Skills and growth. Chicken or egg?

Thomas Johnson questions the mantra that our 'skills shortage' is to blame for poor economic growth

True lies: Skills and the economy

We are frequently told there is a “skills shortage”, and it’s one of the reasons for South Africa’s poor economic growth. No evidence is provided, and none is needed. It’s an article of faith, or one of our origin tales. Like a doubting Thomas, I always questioned it.

Two years ago DA cadre Tim Harris, then newly appointed chief executive of Wesgro, and Western Cape Economic Development MEC Alan Winde, each on different occasions, stated the “skills shortage is a threat to the economic potential of the province”. And visas must be granted to foreigners to make up the deficit.

I emailed them asking for evidence, and which sectors were affected, but neither replied.

(Note despite the alleged shortage, in 2014 199 applications were received for the vacancy of Wesgro CEO, an excellent number for the highly skilled post. Harris was the successful candidate. There was no need to import.)

SA’s average post-1994 economic growth is 3%, below the 6%-plus required to create jobs and development. Projected growth for 2016 is 0.6%.

Unemployment is 26.6% (narrow definition) – in 2015 it was the 8th highest in the world at 25%. In 1994 it was 20%. Manufacturing, a traditional job-creator particularly in engineering and the trades, declined from 21% in 1994 to 13% GDP in 2015.

Sometime over the past year growth fell below population growth (0.9%), indicating the economy is in serious trouble. Inequality and human development indices, which also worsened since 1994, make for bleak reading. Government has no answers. It’s not an exaggeration the country is in slow decline.

Business et al say, despite unfavourable conditions throughout the last 20 years, a skills shortage exists that they are having "sleepless nights" over. But where is this economic activity, this surge of output in manufacturing, mining, retail and services they say is creating demand for skilled job-seekers and university graduates, never mind other job-seekers? This contradiction was never satisfactorily explained.

The first piece of evidence that confirmed my intuitive belief the tale is exaggerated or false was when University of Pretoria researcher Dr Amaleya Goneos-Malka published the findings of a two-year study that showed at South Africa’s top 350 companies PhDs account for only 0.07% of 1.4 million employees, far below the global average. They struggle to find work because employers consider them “overqualified”, overpaid and frustrated in jobs deemed beneath them.

In an email I asked if the findings applied to master’s graduates too. She replied that while she had not investigated them, their situation would be similar. (I confirm that from personal experience.)

PhDs are the crème de la crème of intellectual endeavour. They produce rigorous original research, and are specialist in their fields. They are the basis of university departments, research laboratories and the technological advances we take for granted. But in SA they are deemed surplus to requirements, which may partially account for the country’s lack of innovation and growth.

Last year I put the question of skills to development economist, columnist and author Gavin Chait. He stated the country has sufficient skills to meet the demands of the existing economy. But while skills are essential, they are not sufficient for growth.

The Quarterly Labour Force Survey indicates for the first quarter of 2016, of the 27% unemployed, there is minimal unemployment among black (1.4%) and “coloured” (0%) graduates. For whites and Indians/Asians it’s 8% and 8.7% respectively. The average unemployment rate for all graduates is 4.5%. If we accept some labour market fluctuation, it’s near full employment. In 2015 graduate unemployment was 1.6%.

This analysis excludes skilled people – managers, professionals and technicians – who are unemployed, retrenched or on early retirement.

According to Chait, the economy is “precisely the right size for the skilled employees available for hire. There is no skilled shortage.”

Graduation rates across science, engineering and technology, business and management, education and humanities grew by 9% a year for 2013, and dropped to 2.2% for 2014 (Department of Higher Education and Training’s report for 2012-2014. I’ve updated Chait’s assessment with latest available statistics).

University enrolment was 969 155 in 2014, and government intends it to be 1.6 million by 2030. At the start of the funding troubles last year, Chait argued that providing millions with a tertiary education, while a worthy objective, will not change the economic fundamentals or reduce unemployment.

The top of the skilled and graduate totem pole – PhDs and master’s – and undergraduates are facing increasing “grim job prospects”, as Goneos-Malka stated, in an economy that is unable to absorb them.

A university education is perceived as the only way to get a job and into middle-class. But with graduate growth exceeding economic growth, many will remain unemployed, reducing the value of the degree, as unemployable PhDs have already found.

Where does this leave raucous students who shut universities over funding of their expensive, and in many instances, worthless qualifications? Has anyone told them their dreams of a better life are just that, dreams?

And what does it say about government’s strategic plan to almost double enrolments by 2030, overburdening an underfunded higher education system it cannot afford? And what about an economy that cannot accommodate graduates, school leavers and other unemployed people now?

Do skills create economic growth? Or must macroeconomic conditions for growth exist to enable production and employment of all types of labour? Those who maintain the former – business, government and some economists/analysts – are playing a shell game.

The entrepreneur, or capitalist, brings productive elements together. But conditions for investment must exist before production may proceed. Over time a growing economy creates the need for more material and labour, and so wealth and prosperity is created and spread around.

An economy that has surplus capacity, or not investing and producing – like SA’s almost 0% growth – needs few inputs of material and labour – skilled and unskilled.

However, business et al states (falsely): skills (labour) first, then growth. Therefore, society/universities/labour is the villain for not producing appropriate skills. (And correctly, labour is unproductive and costly.)

Commentators, including Chait, at the time presciently said student protests, although ostensibly about fees, were bringing SA’s economic fault lines into focus.

I previously wrote we inherited an economic system – monopolistic/oligarchic, uncompetitive, high fees/cost, high barriers to entry, etc – from transition circa 1994. Giant corporations made a deal with the ANC to ensure they would continue operating in the new SA as under the old. But greed and stupidity checkmated the economy, and with it our precarious society that hangs by a thread.

The Franken-economy eventually turned, so to speak, on its creators, and populace.

Business found itself constrained by a closed and restricted economy that has the limiting characteristics I list above and more. It was not expanding fast enough to produce more customers, and trade and investment policy was anti-business. So they moved headquarters abroad, shifted investment and funds from South Africa to Africa and elsewhere and withheld investment (they have a cash pile of R725bn).

Government introduced “populism, patronage and economic nationalism, rather than reforms that will expand the economy; patronage politics of the past, with elections added”, Greg Mills and Jeffrey Herbst wrote in Africa’s Third Liberation.

But business and government refuse to understand the built-in kill-switch, the obsolescence, they inserted into the design of our economic system, activated now less than a generation later.

We are at a dead-end, a situation of their making. But the best can do is a pathetic R1.5bn – 0.2% of business’ available cash – small and medium enterprise fund at one minute before midnight, and probable junk rating.

It’s a typical South African response to crises – belatedly throw some money at it and, hopefully, the problem goes away. Analyst Ralph Mathekga called it a “public relations exercise”. He asked why business lacked confidence in the economy to not individually invest substantial amounts. Like with the National Youth Development Agency fund, aka Umsobomvu Youth Fund, there is no strategy for how the fund is supposed to create short, never mind long-term growth. It’s another business-government con.

South Africans were told a story: if you study and obtained a skill, you will find a job and become prosperous. That everything will be alright in the end. We believed because we had no choice, but mostly we allowed ourselves to be led. Almost 0% growth and the ratings downgrade shock, which seems inevitable, have exposed the tale for the lie it is.

And the story tellers – well, like all good conmen they have already made the kill, insulated themselves, or have fled.