The welcome acceleration of real GDP growth in the past few years has done little to improve South Africa's ranking relative to other middle-income countries, as faster growth has been a worldwide phenomenon; South Africa's growth rate still trails behind those of the most dynamic emerging economies.

And while trend growth of total factor productivity also appears to have turned up, it is still only around average for a country of South Africa's per capita income level. Moreover, the faster rate of growth in the past four years has been accompanied by only a modest decline in unemployment, and the government's development strategy, the Accelerated and Shared Growth Initiative for South Africa (AsgiSA), foresees further increases in growth rates to an average of 6% a year between 2010 and 2014 in order to achieve the objectives of halving unemployment and poverty.

Given that the development strategies articulated by the governments of the democratic era have been oriented to improving the lot of the historically disadvantaged majority black population, the most disappointing aspect of post-apartheid economic performance is the emergence and persistence of extreme levels of unemployment, particularly for less-skilled younger blacks, together with the continuation of widespread poverty and the widening of inequalities.

The failure to bring unemployment down decisively is probably the greatest source of popular discontent about the government's economic policies, despite numerous successes, and it naturally leads to pressures to try more radical and activist solutions which risk being wasteful and counterproductive. This is recognized by the government, which aims to promote more employment-intensive growth.

The government has also pursued the route of affirmative action to address historic inequities, but the Black Economic Empowerment initiative (BEE) to this end has often been criticised for primarily enriching a small number of already well-off blacks rather than raising the incomes of the poor.

I

South Africa's very low labour utilisation explains a large part of the gap of GDP per capita with the most advanced economies. Compared to other middle-income countries, South Africa has relatively strong average labour productivity, but extremely low employment (Figure 2). Although in the long-run sustained increases in living standards and convergence to the levels enjoyed by advanced countries will only be achieved via growth in labour productivity, this suggests that in the near term priority should be given to creating jobs for the millions of primarily low-skilled South Africans currently wanting work.

South Africa's relatively strong average labour productivity is a direct consequence of a prolonged process of capital deepening under apartheid. This trend was accompanied by relatively slow growth of total factor productivity (TFP), in an environment of weak competition, extensive public sector involvement and trade isolation. Greater trade openness has led to increased competitive pressures and helped improve productivity performance over the recent past, but a large gap still remains. There is strong international evidence  that a competition-friendly regulatory environment can help to lift living standards in the long run through increases in labour productivity growth.

Strengthening competition can contribute a great deal to the achievement of improved resource allocation and technical efficiency. Robust competition in product markets improves firms' performance by stimulating capital deepening, innovation and better corporate management. Empirical work for South Africa confirms the pro-productivity effect of competition, and surveys of South African enterprises point to anti-competitive barriers and practices as a major impediment to innovation.

As the estimation of an OECD product market regulation (PMR) indicator shows, South Africa's product market is very restricted by international standards, with high mark-ups and concentration in many sectors and relatively extensive state involvement in the economy. These findings highlight the potential contribution of competition-enhancing regulatory reforms to South Africa's long-term economic prospects.

The support for such reforms, clearly expressed in AsgiSA, should therefore be translated into a comprehensive policy strategy: given the complementarities that exist among different elements of regulatory reform, the creation of a broad, coherent and systematic framework for the conduct of regulatory policy would generate synergies between different product market reforms.

More vigorous competition, by depressing excessive margins, would also help contain inflationary pressures which are expected to remain severe for some while to come. Policies to strengthen domestic competition and increase openness to trade and direct investment thus promise substantial payoffs in a range of areas.

The fact that employed workers are on average productive and well-paid compared to those in other middle-income countries while an extremely large part of the labour force is excluded from employment altogether is in part a function of weak product market competition in some sectors. The weakness of competition makes it possible for large incumbent firms to set high prices and make excess returns, which in turn makes it possible for them to pay wages above the competitive level without going out of business.

It also makes strikes or other forms of withheld effort more costly for firms, making them more willing to pay a premium over the market-clearing wage rate. This fact provides a link between the issue of low labour utilisation and product market regulation. Although empirical evidence for South Africa is limited, the existence of large incumbent firms with monopoly power tends to be associated with lower output and employment and higher prices in the affected sectors.

The erosion of excess returns accruing to incumbent firms would therefore be expected to result in higher output and a shrinkage of the wage premium enjoyed by employees of these firms. This would lead to increased employment in these sectors, as well as in other sectors using the output of industries with weak competition (such as monopolised network industries) as inputs.

II

Some aspects of the unemployment problem are clearly related to legacies of the apartheid era. Notably, under apartheid the education system was not designed to provide the majority black population with the human capital necessary to perform skilled work. Blacks were even forbidden from some occupations, and were mainly recruited into manual labour or menial work.

Although access to schooling for non-whites has commendably been increased and public financing per pupil largely has been equalised across the school system, serious defects remain which continue to impede the opportunities of historically disadvantaged groups and which contribute to the skills mismatch in the labour market.

Also, too little has been done to unwind the spatial misallocation of workers - despite improvements, the marks of the homeland and township system remain visible in present settlement patterns. The long distances travelled for commuting and job search raise reservation wages and depress search activity.

Another negative aspect of apartheid that has not been fully addressed in the past 14 years is the suppression of entrepreneurial initiative among the majority black population. In the formal sector, the attractiveness for skilled blacks of affirmative action positions in existing corporations under the BEE initiative hinders the creation of new small black-owned businesses. Meanwhile, the informal sector remains small for an economy of South Africa's average income level, and has absorbed surprisingly little of the surge in the supply of less-skilled labour.

Many restrictions persist making it hard for informal businesses to operate. While efforts to eliminate informality may be understandable in the sense that formal sector jobs provide better pay and conditions, the emphasis should be on facilitating formal sector employment rather than on suppressing the informal sector, which would cut against the imperative of making rapid progress in reducing unemployment.

These are extracts from the OECD's Economic Assessment of South Africa, 2008, as published in its Policy Brief July 15 2008