No time to waste: Southern Africa’s demographic opportunity1
Southern Africa’s middle-income countries are sitting on a potentially large demographic windfall: their populations include an above-average share of people of working age whose productive employment would generate sizeable economic gains and faster growth through higher savings and investment.2 However, this demographic opportunity cannot be taken for granted. Major social challenges such as chronic unemployment, wide inequalities, and high HIV rates will continue to undermine the region’s demographic potential unless governments implement effective measures targeting the supply and demand side of the labour market.
Missed opportunities
The five Southern African countries are relatively mature demographically unlike the rest of sub-Saharan Africa. They have a high and rising proportion of people of working age, while the share of young people of working age is declining. As the average age of this population segment rises, its members, if engaged in productive and well-paid jobs, tend to save and invest more than the rest of the population. While this should support growth, relevant data from the past decade are not encouraging. Since the global financial crisis in 2008 and 2009, southern African countries have missed out on the opportunities presented by their favourable demographics. They have some of the world’s highest rates of unemployment, inequality in income and opportunity, and HIV, all contributing to sluggish growth and deteriorating public finances. Unemployment, particularly among the young, is one of the highest in the world.
Demographic tensions are most acute in South Africa, the key economic player in the region and on the continent, on which the fortunes of Eswatini, Lesotho and, to a lesser degree, Botswana and Namibia depend. In South Africa, economic growth has underperformed that of other emerging markets for years. Low levels of employment, running at 40-45% of the working-age population, are a permanent feature of the economy. Growth fell below 2% a year after the global financial crisis. The economy contracted by 7% in 2020 due to the Covid-19 pandemic. Low growth has contributed to rising public debt to GDP over the past decade, now reaching 77% of GDP, up from 27% in 2008, according to the IMF.
Scenarios for the future
Achieving inclusive growth without structural transformation has remained elusive. The region’s economies continue to exhibit a dual nature: (i) a large government sector running alongside a relatively small, but efficient formal private sector and (ii) a large and mostly subsistence-based informal sector with low productivity. Thus, without timely and well-designed structural reforms, the potential demographic dividend might turn into a more severe demographic burden, straining public finances and sharpening social tensions as it has in recent years.
To assess the outlook for Southern Africa in this context, we explored two scenarios for South Africa for the period 1995-2045. The first assumes “no policy progress”, with flat labour productivity growth in line with average outcomes in 2010-2020. We assume that employment gradually recovers from the Covid-19 shock, but just to pre-crisis levels. In this case, the average annual potential real GDP growth would slow to 1% in the longer term, with adverse consequences for economic output, social stability and public finances.
The second scenario assumes annual average productivity growth of about 0.5% as the government undertakes policies to make labour and product markets more business friendly and improve education and training. Such measures would lift the country’s longer-term growth potential towards 2-3% a year, easing pressure on public finances. Growth would become more inclusive, with the employment rate rising slowly from about 45% in 2015 to 55% by 2045. The outcome would represent some measure of a demographic dividend for South Africa with a favourable knock-on effect for its neighbours.
Turning the tide
For South Africa to reap its demographic dividends, policy makers will need to raise their game. In addition to improving supply of and demand for labour, other priorities include investing in better education and vocational training, making it easier to start businesses with respect to South African entrepreneurs and encouraging innovation. Additionally, authorities will need to concentrate on deepening and broadening financial markets to make the domestic sector more conducive to savings and investment. To boost job creation and productivity growth, product and labour market reforms are crucial. Removing barriers to competition and restrictions within heavily regulated industries could improve the business environment and support private-sector investment and innovation. The labour market requires increased flexibility, such that hiring is more aligned with the needs of businesses. This way, private firms will be better able to differentiate compensation between skilled and unskilled workers and avoid job creation that only benefits the former group.
Besides contributing to productivity growth, education reform is of special importance in addressing skills mismatches and reducing high levels of income and wealth inequality. South Africa’s poor education outcomes – the percentage of those aged 25 and 64 years with tertiary degrees is among the lowest in middle-income and advanced economies, according to the OECD – signal the urgency of making quality schooling more widely available to all, irrespective of socio-economic background.
Certainly, elevated and rising public debt means any government agenda of growth-friendly structural reform will have to be tailored to South Africa’s limited fiscal space. Public spending needs to become more efficient. Capitalizing on South Africa’s demographic opportunity can help strike a good balance between fiscal discipline and long-term growth, which will eventually ensure sustainable government finances.