Since the government is unlikely to address unemployment in the short term, the private sector should take matters into their own hands
South Africa’s economy is in the midst of a battering. The rand has reached a 14-year low against the dollar and the shock contraction of GDP in the third quarter of 2015, driven by electricity outages, means that the expected annual GDP growth rate for 2015 has been revised down, according to Nomura International, to 1.6%- a far cry from the 5% growth targeted by the National Development Plan.
This is not good news for the country’s unemployment rate which, at almost 27% and rising, is at the highest level since apartheid ended. Alarmingly, youth unemployment is close to 50%. If this is not addressed urgently, the country risks losing another generation to poverty.
There has been lively debate around what action the Government should take to ameliorate the situation- from discussions around the youth wage subsidy to the establishment of special economic zones. Whilst these ideas are pragmatic and sensible, many believe that they are unlikely to be implemented in the short term due to the perception that the leadership is not even aware of the gravity of the situation, and remains in denial that the country’s economic trajectory is now firmly off course.
South Africa does, however, possess a thriving private sector- with world-class players in financial services, telecommunications, retail and manufacturing. These businesses have good corporate governance, best-practice processes and a strong knowledge base. Most importantly, they are aware of the current unemployment situation and have the capability to take action. We believe that it is up to the private sector now to take the destiny of South Africa’s economy into its own hands. Below are some key actions that can be taken to start fixing the dire unemployment situation:
1. All corporates should implement large-scale apprenticeship programmes. Large companies should employ recent matriculates and graduates as apprentices on a reduced-wage basis. This will help equip youth with much-needed skills and enable them to earn a wage, whilst providing businesses with a low cost workforce that can perform entry level functions.
Although several corporates do have apprenticeship programmes, they should improve their ability to identify, source and recruit the most suitable candidates for the positions- based on education qualifications, interests and location- in order to ensure that both the business and the apprentices benefit properly from the engagement.
If the top 160 biggest South African corporates implemented such a programme in a structured manner, this could create over 100 thousand new jobs, would cost less than one percent of their annual revenues and generate considerable upside for these businesses.
2. Local manufacturers and retailers should partner with foreign firms to help them set up shop in SA. Foreign firms are understandably nervous about investing in South Africa. However, given the weakening Rand, South Africa should in theory be an attractive destination for manufacturers, especially those that control the raw materials component of the supply chain.
Local companies can partner with such foreign firms to help them navigate red tape, establish operations on the ground and even subsidise their corporate tax for a limited period, in exchange for profit share. By helping suppliers move closer to home, South African retailers may even be able to improve their margins. The establishment of new manufacturing bases in the country could create thousands of jobs.
3. Financial services firms should create and distribute new types of loan specifically targeted to entrepreneurs and micro enterprises. South Africa’s financial services industry is world-class but retail banks can significantly improve their financial inclusion offerings, especially towards entrepreneurs and small businesses.
There are approximately two million small businesses in South Africa, the majority of which are non-VAT registered micro enterprises operating in the informal sector. Of these, only 10% that borrowed money to start operating did so from a bank- the remainder took loans from friends and family. This highlights the need for capital by many entrepreneurs and points to a significant opportunity for banks to service this space.
New types of small business loan could include short term-payment holidays, or could be combined with mentorship to help new businesses set up and gain market traction. Critically, such products need to be marketed and distributed effectively to entrepreneurs and small businesses in the informal sector. If banks are successful in doing so, this could create hundreds of thousands of jobs in the small business segment.
Whilst several companies may have tried to implement these actions, none of them are happening on a sufficiently large enough scale or in an adequately structured manner. Given that all of the actions can create both shareholder value and jobs in the short term, and none of them require government involvement or policy changes, they remain viable options that all relevant South African companies should pursue.
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Sources: Nomura International, StatSA, Capital IQ, Giraffe analytic