No quick fix for unemployment: Marcus

21 October 2010

South Africa’s biggest internal challenge is unemployment, which currently stands in excess of 25%, and there is no doubt that addressing this must be a national policy priority, says Reserve Bank Governor Gill Marcus.

She added, however, that unemployment in the country was of a structural nature, and was not something that could be solved simply by cutting interest rates or intervening in the exchange rate.

“It’s incorrect to look at the interest rate or the exchange rate as the silver bullet that will solve the country’s growth problems,” she said in Pretoria on Tuesday.

Marcus warned that excessive focus on the exchange rate could result in the neglect of other factors, which would constrain growth even with a properly valued exchange rate.

Labour market flexibility

Structural reforms were required in skills development and education, while skilled artisans were also needed.

She said that the response to the financial crisis, when about a million jobs were lost, showed that South Africa has a fair amount of labour market flexibility.

“However, if we are looking at job creation as a priority to address unemployment, then current labour legislation, which extends wage determination to all firms in a particular sector, needs to be examined regarding its effects on small and medium enterprises, which should be a focus of growth and employment creation,” Marcus said.

Strong rand dilemma

Marcus said the central bank was aware of the disadvantages of a stronger currency and that it was ready to do what it could to alleviate this situation, adding, however, that “we need to recognise the limits to what can be done”.

“The various forms of direct intervention on their own will not suffice, as international experience has suggested. Consideration should be given to combining intervention policies with direct special targeted support measures for those sectors of industry that are hardest hit by the exchange rate developments,” Marcus said.

She said there was no doubt that the rand was overvalued relative to its fundamentals.

“While we clearly recognise the problem, the solution is not clear cut. The costs of intervention are not insignificant and involve serious policy choices,” Marcus said. “Nevertheless the bank is engaging with the National Treasury, and we are examining the effectiveness and appropriateness of what other countries are doing.”

Source: BuaNews