenezuelaVietnam
South Africa
02
46
8L
TO
UR
PC
6 8 10 12LYPCA
LTOURPC LTOURPC
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…but tourism receipts have been rising quickly in the recent past
20
40
60
80
100
120
TO
UR
PC
1990 1995 2000 2005 2010year
Tourism receipts per capita
Source: Economist Intelligence Unit
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South Africa after 2000
.2.2
5.3
.46
.48
.5.5
2.5
4.5
6no
ntra
d_o
ver_
lf
2000 2002 2004 2006 2008year
nontrad_over_lf trad_over_lfunemp_over_lf
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Relative prices moved against manufacturing
Relative price of manufacturing, compared to
0.6
0.8
1
1.2
1.4
1.6
1.8
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
SIC 6
SIC 8
GDP deflator
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IDC as a Google-like institution
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Reform the way DTI talks to the private sector
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2000