SOUTH AFRICA ECONOMIC UPDATE Edition 12 | January 2019 | World Bank Public Disclosure Authorized © 2019 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved Photos: Shutterstock, Pexels, Unsplash, University of Pretoria and World Bank CONTENTS Acknowledgments iii Foreword iv Abbreviations v Executive Summary vi CHAPTER 1 CHAPTER 2 Recent Economic Developments 1 Tertiary Education Enrollments Must Rise 30 Global Economic Developments 2 The Promise of Encouraging PSET Enrollments Real Sector Developments in South Africa 5 through Financial Support to Students 34 Labor Market Developments in South Africa 16 The Fiscal and Quality Challenges of Expanding Fiscal Developments in South Africa 17 Tertiary Education 38 Inflation and Monetary Policy in South Africa 21 The Short-term Outlook for the PSET System 39 The External Sector in South Africa 23 Improving Comprehensively the PSET System over The Outlook for South Africa 27 the Long Term 43 Conclusion 58 References 59 Annex. PSET Statistics 61 FIGURES Figure 1.1: Global activity indicators 2 Figure 1.2: Portfolio flows and commodity prices 3 Figure 1.3: Confidence indicators and growth estimates 5 Figure 1.4: Infrastructure quality 2008-2009 vs. 2017-2018 10 Figure 1.5: Contributions to GDP (supply side) 12 Figure 1.6: Industry production and Purchasing Managers’ Index (PMI) 13 Figure 1.7: Contributions to GDP (demand side) 14 Figure 1.8: Oil prices and estimated impact on household consumption 15 Figure 1.9: Contributions to gross fixed capital formation 15 Figure 1.10: Exports and imports of goods and services 16 Figure 1.11: Unemployment by education level 17 Figure 1.12: Fiscal consolidation objectives, 2016-18 20 Contents | South Africa Economic Update 12 | i Figure 1.13: Actual and forward inflation expectations 21 Figure 1.14: South African exports and imports 26 Figure 1.15: South African Reserve Bank cyclical indicators 27 Figure 1.16: GDP growth projections 27 Figure 2.1: University access and wage inequality, 2006-15 31 Figure 2.2: University enrollment rate in South Africa and selected countries, 2015 32 Figure 2.3: Enrollments in public TVET colleges and universities, 2015 33 Figure 2.4: Poverty and tertiary education, 2006-15 34 Figure 2.5: University access by decile 35 Figure 2.6: Private rates of return from subsidized education 37 Figure 2.7: NSFAS loan recoveries (1997-2014) 56 TABLES Table 1.1: Baseline annual growth forecasts 29 Table 2.1: Private rates of return from PSET 36 Table 2.2: Public rates of return from PSET 38 Table 2.3: The estimated fiscal cost of the new financial aid scheme 41 Table 2.4: The estimated impact of various PSET policy interventions on equity and growth 42 Table 2.5: Planned evolution of the PSET system by main segment (2015-2030) 43 Table 2.6: Private enrollment as a share of total PSET enrollments 46 Table 2.7: Types of private tertiary education institutions 46 Table 2.8: Enrollment rates by income quintile in four Latin American countries 55 BOXES Box 1.1: What is the state of human capital in South Africa? 6 Box 1.2: Presidential jobs summit and investment conference 8 Box 1.3: Reform of the mining sector 9 Box 1.4: Treating customers fairly in relation to transactional accounts and fixed deposits 13 Box 1.5: When the cycle becomes the trend: the impact of the commodity super cycle on South Africa 18 Box 1.6: Credible monetary policy cushions the impact of exchange rate volatility on inflation 22 Box 1.7: South Africa’s vulnerability and resilience in emerging market storms 24 Box 2.1: Licensing and accrediting PSET institutions 48 Box 2.2: Lessons from co-operative programs 49 Box 2.3: Acquiring skills to become a chef 50 Box 2.4: Lessons from fundraising efforts in Europe 54 Box 2.5: Income-contingent loans in Australia and New Zealand 57 ii | South Africa Economic Update 12 | Contents ACKNOWLEDGEMENTS The 12th South Africa Economic Update was produced by a World Bank team comprising Marek Hanusch, Victor Sulla, Precious Zikhali, Vincent Dadam, Nomsa Mkhize, Kobina Daniel, Rudibert Steinbach, Alain Ntumba Kabundi, Ayanda Mokgolo, Yoko Nagashima, Jamil Salmi, Servaas van der Berg, Reynold Duncan, Phemelo Kekana, Paolo Belli, Gert van Linde and Zandile Ratshitanga, led by Sébastien Dessus. It was internally peer reviewed by Roberta Bassett and Jacques Morisset. It benefited from comments and inputs from John Krueger (Department of Planning, Monitoring and Evaluation), Sacha Backes, Alejandro Caballero, Rajeev Gopal and Ken Osei (International Finance Corporation), Alejandro Simone (International Monetary Fund) and overall guidance from Mathew Verghis (Practice Manager, Macroeconomics, Trade and Investment) and Paul Noumba Um (Country Director for South Africa). The report was edited by Sharon Chetty and designed by Cybil Maradza. Acknowledgements | South Africa Economic Update 12 | iii FOREWORD I am pleased to launch this 12th South Africa Economic Update, which offers a review of the country’s recent economic and social developments and its outlook in the context of global economic prospects. In the second half of 2018, the World Bank released two important global reports on the changing nature of work, and on a new measure of countries’ human capital – the Human Capital Index (HCI). Both reports underlined the criticality and urgency for societies to equip their population, and their youth in particular, with a new set of high-order cognitive and non-cognitive skills that are needed to prosper in a world that is constantly being reshaped by technological progress. These global recommendations surely apply to South Africa, which ranks 126th on the HCI out of the 157 countries for which data exist – highlighting the human capital crisis that the World Bank President Kim urged global citizens to tackle at the Johannesburg Festival in December. They strongly echo the main conclusion of the World Bank Systematic Country Diagnostic of South Africa also conducted in 2018: the insufficiency of skills is the key constraint to reducing poverty and inequality, and eventually overcoming a legacy of exclusion. Authorities are cognizant of the challenge, and have, among other things, decided to accelerate the expansion of the Post School Education and Training (PSET) sector – university and Technical and Vocational Education and Training (TVET) – through devoting more budgetary resource to it (an additional 1.1% of GDP). Nevertheless, South Africa’s tight fiscal situation means the right balance has to be found between supply (expanding PSET admission capacity) and demand (encouraging students to enroll with financial support) interventions, to protect fiscal and debt sustainability without compromising education quality. In this regard, this Update discusses options successfully tested internationally to sustainably increase PSET enrollments through (i) diversifying the PSET sector from a mostly government funded-university centric model; (ii) encouraging private sector participation; (iii) strengthening quality assurance mechanisms; (iv) improving resource mobilization; and (v) ensuring greater equity in supporting students. It argues that South Africa could reduce inequality faster by rebalancing budgetary resources towards interventions that improve the quality of education, notably in TVET and community colleges, and expand PSET admission capacity. This would be made fiscally possible by limiting financial aid to poorest students while extending income-contingent loans to more affluent students. This Update builds on our solid partnerships with the National Treasury, the Department of Planning, Monitoring and Evaluation, the Department of Higher Education and Training, and various public and private PSET institutions. As the World Bank, we stand ready to work with all stakeholders and support South Africa to fulfill its development agenda and contribute to ending extreme poverty and promoting shared prosperity. It is our hope that the country will continue to use the World Bank’s knowledge, global experience, and convening power as a platform for peer- to-peer learning to identify evidenced-based, pragmatic solutions that contribute to the National Development Plan’s goals of eradicating poverty and reducing inequality. Paul Noumba Um World Bank Country Director for South Africa iv | South Africa Economic Update 12 | Foreword ABBREVIATIONS BBBEE Broad-based black economic empowerment PMI Purchasing Managers’ Index DHET Department of Higher Education & Training PSET Post-school education and training EMDEs Emerging markets & developing economies R South African rand ERPT Exchange rate pass-through SACU Southern African Customs Union EWC Expropriation without compensation SARB South African Reserve Bank GDP Gross domestic product SETA Sector education and training authority HCI Human Capital Index SME Small and medium-sized enterprise MOOC Massive Open Online Course SOE State-owned enterprise MTBPS Medium Term Budget Policy Statement StatsSA Statistics South Africa NEET Not in employment, education or training TVET Technical and vocational education & training NIDS National Income Dynamics Study UNISA University of South Africa NSFAS National Student Financial Aid Scheme US$ United States dollar OECD Organization for Economic Co-operation WDR World Development Report and Development Abbreviations | South Africa Economic Update 12 | v EXECUTIVE SUMMARY vi | South Africa Economic Update 12 | Executive Summary South Africa’s much anticipated economic rebound to reduce policy uncertainty on land reform, mining in 2018 did not occur. While substantial efforts by and black economic empowerment. the authorities to strengthen governance of public resources and stabilize the fiscal situation helped the The financing of structural reforms and projects to economy to not contract further, economic growth promote greater economic and social inclusion is remained tepid with a technical recession (two nonetheless rendered difficult by South Africa’s tight successive quarters of negative economic growth) in fiscal and debt situation, itself mainly the consequence the first half of 2018. GDP growth is expected at below of slow growth and strong spending pressures. As 1% in 2018, down from an already low 1.3% in 2017. in most previous budget speeches, the commitment to public debt stabilization was reaffirmed in the A number of exogenous factors contributed to this poor October 2018 Medium Term Budget Policy Statement growth performance. Domestically, climate variations (MTBPS), but the target date for debt stabilization such as a prolonged drought in the Western Cape was shifted yet again, this time to 2023/24, and at a where harvests were delayed exerted a huge toll on higher level, to 59.6% of GDP against 56.1% in the 2018 agricultural production. Externally, mounting trade Budget Review. Though in a significant departure from tensions between the United States and China, and previous statements, there was clear recognition of the tightening global financial conditions contributed to greater role the private sector, development finance slowing the pace of foreign financial inflows to South institutions, and multilateral development banks Africa while lessening the demand for its exports. could play in complementing scarce public finances Rising world oil prices also exerted strong pressure for infrastructure. Regulatory reforms, lowering on the balance of payments and domestic prices, the risk of financial instruments to facilitate private depressing private consumption. sector investment, and a clearer delineation between commercially viable and socially desirable interventions These negative developments, however, do not were identified as instrumental to breaking a vicious conceal the fact that South Africa’s growth challenge cycle of low inclusiveness coupled with limited public is deep-seated and largely structural. To grow faster resources to speedily address the challenge. and sustainably, the economy will need to be more inclusive, requiring the participation of a greater The policy agenda of expanding the Post School share of the population mainly through job creation. Education and Training (PSET) sector clearly illustrates Furthermore, persistent inequality of income and the trade-off between maintaining fiscal restraint and of opportunity will continue to raise pressures for addressing key structural constraints that may be costly redistribution of limited resources that are drawn from to the fiscus. In South Africa, acquiring skills through a small tax base. Radical policy demands are more PSET is the best guarantee of escaping poverty. Indeed, likely in a stagnant economy, fuel policy uncertainty income inequality continues to be mostly driven by and deter private investment. At the Presidential Jobs labor market developments that demand the skills that Summit and the South African Investment Conference South Africa’s poor currently lack. Notwithstanding the held in October 2018 agreements were made on longer-term need to fundamentally improve the basic actions that are expected to enable job creation and education system, rapidly enrolling more students in to attract higher levels of investment, including inter university and Technical and Vocational Education and alia, education and skills interventions, and initiatives Training (TVET) institutions has become a major political Executive Summary | South Africa Economic Update 12 | vii imperative in the face of the growing frustration among Indeed, the threshold for financial eligibility under the youth unable to access economic opportunities. Yet, new policy – parental income of less than R 350,000 the decision announced in December 2017 entitling all per year – entitles more than 9 out of 10 prospective students from poor and working-class families to free students to receive support. higher education may actually aggravate frustration and discontent among youth and may not necessarily However, implementing this policy would have a supply more skills to the economy. substantial impact on the budget. Projections undertaken in this Update suggest that public resources allocated to Quantitative analysis in this Update based on PSET would need to increase from 1.4% to 2.5% of GDP in administrative and household survey data suggests 4 years, to finance increased student aid, while keeping that the financial cost of studies can be a major total enrollments, and expenditure per student (thus barrier to enrolling poor students in PSET institutions. the low quality of education at TVET) unchanged. A 10% This barrier was only partially lowered through the increase in PSET enrollments (i. e. an additional 45,000 extension of loans from the National Student Financial first time students) under the new aid scheme would cost Aid Scheme (NSFAS) to the poorest students, as the an additional 0.15 percentage points of GDP. financial assistance covered only part of the costs of studying, leaving the risk of not reaping the benefit While the scheme would lead to a slightly higher proportion of studying, whether they drop out, fail to graduate of students from poor and working-class families being or remain unemployed after graduation, entirely to enrolled, its very high cost would likely make the target of the students. But it also suggests that the quality of doubling enrollments in PSET by 2030 elusive. This would education, in TVET notably, is very poor and is not inevitably create frustration among youth who would be meeting labor markets’ demand – making private barred from entering PSET institutions even though they returns from TVET very low, likely discouraging would be academically eligible and qualify for financial enrollments. The low take-up rate of 40% of NSFAS support. Employers would not be able to find the skills loans, and the high rate of default on these loans they need to stay competitive; and the government and reflect such shortcomings. Small and Medium-sized Enterprises (SMEs) would be at a particular disadvantage as they are less able to attract Converting loans to grants and covering the entire skilled workers compared to larger private companies. financial cost of studying beyond tuition fees (e.g. accommodation, transport and books) will encourage International experience offers some options for South many academically eligible poor students to enroll in Africa to solve the trade-off between supporting more PSET while receiving financial aid. And extending this students and encouraging higher enrollment. This opportunity to students from working-class families includes diversifying PSET from the publicly-funded would multiply demand for education several times. contact university-centric model towards: A PSET sector more centered around technical, vocational and lifelong training. Expected matric results of school students is such that demand for PSET education in the next decade will be directed mostly towards TVET. This will make students more employable, given their academic capacity at entry in PSET and be more affordable for government as the unit costs are lower than that of a university. However, this will require much higher investment per student, more effective links with private employers, better quality assurance and the strengthening of the incentives framework to improve the quality of education before rapid increases in enrollments can be envisaged. Furthermore, community colleges, which offer more flexibility to accommodate the demand for education along the full life cycle and pathways to university for its brightest students, should receive the same level of attention for improvement as TVET. This will be instrumental to avoid fueling the perception that TVET and community colleges are for the poor only, and universities for the rich. A revamped distance-learning model. Distance learning makes eminent sense in South Africa, where the lack of spatial integration remains a key developmental issue. Yet, the University of South Africa (UNISA), the most prominent institution offering such programs and training most school teachers, suffers from massive inefficiencies and losses on investment as dropout rates exceed 85% for 3 to 4-year degrees. International experience suggests that moving from the traditional model of integrated courses towards individualized coursework strongly supported by mentorship is more cost effective, as completion rates and the employability of graduates are likely to improve significantly. viii | South Africa Economic Update 12 | Executive Summary More private sector participation. The Sub-Saharan Africa region ranks last in terms of private PSET enrollments as well as enrollments overall, and South Africa is not an outlier in the region. Under the premise that it would provide a means of expanding enrollments at a lower cost to the state while protecting the quality of education, greater private sector participation could be encouraged through the adoption of simpler accreditation rules similar to that for public institutions. The possibility of private institutions receiving performance-based subsidies, employing public university professors, and for its students to receive financial aid, could also be explored. As a first step, the establishment of non-profit institutions could be encouraged. As they have contributed most to the expansion of PSET enrollments in other continents, the non-profits could offer an alternative to for-profit institutions and address the concern that poorly regulated for-profit institutions may be inclined to compromise on education quality even though their fees may be high, proving costly for both students and the government. Stronger controls and incentives to encourage better quality. Reducing the dropout rate and raising the employability of graduates will help to improve the fiscal rate of return of subsidizing PSET. To improve quality, South Africa could consider three complementary measures: (i) strengthening quality assurance mechanisms by emphasizing learning outcomes and employability; (ii) forging closer links to the productive sectors of the economy and the labor market, notably through cooperative programs; and (iii) promoting performance-based funding through stable, output-based funding formulas, performance contracts and competitive funds. Greater reliance on labor market observatories to guide students and PSET institutions in their selection of curricula. In order to ensure that students enroll in programs that prepare them for meaningful employment and that PSET institutions adapt their programs to the changing needs of the labor market, one of the more effective tools that the government could use is a labor market observatory. A well-functioning observatory could monitor the skills needed for the labor market, channeling students towards them instead of encouraging students to follow prescribed programs. More fiscal incentives to mobilizing resources. Government should not penalize the most entrepreneurial PSET institutions by reducing their budgets when they become more adept at mobilizing resources beyond tuition fees and subsidies through fundraising and savings by sharing resources. Penalties are self-defeating as they remove the incentives to generate additional income. A larger use of risk sharing mechanisms. South Africa could consider extending income-contingent loans to students from affluent households while confining grants to highly vulnerable and underprivileged students. This would free public financial resources to expand PSET admission capacity and improve the quality of education while protecting poor and working-class students who are at risk of defaulting. Better regulation of tuition fees. The higher demand for PSET arising out of the new student financial aid system may result in tuition fees rising. Potential trade-offs between the necessary economic autonomy and viability of PSET institutions, and the effectiveness of the NSFAS in promoting equity could be mitigated by making tuition fee increases that are above inflation conditional on the meeting of PSET performance indicators, such as teaching quality. Executive Summary | South Africa Economic Update 12 | ix CHAPTER 1 Recent Economic Developments Chapter 1 aims to convey the following key messages: • Global economic growth is losing steam, and risks of macroeconomic disruption in emerging economies are mounting. • • South Africa’s anticipated economic rebound in 2018 did not occur, confirming the deep-seated nature of its growth challenges, and its vulnerability to climate change and commodity price variations. • • The government maintained its committment to fiscal and debt sustainability and price stability, emphasizing structural reforms and greater private sector participation to address South Africa's development challenges. Global Economic Developments Global economic activity is losing momentum. At 3.0%, global GDP growth in 2018 was slower than was underpinned by slowing export orders and expected (Figure 1.1.A). While economic activity in weakening global manufacturing activity, as capital the United States was supported by fiscal stimulus, goods production moderated in many economies, growth in the Euro Area and Japan decelerated, partly specifically in developing Asia and Europe - two reflecting weaker manufacturing activity as global tightly interconnected manufacturing hubs. goods trade slowed. Moreover, growth in several Accordingly, the global manufacturing Purchasing emerging and developing economies (EMDEs) was Managers' Index (PMI) declined to 51.5 index points weighed down by substantial financial market in December 2018, from 54.5 a year earlier, as new stress, as investors became risk averse, turning their export orders fell below 50 - the level that separates focus toward country-specific vulnerabilities amid expansion from contraction. In addition, trade tightening global financial conditions. activity was further weighed down by new tariffs that were introduced by the United States and China Weakening manufacturing activity is weighing on during 2018, which affected around 2.5 percent of global goods trade. Growth in global goods trade global goods trade. slowed in 2018 (Figure 1.1.B). The deceleration Figure 1.1: Global activity indicators A. Global growth B. Global trade in goods growth and manufacturing export orders Percent Percent Index 6 6 54 5 4 4 52 3 2 2 50 1 0 0 48 2013 2014 2015 2016 2017 2018 2019 2020 16Q1 16Q3 17Q1 17Q3 18Q1 18Q3 World Advanced economies EMDEs Global trade growth New export orders (RHS) Sources: A. World Bank staff calculations. B. CPB Netherlands Bureau for Economic Policy Analysis, Haver Analytics, World Bank staff calculations. Global financial conditions tightened. Inflation Reduced appetite for EMDE assets fueled capital forecasts of many advanced-economy central banks outflows in many countries. In the context of heightened have been converging on target levels. As a result, bond global policy uncertainty, trade tensions, and deteriorating purchases have been tapered in the Euro Area and Japan growth prospects, investors’ search for high-yielding safe while in the United States interest rates were increased assets - such as U.S. Treasuries - gained momentum and by a further 100 basis points in 2018. Accordingly, the their appetite toward many EMDEs waned. In particular, dollar strengthened and U.S. 10-year yields rose to a EMDEs with large external vulnerabilities and domestic 7-year high of 3.2%, before moderating in recent weeks. fragilities experienced substantial capital outflows and Chapter 1 | South Africa Economic Update 12 | 2 sharp currency depreciations. Since US$ strength started since early 2016. Moreover, cumulative portfolio outflows in April 2018, EMDE currencies have depreciated by from EMDEs have surpassed the outflows observed at around 10% - the most significant sustained depreciation that time (Figure 1.2.A). Figure 1.2: Portfolio flows and commodity prices A. EMDE portfolio flows during recent B. Brent crude oil and metal prices stress episodes Index, 100=January 2018 US$ billions, cumulative daily flows 10 120 0 110 -10 100 -20 90 -30 80 Jan-18 Apr-18 Jul-18 Oct-18 -40 Taper China Latest tantrum concerns episode 2013 2015 2018 Brent crude Metals Sources: Institute of International Finance and World Bank staff calculations. Notes. A: Cumulative flows to major EMDEs, excluding China, for the 236 days following the start of the stress episode. The start dates for the stress episodes are: taper tantrum: May 23, 2013; China concerns: June 12, 2015; U.S. presidential election in 2016: November 9, 2016; latest episode: April 15, 2018. B: Metals prices represent the average price in US$ of aluminum, copper, iron ore and zinc. While supply concerns kept oil prices elevated Growth in advanced economies has diverged. for most of 2018, fears of weaker demand have United States growth accelerated from 2.2% in 2017 weighed on metals prices. Oil prices increased by to an estimated 2.9% in 2018, as fiscal stimulus was 32% in 2018, averaging US$ 69 per barrel. Supply accompanied by strong domestic demand, especially concerns owing to the continued decline of oil investment. Moreover, the labor market remains robust, production in Venezuela and the reintroduction of with non-farm payrolls averaging nearly 220,000 sanctions on Iran by the United States contributed workers per month in 2018 and the unemployment to prices peaking at US$ 86 per barrel in October. rate reaching an almost 50-year low of 3.7% during However, in early November oil prices fell rapidly the year, before rising slightly to 3.9% in December. toward US$ 60 per barrel as the United States At the same time, average hourly earnings rose 3.2% granted eight countries temporary waivers to the - the strongest annual gain in nearly a decade. In sanctions on Iran. In addition, oil prices were helped the Euro Area, however, growth is estimated to have lower by rising production in the United States slowed to 1.9% in 2018, from 2.4% in 2017, largely and increased output by the Organization of the owing to moderating net exports. Manufacturing Petroleum Exporting Countries. In contrast to the PMIs corroborate the loss of momentum in Euro Area supply-driven volatility of oil prices, several metals growth, falling from a peak of 60.6 in December 2017 prices weakened in 2018 (Figure 1.2.B), especially to 51.4 by December 2018. Moderating net exports during the second half of the year as the imposition also contributed to slower growth in Japan, which of broad-based tariffs by the United States on decelerated to an estimated 0.8% in 2018, from 1.9% Chinese imports fueled market concerns about the in 2017. impact of a slowdown in global trade on commodity demand. As a metals exporter and net-oil importer, Private consumption in China remains resilient, but South Africa’s terms of trade was adversely affected export growth is decelerating. Growth in China has by these opposing commodity price dynamics. slowed to an estimated 6.5% in 2018, from 6.9% in 3 | South Africa Economic Update 12 | Chapter 1 2017. While robust consumption growth and improving manufacturing PMI fell to 44.2 in December, from a private investment have supported economic activity, multi-year high of 55.7 in January 2018. Growth in Brazil slowing global manufacturing activity has contributed is estimated to have improved slightly to 1.2% in 2018, to moderating industrial production and export from 1.1% in 2017. Economic activity remains lackluster growth. Moreover, growth in imports has also been amid political uncertainty and fragile investor decelerating. However, it still outpaced exports, and confidence. In contrast, growth in Russia has been contributed to a current account deficit in early 2018 underpinned by record-high oil production and strong - China’s first in two decades. Recent manufacturing private consumption, and remained steady in 2018, PMIs have been lackluster, remaining near 50 index despite a tightening of sanctions by the United States. points since mid-2018, while the subcategory for new Private consumption was also a major contributor to export orders has declined to 48.3 in December and growth in India, which is estimated to have accelerated underscores weakening global demand. to 7.3% in the 2018/19 fiscal year (April to March), from 6.7% the year before. Economic activity in India has The recovery in other major emerging markets recovered from the temporary disruptions caused and developing economies is facing headwinds. In by demonetization and the harmonization of many Argentina, the economy contracted by an estimated state-level taxes into a federal Goods and Services 2.8% in 2018, amid a crisis of confidence that induced Tax. In Nigeria, growth has risen to an estimated 1.9% substantial financial market stress, halved the in 2018, from 0.8% in the previous year. However, peso’s purchasing power in US$, and necessitated growth in the oil sector was hampered by pipeline an increase in the policy interest rate of around 40 closures, while agricultural activity was interrupted percentage points. The Turkish lira depreciated by escalating conflict between farmers and herdsmen. almost 30% in 2018, as heightened policy uncertainty In Angola, falling oil production has weighed on growth exacerbated investors’ concerns about rising inflation, during 2018, as GDP contracted by an estimated 1.8%. a deteriorating current account deficit, and elevated However, new oil fields that are coming on stream are foreign-currency denominated private sector debt. The expected to support a recovery in Angola’s oil sector. Global outlook is deteriorating Global growth should moderate in 2019 and 2020. a reduced appetite for EMDE assets will impede any Global growth is expected to decelerate from a further acceleration in EMDE growth. downwardly revised 3% in 2018 to 2.9% in 2019 and 2.8% in 2020, as the projected slowdown in advanced Risks to the global outlook are significant. An economies outweighs the gradual improvement abrupt and unexpected tightening of global financial foreseen in EMDEs (Figure 1.1.A). In advanced conditions could trigger significant capital outflows economies, monetary policy normalization, weakening and cause disorderly currency depreciations in many investment growth, and dissipating excess capacity EMDEs, particularly in countries with large external will prompt a gradual slowdown from an estimated vulnerabilities. In addition, escalating trade tensions 2.2% in 2018 to 1.6% by 2020 - broadly in line with involving major economies could weigh heavily on estimates of potential growth. Growth in EMDEs is investment and exports, leading to reduced global expected to rise from 4.2% in 2018 to 4.5% by 2020, trade growth. Moreover, a sudden slowdown in China’s as the cyclical recovery in commodity-exporting growth could induce sharp declines in commodity countries matures. However, the projected slowdown prices - adversely affecting many commodity- in advanced-economy growth, weakening trade, and exporting EMDEs. Chapter11 || South Chapter SouthAfrica AfricaEconomic Economic Update Update 12 11 | 4 Real Sector Developments in South Africa South Africa’s growth challenges are deep-seated and structural The wave of optimism that started at the beginning senior positions in law enforcement agencies and the of 2018 did not last. In December 2017, the African South African Revenue Service. A Judicial Commission National Congress elected Cyril Ramaphosa as of Inquiry into allegations of State Capture chaired president of the party. He became president of the by the Deputy Chief Justice Raymond Zondo, put in country in February 2018. As he was the preferred place a transparent process to judiciously examine candidate by the markets, business and consumer the extent to which SOEs and departments had been confidence indices hit new heights, analysts revised “captured” by corrupt elements within the government their growth projections significantly upwards, and for the benefit of private companies and individuals. the rand appreciated, reflecting increased investor Another commission of inquiry chaired by a retired judge appetite for South African assets (Figure 1.3, various examined tax administration and governance at the panels). As expected, President Ramaphosa quickly South African Revenue Service. Yet the initial optimism moved to address allegations of widespread corruption, did not result in growth, with South Africa dipping into focusing on selected cabinet positions, the boards and technical recession in the first half of 2018. Over the management of state-owned enterprises (SOEs), and course of the year the wave of optimism ebbed. Figure 1.3: Confidence indicators and growth estimates A. Business confidence index (%) B. Consumer confidence index (%) 60 30 52 24 25 21 50 44 20 39 40 37 15 40 34 32 32 10 7 27 5 3 30 2 0 20 -5 1 5 4 4 -10 6 6 10 10 7 7 9 -15 12 12 10 0 -20 16 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2018Q3 C. Political constraints and exchange rate D. Growth forecasts for the year 2018 (%) 100 18 2.5 2.0 16 2 80 14 1.4 1.4 12 1.5 60 10 0.8 1 40 8 6 0.5 20 4 0 2 Jul Nov Mar Apr May Nov Sep Oct Dec Jan Feb Jun Aug Sep Oct 0 0 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2017 2018 Political climate as constraint - Manufacturing (LHS) Consensus estimates World Bank estimates R/US$ exchange rate Sources: Bureau for Economic Research, Haver Analytics, Consensus Economics and World Bank staff calculations. Notes. A: percentage of respondents indicating that prevailing conditions are satisfactory; B: percentage of respondents expecting an improvement less the percentage expecting a deterioration; C: respondents identifying the political climate as a constraint in manufacturing (LHS). 5 | South Africa Economic Update 12 | Chapter 1 South Africa’s deep-seated structural challenges is that despite significant efforts since 1994, outcomes thwarted a rapid economic takeoff. One critical in health and education (South Africa’s human constraint is poor human capital. World Bank capital) remain low (Box 1.1) among the historically (2018c) argues that South Africa’s legacy of exclusion disadvantaged who make up the country’s majority. constrains growth, meaning that a rapid, sustainable Chapter 2 looks at one area, higher education, which acceleration of growth will require significant reforms. can help ensure that more South Africans participate For example, too many South Africans do not contribute in the skills-hungry economy. Although it requires to national output as they are out of work: labor force significant fiscal commitments, Chapter 2 shows that participation averaged 58.8% and unemployment investing in people is a sustainable investment in long- 26.4% in the past five years. One critical reason for this term, inclusive growth in South Africa. Box 1.1: What is the state of human capital in South Africa? In October 2018 the World Bank (World Bank, 2018e) South Africa does not fare well against these metrics. unveiled its new global Human Capital Index (HCI). It ranks 126th out of the 157 countries for which data The HCI measures the amount of human capital that is available, below neighboring Namibia, Malawi, a child born today can expect to attain by age 18. It Zimbabwe, Eswatini or Botswana, and far below what conveys the productivity of the next generation of is expected from its per-capita income (GDP) level. This workers against a benchmark of complete education can be attributed mainly to the poor quality of learning: and full health, through the combination of 5 children in South Africa can expect to complete 9.3 indicators: (i) the probability of survival to age five; (ii) years of preprimary, primary and secondary school by a child’s expected years of schooling; (iii) harmonized age 18. However, when years of schooling are adjusted test scores as a measure of quality of learning; (iv) for quality of learning, this is equivalent to only 5.1 adult survival rate: the number of 15-year-olds that years – a learning gap of 4.2 years. Other components will survive to age 60; and (v) the proportion of of the index related to child mortality, stunting and children who are not stunted. adult survival, are more in line with peers. Box 1.1 Figure 1: South Africa’s Human Capital Index A. HCI versus per capita GDP 1 Singapore Korea. Rep. .8 Canada United States Poland Russian Federation Vietnam Ukraine Argentina Qatar .6 Peru HCI Brazil Morocco Indonesia Bangladesh Egypt, Arab. Rep. India .4 Senegal Ethiopia Pakistan Nigeria South Africa Chad .2 6 8 10 12 Log Real GDP per Capita at PPP Chapter 1 | South Africa Economic Update 12 | 6 B. Quality-adjusted years of schooling 15 Learning-adjusted expected years of school 10 Learning Gap 5 South Africa 0 0 5 10 15 Expected years of school Source: World Bank (2018e). The poor quality of learning in South Africa resonates Together with key stakeholders, the Department of with the key messages of the World Development Basic Education led the discussion on the WDR and Report (WDR) 2018 — Learning to Realize Education’s sought ways to strengthen policy implementation and Promise. The WDR emphasizes that schooling is not strategies by adopting three policy actions to address the same as learning; schooling without learning is not the crisis: (i) assess learning quality by promoting just a wasted opportunity, but a great injustice; and the integration of formal assessments in teaching there is nothing inevitable about low learning in low- and learning, utilizing pre- and post-test strategies and middle-income countries (World Bank, 2018f). while improving the quality assurance of summative school-based assessments; (ii) act on evidence that What are the dimensions of the learning crisis in will make schools work for all learners by improving South Africa? They are: the poor learning outcomes teachers’ skills and motivation through professional themselves; immediate causes such as teachers often development programs and continuous support such lacking the skills or motivation to teach effectively and as coaching and mentoring and by creating an inspiring inputs that often fail to reach classrooms or to affect work environment, as teachers are the key to learning; learning; and that poor management and governance and (iii) align the entire system, making it suitable for such as ineffective school leadership and lack of learning through salient methods by focusing on how community engagement, often undermine schooling information on learning outcomes can be used to align quality; and deeper systemic causes. the stakeholders and forge coalitions for learning. A weak human capital foundation is but one of the in optimism over the year. Confidence relating to capital legacies that constrains South Africa’s growth and investments in agriculture plummeted in the third social progress. Uncertainty over the future of land quarter of 2018 but recovered somewhat in the fourth reform is another. World Bank (2018c) identifies slow quarter. There is little evidence that this has translated progress in land reform since 1994 as a source of social into a moderation in moveable investment in the sector fragility and the risk that it could undermine property (tractors, for example), yet there appears to be less rights if not managed carefully. In December 2018, South appetite to invest in land upgrades. African lawmakers voted for a constitutional amendment enabling a greater degree of expropriation of land President Ramaphosa has undertaken several without compensation to speed up the process of land initiatives to reduce policy uncertainty and boost reform. Even though assurances have been given by the the economy. In a divided society like South Africa’s, government that expropriation without compensation building consensus among social partners is critical (EWC) was not expected to affect agricultural production (World Bank, 2018c) and President Ramaphosa or investment in agriculture, uncertainty over the prioritized a consensus-building process through two constitutional amendment contributed to a moderation separate summits on jobs and investment (Box 1.2). 7 | South Africa Economic Update 12 | Chapter 1 Box 1.2: Presidential jobs summit and investment conference Against the backdrop of low economic growth and • Inclusive growth interventions through improved a stubbornly high unemployment rate, in October workplace collaboration, reporting by businesses 2018 President Ramaphosa chaired two summits: on executive pay ratios in annual reports, one addressing the unemployment challenge and the addressing the gender pay gap, addressing other the need to boost investment in the economy. customs fraud and illegal imports, and enhancing The investment conference was part of government’s socio-economic impact assessments. ambitious drive to raise US$100 billion worth of new investment over the next five years. The conjunction • Public and social interventions through of the two summits comes from the realization that strengthening expanded works programs, social job creation requires investment, and that investment audits as part of the monitoring and evaluation necessitates skills. of the Expanded Public Works Program, and anti- corruption strategies. More than 70 interventions to protect existing jobs and create new ones were identified. They were • For effective monitoring, a Presidential Jobs informed by the need to address the pillars of South Committee was created to receive quarterly Africa’s growth strategy that include: (i) ensuring progress reports on the implementation of action sound and responsive government that prioritizes plans, monitor employment and take remedial inclusive growth; (ii) investment promotion and actions when required. the upgrading of industrial capacity; (iii) holistic support for township and rural enterprises; (iv) The South African Investment Conference aimed to increased workplace equality; (v) upgrading skills restore confidence not just among foreign investors and education; (vi) infrastructure development; (vii) but also domestic investors, who in recent years were maintaining and strengthening the social safety net; described as being on an investment strike as businesses and (viii) innovative measures to assist businesses have been reluctant to invest in the economy given the facing challenges. high levels of policy uncertainty. It was a milestone in the President’s quest to raise at least US$100bn in The commitments to increase access to employment new investment over the next five years. Addressing include: EWC and broad-based black economic empowerment (BBBEE) elements of the Mining Charter, the President • Education and skills interventions to build assured investors that policies meant to transform the competencies needed for employment and self- economy and to empower the previously disadvantaged employment (where TVETs and community colleges would be executed in a deliberative manner that would play a critical role); expanding public and private respect the rights of all investors. Efforts to improve the sector skills commitments for youth employment, investment environment were broadly welcomed and including capacity building; and finding solutions to include initiatives to boost tourism. By all accounts the accelerate the transition of NEETs (a young person conference was successful in altering perceptions about not in education, employment or training) towards South Africa as an investment destination. Early results earning an income. included pledges of R290 billion (over US$20 billion) in investment over the next five years (adding to prior • Interventions to boost domestic demand, pledges of US$10 billion each from Saudi Arabia and the to identify and pursue import replacement United Arab Emirates, and US$14 billion from China). opportunities and to grow exports. They encompass a combination of new and pipelined commitments in the mining, ICT, and manufacturing • Assisting small businesses by leveraging sectors. The US$100 billion target represents a stepping procurement for small firms and cooperatives, up in the government’s engagement with investors large-scale youth entrepreneurship programs, and will require a well-resourced institutional and and support to the informal sector. operational framework to deliver on it. The new administration managed to fast- Labour Relations Amendment Bill. In mining, the track a number of reforms in labor and mining controversial third Mining Charter was renegotiated legislation. In May 2018 Parliament approved the and gazetted in September 2018 (Box 1.3). The Minerals National Minimum Wage Bill together with the Basic and Petroleum Resources Development Amendment Conditions of Employment Amendment Bill and the Bill, which had long contributed to policy uncertainty Chapter 1 | South Africa Economic Update 12 | 8 in the mining sector, was withdrawn. Although some conference. Though the extent to which the pledges commitments were not new, investment pledges from will translate into actual investment remains to be mining companies were prominent at the investment seen, there is clearly a new mood among businesses. Box 1.3: Reform of the mining sector According to the Fraser Institute, in 2017 South Africa equity-equivalent beneficiary – each for communities ranked 81st out of 91 global jurisdictions in terms of the and mine workers, the costs of which can be recouped perceived attractiveness of mining policies. The third by companies through the mining operations. Black Mining Charter of 2017 aimed to raise transformation entrepreneurs are expected to hold a 20% stake. requirements but was strongly opposed for being too There is thus a move away from “freely” carried stringent with critics saying it offered little incentive interests though it is unclear how companies will be to invest in the sector. The revised version gazetted able to recoup the costs associated with the non- in September 2018 was based on a consensus that transferable interests; (iii) the 1% of Earnings Before emerged from extensive consultations. Interest, Tax, Depreciation and Amortization that was included in the previous version of the charter has Key elements include: (i) minimum 30% black been abandoned; (iv) procurement and employment economic empowerment ownership – increased from equity targets have largely remained the same as 26% previously – for new mining rights, renewals and in the previous draft of the charter, though there certain ownership changes. Companies that complied are increased gender requirements; and (v) junior with the previous requirement but had their black miners are exempt from black equity requirements ownership diluted, won’t have to increase black if they have turnovers of less than R150 million, but ownership now; (ii) the 30% black ownership will be companies with turnovers of more than R10 million made up of 5% non-transferable interests – or an have to comply with the requirements. Box 1.3 Figure 1: Policy perception index (100=most attractive) 100 90 80 70 60 50 40 30 20 10 0 Portugal Ecuador Turkey Jujuy Northern Territory Newfoundland & Labrador New Brunswick Zimbabwe Guatemala China Philippines Indonesia Bolivia South Africa Tanzania Panama Romania Zambia Kenya Ethiopia Russia Santa Cruz Dominican Republic Burkina Faso New South Wales Ghana New Zealand Mexico Mali San Juan Peru Washington Namibia Colorado Tasmania Queensland Minnesota Alaska Manitoba Chile Nova Scotia New Mexico Botswana Ontario Serbia Spain Idaho Utah Quebec Northern Ireland Nevada Sweden Finland Source: Fraser Institute. Note: The policy perception index assesses the attractiveness of mining policies. A score of 100 indicates maximum attractiveness. 9 | South Africa Economic Update 12 | Chapter 1 According to World Bank (2018b and 2018c), an on how competitive the charter makes South Africa amicable resolution of the dispute around the third relative to other mining jurisdictions. In addition, Mining Charter could result in investment increasing relatively pessimistic price forecasts for many of South by 25% in the sector, based on historical performance. Africa’s commodities may mean that a significant Whether this investment materializes will depend increase in mining investment will require more time. Another critical constraint to growth is inadequate 2007 and 2015 periods when South Africa experienced infrastructure. South Africa urgently needs to significant demand-supply gaps which by World Bank strengthen the competitiveness of its infrastructure, estimates cost 0.12 and 0.06 percentage points of which has deteriorated in some key areas (Figure headline growth respectively. As a result, Eskom 1.4). Load shedding resumed in November 2018 and has had to implement up to Stage 2 load shedding, could again constrain growth. Even though generation resulting in up to 2000 MW of demand being capacity has caught up with demand and Eskom’s disconnected during peak periods. Eskom's weak reserve margins have increased to comfortable financial situation has contributed to a backlog in levels, maintenance disruptions resulting from recent the refurbishment of its mid-life generation plants, industrial action, particularly in August 2018 which further constraining power supply. Eskom expected resulted in some damage at Kendal Power Station, to address short-term issues soon. Over the next and loss of the powerline from Mozambique (which two years, Eskom expects to increase the energy delivers 1200 MW to Eskom), have been significant. availability factor (which should be above 80%) from The resultant load shedding is reminiscent of the below 70% at present to at least 76%. Figure 1.4: Infrastructure quality 2008-2009 vs. 2017-2018 (Index: 1 = underdeveloped, 7 = meets international standards) Quality of overall infrastructure 6 5 4 3 Quality of Quality of roads electricity supply 2 1 0 Quality of air Quality of railroad transport infrastructure infrastructure 2008-2009 Quality of port infrastructure 2017-2018 Source: World Economic Forum Chapter 1 | South Africa Economic Update 12 | 10 Accelerating public investment is critical. Weak public economic stimulus and recovery plan. The technical investment in SOEs and local government has been a recession dampened hopes of a quick economic major drag on growth in recent years. SOEs account takeoff, necessitating a concerted response. The for about half of the total public-sector capital budget economic stimulus and recovery plan addresses and their structural reform will likely translate into some of the constraints on the economy. Reforms investment that can be expected to have a positive include the easing of visa regulations (partly to help impact on growth and on South Africa’s competitiveness. address South Africa’s skills shortage, but also to Provincial and municipal governments provide many attract more tourists); gazetting the third Mining key public services, including infrastructure. However, Charter; and the assignment of spectrum for ICT capacity constraints have resulted in underspending expansion. The plan also calls for more efficient on vital infrastructure. The national government is spending and includes fiscal reallocations instead of cognizant of capacity constraints in other spheres of new commitments, mindful of South Africa’s elevated government: for example, in May 2018, the North West public debt level and the structural, rather than province was placed under administration in terms financial nature of the country’s growth challenges. of section 100 of the Constitution. Municipal finances The plan can thus be seen as a confidence and yet again came under scrutiny when it appeared that efficiency stimulus, prioritizing solutions to South some municipalities violated the Municipal Finance Africa’s structural constraints. Management Act by depositing funds in a mutual bank that had to be placed under curatorship in 2018 due The plan includes a focus on removing South to accounting irregularities. According to the National Africa’s infrastructure bottlenecks. Through Treasury, 113 municipalities adopted unfunded budgets an Infrastructure Fund, the new administration in 2018/19, up from 83 the previous year, while is hoping to leverage a coalition of partners municipalities are more than R23 billion in arrears to including the private sector, development finance Eskom and water boards.¹ The government spends institutions and multilateral development banks R2.5 billion per year on municipal capacity building, but to improve and accelerate infrastructure delivery, improving service and infrastructure delivery in local within the existing budget envelope. Infrastructure government, especially in councils serving South Africa’s and service delivery at the local level is a priority, poorest communities, remains a critical challenge. with 57 pilot municipalities identified and the focus placed on water and sanitation, electricity and In response to stagnant growth and a technical refuse disposal. recession, President Ramaphosa announced an South Africa emerged from recession in the third quarter of 2018 In spite of the technical recession, South Africa’s to the previous quarter (seasonally adjusted and economy grew by 0.8% in the first three quarters annualized), which was stronger than expected. of 2018. While the quarter-on-quarter contraction However, this should not distract from the major in the first two quarters of 2018 means that South concern that the economy grows at a slower pace Africa experienced a technical recession, the than the population. This means that South African economy continued to grow throughout 2018 when income per person declines, reducing individual compared to the previous year (Figure 1.5). In the spending power and the scope to lift more people third quarter, the economy grew by 2.2% compared out of poverty. ¹ National Treasury (2018). 11 | South Africa Economic Update 12 | Chapter 1 Figure 1.5: Contributions to GDP (supply side) (Percentage point contributions to year-on-year growth) 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Agriculture, forestry and fishing Mining Manufacturing Electricity, gas and water Construction Trade, catering and accommodation Transport, storage and communication Finance, real estate and business services General government services Personal services GDP at market prices Source: StatSA and World Bank staff calculations Agriculture was the main reason for the technical however lower than mining production, shaving off recession. Agriculture contracted by an average 5% 0.1% off GDP growth. in the first half of the year, compared to the same period in the previous year. Although agriculture Some momentum emerged in manufacturing. accounts for less than 3% of GDP, large swings in The sector grew at an average 0.9% in the first production have recently had significant impacts on three quarters, faster than the overall economy. economic growth. Without the poor performance of The third quarter was particularly strong, with agriculture, the technical recession would have been main contributions from basic iron and steel, metal avoided. Poor weather conditions in western parts products and machinery, wood, paper and publishing, of South Africa were among the main factors for low petroleum, chemical products, rubber and plastic agricultural output. Conditions improved over the products, and motor vehicles, parts and accessories course of the year, and agriculture recovered in the and other transport equipment. The past investments third quarter of 2018. in car manufacturing are yielding results, with the number of cars produced in South Africa expected Mining and construction also subtracted from to increase by 8.6% in 2018, largely due to new growth. Compared to the previous year, mining fell by production coming onstream from Chinese car an average 1.4% and construction by 1.2% in the first manufacturer BAIC Group. Improving momentum in three quarters of 2018. On a quarter-on-quarter basis, manufacturing is also reflected in the latest readings mining shaved 0.7 percentage points off GDP growth on the manufacturing PMI. In November 2018, the due to low production in subcategories including index climbed to 49.5, thus approaching readings that platinum, iron ore, gold, copper and nickel. Decreases point to expansion (Figure 1.6). Finally, investment in non-residential building and construction works and import data indicate that businesses have been activities were chiefly responsible for the contraction acquiring more machinery, suggesting that they are in the construction industry in the third quarter of 2018. preparing for expansion. The sector’s negative contribution to GDP growth was Chapter 1 | South Africa Economic Update 12 | 12 Figure 1.6: Industry production and Purchasing Managers’ Index (PMI) (index: readings of 50 or higher point to expansion) 56 4 3 54 2 52 1 50 0 -1 48 -2 46 -3 44 -4 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 PMI 50 Industry production (RHS) Source: StatSA, Haver Analytics and World Bank staff calculations. Note: Industry production combines mining and manufacturing output. The growth rate is seasonally adjusted and annualized. Finance, real estate, and business services remain international markets (which is consistent with the South Africa’s main engine of growth. The sector high volatility in emerging markets in August 2018, led grew by an average 2.2% in the first three quarters of by the plummeting of the Turkish lira). Insurance, real 2018, the strongest performance across productive estate activity, and business services also supported sectors in South Africa. Momentum accelerated over growth in the sector in the third quarter. While the the course of the year. In the third quarter, the main growth in consumer credit is good news for many reasons for strong performance in the sector were South Africans, South African banks can do more to financial intermediation (which is consistent with a ensure that customers are treated fairly to fully benefit modest acceleration of credit growth) and trading in from the country’s financial system (Box 1.4). Box 1.4: Treating customers fairly in relation to transactional accounts and fixed deposits At the request of the National Treasury the World Each phase of the product life cycle, from design, offer, Bank Group undertook a Retail Banking Diagnostic and sale through to operation, administration, and focusing on the provision of consumer transactional closure, was reviewed. Current practices in South Africa accounts and fixed deposits by retail banks in South were assessed against international good practices Africa. The report was released for public comment and the policies promoted by South Africa’s financial in September 2018 by the National Treasury and the sector authorities through their Treating Customers Financial Sector Conduct Authority (World Bank, Fairly program. Fair treatment in this context includes 2018d). The Diagnostic aimed to assess the fairness the appropriate design of products and services that of banks’ treatment of consumers with transactional meet customers’ needs and the provision of clear accounts and fixed deposits and to identify potential information to customers at the point of sale; ensuring improvements that could be achieved through that products perform as customers have been led regulatory reforms. The focus was on accounts to believe; and that customers are able to submit offered to low-income customers. complaints and disputes and have these resolved. 13 | South Africa Economic Update 12 | Chapter 1 Yet, the diagnosis found that product pricing is cost and value be provided; an effective regime that complex and acts as a potential barrier to the prohibits unfair terms and fees be established; the effective use of transactional accounts by low- implementation of an improved disclosure regime to income customers, making it difficult for customers ensure that all institutions provide customers with to compare and assess different products. It also timely, clear and comparable information; and that found that terms and conditions, as well as charges, reporting requirements on financial access targets could be potentially unfair. Against these findings, be strengthened. These reforms would facilitate the the diagnostic suggests that transactional accounts adoption of the outcomes-based regulation model that cater for low-income customers in terms of currently under consideration. On the expenditure side, household consumption three quarters of 2018 and household consumption remained an important domestic driver of growth. grew by 1.9% compared to the previous year (Figure 1.7). However, household spending was affected by higher In spite of the government’s intentions to consolidate Value-Added Tax, higher fuel levies, and other fiscal the budget, general government consumption still measures that came into effect in April 2018. Tighter grew by 1.2%, a consequence of the most recent monetary policy raised the cost of credit. Yet lower wage settlements in the civil service as well as higher inflation, notably from food prices and a stronger rand, spending on goods and services. spelt some relief for household budgets in the first Figure 1.7: Contributions to GDP (demand side) (Percentage point contributions to year-on-year growth) 8 6 4 2 0 -2 -.4 -6 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Households General Government Public investment Private investment Change in inventories Exports of goods and services Imports of goods and services Source: StatSA and World Bank staff calculations Oil prices put pressure on consumers in 2018, when international oil prices declined substantially. although they dropped in November. Low oil prices The World Bank estimates that a 100% increase in oil had supported household consumption in South prices reduces South African household consumption Africa since declining from a peak in 2013 (Figure 1.8). by about 5%, and vice versa. Comparing 2018 and 2017, Oil prices picked up again in 2016, putting pressure on the increase in oil prices is estimated to have reduced household consumption in subsequent years. In 2018, household consumption by about 1.5%. the oil price put pressure on motorists until November, Chapter 1 | South Africa Economic Update 12 | 14 Figure 1.8: Oil prices and estimated impact on household consumption (Oil price (LHS) and percentage change in consumption relative to highest recent oil price (Q1 2013)) 120 7% 100 6% 5% 80 4% 60 3% 40 2% 20 1% 0 0% 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 Oil price (LHS, US$) Percentage change in household consumption due to change in oil price Source: StatSA and World Bank staff calculations Fixed investment remains stuck in low gear. investment momentum has been soft since 2015 and Notably, SOEs were responsible for the greatest drag declined by an average 0.3% year-on-year between on investment growth in 2017, while private sector the third quarters of 2015 and 2018. Inventory build- investment subtracted from growth in the first three up is responsible for an overall positive contribution quarters of 2018 (Figure 1.9). The construction sector of gross capital formation to GDP growth in the first continues its slump from 2017. Investment in non- three quarters of 2018 (Figure 1.9). residential buildings was also weak in Q3. Overall, Figure 1.9: Contributions to gross fixed capital formation (Percentage point contributions to year-on-year growth, by type of organization) 5 3 1 -1 -3 -5 -7 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 General government Public corporations Private business enterprises Gross fixed investment Source: StatSA and World Bank staff calculations. International trade subracted from growth (Figure and precious metals. Imports outgrew exports, 1.10). Exports stepped up over the course of 2018 with with a strong increase in the third quarter driven by a strong third quarter, driven by exports of vehicles and machinery and electrical equipment, vehicles and transport equipment, base metals, vegetable products transport equipment, chemical products and mineral 15 | South Africa Economic Update 12 | Chapter 1 products, again supporting the narrative of improving performance once more highlights the importance momentum in manufacturing. Overall, net exports of the government’s structural reforms which can be subtracted 0.7 percentage points from year-on-year expected to make South Africa more competitive in growth in the first three quarters of 2018. The trade global markets. Figure 1.10: Exports and imports of goods and services (imports, exports (LHS), and net exports (RHS) in 2010 constant rand, million, seasonally adjusted and annualized) 1,050,000 100,000 1,000,000 80,000 950,000 60,000 40,000 900,000 20,000 850,000 0 800,000 -20,000 750,000 -40,000 700,000 -60,000 650,000 -80,000 600,000 -100,000 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 Net exports (RHS) Exports Imports Source: StatSA and World Bank staff calculations Labor Market Developments in South Africa Unemployment remains high Little progress in reducing unemployment is President Ramaphosa signed the National Minimum consistent with the weak economy. In the first Wage Bill into law, making it effective on January 1st, three quarters of 2018, unemployment averaged 2019. The bill was formulated by the National Economic 27.1%, slightly lower than an average 27.7% in the Development and Labour Council and has been in the same period in 2017. Respectively, for 2018 and 2017, works since 2015. The parties agreed to set the minimum broad unemployment (i.e. including discouraged hourly wage at R20, benefiting over 6 million workers workers) averaged 37.1% and 36.6%. Although earning below R3,700 per month but excluding domestic this suggests an improvement in the labor market, and farm workers, who are expected to be covered outcomes deteriorated over the course of the year: at a later stage. Exemptions will also be made for unemployment stood at 26.7% in Q1 2018, climbing to employers facing business constraints. A commission 27.5% by Q3. The main reason for this deterioration will be set up to review the minimum wage bill and make over the year is that employment grew more slowly annual adjustments. While unions have welcomed the in the first three quarters (0.4% average) than the announcement, critics of the bill have raised concerns labor force (0.8% average), demonstrating the about the fact that it may lead to job cuts due to difficulty of absorbing new entrants into the labor employers having to pay higher wages, adding to the market (also see Chapter 2). Youth unemployment cost of doing business and have unintended negative remains high at an average 53.0% in the first three consequences on inequality, such as raising the prices quarters of 2018. of goods consumed by poor households. Chapter 1 | South Africa Economic Update 12 | 16 Unemployment, even among those with tertiary education, has been steadily rising since 2008 Only three out of ten sectors contributed to the lift in (13.7%) followed by the transport sector (10.8%) and the employment in the third quarter of 2018. The finance, community and social services sector (10.4%). trade and construction sectors added 215,000 jobs, enough to offset losses in the other sectors. However, Education remains an important factor in the labor formal employment decreased in the third quarter with market. The proportion of jobless is the highest among manufacturing, mining, transport and construction South Africans that haven’t passed the matric exam chiefly responsible for the dip. A year-on-year (secondary not completed, Figure 1.11), amounting comparison shows that fewer jobs were created in the to 34.8% in 2017 and 33.6% between January and first three quarters of 2018, with 105,000 added against September 2018. Of concern is that unemployment 117,000 in 2017. This is mainly due to dismal performances among those with a tertiary level of education in the mining, manufacturing and community and social has been on a steady rise in the last decade from services sectors in 2018. With regards to remuneration, 7.6% in 2008 to 12.7% in 2018. Despite the general between the first and the third quarter of 2018, total deterioration in employment conditions, these wage per worker has increased by 6.7% with the numbers emphasize the importance of education in highest increase recorded in the manufacturing sector accessing job opportunities. Figure 1.11: Unemployment by education level 35 30 25 20 15 10 5 0 No Less than Primary Secondary Secondary Tertiary Other schooling primary completed not completed completed completed 2008 2016 2017 Jan-Sep 2018 Source: StatsSA Fiscal Developments in South Africa The government remains committed to fiscal and debt sustainability The 2018 Medium Term-Budget Policy Statement partnerships with development finance institutions, (MTBPS) reflects priorities communicated by multilateral development banks and the private sector. President Ramaphosa in his state of the nation The MTBPS also slashed the growth forecast in the address in February. The themes of strengthening National Treasury’s macro-framework; over-optimism institutions and the acceleration of infrastructure and in growth forecasts, both by the government and service delivery for economic growth, job creation, and markets, has historically added to pressure on fiscal poverty reduction were prominent. A stronger emphasis sustainability (Box 1.5). As was announced by President on partnerships with the private sector was evident and Ramaphosa and reflected in the MTBPS, the economic aligned with the presidential imperative to attract private stimulus and recovery plan will be implemented within investment of US$100 billion over the next five years. The existing budget resources, which in light of high public MTBPS also reflected the president’s announcement of indebtedness, is itself critical for investor confidence. As an Infrastructure Fund, which is intended to unblock the such, the 2018 MTBPS was a candid and realistic fiscal delivery and maintenance of infrastructure by leveraging policy pronouncement. 17 | South Africa Economic Update 12 | Chapter 1 Box 1.5: When the cycle becomes the trend: the impact of the commodity super cycle on South Africa As in many emerging markets, South Africa’s fiscal elevated commodity prices for commodity exporters buffers are depleted. The latest National Treasury like South Africa could easily create the impression projections in the October 2018 MTBPS see gross that this was not a temporary effect: the commodity debt stabilizing at 59.6% of GDP by 2023/24 following super cycle extended the business cycle to the point several upward revisions. Why did South Africa’s fiscal where a “mirage” of higher trend growth was created. position weaken so dramatically since the global The long cycle was mistaken for the trend (Box financial crisis? After all, South Africa had managed Figure 1). When the commodity super cycle ended, to significantly reduce the public debt burden between it became clear that growth had been sustained by the dawn of democracy in 1994 and the mid-2000s. commodity prices and trend growth had been lower than anticipated. Indeed, after 2009, three-year Although there are various factors that explain the growth forecasts by the National Treasury tended to increase in public debt, one possible reason lies in be overly optimistic (Box Figure 2) — but the National the long commodity super cycle, which lasted from Treasury was not alone in doing this, as the market 2000 to 2015. The unusual length of a boost from consensus forecasts tended to be optimistic too. Box 1.5 Figure 1: How the commodity super cycle created the impression of higher trend growth "The cycle is the trend" Business cycle Value added Actual trend Mirage of a negative Actual negative output gap output gap Time Box 1.5 Figure 2: National Treasury growth forecasts vs. actual growth (%) 7 6 5 4 3 2 1 0 -1 -2 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Real GDP 3.5yr forecast Real GDP growth Actual Chapter 1 | South Africa Economic Update 12 | 18 Overestimating growth potential can adversely affect fiscal policy pro-cyclical: weakening growth would be policymaking. Prudent fiscal policy is countercyclical, perceived as moving the economy below potential, meaning a fiscal expansion when growth falls below warranting fiscal support; yet as potential was potential (or trend) and fiscal restraint when growth overestimated, the economy received fiscal support exceeds potential. While the South African government even though it was still above potential. This can help has been committed to counter-cyclical fiscal policy, the explain why South Africa’s brief structural surplus of commodity super cycle may have inadvertently turned the mid-2000s did not last long (Box Figure 3). Box 1.5 Figure 3: Estimates of South Africa’s budget balances (%) 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 2002 2004 2006 2008 2010 2012 2014 2016 Recessions Budget Balance Structural Budget Balance In essence, this means that South Africa did not save structural reforms becomes even more important. as much as it should have in good times to prepare for In this context, an economic stimulus and recovery bad times. South Africa’s high debt levels now make it plan that focuses on boosting growth by acting as a difficult to counter a recession, such as the one in the confidence stimulus, accelerating structural reforms, first half of 2018, through fiscal stimulus measures. and increasing the quality of spending, instead of a When fiscal space is limited, boosting growth through traditional fiscal stimulus, is a prudent choice. Source: Amra et al. (2019). The MTBPS estimates the consolidated budget points in the 2018/19 and 2020/21 fiscal years. This deficit at 4% of GDP in 2018/19, with consolidated is due to lower than anticipated revenue collections expenditure expected at 33.1% of GDP and revenue at coupled with weak economic activity. Consequently, 29.1% in 2018/19. The 2018/19 deficit estimated in the government debt is expected to rise at a rate higher MTBPS is 0.4 percentage points higher than projected than projected in the 2018 Budget Review, to stabilize in the 2018 Budget (Figure 1.12A). The budget deficit at 59.6% of GDP in 2023/24, 3.5 percentage points is expected to widen to 4.2% of GDP in 2019/20, with higher than projected (Figure 1.12B). a cumulative slippage in deficit of 1.3 percentage 19 | South Africa Economic Update 12 | Chapter 1 Figure 1.12: Fiscal consolidation objectives, 2016-18 A. Budget balance (% of GDP) B. Gross public debt (% of GDP) 70 2019/20 2020/21 2021/22 2018/19 2015/16 2016/17 2017/18 60 50 0 40 -1 30 20 -2 10 -3 0 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 -4 -5 2018 MTBPS 2018 Budget 2018 MTBPS 2018 Budget 2017 MTBPS 2017 Budget 2017 MTBPS 2017 Budget Source: World Bank Staff calculations based on National Treasury data Higher-than-expected Value-Added Tax refunds The second spending pressure continues to come from resulted in revenue underperformance in 2018. SOEs. According to the Auditor-General, state entities Corporate and personal income tax underperformed are responsible for irregular expenditure of R27 billion. slightly relative to what was expected in the 2018 Despite changes to corporate governance, mistakes of Budget. Weak economic growth and soft activity the past (and other pressures, such as the refusal by in wholesale and retail trade, manufacturing and some municipalities to pay Eskom) continue to negatively transport were responsible for lower than anticipated affect SOE performance. Additional bailouts in 2018/19 corporate tax collection, while personal income are penciled in for South African Airways (R5 billion), tax was impacted by job losses, moderate wage South African Express Airways (R1.2 billion) and the South settlements (except in the public sector) and slower- African Post Office (R2.9 billion). The MTBPS commits than-anticipated growth in public sector employment. the government to reforming loss-making SOEs. Further Corporate income tax collection is expected to fall short upward revisions to expenditure were made to provide by 2.5% and personal income tax by 0.3% in 2018/2019. for the Judicial Commission of Inquiry into State Capture Despite the rate hike from 14 to 15% implemented at and the Commission of Inquiry into tax administration the beginning of the 2018/19 fiscal year on 1 April 2018, and governance in the South African Revenue Service Value-Added Tax collections are expected to come in (R409 million in total), school infrastructure backlogs 5.8% below the budget target — largely due to an (R800 million), drought relief (R3.4 billion), and the expedited clearance of the backlog in Value-Added operationalization of the Budget Facility for Infrastructure Tax refunds. The MTBPS commits the government to (R870 million). As in previous years, this was partly limiting tax increases in future, paying more attention compensated with adjustments from unspent funds and to living within the constraints of the existing budget. departmental underspending as well as by tapping into the R8 billion contingency reserve. Overall, adjustments The government stays committed to its expenditure to expenditure compared to the 2018 Budget are minimal. ceiling. Two major sources of pressure on expenditure stand out, with the wage bill the most important. Public expenditure is expected to continue growing Minister of Finance Tito Mboweni stated in the MTBPS in real terms, with a focus on education, healthcare that no additional fiscal resources would be made and social development. Over the medium-term available for the portion of the recent public-sector expenditure period, government projects spending R5.9 wage settlement that exceeds the allocation that trillion, 56.2% of which will be allocated to education, had already been budgeted. National and provincial health, the provision of water and electricity services, departments were enjoined to identify savings that and social grants. Education is then the fastest-growing would allow them to continue operating within their expenditure segment after debt-service costs, which original appropriations. reflects the widening budget deficit. Health comes Chapter 1 | South Africa Economic Update 12 | 20 third. The rapid growth in education appropriations was early-grade reading and mathematics in basic education. prompted by the increase in financial aid for poor and In addition, existing school infrastructure budgets are to working-class students pursuing PSET, (see Chapter 2). be reprioritized to focus on improvements to sanitation. Other priorities in education spending concentrate on Inflation and Monetary Policy in South Africa Growing external and domestic inflation pressures have been contained so far Although lower than in 2017, inflation picked up include the rand, with the SARB expecting volatility in over the course of the year 2018, partly driven by the exchange rate over the medium term. Monetary a depreciating exchange rate and higher oil prices policy tightening in the US coupled with the expectation (until November when oil prices dropped). Inflation that in late 2019 the European Central Bank will start an accelerated from 4.1% in the Q1 2018 to 4.9% in Q3 and interest rate-hiking cycle, present additional upside risks averaging 5.2% in November. During the last meeting to inflation prospects. Domestically, the SARB expects of the Monetary Policy Committee (MPC) in November higher wage growth, combined with rising electricity, 2018, the South African Reserve Bank (SARB) announced water and fuel tariffs to exert upward inflation pressures, that it would expect inflation to accelerate from an despite continuously weak aggregate domestic demand. average 4.7% in 2018 to 5.5% in 2019. For core inflation – which excludes food, fuel and electricity prices, the SARB Over the years, the Monetary Policy Committee has now expects it to be 5.3% in 2019. Inflation expectations emphasized the need to act on the second-round (Figure 1.13) of market analysts for 2019 are broadly in effects of supply-side shocks. However, the task of line with SARB estimates. disentangling first and second-round effects has been made difficult by several factors, including extended The SARB explicitly expressed the intention to keep periods of exchange rate depreciation, higher electricity inflation expectations anchored near 4.5% but there and water prices and rising fuel prices due to higher are both global and domestic risks to this objective. At international oil prices. These factors have contributed to a global level, tighter global financial conditions, financial the economy facing shocks of a more persistent nature. market volatility, rising oil prices and shifting investor As a result, a delayed monetary policy adjustment could sentiment towards emerging markets are projected to keep inflation expectations away from the target and may have an impact on the path of inflation. Domestic factors require a stronger monetary policy response in the future. Figure 1.13: Actual and forward inflation expectations (actual and expected inflation) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 2015/03/31 2015/06/30 2015/09/30 2015/12/31 2016/03/31 2016/06/30 2016/09/30 2016/12/31 2017/03/31 2017/06/30 2017/09/30 2017/12/31 2018/03/31 2018/06/30 2018/09/30 Inflation expectations Inflation Upper end Midpoint Lower end Source: StatSA and Bureau for Economic Research 21 | South Africa Economic Update 12 | Chapter 1 Robust monetary policy is serving South Africa well. earned asset that serves South Africans well, by, for Guaranteeing the independence of the SARB was a instance, limiting the impact, or “pass-through” of major achievement under South Africa’s Constitution the volatile currency on inflation (Box 1.6). Keeping of 1996. Adherence to an inflation target and strong inflation manageable is important for all South communication around its intentions to maintain Africans, especially the poor, as it helps to maintain inflation within the target range has helped build their purchasing power. the credibility of the SARB. This credibility is a hard- Box 1.6: Credible monetary policy cushions the impact of exchange rate volatility on inflation What have been the key drivers behind a decline in path. Unlike many other central banks, especially in the exchange rate to inflation pass-through in South emerging market economies, the SARB still enjoys a Africa over the past two decades? Monetary policy constitutionally-enshrined independence. credibility stands out as the main factor. A central bank is considered credible if it successfully manages Consequently, periods of high monetary policy the level of inflation, inflation volatility, and provides credibility are mirrored by a decline in the exchange certainty about monetary policy. The SARB has rate pass-through (ERPT). It is apparent from Box 1.6 successfully managed to stabilize all three factors since Figure 1 that the two series are negatively correlated. 2009. As a result, inflation expectations have been well The relatively high pass-through observed at the anchored, in line with its objective. All agents, including beginning of the sample coincides with instances of price setters, have become forward looking in setting low credibility. It is followed by a downward trend in their expectations. The decline in inflation from 2004 the ERPT while at the same time credibility improves, to 2006 was followed by a decrease in expectations reaching the peak in 2006 before starting its decline of all agents. However, expectations remain anchored in the second quarter of 2007. Notice that this decline at 6% even after a decrease from 6.4% in the second is mirrored by an upward trend in the ERPT, which quarter of 2014 to 4.1% in the second quarter of 2015. rises to 27% in the third quarter of 2009, whereas Credibility was enhanced by improved communications the monetary policy credibility reaches the trough by the SARB. These include the systematic publication two quarters earlier. Again, the two series portray of macroeconomic assumptions and forecasts after a negative relationship from 2009 to 2012, where each Monetary Policy Committee meeting and a press credibility increases sharply, then remains high and conference, complemented by a detailed analysis of stable until the end of the sample period. It is worth prevailing macroeconomic conditions in its six-monthly mentioning that the period of high and stable monetary monetary policy review. A further improvement has policy credibility coincides with stable inflation and been the publication of its core Quarterly Projection inflation expectations, albeit at the upper end of the Model in 2017,² which gives the projected interest rate official target range. Box 1.6 Figure 1: Cumulative credibility and exchange rate pass-through 0.30 25 0.25 20 0.20 15 0.15 ERPT 10 0.10 Credibility (RHS) 5 0.05 0.00 0 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 Source: Kabundi and Mlachila (2018). ² See Botha et al. (2017). Chapter 1 | South Africa Economic Update 12 | 22 The External Sector in South Africa External vulnerabilities remain heightened In August 2018 emerging market currencies, Both exports and imports experienced a strong third particularly the Turkish lira and the Argentinian quarter in 2018. Robust car manufacturing in 2018 peso, suffered dramatic losses that negatively translated into export growth (Figure 1.14A). Other support affected investor sentiment towards this group for exports came from stone, plaster and cement, base of economies. The ripple effect dragged down the metals, mineral products, and machinery and agricultural South African rand and the gains stemming from products. On the import side (Figure 1.14B), fuel dominated the election of President Ramaphosa were reversed. growth throughout the first three quarters of 2018. In local Further pressures on the rand emanated from the currency terms, the merchandise trade balance remained normalization of monetary policy in the United States, positive. Coupled with services trade, and income and the strengthening of the US$, and higher oil prices. current transfer payments, the current account deficit Compared to some other emerging markets, South continued to remain negative, a consequence of South Africa is relatively resilient (Box 1.7). Yet external Africa’s structural savings-investment gap. By the third shocks continue to pose potential risks to the South quarter of 2018, the current account deficit stood at 2.3% African economy. of GDP, little changed from the previous quarter (2.4%). 23 | South Africa Economic Update 12 | Chapter 1 Box 1.7: South Africa’s vulnerability and resilience in emerging market storms The South African rand depreciated by almost 10% a constitutional amendment on land. The depreciation against the dollar in August 2018 and was temporarily of the exchange rate was as marked as in Turkey (Box trading at a two-year low. This fueled concern that Figure 1a). The share of foreign holdings of domestic South Africa was vulnerable to a crisis from an bonds fell from a high of 43% in March to about 40% emerging markets sell-off originating in Turkey. currently (Box Figure 1b). However, those levels are Pressure on the rand came from foreign investors not far from historical levels and the retreat followed retreating from both debt and equity markets because a build-up in foreign ownership following the election of a general sell-off in emerging markets, as well as of President Ramaphosa. from domestic events such as investor concerns about Box 1.7 Figure 1: Exchange rates and foreigners’ bonds holdings A. Exchange rates 250 250 ZAR TL ARS 230 230 210 210 190 190 170 170 150 150 130 130 110 110 90 90 70 70 02/08/2018 02/01/2018 02/02/2018 02/03/2018 02/04/2018 02/05/2018 02/06/2018 02/07/2018 02/09/2018 02/10/2018 02/11/2018 ZAR TL ARS B. Share of foreign holdings of domestic bonds 44% 43% 43% 42% 42% 41% 41% 40% 40% 39% 39% Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Source: Haver Analytics and Bank staff calculations Debt and equity markets remain resilient. The purchases compensate for portfolio flow reversals, Johannesburg stock exchange’s All Share Index fell so that bond prices have held steady and the fall in by 5% since the beginning of the year, and the yield the stock market has been relatively contained. This on the benchmark 10-year bond stayed relatively reflects South Africa’s liquid and deep financial market flat (Box Figures 2a and 2b). It appears that domestic that provides a buffer against capital flow reversals. Chapter 1 | South Africa Economic Update 12 | 24 Box 1.7 Figure 2: Stock markets’ indexes and 10-year bonds’ yields A. Stock market index Johannesburg, Istanbul and Buenos Aires 120 120 JSE All Share ISE National 100 Merval 115 110 110 105 100 100 95 90 90 85 80 80 75 70 70 02/01/2018 02/02/2018 02/03/2018 02/04/2018 02/05/2018 02/06/2018 02/07/2018 02/08/2018 02/09/2018 02/10/2018 02/11/2018 JSE All Share ISE Natio nal 100 Merval B. 10-year bond yields: South Africa, Turkey and Argentina 320 320 South Africa Turkey Argentina 270 270 220 220 170 170 120 120 70 70 02/01/2018 02/02/2018 02/03/2018 02/04/2018 02/05/2018 02/06/2018 02/07/2018 02/08/2018 02/09/2018 02/10/2018 02/11/2018 South Africa Turkey Argentina Source: Haver Analytics and Bank staff calculations Foreign currency borrowings have been high. The actively hedging in financial markets. In addition, South private sector has significant foreign exchange- African firms have been investing abroad, providing denominated debt, raising concern about the a further hedge against exchange rate risk. Overall, effects of continued foreign exchange depreciation. macroeconomic fundamentals – the current account Though individual companies may be vulnerable, deficit, the fiscal deficit, and inflation – are sound and the macroeconomic risks appear to be contained. gross foreign exchange reserves are at $47 billion. The exchange rate has historically been volatile and And while South Africa’s growth prospects are poor, both state-owned companies and corporates either requiring structural reforms, the economy appears to have natural hedges against export earnings or are be fairly resilient to contagion risks. Both exports and imports experienced a strong side (Figure 1.14B), fuel dominated growth throughout third quarter in 2018. Robust car manufacturing in the first three quarters of 2018. In local currency 2018 translated into export growth (Figure 1.14A). terms, the merchandise trade balance remained Other support for exports came from stone, plaster positive. Coupled with services trade, and income and cement, base metals, mineral products, and and current transfer payments, the current account machinery and agricultural products. On the import deficit continued to remain negative, a consequence 25 | South Africa Economic Update 12 | Chapter 1 of South Africa’s structural savings-investment gap. deficit stood at 2.3% of GDP, little changed from the By the third quarter of 2018, the current account previous quarter (2.4%). Figure 1.14: South African exports and imports A. Percentage point contributions to year-on-year exports growth 30 20 10 0 -10 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 -20 Other ICT Vehicles Machinery Base metals Precious stones Wood Agriculture Mineral products Stone, plaster, cement Leather, textile and footwear Chemical, plastics and rubber Exports Food, beverage and tobacco Miscellaneous manufactured articles Source: Haver Analytics and World Bank staff calculations B. Percentage point contributions to year-on-year imports growth 30 20 10 0 -10 -20 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 Other ICT Vehicles Machinery Metals Precious stones Wood Agriculture Mineral products Stone, plaster, cement Leather, textile and footwear Chemical, plastics and rubber Imports Food Miscellaneous manufactured articles Source: Haver Analytics and World Bank staff calculations Chapter 1 | South Africa Economic Update 12 | 26 The Outlook for South Africa The World Bank expects growth at 0.9% for cautious picture (Figure 1.15) there are reasons 2018. Although the previous South Africa Economic to be optimistic about future growth, given the Update (World Bank 2018b) of April 2018 cautioned government’s structural reform agenda. As this against large upward revisions to growth forecasts chapter has argued, many of the critical issues early in the year — as most of South Africa’s that will raise South Africa’s growth potential are constraints to growth are deeply structural —its being tackled. Investment pledges under President GDP forecast of 1.4% for the year 2018 turned out Ramaphosa’s investment drive are assumed to to be optimistic. The main reason is that the boost materialize, further supporting growth. Chapter to confidence had a smaller than expected cyclical 2 will also look at a specific policy, fee-free impact, while the weakness in the agriculture higher education that in the long run is expected sector was underestimated. A stronger investment to contribute to more inclusive and sustainable response that was expected to translate into higher growth. Although structural reform always takes exports had also been anticipated. time, the World Bank expects an acceleration of South African growth, to 1.3% in 2019 and 1.7% in Yet a recovery in growth remains likely. While 2020 (Figure 1.16). the SARB’s cyclical indicators still paint a Figure 1.15: South African Reserve Bank cyclical indicators 107 105 103 101 99 97 95 93 01/01/2015 01/03/2015 01/05/2015 01/07/2015 01/09/2015 01/11/2015 01/01/2016 01/03/2016 01/05/2016 01/07/2016 01/09/2016 01/11/2016 01/01/2017 01/03/2017 01/05/2017 01/07/2017 01/09/2017 01/11/2017 01/01/2018 01/03/2018 01/05/2018 01/07/2018 01/09/2018 01/11/2018 Leading Coincident Lagging Source: Haver Analytics Figure 1.16: GDP growth projections 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2018 2019 2020 Emerging markets and developing economies South Africa Source: World Bank Staff Calculations 27 | South Africa Economic Update 12 | Chapter 1 The external environment holds opportunities and stimulus and recovery plan are likely to have significant challenges for South Africa. The World Bank expects growth dividends. They include a renewed focus the US$ oil price to stay flat at their 2018 levels in 2019- on infrastructure and the anticipated progress on 21, with the impact on the South African consumer innovative and cost-effective infrastructure delivery depending on the rand-dollar exchange rate. Should and maintenance will provide a much-needed the 2019 elections reduce political uncertainty, large competitiveness boost to South Africa. The new and abrupt depreciations of the rand due to domestic approach of leveraging partnerships with development reasons will be less likely. However, external events finance institutions, multilateral development banks, such as heightened trade tensions and tighter and the private sector, combined with the pledge to monetary conditions in global markets could continue strengthen capacity in local government, makes this to put pressure on the rand. Slowing demand in China a promising area for reform. More reliable, modern, will drag down prices for South Africa’s commodities, and affordable infrastructure will benefit South with the exception of platinum group metals, while African businesses and citizens alike, including the more advanced economies are also expected to slow poor. However, ensuring that townships and rural in the medium term. Another drought brought about areas benefit from the infrastructure expansion will by the El-Nino weather phenomenon is likely in 2019, be a critical marker of the program’s success. Finance which will again hurt agricultural production. This Minister Mboweni has declared that safeguarding the emphasizes that domestic efforts are paramount in country’s investment-grade credit rating from Moody’s lifting growth and improving the conditions for social will be a priority and a stronger fiscal outlook will be progress and that South Africa cannot rely on external crucial to maintaining that. Overall, faster growth and factors to achieve this. more efficient public spending can make a significant contribution to strengthening South Africa’s fiscal Maintaining the momentum on reforms and position, creating more room for investing in people, safeguarding fiscal sustainability remain important. South Africa’s most important asset. Reforms outlined by the president in the economic Chapter 1 | South Africa Economic Update 12 | 28 Table 1.1: Baseline annual growth forecasts 2015 2016 2017 2018e 2019f 2020f Real GDP growth, at constant market prices 1.3 0.6 1.3 0.9 1.3 1.7 Private consumption 1.8 0.7 2.2 2.0 1.7 2.0 Government consumption -0.3 1.9 0.6 1.0 0.8 -0.1 Gross Fixed Capital Formation 3.4 -4.1 0.4 0.2 1.2 2.1 Exports, Goods, and Services 2.8 1.0 -0.1 2.9 3.7 2.4 Imports, Goods, and Services 5.4 -3.8 1.9 5.0 4.0 2.0 Real GDP growth, at constant factor prices 1.2 0.4 1.1 0.9 1.3 1.7 Agriculture -6.4 -10.2 17.7 -2.9 1.7 2.0 Industry 0.8 -0.8 1.5 0.1 2.2 2.5 Services 1.6 1.4 0.4 1.3 0.9 1.4 Inflation (Consumer Price Index) 4.5 6.6 5.2 4.7 5.1 5.0 Current Account Balance (% of GDP) -4.4 -3.1 -2.5 -3.4 -3.5 -3.2 Net Foreign Direct Investment (% of GDP) -1.3 -0.4 -0.3 0.3 0.4 0.6 Fiscal balance (% of GDP) -3.7 -3.6 -4.0 -4.0 -4.2 -4.2 Debt (% of GDP) 48.9 50.6 52.7 55.8 56.1 57.4 Primary Balance (% of GDP) -1.0 -0.5 -1.0 -0.8 -0.6 -0.5 International poverty rate ($1.9 in 2011 PPP)a,b 18.9 19.1 19.1 19.0 18.9 18.7 Lower middle-income poverty rate ($3.2 in 2011 PPP) a,b 37.6 37.9 37.9 37.8 37.6 37.3 Upper middle-income poverty rate ($5.5 in 2011 PPP)a,b 57.1 57.3 57.3 57.2 57.1 56.9 (a) Calculations based on 2014-LCS (b) Projection using neutral distribution (2014) with pass-through = 0.87 based on GDP per capita in constant LCU Source: World Bank staff calculations. Note: e = estimate, f = forecast. Investing in higher education is an important step turn will create demand for both skilled and unskilled toward more inclusive growth. Investing in tertiary labor. In a fiscally constrained environment, it will be education is an investment in South Africa’s human critical that the government’s higher education policy capital, making it easier for labor market entrants to does not impose unnecessary burdens on the national find jobs and earn higher wages. At the same time, budget. Chapter 2 reviews policy options to sustainably a greater number of skilled workers will reduce the and equitably expand enrollments in universities and wage premium, thus raise the competitiveness of the colleges in more detail. South African economy, and foster growth—which in 29 | South Africa Economic Update 12 | Chapter 1 CHAPTER 2 Tertiary Education Enrollments Must Rise Chapter 2 aims to convey the following key messages: • Enrolling more students in PSET is a must for South Africa to strengthen its social contract and remain competitive in a world constantly reshaped by rapid technological progress. • • More public resources can be devoted to PSET as long as they generate positive social returns. However, the new students’ financial aid scheme will have little impact on PSET enrollments and education quality – thus job creation - and will only slightly reduce income inequality. • • South Africa could reduce inequality faster and more sustainably by rebalancing budgetary resources towards supply-side interventions: improving the quality of education, notably in TVET and community colleges, and expanding PSET admission capacity, including through greater private sector participation. This would be made fiscally possible by limiting financial aid to poor students while extending income- contingent loans to more affluent students. There is large consensus in South Africa on the need for PSET enrollments to rise There is a growing recognition in South Africa of works programs and support for entrepreneurship.4 the need to expand the Post School Education and Training (PSET) system to enroll more students in Raising PSET enrollments is also likely to consolidate universities, the Technical Vocational Education and the South African social contract. Violence and Training (TVET) sector, community colleges, and in other disruption around the #Fees Must Fall movement can tertiary education institutions, both public and private. be interpreted as a reflection of a deteriorating social In 2013 the government’s White Paper on PSET (DHET, contract, whereby citizens delegate their individual 2013), foresaw the need to more than double the number powers to the state in exchange for services. One of them of students enrolled in universities and TVET by 2030 is the fair provision of income opportunities, which could while students in the #Fees Must Fall movement that have been undermined, inter alia, by the conjunction of started in 2015 demanded drastically reduced tuition two important trends: (i) a rising proportion of youth fees. In December 2017 former President Jacob Zuma eligible to enroll at university, but who are financially announced that students from poor and working-class unable to do so; and (ii) a persistently high skills premium families would be entitled to free higher education – the difference between the wages of skilled and through the National Student Financial Aid Scheme unskilled workers – leading to growing wage inequality.5 (NSFAS) by raising the threshold for financial eligibility Between 2006 and 2015, the proportion of annual cohorts from a maximum family income of R122,000 to R350,000, obtaining the bachelor’s pass that enables academic and converting loans to grants. access to university, rose from 8 to 15% (from 86,000 to 166,000 students annually), reflecting efforts since Raising PSET enrollment is seen as a key ingredient 1994 to improve schooling outcomes for children from of a policy package necessary to sustainably reduce poor backgrounds (World Bank 2018b). But the number South Africa’s record-high youth unemployment. of first-time students (of all ages) entering university Since 2010, labor force surveys show that more than grew less rapidly, from 140,000 to 172,000, and broadly 50% of the population aged 15-24 is unemployed, a stagnated since 2010 (DHET, 2018a).6 This growing level that is among the highest in the world.³ To tackle perception of being excluded from the opportunity to this, the authorities see increased PSET enrollments and reap the benefits of higher education – whatever the graduations as a central part of a policy package that also reason: affordability or absorptive capacity of the PSET includes active labor market policies, tax incentives, public system – may have added to the frustrations of students. Figure 2.1: University access and wage inequality, 2006-15 72 2 70 1.8 68 1.6 66 64 1.4 62 1.2 60 1 58 0.8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Wage Inequality (LHS) University access (RHS) Source: World Bank staff calculations. Note: University access is measured by the ratio of first-time students over the number of bachelor pass graduates in the previous school year. ³ Greece, Spain, Nigeria and Italy are a distant second with youth unemployment rates ranging between 30% and 40% in 2017. India and China record youth unemployment rates close to 10%, while Brazil saw youth unemployment rise from 15% in 2014 to 30% in 2017. Source: World Bank Development Indicators. 4 See World Bank (2016, 2017) for discussions on the impact of employment tax incentives and active labor market policies, and the Centre for Development and Enterprise (2017) for a general discussion on youth unemployment in South Africa. 5 Source: World Bank (2018a). The rise in wage inequality resulted from a combination of a persistently high skills premium combined with a decline in the creation of semi-skilled jobs over the period 2005-14. Over the same period, the share of the top 10% of earners’ wages compared to the share of the bottom 40% almost doubled. 6 While the limited absorptive capacity of universities is the primary factor curtailing the entry of first-time students, a secondary factor is that students stay longer at university, as more enroll in post-graduate degrees and fewer in short diploma course programmes. 31 | South Africa Economic Update 12 | Chapter 2 At 19%, South Africa’s gross enrollment rate in Africa belongs, but also with lower middle-income university lags behind most peers. In 2015, a total countries. Nonetheless, universities only constitute of 985,000 students were enrolled in universities – one part of the broader PSET7 sector, in which a total including 338,000 at the distance learning University of 2.2 million students were enrolled in 2015, including of South Africa (UNISA), – representing 19% of the private higher education institutions (147,000 students population aged 19-23 and comparing poorly with the in 2015); public TVET (738,000); private TVET (88,000); group of upper middle-income countries to which South and community colleges (283,000). Figure 2.2: University enrollment rate in South Africa and selected countries, 2015 OECD Members Brazil Upper Middle Income Lower Middle Income South Africa Sub-Saharan Africa 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: World Development Indicators. Many academically eligible students do not enroll, especially among poor and working-class families In 2015, public PSET institutions could only enroll a and community colleges, while Grade 12 may give small proportion of academically eligible students. access to higher education.8 Against these numbers, Focusing on youth aged 18-25, South Africa counted in students aged 18-25 enrolled in TVET colleges were that year 4.5 million youth with at least grade 10 not fewer than 600,000, while students aged 18-25 enrolled in any PSET institutions, including 2.8 million enrolled in undergraduate studies at university were with at least grade 12. Grade 10 gives access to TVET fewer than 550,000 (Figure 2.3).9 7 Learnerships, internships and skills development programs under the sector education and training authorities (SETAs), are also considered by the Department of Higher Education and Training (DHET) as a part of a broad definition of the PSET system. However, these are not discussed in this chapter as they are financed through the skills levy while public universities, TVET and community colleges are funded from the consolidated government account. SETA students are currently not envisaged as beneficiaries of the new financial aid scheme. 8 Grade 12 may be decomposed into 3 sub-categories: matriculants with bachelor pass, matriculants without bachelor pass, and grade 12 learners not having passed the matric (high-school) exam. Only the bachelor pass allows enrollment for a degree at university and is obtained by about a quarter of grade 12 learners (World Bank 2018b). However, universities also offer certificates and diplomas to the two other categories. The breakdown between the three categories is however unavailable in the NIDS household survey used in this analysis. 9 In 2015, another 290,000 (respectively 80,000) students aged 18-25 enrolled in private TVET and community colleges (respectively private higher education institutions). However, students in these institutions are not eligible for NSFAS support. The remaining 715,000 students enrolled in PSET were older than 25 or in post graduate studies, which may not be a relevant group for NSFAS support as it is targeted towards first time students. See Annex for a detailed report on PSET demographics. Chapter 2 | South Africa Economic Update 12 | 32 Figure 2.3: Enrollments in public TVET colleges and universities, 2015 TVET University 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Not enrolled Enrolled Not enrolled Enrolled Poor Non-poor eligible Not eligible Poor Non-poor eligible Not eligible Note: Eligibility is in reference to NSFAS support. Source: World Bank Staff calculations based on NIDS 2014/15. This comparison highlights the potentially large social contract that is undermined by the persistent latent demand for PSET which could be met through exclusion of large segments of the society, higher demand (encouraging students to enroll) or supply enrollments are worth pursuing as a policy. But it interventions (expanding PSET admission capacity). is equally risky given the current challenging fiscal As far as demand interventions are concerned, in situation and the difficulties already faced by the particular the policy of covering the education costs PSET institutions in offering education of a quality that of students living in families with incomes lower than maximizes professional opportunities for all students. R350,000, it is worth noting that 89% of students enrolled in public PSET fell under this category; and This chapter reviews policy options to sustainably that 95% of students with at least Grade 10 not and equitably expand PSET enrollments in South enrolled were also in this category. The proportion of Africa through demand and supply interventions. As poor students (i. e. living in 2018 under the upper bound already discussed in Chapter 1, measures to strengthen poverty line of R1,200 per month, per person) in the human capital and the pipeline of students eventually various categories also reflected that: enrolling in the PSET system is central to South Africa’s broad development agenda and to the capacity of the • Poor students are underrepresented among PSET system to equip students with the skills markets students academically eligible to enroll in PSET need; as is the need to structurally increase demand institutions, when compared with their proportion for skilled labor to ensure more young graduates in the total population – 47.6% in 2015. find employment. In this respect, World Bank (2018b, 2018c) highlighted the importance of focusing more • Among academically eligible students who have on the first thousand days of a child’s life, capacity enrolled in PSET institutions, poor students are and accountability of school teachers, economic also underrepresented when compared to the competition in product markets, property rights, skilled proportion that they make up of this cohort. migration and spatial integration. Acknowledging these important dimensions, this chapter focuses on what Enrolling more students in university and the may be achieved within the PSET sector to address the rest of the PSET system is an attractive, but risky insufficiency of skills which was ranked as the most investment proposition for South Africa. Given its binding constraint to reducing poverty and inequality likely large impact on reducing poverty and inequality, in the World Bank Systematic Country Diagnostic for sustainably stimulating growth and strengthening a South Africa (World Bank 2018c). 33 | South Africa Economic Update 12 | Chapter 2 The Promise of Encouraging PSET Enrollments through Financial Support to Students A PSET degree is a strong assurance against poverty. composition), a tertiary education degree reduces the The World Bank’s recent poverty assessment (World probability of an adult being poor by 20 percentage Bank, 2018a) underlines the strong relationship points compared with those with just secondary between individual poverty and education status. schooling (Figure 2.4). A PSET degree in South Africa Individuals with tertiary education are more likely to increases incomes by 85% on average (World Bank earn higher incomes in the labor markets, enjoying 2018a), which is comparable to Rwanda, Kenya and the combination of a lower probability of being Ghana, where the percentage increment in wages unemployed10 with higher wages. Controlling for stands close to 100% between upper secondary and individual characteristics (work status, age, family post-secondary education (Darvas et al., 2017). Figure 2.4: Poverty and tertiary education, 2006-15 100 2006 2009 2011 2015 Poverty headcount ratio (%) 80 60 40 20 0 No primary Primary Lower secondary Upper secondary Tertiary Inactive Occupied active No education No children 1 2 3 or more children 1 2 3 4 5 6 7 or more 0-5 6-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+ Work Education Number of Household Age children size Source: World Bank 2018a. Poor returns from TVET, limited access to finance and risks of not graduating may discourage students from investing in PSET Many academically eligible poor students do not In 2011, more than 70% of students from the poorest enroll in TVET or university. In 2015, 8% of students 5 deciles that had the bachelor pass did not enroll at from poor households that had at least Grade 10 were university, against less than 30% for the richest decile enrolled in TVET, against 14% of non-poor students. (Figure 2.5). 10 The unemployment rate of individuals with a PSET education stood at 13.1% in 2017 (Figure 1.10), against 30.5% for individuals without. Graduating from university in South Africa drastically reduces the probability of being unemployed, irrespective of other individual characteristics, including race (van den Berg and van Broekhuizen, 2012). Computations of unemployment rates with NIDS data used in this chapter confirm that the economic origin (e. g. being from a poor family) is not a significant determinant of unemployment: graduates from different economic origins can expect the same unemployment rate. Chapter 2 | South Africa Economic Update 12 | 34 Figure 2.5: University access by decile 100% Proportion of students 80% not enrolling 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 Income deciles Source: World Bank staff calculations based on Income and Expenditure Survey 2010/11. Computing private rates of return to investing in • In TVET, the total cost borne by students is PSET education provides some insight into why estimated at R50,000 per year (2018 prices), prospective students who are poor are less likely for registration and tuition fees (R10,000), and to enroll. Despite the gains made through higher books, meals, and accommodation or transport earnings once completed, investing in PSET can be (R40,000). The total cost borne by government considered risky for the poorest students as they per TVET student is estimated at R14,000, are burdened with upfront payments for registration through direct subsidies to colleges (R11,000) and tuition fees, books, meals, accommodation or and unrecovered NSFAS loans (R3,000). Under transport. There’s also the opportunity cost of forgoing a fully-subsidized scheme, the government potential income while studying, to which should be would transfer R40,000 per year to eligible TVET added the risk of taking too long to, or eventually students and an additional R10,000 – on top of not graduating. Table 2.1 shows estimates of private already existing subsidies – to TVET colleges to rates of return from PSET at the national level and cover the tuition fees for each student receiving for students from poor households.11 It measures the financial support. extent to which graduating from PSET improves the stream of an individual’s revenue over time, net of • At university, the total cost borne by students initial expenditure on PSET. Computations account for is estimated at R90,000 per year (2018 prices), an individual’s economic background (whether or not for registration and tuition fees (R50,000), and they originate from a poor household, as measured by books, meals, and accommodation or transport parents’ incomes), to capture the possibility that other (R40,000). The total cost borne by government factors – such as networking that makes it easier for per university student is estimated at R50,000, a graduate from a rich background to rapidly find a through direct subsidies to universities (R43,000) job – may influence returns (See Annex for background and unrecovered NSFAS loans (R7,000). Under data). It also accounts for the probability and time taken a fully-subsidized scheme, the government to graduate, versus dropping out before graduating, would transfer R40,000 per year to eligible which differ across deciles. It finally accounts for the university students and an additional R50,000 estimated costs of studying at various PSET levels, to universities on top of existing subsidies for currently broken down between students and the each student receiving financial support, to cover government through a cost-sharing mechanism: their tuition fees. 11 Rates of return should be understood as being computed in “real” terms, that is, after being discounted for consumer price inflation. 35 | South Africa Economic Update 12 | Chapter 2 Table 2.1: Private rates of return from PSET TVET Undergraduate Graduate National Levels Private, cost sharing 1.4% 7.6% 10.2% Private, subsidized 8.9% 28.8% 33.5% Poor Students Private, cost sharing 1.3% 7.4% 9.9% Private, subsidized 11.2% 34.3% 39.6% Source: World Bank staff calculations based on NIDS Computation of private rates of return from PSET remain high at university, these are more than reveals several interesting facts: offset by high wage premia (R6,000 per month for undergraduates, R15,000 per month for • First, that investing in TVET under a cost-sharing graduates), and low unemployment rates (12% for arrangement, where students pay most study- undergraduates, 1% for graduates), irrespective of related expenditure, may not be a sound economic the student’s original economic status. proposition. At less than 2%, rates of return from TVET are very low:12 relatively low wage premia • Third, that subsidizing studies would significantly (less than R2,000 per month), high unemployment increase private rates of return, including for TVET, rates (21%) and very high dropout rates contribute which would make enrollment more attractive. to this outcome, where differences between poor Comparing rates of return under a cost-sharing and non-poor students lie in lower opportunity arrangement with that of a subsidized scheme – costs but higher dropout rates for poor students. where private studying costs would be covered by Such low rates of return may explain high defaults public grants – suggests it would make a significant against NSFAS loans, as discussed below. difference in terms of higher rates of return, in particular for poor students. While increases in • Second, that private rates of return increase with private rates of return would average 17 percentage the academic level eventually reached: from less points at the national level, they would average 22 than 2% for TVET, rates of return reach 10% for percentage points for poor students (Figure 2.6). graduate studies (despite a much higher cost of The main reason behind this difference lies in the studying at university than at TVET), reflecting fact that the higher risk of dropping out and the the strong mismatch between the demand for related cost13 among poor students would be borne and the supply of skills. While dropout rates by the government under the subsidized scheme. 12 At less than 2% per year, returns can be considered low in a country where the preference for the present remains high, given the high prevalence of HIV and the relatively low life expectancy at birth of 63 years at the national level, and even lower for poor students. On South Africa’s equity markets, a minimum real rate of return of 8% can typically be expected for long-term instruments. 13 Same computations suggest that the cost of dropping out without graduating at university is equivalent to 9 times the annual income of students at the national level; and 32 times that of poor students. The cost of dropping out without graduating from a TVET institution is equivalent to 5 times the annual income of students at the national level; and 17 times that of poor students. Chapter 2 | South Africa Economic Update 12 | 36 Figure 2.6: Private rates of return from subsidized education Graduate, poor Undergraduate, poor TVET, poor Graduate, national Undergraduate , national TVET, national 0% 10% 20% 30% 40% 50% Cost sharing Subsidized Source: World Bank staff calculations Subsidizing PSET students’ cost will strongly increase enrollment demands Easing the budget constraints of the poor could Furthermore, evidence for South Africa suggests that contribute to higher student enrollments. As in supporting students financially results in a higher many other Sub-Saharan African countries (Darvas probability of their completing their university studies. et al. 2017), it is likely that low-income South African Analyses by De Villiers et al. (2013), and Van Broekhuizen families lack information on studying opportunities, et al. (2016) suggest that on average, students receiving whether on admission processes, support schemes NSFAS support performed academically better than non- and leveling programs; overestimate the opportunity NSFAS students in terms of throughput and retention, and cost of studying and the risks of not graduating; and after controlling for differences in matric performance, underestimate its returns.14 But it is also likely that school-level factors, and other university-specific and severe liquidity constraints among poor students program-specific factors.17 prevent higher enrollments in PSET, particularly in university where rates of returns are positive. The liquidity constraints were only partially relaxed with the NSFAS concessional loans,15,16 as they covered only tuition fees, leaving poor students to cover the rest of their education costs and to fully bear the risk of not graduating, in a context of already high household indebtedness. Therefore, subsidizing all the costs of studying could encourage higher enrollments in PSET, particularly among poor students, as the financial assistance would ease the liquidity constraints and strongly reduce the economic cost of not graduating. 14 Insufficient information on academic and financial opportunities may also explain why academically eligible students from poorer deciles delay their entry into university compared with more advantaged ones (Van Broekhuizen et al. 2016) and miss out on deadlines for bursaries and university admissions (Fedderke et al. 2000). 15 In 2015, NSFAS granted support worth R7.2 billion to 179,000 university students (averaging R40,200 per student), and R2.1 billion to 235,000 TVET students (averaging R8,900 per student). 16 This is not to say that NSFAS loans have been ineffective in encouraging student enrollments. Figure 2.5 suggests that NSFAS loans (accruing to the poorest five income deciles) may have attenuated the strong relationship between incomes and enrollments, which is observed for richer deciles. 17 Van Broekhuizen et al. (2016) find that completion (respectively dropout) rates at university are about 10 percentage points higher (respectively lower) for students supported by NSFAS than for students not supported by NSFAS. However, this does not necessarily imply a causal linkage between receiving financial support and academic performance. Indeed, as financial support was partly awarded on the basis of academic merit it is plausible that, on average, learners who received NSFAS loans would have performed better than those who did not, regardless of whether they were awarded the loans. Given this uncertainty, no improvement in academic performance is assumed in the computations of rates of return under the subsidized scheme, which can be considered a conservative assumption. 37 | South Africa Economic Update 12 | Chapter 2 The Fiscal and Quality Challenges of Expanding Tertiary Education The new student financial aid scheme will not be fiscally sustainable The increases in PSET enrollments are expected to amounted to R70.4 billion in 2015, or 1.7% of GDP. be financed mostly with public resources and would therefore have significant fiscal implications. As Moving from a cost-sharing scheme to a subsidized discussed extensively in Chapter 1, protracted weak scheme of financing PSET will have a negative impact economic growth makes South Africa’s fiscal situation on long-term fiscal sustainability. As discussed below, challenging. Therefore, additional expenses that would expenses incurred until 2017 by the government on tertiary not have a rapid and large impact on growth could further education included direct subsidies to PSET institutions, weaken the fiscal position and debt sustainability. In the administrative costs, and the bailout of uncollected NSFAS case of PSET, most additional expenditure would be on loans. The system was broadly sustainable, as higher domestic goods and services, such as accommodation taxes, both direct and indirect, paid by the new graduates and education, and are therefore likely to generate positive compensated for public expenditure on PSET. This is multipliers. Nonetheless, there would be a lag before reflected in the small, but positive estimated fiscal rates of there is increased productive capacity through a higher return under the cost-sharing arrangements, computed at supply of skilled workers. It would take several years for the individual level, where initial public costs are weighted students to graduate; not all students would graduate; against longer-term additional tax revenues stemming those who do graduate would likely spend time trying from the higher incomes and consumption expenditure of to find jobs matching their skills and potential; and not new graduates (Table 2.2). However, poor market outcomes all graduates would find a job or participate in the labor in terms of wages and employment and high dropout rates market. And, given the existing tax structure, additional tax reflect the low value addition of TVET education, making the revenue collected on the higher incomes of new graduates fiscal rate of return of TVET barely positive and lower than and through their consumption spending, may not be that generated at university (3 to 5%). Under the new NSFAS sufficient to offset additional public expenditure on PSET. scheme, taking on a larger share of the cost through the subsidization of all education costs, without generating any In the fiscal year 2015/16, the government’s allocation additional tax revenue, would push the fiscal rate of return to the PSET system amounted to R51.2 billion, or 1.2% into negative territory. The overall financial sustainability of of GDP (DHET, 2018b). This included direct subsidies to the PSET sector would be threatened and its subsidization universities (R32.9 billion), transfers to TVET colleges would need to be justified with the mobilization of positive (R6.6 billion) and community colleges (R1.8 billion), and externalities, such as the reinforcement of the social NSFAS financing (R9.3 billion18), see Table 2.3. From a contract through reduced inequality of opportunity, or revenue perspective, public PSET institutions could externalities of agglomeration.19 Alternatively, keeping count on other sources, notably tuition fees not financed the fiscal deficit unchanged would require creating fiscal by NSFAS, research income and donations totaling R19.2 space through expenditure cuts in other sectors and raising billion. Thus, the total revenue of public PSET institutions additional taxes. Table 2.2: Public rates of return from PSET TVET Undergraduate Graduate Public, cost sharing 1.3% 3.2% 5.5% Public, subsidized -4.1% -1.5% 0.2% Source: World Bank staff calculations based on NIDS 18 Numbers may differ between the government contribution to NSFAS and NSFAS financial support to students. In 2015/16 for instance, the budget appropriation for NSFAS was R6.4 billion while R9.3 billion was transferred to students. This was because NSFAS could, until 2018, rely on other sources of revenue, including loans recovery. Nonetheless, for the sake of simplicity and alignment with fiscal projections where loans are converted into grants to be exclusively financed with budgetary resources, in this chapter we equate transfers to students with budget contributions to NSFAS. 19 Externalities of agglomeration can, for instance, take the form of spatial concentration of skilled workers. World Bank (2017) discusses the extent of such agglomeration effects in Cape Town and Johannesburg. Chapter 2 | South Africa Economic Update 12 | 38 The implementation of the new students’ financial aid scheme will reduce the availability of the budgetary resources critically needed to improve the quality of education A second important challenge lies in the preservation students in 2015, dropout rates ranged from 84% for and improvement of education quality as PSET 4-year degrees, to 95% for 3-year diplomas. enrollments rise. Increased enrollments cannot be made at the expense of quality education, as appears to have Though the quality of education cannot be improved been the case in TVET in recent years. Between 2010 and overnight, it is certainly a critical policy question for TVET 2015, average real expenditure per full-time equivalent if a sustainable and equitable rise in PSET enrollments TVET student dropped by 40%, whereas the number is to be ensured. Quality of education statistics discussed of TVET students grew from 359,000 to 738,000. Other above confirm observations made through the estimated statistics and assessments confirm this likely decline in the rates of return. The TVET system does not generate the quality of TVET education: certification rates20 improved skills needed by labor markets in sufficient numbers and between 2013 and 2016, but remained below 50% on quality and is costly to operate, given the high dropout rates. average, concealing low completion rates, with only one- In contrast, the university system seems to generate skills third of students eventually graduating. And authorities demanded by markets at a reasonable cost, even if this (DHET, 2017), acknowledge that: “in recent years TVET average assessment probably conceals wide differences college quality has been compromised because of the between universities of excellence such as Witwatersrand, pressure to increase enrollments without compensatory Stellenbosch, and Cape Town on the one hand,22 and increases in staff and other resources. […] Currently UNISA and historically disadvantaged universities23 on the learners in the TVET system graduate at an exorbitant other. Thus, the authorities have concluded that investing per capita cost, which is unsustainable. Moreover, the in improving the quality of education in TVET, UNISA and absorption rate of TVET graduates in the economy is historically disadvantaged universities may prove more also of serious concern”. At university, real expenditure efficient and sustainable than enrolling new students in per student grew cumulatively by 6% between 2010 and current circumstances (see below). As for PSET institutions 2015, while enrollments grew modestly, from 893,000 to that already offer good private returns, attention should 985,000. Graduation and throughput rates21 for university focus primarily on addressing market failures in advancing undergraduates rose slightly. Yet, at UNISA, the largest financial resources to students and in sharing the risks of university by enrollment in South Africa with 338,000 not graduating. The Short-term Outlook for the PSET System The expansion of the PSET system will be constrained by inadequate admission capacity and quality considerations in the short term From 2019, demand for PSET is likely to grow about 1% a year, and faster should continuous significantly for several reasons. progress at school level build a stronger pipeline to access PSET. • First, progress made in recent years to prepare school students academically for PSET is unlikely • Second, greater financial support to cover to abate. From the late 1990s to now, the annual education-related expenses beyond tuition for number of matriculants grew from 270,000 to a larger group is not only likely to raise demand 450,000, and the proportion of those matriculants for PSET among new cohorts, but also that of with bachelor passes grew from one-fourth to cohorts from previous years who are employed two-fifths. At the minimum, these flows should or idle – the so called “neets”, those who are not in be projected to grow at the demographic pace of employment, education or training. In 2017 South 20 The certification rate is the formal recognition of a qualification awarded to a successful learner in the last year of study. 21 The graduation rate is the proportion of students enrolled at university (irrespective of the year of study) who graduate in a given year. For undergraduates it rose from 15.6% in 2010 to 17.4% in 2015. The throughput rate is the proportion of students completing their curriculum in time. For 3-year undergraduate degree programs, it rose from 20.5% in 2008 to 28.3% in 2014 (DHET, 2018c). 22 See World Bank (2017) for a discussion on the quality of these universities in terms of research and innovation. 23 Lack of disaggregated economic data prevents the computation of rates of return at the PSET institution level. 39 | South Africa Economic Update 12 | Chapter 2 Africa counted 715,000 matriculants aged 20- of no more than 210,000 first-time students every year 24 not in employment, education or training. Of (including about 17,000 foreign students). As for TVET, those, 9% had a bachelor’s pass. Under the fully- net enrollments are projected to stagnate, indicating the subsidized scheme, granting students an annual need to improve the quality of education to meet labor sum of R40,000 to cover living expenses would be market needs. With a small decline in dropout rates, a considerable inducement24 for people to attend an inflow of 191,000 first-time students in public TVET PSET institutions, even if they are academically is projected. unsuccessful and leave after one or two years. Using the probabilistic model discussed below, we The full fiscal effects of implementing the new estimate that offering the possibility of receiving financial support scheme will be absorbed within 4 R90,000 for university studies or R50,000 for TVET years. The new policy announced by former President studies to students from families with annual Zuma in December 2017 implies that from January incomes lower than R350,000, could increase the 2018, first time students from families earning less notional demand for university studies by 23% and than R350,000 would receive financial support for for TVET by 88%. undergraduate or TVET studies on a “N+1” basis, the normal duration of the degree program, plus one year. The demand for tertiary education is unlikely to be Therefore students pursuing a 3-year degree would met in the near future. Over the period 2019-2022, the be eligible for 4 years of financial support. Given that admission capacity of PSET institutions, the “supply the average duration of undergraduate and TVET side” of tertiary education, will likely be the biggest studies is 3 years, one could expect that the full effect constraint to the faster enrollments necessary to meet of implementing the policy will be felt in 4 years. the rise in demand. By end-2018, universities planned Meanwhile, students who were receiving NSFAS support to increase their enrollments by 1.9% a year. Taking into in 2017 will continue to do so under the financial and consideration students already enrolled and continuing academic conditions prevalent at the time, with the only their studies or repeating, and those graduating or difference being that loans from 2018 will be converted dropping out, the higher enrollments mean an inflow into grants. The new student financial aid scheme will be progressive from an income distribution perspective Short term fiscal and poverty impacts of the new The new financial aid scheme is likely to influence support scheme will depend on the still-unknown the income distribution of enrolled students. proportion of first-time university and TVET students Assuming modest increases in the flow of entrants benefiting from it. It is unclear how students responded to to university and stagnation in numbers for those the greater financial incentives as the admission process entering TVET, the fiscal implication of the new for 2018 closed shortly after the policy announcement in scheme will be mainly determined by the proportion December 2017 and probably did not allow enough time of enrolling students receiving financial aid. for all students to react to it. To address this uncertainty, Results of the probabilistic model suggest that the a probabilistic model was developed to predict the composition of entrants to university will be affected propensity of academically eligible youth aged below 25 by the full implementation – a 100% take-up of the to enroll as first-time students in university and in TVET. financial incentive – of the new aid scheme. From Enrollment propensity is estimated based on individual 86.6% currently, the proportion of South African25 characteristics – location, race, age, employment status university students eligible for financial aid would – and the possibility for those from families earning less rise to 91.6% while the proportion of TVET students than R350,000 to receive financial support of R90,000 eligible for financial aid would grow from 90.7% to annually for university and R50,000 for TVET. Results 92.5%. Meanwhile, the proportion of poor first-time suggest that income levels had a significant influence students could also rise noticeably, from 35.0% to on the likelihood to enroll. Individual enrollment 42.5% at university, and from 30.5% to 41.0% at TVET. propensities are then ranked from highest to lowest, A higher relative increase in demand for PSET from and the predicted composition of enrolling students is poor students is consistent with the rates-of-return determined by this ranking, given the PSET admission approach, which indicates that a subsidized scheme capacity of first-time students discussed above. would in particular benefit the poorest students. 24 R40,000 would add more than 50% to the parental income of about 47% of students who have a matric only, and 30% to those with matric with a bachelor’s pass. 25 Under the proposed new NSFAS scheme, only South African citizens are eligible to receive financial support. Chapter 2 | South Africa Economic Update 12 | 40 The new financial aid scheme will absorb a much described above, proportion of students eligible higher proportion of budgetary resources. It is to receive aid, and constant per-student subsidy projected that the PSET allocation could increase from to universities and TVET, in real terms. PSET R65 billion in 2017/18 to R172 billion in 2022/23, or appropriations retained up to 2020/21 in the medium- from about 1.4 to 2.5% of GDP (Table 2.3), calculated term expenditure framework presented with the 2018 using the assumptions of first-time student flows Budget Review are of similar magnitude. Table 2.3: The estimated fiscal cost of the new financial aid scheme (PSET-related fiscal expenditures, R billions, nominal terms, unless indicated otherwise) Fiscal Year 2015 2016 2017 2018 2019 2020 2021 2022 Transfers to universities 32.9 39.5 41.9 45.4 49.0 52.9 57.2 61.7 Transfers to TVET colleges 6.6 6.9 7.4 7.9 8.3 8.8 9.4 9.9 Transfers to community colleges 1.8 2.1 2.2 2.4 2.5 2.7 2.8 3.0 University students financial aid 7.2 10.3 10.8 24.0 37.0 51.0 62.2 65.2 TVET students financial aid 2.1 2.1 2.2 11.0 18.1 23.4 28.7 31.3 Other 0.6 0.7 0.7 0.8 0.8 0.9 0.9 1.0 Total 51.2 61.6 65.4 91.4 115.8 139.8 161.2 172.2 Total (% of GDP) 1.2 1.4 1.4 1.8 2.1 2.4 2.6 2.5 Source: World Bank staff calculations based on Department of Higher Education and National Treasury data. Notes: Years refer to fiscal years, e.g., 2015 is the fiscal year 2015/16 from April 1, 2015 to March 31, 2016. The pressure on the fiscus may not be felt of their studies. immediately. As already discussed, the fiscal cost will grow over the years as new cohorts of first-time But the projected fiscal outcome of the new students join the new financial aid scheme. The take- financial aid scheme casts doubt on South Africa's up of the financial incentives may initially be less than capacity to meet its White Paper enrollment 100%, due to delays in establishing the necessary targets. Under the new financial scheme, increasing capacity at NSFAS to support a much larger pool of public TVET admission capacity by 10% would cost students and because of initial information gaps. an additional 0.05% of GDP and an additional 0.10% The take-up rate of the previous NSFAS financial of GDP to increase university admission capacity aid scheme was around 40%. Nevertheless, a much by 10%. Thus, the White Paper’s objectives to raise larger take-up is expected under the new scheme, enrollments at TVET and university by 140% and 60% as it is more generous and less risky than the respectively by 2030 (see Table 2.4, not considering previous one. In this regard, current capacity issues enrollments in community colleges) may prove to be at NSFAS 26 to manage higher demand could be extremely challenging within South Africa’s medium regressive, disfavoring the less-informed students, term fiscal framework, and likely impose expenditure the majority of whom are poor, and those without cuts in other sectors or higher taxation to protect debt financial resources to pay in advance for the costs sustainability objectives. 26 In August 2018, the government raised "serious concerns about the failure of NSFAS to effectively confirm funding for students and disburse funding timeously to students in TVET colleges and universities. [. . ] Despite increased DHET support, NSFAS continues to face serious challenges in its business processes, IT systems, capacity, and policies and controls. [. . ] These challenges have had a grave effect on the student funding environment since 2017, and have been exacerbated in 2018". Source: Republic of South Africa, 2018. 41 | South Africa Economic Update 12 | Chapter 2 A more targeted financial support to students would further reduce inequality while freeing additional financial resources to increase enrollments and improve quality of education The fiscal constraint should nonetheless not • A second scenario (NSFAS) where the new compromise the desired objective of increasing PSET financial aid scheme would be implemented, along enrollments. Rather, it may prompt revisiting the policy the lines reported in Table 2.3: keeping PSET real trade-off between supporting more students, on the expenditure per student constant and limiting one hand, and improving admission capacity and the admission capacity unchanged at TVET and slowly quality of education of the PSET sector. A quantitative growing at university. simulation exercise illustrates this point, running the World Bank Computable General Equilibrium model • A third scenario (NSFAS+) where (i) the new (World Bank 2018b) over the period 2019-30. It consists financial aid scheme would only be extended to in comparing three different policy scenarios: students from the first five deciles; (ii) real per student TVET expenditure would be raised by 50%; • A baseline scenario (BAS) in which the new financial and (iii) PSET admission capacity would be raised aid scheme would not be implemented. This by 10% compared with the two previous scenarios scenario just serves as a counterfactual to measure through higher transfers to public institutions. the impact of the new financial aid scheme. Table 2.4: The estimated impact of various PSET policy interventions on equity and growth Poverty Rate Gini Bottom 40% share GDP index ($1.9 a day) Coefficient of total consumption (2017=100) 2017 18.6% 0.628 8.6% 100.0 BAS (2030) 12.7% 0.595 10.2% 119.5 NSFAS (2030) 12.1% 0.588 10.5% 117.8 NSFAS+ (2030) 7.9% 0.574 11.5% 120.0 Source: World Bank staff calculations. Simulations highlight the mixed impact of the new with public investments in improving the quality of financial scheme on inequality, as well as its high education offered by TVET institutions and expanding macroeconomic cost. Comparing the BAS and NSFAS admission capacity would further reduce inequality, scenarios (Table 2.4) suggests that the latter would while stimulating economic growth. help in reducing income and consumption inequality. Income for poor households would increase, in relative Therefore, as South Africa decides to devote more terms, more than that of non-poor households, even public resources to PSET, it could explore alternative though three-fifths of financial aid would accrue to options that increase PSET enrollments faster and non-poor students (as they represent a larger share more equitably in terms of access to and quality of eligible students enrolling in PSET). Yet, the cost of education received. These policy options are for the economy would be significant, entailing a loss discussed in the next section. As they would entail of 1.4% of GDP in 2030 compared with the baseline institutional reforms, massive investments, and scenario. This is because NSFAS transfers would be greater coordination between various players, such mostly consumed (as opposed to saved and invested), policy options may take time to be implemented, and would not lead to higher PSET enrollments, and would should therefore be considered as opportunities of a bear a much higher fiscal cost. In contrast, more medium to long-term nature. targeted financial support to poor students, combined Chapter 2 | South Africa Economic Update 12 | 42 Improving Comprehensively the PSET System over the Long Term Expanding the South African PSET system over the expanding tertiary education in a fiscally sustainable longer term to improve youth opportunities for manner. Several options can be explored in improving professional development will require revamping the performance of PSET institutions, thus ensuring the institutional framework and funding sources. better returns in terms of meeting social objectives, South Africa is not unique. International experience and their capacity to mobilize both public and private shows that countries that face acute public resource revenue, including reviewing financial aid in terms of constraints cannot achieve rapid growth in enrollment cost effectiveness and efficiency. by following the traditional model of building and funding new public universities with budgetary resources. For South Africa was one of the first countries in the this reason, spreading enrollment growth across a developing world that started thinking carefully variety of PSET institutions and delivery modalities — about balanced development of its tertiary public and private — can achieve higher enrollments in education system. In the late 1990s, the government a financially manageable way from a public resources set up a task force to investigate the size and shape perspective. Non-university institutions such as TVET, of the post-apartheid PSET system, which developed a community colleges, and distance education institutions comprehensive plan for diversifying tertiary education usually have lower per-student costs than universities,27 opportunities in South Africa. Along the same lines, especially research-intensive ones. Countries that have the 2013 White Paper (DHET, 2013) spelt out ambitious allowed the private sector to invest in setting up good- enrollment growth targets for each of the main quality institutions have better managed the cost of segments of the PSET system (Table 2.5). Table 2.5: Planned evolution of the PSET system by main segment (2015-2030) Sub-Sector 2015 % 2030 % Public universities (excl. UNISA) 647 28.9 1,000 17.9 UNISA 338 15.1 600 10.7 TVET 738 32.9 2,500 44.6 Community colleges 284 12.6 1,000 17.8 Private higher education institutions 147 6.6 300 5.4 Private colleges 88 3.9 200 3.6 Total 2,242 100.0 5,600 100.0 Source: World Bank staff calculations based on DHET (2013 27 Typically, TVET colleges prepare young learners for specific trades and offer technical degrees. Community colleges prepare young and adult learners for professional work and further education and offer associate degrees while distance-learning institutions extend online general and professional education for young and adult learners and offer associate, bachelor, masters and PhD degrees. 43 | South Africa Economic Update 12 | Chapter 2 Diversifying from the university sector towards TVET and community colleges The White Paper enrollment targets will be difficult the brightest graduates from second-tier PSET to achieve but point to the need to develop the institutions to move onto mainstream universities. non-university sector, given the current pipeline of That would be a way to attract promising school students. Current demographic trends indicate students and eliminate the perception of training that enrolling 5.6 million students in PSET by 2030 institutions as academic dead-ends. In that would require doubling the share of matriculants in respect, the government’s decision to expand age cohorts, from 38% in 2017 to above 70% in 2030. the proportion of students enrolled in community This is unlikely to be attained, considering the modest colleges is a strategic move, as these colleges improvements in pass rates since 1994 from an are less narrowly defined and specialized than average of 32% from 1994-99 to 40% from 2011-17, and TVET. By combining a core liberal arts curriculum the fiscal constraints discussed above. Nevertheless, with vocationally-oriented professional courses, increasing non-university academic opportunities community colleges could also equip students to in TVET and community colleges in particular, will later transfer to a university. By contrast, TVET be instrumental in raising overall PSET enrollments, programs focus on technical trades that do not given the need for marketable skills among a growing transfer easily to universities. Furthermore, from a number of students who do not necessarily have the lifelong-learning perspective, community colleges academic capacity to thrive at university. Described offer young and adult students better long-term by the White Paper as the cornerstone of the PSET opportunities. Their flexibility could cater for those system, TVET and community colleges will increasingly not in employment, education or training and contribute to building the skills of South African youth. employed matriculants who may find it difficult to enrol in TVET several years after passing matric. In expanding enrollment at TVET and community colleges, it will be critically important to ensure that The North American success with community this does not reinforce social stratification. In too many colleges could be a source of inspiration for South countries, TVET and community colleges are perceived as Africa. With one-third of its expenditure on PSET PSET institutions for the poor and are not able to attract devoted to non-university institutions, Canada stands students from richer origins (see Box 2.3 for a counter as an outlier among OECD countries, which on average example). Diversifying the PSET sector so that students devote only one-eighth to it.28 In Canada, community from all economic origins access all forms of institutions colleges enrolled 43% of the total undergraduate in reasonable proportions is critical for strengthening population in 2017, playing a key role in the preparation social cohesion, and the attention and resources put by of middle-level workers and employees. In future the authorities on the various PSET institutions. Two main South African government may consider changing the avenues can to be considered here. balance between the community college and the TVET sub-sectors and increase the share of enrollment in • First, South Africa needs to reallocate funds the former segment. In Canada and the United States, towards TVET and community colleges and offer community colleges tend to offer vocational programs first-rate programs and facilities with qualified that generate the middle-level and high-level skills instructors. As already discussed, the returns required for entry into many professions. In fact, enjoyed by both private and fiscal investment specialists nowadays tend to look at TVET institutions in TVET are low and need to be raised before and community colleges as performing similar enrollments are expanded. TVET/community functions and label them as providers of technical colleges are less expensive than universities and career education. The Georgetown University because of the shorter duration of studies and Center on Education and the Workforce estimates that the absence of research facilities. But they should between 2018 and 2024, the United States will have not be underfunded, and the negative trend of about 16 million openings for middle-skill jobs—those declining per capita investment in TVET needs to requiring more education than a high school diploma be reversed. Some institutional reforms discussed but typically not a bachelor’s degree. With the rapid in the next section can also help improve the growth of the digital economy, these jobs will be in quality of education offered at TVET institutions. industries such as computer technology, health care, construction and high-skill manufacturing, and require • Second, the PSET system needs to ensure year-long certificates or two-year degrees. pathways and transfer agreements that allow 28 Organization for Economic Cooperation and Development (2008). Chapter 2 | South Africa Economic Update 12 | 44 Expanding cost-effective distance education modes South Africa has been a leader in distance education where a faculty member is fully responsible for on the African continent. Established in 1946, UNISA developing, teaching and assessing her/his own offers certificate, diploma and degree programs course. Instead, WGU unbundles the process by up to the doctoral level to 338,000 students, is the assigning each of those responsibilities to different largest open distance learning institution in Africa; groups of professionals, including industry experts. and one of the world’s top 30 mega-institutions.29 The success of this innovative online model has been UNISA is committed to providing inclusive education due in large part to the extensive academic support and keeping abreast of a rapidly evolving distance that learners receive from WGU: every student is education landscape. It sees itself as a public-good paired with a mentor who provides advice, from institution with a clear social mandate on the national enrollment to graduation. In addition, each course and international scene. has a group of mentors responsible for disciplinary support (this is the equivalent of a teaching assistant UNISA has the potential to absorb a larger in the traditional campus-based model). Learners proportion of South African students and to play also receive help from WGU’s Career and Professional a major role in supporting enrollment expansion Development Center which provides guidance to targets, assuming it improves its graduation job seekers or to employed students seeking new rate to a significant degree. Thailand’s two open opportunities. universities, for example, enroll half the total student population, making them the principal instrument for The second option that UNISA could consider to expanding access and reaching out to students from improve the quality of its programs is to rely more rural areas and the poorest social stratum (Salmi, extensively on high-end Massive Open Online 2017).30 As it is responsible for a large share of all Courses (MOOCs). Today, the MOOCs come complete teacher-training programs in South Africa, UNISA also with exams and electronic feedback from teaching has a strategic role to play in building the pipeline of assistants with some also providing certificates to future PSET students. students who complete the courses. Six levels of pricing and academic recognition can be found among UNISA could apply some of the principles that have the MOOCs in operation around the world (Class made Western Governors University (WGU) one of Central, 2017): the most successful online universities in the world. A private institution in the United States, WGU is a • Free MOOCs with no academic endorsement. non-profit, fully online university, whose curriculum • MOOCs sanctioned by a single-course certificate. is competency-based. Its mission is to improve • MOOCs leading to a micro-credential (program the quality of the work force and expand access by with several courses). providing its mostly adult learners with opportunities • MOOCs giving a university credit to on-campus for independent studies, regardless of time or place. students. The university offers bachelor’s and master’s degrees in • Online degrees through MOOCs. teaching, nursing, IT and business administration, and • MOOCs as part of corporate training, whereby has been recording impressive successes as measured firms pay for the acquisition of certificates and by graduation rates, employer satisfaction, student microcredits by their employees. engagement and follow up with alumni (Middlehurst and Fielden, 2016). WGU does not employ traditional Finally, UNISA needs to guarantee the quality of instructors and its academic courses do not follow its programs through international accreditation. conventional standards. Students advance through In 2015, the Times Higher Education ranked UNISA their coursework independently and at their own as the sixth-best university in South Africa. UNISA pace. Faculty members, who are external providers was granted full institutional accreditation from the contracted by the university give personalized support Accrediting Commission of the Distance Education to students. WGU breaks the traditional model of and Training Council of the United States in 2002. integrated course design, delivery and assessment The accreditation however lapsed in 2007 and was 29 A number of private higher education providers (Mancosa, Educor) have also developed strong distance learning operations, with potential to expand beyond South Africa into the rest of Africa. Foreign distance-learning institutions, such as Getsmarter, also operate in South Africa. 30 Thailand had a tertiary enrollment rate of 52% in 2014, which is much higher than the rate achieved by its neighbour, Malaysia (30%), even though the latter is among the countries that devote the highest share of public resources to tertiary education (2.6%). 45 | South Africa Economic Update 12 | Chapter 2 not renewed. It is important for UNISA to regain distance learning institutions in an online world that international accreditation to stay on par with other has transformed drastically over the last 10 years. Encouraging effective private sector participation Faced with a rapidly growing demand for tertiary public ones, as can be seen in several Latin American education, many nations have encouraged the (Brazil, Chile, Dominican Republic, El Salvador) and growth of private PSET institutions as part of East Asian (Indonesia, Japan, Philippines, South their expansion and institutional differentiation Korea) countries. Table 2.6 shows the average strategy. In several cases, the growth of private proportion of private sector enrollment in various tertiary education has been so significant that more regions. In OECD and Sub-Saharan African countries, students are now enrolled in private institutions than the share is 32%. Table 2.6: Private enrollment as a share of total PSET enrollments Region Proportion (%) East Asia and the Pacific 42,2 Eastern Europe and Central Asia 29,2 Latin America and the Caribbean 50,2 Middle East and North Africa 39.0 South Asia 47.0 Sub-Saharan Africa 32.0 Source: Salmi (2017) Private tertiary education institutions vary. universities—secular and/or religious—that are often Using the two dimensions of degree of selectivity among the best in these countries. The second tier is in admissions and legal status, one can distinguish made up of less academically and socially selective among at least eight categories of such institutions institutions. The third tier consists of open access (Table 2.7). Several Asian, Latin American and Middle private institutions that are often of dubious quality Eastern countries have highly selective private (Salmi, 2017). Table 2.7: Types of private tertiary education institutions Degree of selectivity/legal status Elite Semi-elite Non-elite Secular non-profit X X X Religious non-profit X X For-profit X X Public-private partnerships X Source: Salmi (2017) Chapter 2 | South Africa Economic Update 12 | 46 There are few examples of private institutions Against this background, the White Paper goal of resulting from a partnership with the state, but enrolling 500,000 students in private institutions where they exist, they represent an innovative by 2030 may be considered modest. It would imply funding approach. Some of the best-known cases a decline in the proportion of private enrollments as can be found in Malaysia, where three public part of total enrollments, in a context where scarce corporations each sponsored the establishment budgetary resources will most likely curb the entry of of a private university.31 In each case, the public new students. However, several instruments could be corporation financed all the initial investment costs leveraged under the premise that greater private sector and the first three years of operating expenditure. participation would help expand enrollments at a lower Afterwards the new universities had to function cost to the state (than by expanding public universities), as independent private entities, without further while protecting the quality of education. They are: public support, except for student aid. Similarly, Al Akhawayn University in Morocco was initially funded • Regulatory reforms enabling the establishment of by an investment grant from the Kings of Morocco and private PSET institutions, including accreditations, Saudi Arabia, but now operates as an independent, under the same provisions governing public American-style university. In Kazakhstan, public- PSET institutions. Currently, private institutions private partnerships operate in the form of “joint- must hire their full contingent of administrative stock” companies established by inviting private and academic staff before being licensed to sector investors to take equity in former public operate.32 Private institutions are not allowed to universities. While the ownership is shared between call themselves “university”, even though some the state and private individuals or entities, these of them are officially licensed or accredited to universities operate as private sector institutions. deliver university degrees up to the doctorate level. The process for modernizing the curriculum Private sector investment can relax the public and opening new programs appears to be budget constraint but entails risks in terms of unnecessarily lengthy and cumbersome, with equity. Substituting private sector investment in DHET having put in place rigid procedures for the PSET for public investment may make higher PSET creation of new programs or the modernization enrollments more affordable to the public purse. of existing ones. Because of lack of capacity in the However, there is no strong empirical evidence to three regulating bodies – the Council on Higher support the view that private sector PSET can be Education, South African Qualifications Authority made cheaper to students, when comparing programs and Higher Education Quality Committee – private of similar nature and quality. Ensuring equity would institutions experience long delays in the review thus require extending financial support to poor and processing of their applications, sometimes students in private PSET and in effectively regulating up to 18 months. Box 2.1 discusses good practice fees against quality of education, as discussed later for licensing and accrediting PSET institutions. in this report. • Public subsidies linked to performance (see section It is also important to note that South African public below). These could include support for academic universities operate with the kind of flexibility often staff salaries, concessional land leases, or the associated with the private sector. Universities are chance to compete for public research funds, a free to select their students, decide on their programs provision that could be considered under South and set their fees. Their funding also relies, to a large Africa’s broader industrial policy framework.33 extent, on private financial resources. In this context, it is useful to review which functions, within each • Financial aid to low-income students in private PSET sub-sector, are best operated by the public or PSET institutions, as is the case in most countries, private sectors. but not in South Africa. 31 Universiti Teknologi Petronas; Kuala Lumpur Infrastructure University College; and Multimedia University. 32 In Poland, the government introduced simple licensing criteria to authorize the operation of new private tertiary education institutions. To start a bachelor’s program, private institutions need only have a few high-level professors, an approved curriculum and a minimal teaching infrastructure. The Polish government also allowed public university professors to take teaching assignments in private institutions. 33 See World Bank (2016) for a discussion of South Africa's industrial policy objectives and instruments. 47 | South Africa Economic Update 12 | Chapter 2 Box 2.1: Licensing and accrediting PSET institutions To assess whether a country has favorable legislation share the same socio-economic characteristics, and regulation for the private tertiary education sector, but who are enrolled in public institutions? it is useful to consider the following five aspects: • Transparent quality assurance: Does the country • Barriers to entry: Are there any precluding the have clear evaluation and accreditation criteria entry of private providers, including foreign ones? and procedures that apply equally to all tertiary education institutions? • Institutional autonomy: Does the regulatory body allow full institutional autonomy - organizational, Good practice for licensing tertiary education academic, financial and HR - of private tertiary institutions include the following considerations: education institutions? • Clear criteria and timelines, and regulatory bodies that • Eligibility for government subsidies: Can private fully comply with their own criteria and deadlines. institutions benefit from the incentives or subsidies available to public institutions, such • Small number of requirements in the licensing as tax exemptions, land leases and salaries of phase, as opposed to the accreditation stage, academics? which should legitimately combine a strong self-evaluation report and a thorough external • Eligibility of private-institution students for state evaluation by independent peers. scholarships, grants or loans: Can students from private PSET institutions benefit from government • Reliance on qualified and objective evaluators subsidies that are available to students who who do not have conflicts of interest. As a first step, non-profit institutions could government and with academic results comparable be encouraged. South Africa’s reluctance to to those of public institutions. encourage private sector participation perhaps stems from the fear that those institutions will not The World Bank Group private sector arm - The advance social objectives such as offering youth International Finance Corporation (IFC), is among an equal opportunity to access quality education. institutions that could facilitate the development Indeed, experience suggests that for-profit private of quality South African private PSET institutions. institutions that are poorly regulated may be inclined Since 2000, the IFC has invested US$2 billion in private to compromise on quality, at a high cost to students education, impacting almost 5 million students. IFC and/or the government, or even be fraudulent. 34 investment decisions are driven by the potential Beyond strengthening the regulatory and incentive of private PSET institutions to ensure the effective framework, which is likely to be cheaper than employability of its students. In order to do so, a expanding public universities, South Africa could first diagnostic tool – the Employability Tool – was recently consider encouraging the expansion of non-profit deployed to assist PSET institutions understand how private PSET institutions. In other continents, these well they are preparing graduates for the job market. types of organizations have contributed the most to The tool measures learning, retention, graduation, and the growth in enrollments, at a reduced cost to the placement rates to assess an institution’s effectiveness. 34 In August 2017, DHET publically reported on 21 cases of fraud in higher education between 2012 and 2017, where some registered institutions offered certificates that were not accredited with relevant authorities. Chapter 2 | South Africa Economic Update 12 | 48 Raising the quality and performance of PSET institutions South Africa must address the trade-off between achieved through a combination of matching grants to meeting the growing demand for enrollments ensure ownership by the concerned PSET institutions while offering good quality and relevant programs. and technical support to disseminate good practices To improve quality, raise student learning outcomes, from South Africa and beyond. reduce the large numbers of dropouts and repeaters, and increase the relevance of PSET programs – Forging closer linkages with industry. Strengthening especially from an employability perspective – South linkages with industry is an effective way of increasing Africa may consider three complementary measures: the relevance of PSET programs. Universities can use (i) strengthening quality assurance; (ii) ensuring closer a large variety of mechanisms, including internships links to the productive sectors of the economy and for undergraduate students, in-company placements the labor market; and (iii) performance-based funding. of research students and academics, and encourage practitioners from industry to offer their services Strengthening quality assurance. The government as visiting lecturers. Incorporating training for could prioritize the tightening of the licensing entrepreneurship into regular university programs can system and closing down sub-standard institutions also help bring them closer to the productive sectors. and programs while applying uniform standards in Universities may consider establishing cooperative both the public and private sub-sectors. Over time, learning programs that alternate on-campus learning the quality assurance standards and criteria should periods and regular in-firm internships, (Box 2.2). And evolve from focusing on inputs and processes to while it is often assumed that efforts to bring universities emphasizing the learning outcomes of students and closer to industry apply only to engineering and applied how well graduates of all institutions are absorbed science programs but not to the social sciences and into the labor market. The impact of the work done by humanities, it is actually more a matter of mindset than research-intensive universities would also be closely academic discipline. A cooperative program could be set monitored. In addition, DHET could offer incentives for up for a history degree, for instance, whereby students the establishment and/or consolidation of internal would alternate between formal periods of learning at quality assurance units in all tertiary education the university and periods of study or research while institutions, which are essential for a genuine and attached to a museum, a restaurant (Box 2.3), or a effective quality assurance culture. This could be company in the creative industries. Box 2.2: Lessons from co-operative programs Co-operative education alternates academic studies Waterloo, Canada is home to the world’s largest co- with work experience in a field directly related to op program with 15,800 undergraduate students and a student's academic or career goals. The model 3,500 partner employers around the world. A co-op has considerable advantages: it allows students student at Waterloo graduates with the same number to gain relevant work experience, apply theoretical of study/academic terms as a non-co-op student, plus knowledge gained in the classroom and clarify up to two years of work experience. The student has 4 career plans. It also helps students to build contacts to 6 work terms – each usually four months long – to with employers and establish networks that would try out a variety of careers to find out his/her interests assist in finding employment after graduation. before graduating. On average, by the time the student Working as part of the studies program helps graduates, he/she has already earned between US$ students to finance their education. It is also useful 25,000 and US$ 74,000, resulting in smaller student loans for learning how to behave on the job and to develop compared to other students and a greater capacity to the skills employers require. The Waterloo example pay them back. Graduates of Waterloo's co-op programs below illustrates these points. Other examples of earn about 15% more than graduates of non-co-op co-operative education programs are the Singapore programs. Furthermore, Waterloo University offers the Institute of Technology, the Singapore Institute enterprise co-op program where students are advised of Management and Berlin’s Steinbeis Center of by experienced professionals and in some cases are Management and Technology. supported financially to develop their own businesses. 49 | South Africa Economic Update 12 | Chapter 2 Box 2.3: Acquiring skills to become a chef Sibongakonke “Sbo” Kunene, 21, and Gontse Mathobela, Offering national and internationally-recognized 25, are proud students of a private culinary TVET qualifications, the Capsicum Culinary Studio, which college in Rosebank, Johannesburg. Since enrolling has six campuses around South Africa, mainly targets at the school in February 2018, the two young men school leavers for a year-long teaching program, have formed a bond driven in part by a passion to be including placement in the industry for work experience. chefs. Following their vocation has meant abandoning Both Sbo and Gontse will begin their work experience university education, a move their respective families at restaurants in the prestigious Michelangelo Hotel in did not always support. Sandton, followed by placements in other restaurants. “Getting here was difficult, at first my family didn’t “We teach them core classical foundational cooking understand why I wanted to be a chef, but I can techniques that can be applied to different cuisine, now see that they are coming around,” says Gontse, and skills that will allow them to branch into different who left a career in mechanical engineering after areas of specialty,” said Capsicum Managing Director completing his degree at the University of Botswana. in Rosebank, Renee Hill. The skills learnt prepare the “Coming from a family of teachers, nurses and doctors chefs for work in restaurants or to open their own and four siblings who all have degrees, I felt a lot of businesses. In 15 years, the school has had about pressure, and I could not explain why I was leaving a 5,000 graduates. potentially high-paying career for one that is grueling, with very long hours. But I have never been happier”. Capsicum boosts of making it easier for their students to obtain work in an industry that is growing. According TVET colleges empower post-school students like Sbo to a report by Deloitte, 1 in 22 people employed in South and Gontse to make the transition from education to Africa work in the hospitality industry. Worldwide, the the world of work by combining learning and working, norm is 1 in 11. The report estimates that by 2020, food ensuring their employability while helping them to and beverage services will employ around 12.7 million make informed choices and to fulfill their aspirations. people and by 2023, there will be 337 million jobs in For the two, that aspiration is to specialize in fine dining. hospitality worldwide. Chapter 2 | South Africa Economic Update 12 | 50 Using financial incentives. The government could according to its own configuration of teaching, introduce performance-based budget allocation research and community-engagement activities.35 mechanisms that would provide financial incentives for improved institutional results and better • The main drawback of the current allocation alignment with the labor market (OECD, 2007; Salmi mechanism is that the government is not strictly and Hauptman, 2006). Policymakers may consider bound by the distribution formula, as resources the following three types of allocation mechanisms, allocated each year depend on the fiscal separately or combined, to achieve this purpose: situation, taking away the long-term stability that a funding formula affords PSET institutions. • Funding Formulas. One of the most transparent Another limiting aspect is that only a small and objective manners of distributing funds for part of the budget allocation is determined by recurrent expenditure is to use a mathematical institutional performance and alignment with formula linking the amount allocated to indicators national policy objectives. For instance, the of institutional performance such as the number number of undergraduate students completing of graduates, the employment rate of graduates their degrees and research outputs accounted and/or the research output. Examples of for only 25% of the funding formula in 2016-17. countries that have built performance into their Moving to an actual funding formula would allow funding formulas include: Denmark, which has a the government and PSET institutions to work out “taximeter model” by which 30 to 50% of recurrent a clear understanding of the amount of resources funds are based on the number of students who allocated every year and the rules for calculating successfully pass exams every academic year; the budgetary contribution that each institution the Netherlands, where half of recurrent funding would be entitled to. The allocations could be is tied to the number of degrees awarded as an linked to agreed performance measurements incentive to improve efficiency; Australia, where such as graduation rates, learning outcomes, funding for doctoral student places is based on a labor market results, and scientific production in formula comprising 40% for graduates, 10% for terms of quantity, quality and impact. research outputs and research income. • Performance contracts are agreements negotiated • Since 2004/5, South Africa has been relying on between the governments and PSET institutions, a funding framework that has elements of a defining a set of mutual obligations under which formula. The framework allocates the available the government provides additional funding to budget according to national priorities. The institutions meeting their performance targets. formula part of the framework combines four Agreements may be with several or all institutions dimensions: (i) teaching input linked to the in a given tertiary education system, or with a number of undergraduate and postgraduate single institution. All or a portion of the funding students; (ii) teaching output based on the may be conditional on the institution meeting number of undergraduate students completing the requirements in the contracts. Examples their studies; (iii) research output based on the of countries or sub-national jurisdictions with number of publications making up a quarter of performance contracts include: Chile, Costa Rica, the component, and the number of graduating Finland and France.36 research masters and research students comprising three quarters; and (iv) institutional • The main advantage of performance contracts factors, which take into account the size of the is that they encourage institutions to improve institution so as to help smaller institutions, and their results voluntarily. From the government’s the proportion of black African students. The viewpoint, it helps align the behavior of tertiary larger share of budgetary resources is allocated education institutions with national policy to universities as a block grant, allowing each objectives, such as improved completion rates institution to distribute its resources internally and better alignment between programs and 35 The remaining resources are allocated as grants for NSFAS student loans, teaching and research development, foundation provisioning to support underprivileged students needing additional academic help, veterinary science grants, infrastructure and efficiency grants to cope with rising enrollment, clinical training grants, and grants for historically deprived institutions. 36 Chile introduced pilot performance agreements in the late 2000s, whereby four public universities volunteered to receive additional resources to implement a carefully negotiated institutional improvement plan with clear progress and outcome indicators. After a positive evaluation, the scheme has been extended to a large number of public and private universities. Costa Rica has used performance contracts to promote the transformation of four of its five public universities. Denmark uses development contracts setting out long- term improvement goals for the institutions. Finland has contracts that set out general goals for the entire tertiary education system as well as specific goals for each institution while France has allocated about one third of the recurrent budget through four-year performance contracts since 1989. 51 | South Africa Economic Update 12 | Chapter 2 labor market needs. For the institution, it brings In its attempt to improve the quality of PSET, South in additional resources to implement the strategic Africa should not necessarily encourage specific plan, provided the institution has a transformative curricula. Recommending the use of financial vision and the will to implement it. Success usually incentives does not mean that the government should depends on two factors. First, when negotiating try to influence the choice of disciplines and programs. the performance agreement, it is good practice International experience shows that manpower to involve someone who is a neutral broker to planning does not generally work and is even less facilitate a reasonable dialogue between the likely to work today in a world of rapidly changing government and the university leadership. In technologies that continuously shape the labor market Chile, former university vice-chancellors widely (World Bank, 2018f). To ensure that students enroll in respected as “wise persons” played a decisive role programs leading to meaningful employment and that in that respect. Second, the DHET would need to PSET institutions adapt their programs to the changing devote sufficient expertise and time to monitor needs of the labor market as much as possible, one the implementation of the performance contracts. of the most effective tools that the South African government could rely on is a well-functioning labor • Competitive funds have proven their strength market observatory. Bulgaria, Chile and Colombia offer and value as an effective and flexible resource noteworthy examples (Salmi, 2017): allocation mechanism for transformative investments (Salmi, 2017). Under this mechanism, • Since 2012, Bulgaria has published detailed project proposals from institutions are reviewed data on the labor market results of university and selected by committees of peers according graduates. Using data from the Registry of Tertiary to transparent procedures and criteria. Eligibility Students and statistics from the National Social criteria vary from country to country and depend Security administration, the Bulgarian Ministry of on the specific policy changes sought.37 Positive Education can provide a wealth of information on experiences in countries as diverse as Chile, the jobs and levels of remuneration of graduates China, Egypt, Indonesia and Tunisia show that who left university in the previous five years. competitive funds help to improve quality and relevance, promote pedagogical innovations, • Chile’s Futuro Laboral, supported by its reduce dropouts, and foster better management, ministry of education and run jointly with the objectives that are difficult to achieve through University Adolfo Abánez and University of funding formulas. Chile, aims to equip youth and students with the information tools necessary for them to enter • Eligibility criteria vary from country to country and the labor market. It provides information on the depend on the specific policy changes sought. In employment situation and salaries of 75% of Argentina and Indonesia, for instance, proposals technical and professional graduates spanning could be submitted by entire universities or by hundreds of professional and technical careers. individual faculties or departments. In Chile, both The portal displays information on dropout public and private institutions were allowed to rates, average time taken to complete a degree, compete. In Egypt a fund was set up in the 1990s average earnings of the graduates after 4 years of specifically to stimulate reforms in engineering graduation, current tuition fees for the program, education. An added benefit of competitive funds and accreditation status for each program of is more transparency as they have an independent every tertiary education institution. monitoring committee and clear criteria and procedures. In addition, they encourage universities • Graduados Colombia monitors since 2005 the to prepare a solid strategic plan, which helps them demand for and supply of graduates and is formulate proposals based on actual needs and a managed by the Colombian Ministry of Education. rigorous action plan. South Africa could consider It offers statistics on the academic level of the piloting a competitive fund for allocating public graduates of technical institutes and universities, investment funds to improve the quality, relevance the salaries they receive, the average time taken to and efficiency of PSET institutions. find their first job, and the cities in which they work. 37 In Argentina and Indonesia, for instance, proposals could be submitted by entire universities or by individual faculties or departments. In Chile, both public and private institutions were allowed to compete. In Egypt a fund was set up in the 1990s specifically to stimulate reforms in engineering education. Chapter 2 | South Africa Economic Update 12 | 52 Improving resource mobilization Very few governments in the world can afford to In seeking ways to balance the PSET budget that fully finance PSET systems. Those who are able to is already stressed by increased financial aid, include Saudi Arabia, the Gulf countries, the Nordic authorities should be careful to avoid the pitfall of countries, Scotland,38 and Singapore. A few others, reallocating money from the university research such as Australia, Canada, England, Hong-Kong (China), budget to the general PSET budget. The major cuts to Iceland, the Netherlands, New Zealand, Switzerland, the Incentive Funding for Rated Researchers program, Chile (until the recent abolition of fees), China, Japan, announced in October 2017, were an early warning that Jordan, Malaysia, South Korea, and the United States, research funding could be adversely affected by the manage to properly finance their systems through new fees policy. This is of concern as public financial a combination of high tuition fees and private support for innovation has been declining since 2008 sector participation. Most countries, though, rely on (World Bank, 2017). public resources to finance PSET systems that are predominantly in the public sector, which tends to be Several options are envisaged to mobilize additional insufficiently funded anyway. This is the case in Egypt, resources. As discussed below, tuition fees will Ghana, Kenya, Tanzania and Uganda, and in many of need to be regulated to avoid defeating the social the Eastern European and Central Asian countries that purpose of extending financial aid to a larger number were once part of the former Soviet Union. Insufficient of students. Thus, above-inflation fee increases to public funding is also a feature of several industrial help defray the cost of providing PSET may not be a countries, Belgium, France, Germany, Greece, Italy, workable solution. Therefore, PSET institutions could Portugal and Spain, whose total share of tertiary be encouraged to diversify their income sources education expenditure of GDP is below the OECD through donations, contract research, consultancies, average, in large part because of the governments’ continuing education and other fundraising methods. reluctance to introduce or raise tuition fees. South However, not all sources of income have the same Africa can be considered part of this last group, as potential. Contrary to what is commonly assumed, public resources through the student aid scheme will technology transfer, on average, is not highly now cover most tuition fees even though the fees beneficial in generating income.39 Experience suggests covered are insufficient to defray all costs. that providing continuing education, undertaking productive activities and raising funds from alumni South Africa must find ways of generating additional and corporations are the three most important income resources to expand the PSET system while generation sources. improving the quality of education offered. The Heher Commission of Inquiry into Higher Education Fundraising has not been a major priority area in South and Training (2017), stated: “Block funding to PSET Africa until now, on the assumption that resources are institutions needs to increase in line with increased limited throughout the economy and that philanthropy costs for providing quality education and infrastructure is not part of the national culture. However, international needs. Despite pressure on the National Treasury to experience shows that even in resource-constrained consolidate the budget, it is necessary for all three countries, universities can find a few rich companies and arms of the PSET sector to be funded at an appropriate individuals – locally and among members of the Diaspora level to ensure quality education and training. We — who can be persuaded to make financial contributions recommend that, in the short-term, the government to universities. In Europe, a region with little tradition of work towards funding universities with 1% of GDP philanthropy towards universities, significant progress (excluding the funding required to establish the has recently been made in this regard (Box 2.4), making recommended student funding model)”. its experience relevant to South Africa. 38 While it is true that Scotland does not charge fees for Scottish students, 45% of Scottish universities’ teaching income is financed by the tuition fees paid by foreign students and non-Scottish UK students. 39 Even in the United States, which has a favorable policy framework for innovation and technology transfer, very few institutions hit the jackpot with path-breaking innovations that can be successfully commercialized. At Harvard University, income from technology transfer licenses is equivalent to only 1% of annual fundraising receipts. 53 | South Africa Economic Update 12 | Chapter 2 Box 2.4: Lessons from fundraising efforts in Europe A survey (European Commission, 2011) on the • Financial and human investment in fundraising fundraising efforts of European universities found activities. that success was related to three factors. The first is what is defined as institutional privilege, i. e. the • Rewards for staff who are successful in attracting wealth and reputation of the university, as well as philanthropic donations. pre-existing relationships with potential donors. The second is the level of commitment of senior • Production and dissemination of materials for academic leaders and other research staff in this fundraising purposes, such as a website, leaflets regard. The third has to do with the location of the and brochures. university and the geopolitical context in which it operates. • Use of a database to maintain and update records on interactions with donors. With regards to the type of donors, the survey showed that money is raised mostly from private corporations • Reporting on philanthropy in universities’ annual while contributions from alumni are less frequent. financial reports. Experience indicates that successful fundraising One of the cases of effective fundraising came from involves the following aspects: the United Kingdom (Universities UK, 2008), where a government-sponsored matching funding scheme was • Commitment of management and governing set up in 2008, following positive experiences in Alberta, bodies. Florida, Hong Kong and Singapore. Between 2008 and 2011, the British government matched any eligible gift • Full participation of academic staff. made to a participating tertiary education institution. PSET institutions should be encouraged to fundraise. funds will invest in. The University of Hong Kong, for If the tight fiscal situation makes it difficult for South instance, has ruled out donations from tobacco and Africa to put in place a matching program, at the very arms-producing companies. least the government should not penalize the most entrepreneurial PSET institutions by reducing their Resource sharing is another indirect way of budgets if they become adept at fundraising. Such mobilizing additional resources. A growing number penalties would be self-defeating as they remove of universities around the world have redesigned the incentives to generate additional income. South and reorganized their scientific laboratories so Africa should maintain or even consider increasing that several departments across the institution can the tax deductions that make it advantageous for use the shared facilities. In Quebec, the network businesses and individuals to donate money to PSET of community colleges known by the acronym institutions.40 Favorable tax incentives have been CEGEP, has experimented with conducting scientific found to be crucial in stimulating philanthropic and experiments in one college while students in other charitable gifts to tertiary education institutions. From colleges are connected by video and via the Internet the viewpoint of the universities seeking to increase and benefit from observing experiments in the same fundraising, it is important to have an audacious vision lab facilities. The digital sharing of scientific facilities and strategic plan to convince potential donors that and resources can be extended to many fields and can their contributions will have a profound developmental even cross national boundaries when researchers in impact. Universities must also define clear ethical one country are able to program experiments that rules regarding the origin of the funds that they can actually take place in the laboratory of a university accept and the types of companies their endowment in another country. 40 In the United States, 2015 was a record year with tertiary education institutions raising a total of US$40 billion. Canada, Hong Kong, several European countries and the United Kingdom also offer generous tax incentives to encourage donations to universities. In Latin America, Brazil, Colombia and Chile permit income tax deductions. Among developing countries, India has one of the most generous tax concession schemes, as all individual and corporate donations to universities are fully exempt from taxation (World Bank, 2002). Chapter 2 | South Africa Economic Update 12 | 54 Revisiting the financial aid scheme Public support to PSET is generally regressive. Even fees; and Ecuador abolished tuition fees to improve though, intuitively, keeping tertiary education free of access. The natural expectation would be that Chile charge for all is seen as the best way of promoting equity, would display the highest degree of inequality. But empirical evidence shows that free tertiary education is Brazil is the most regressive country, followed by highly inequitable, unless the country has a progressive Argentina and Ecuador, and then Chile. As revealed income tax system, as is the case in the Nordic countries. by Table 2.8, which shows the enrollment rate in Experience in many parts of the world indicates that a each country for the various socio-economic groups, disproportionate number of students from advantaged Chile has the highest enrollment for the poorest backgrounds tend to access tertiary education at no two quintiles and the lowest disparity ratio, which is personal cost and secure higher remuneration after calculated as the ratio between the enrollment rate of graduating yet rely on the less-advantaged general the richest quintile and that of the poorest quintile. The taxpayers to fund their education. Independently from better results in Chile from an equity viewpoint stem the need for additional resources, financing of tertiary from the fact that, even though all students must pay education is more equitable when students from high high tuition fees in both public and private universities, and middle-income families are made to contribute a the country has a comprehensive system of well- larger share of the cost of their education. targeted grants and student loans to protect low- income students. In fact, a benefit incidence analysis of Analyzing data from the Latin American region sheds public expenditure in Chile’s tertiary education system light on the impact of various access and funding clearly demonstrated that the student aid subsidies policies. Argentina has an open access and free tuition were distributed in a progressive way, whereas the policy; Brazil has a restricted access and free tuition public funds allocated directly to the universities were policy; Chile has both restricted access and high tuition highly regressive (OECD, 2009). Table 2.8: Enrollment rates by income quintile in four Latin American countries Quintile Argentina Brazil Chile Ecuador Q1 18.0% 5.0% 21.2% 15.6% Q2 25.3% 6.3% 26.4% 19.7% Q3 29.5% 11.6% 26.0% 23.8% Q4 38.2% 20.7% 37.5% 27.1% Q5 56.6% 47.0% 61.6% 49.3% Disparity Ratio (Q5 / Q1) 3.1 9.4 2.9 3.2 Source: SEDLAC; http://www. cedlas. econo. unlp. edu. ar/wp/en/estadisticas/sedlac/estadisticas/ South Africa could consider revisiting the design of Loans versus grants. In South Africa and elsewhere,41 its financial aid scheme to make it more efficient and there is general recognition that financial aid has a sustainable. Two dimensions are worth considering: positive impact on the academic performance of the nature and targeting of financial aid, and how this students receiving the assistance, as discussed is articulated in policies for tuition fees. before in the case of South Africa. In this regard, the 41 In Colombia, 20% of the total student population is supported by the ICETEX loan agency. The agency provides subsidized loans to students from the poorest families, ethnic and racial minorities, and students with disabilities. The poorest students enjoy a zero real interest rate during the loan period. An impact evaluation carried out a few years ago found that, on average, loan beneficiaries were less prone to drop out and obtained better academic results than the other students (Salmi, 2017). The average dropout rates were 34.4% for non-beneficiaries and 9.4% for student loan beneficiaries. During the first semester of study, the percentage of students with high marks was 92% for loan beneficiaries in private universities compared to 83% for those without a loan; in public universities it was 85% with a loan and 72% without a loan (Econometria, 2010). 55 | South Africa Economic Update 12 | Chapter 2 nature of the financial aid – loans versus grants – is an Such difficulties could have contributed to the creation important consideration when seeking to expand PSET of a so-called “missing middle”, whereby a large enrollments. Indeed, South Africa’s experience with group of students are excluded from financial aid but NSFAS suggests that it became increasingly difficult to cannot access bank loans and other funding due to a recover loans since 2008 (Figure 2.7), and that the effect lack of capital and low salaries in the family (Heher of the non-recovery on NSFAS’ financial sustainability Commission, 2017). made it difficult to support a larger number of students. Figure 2.7: NSFAS loan recoveries (1997-2014) 1,800 1,711 1,600 1,400 1,231 1,200 Rand Millions 1,000 885 800 636 600 540 392 400 542 248 200 112 30 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Loans recovered Normal trend in recoveries Source: Heher Commission, 2017 Converting grants to income-contingent loans could to simply abandon it. Indeed, without an income- strengthen NSFAS’ financial sustainability. The contingent provision, economic crises are bound to decision made in 2017 to convert all students’ loans cause repayment difficulties (Chapman, 2014; Salmi, into grants is an acknowledgement of the difficulty 2014). International experience shows that income- of recovering loans.42 Yet, many factors explain the contingent loans tend to have higher repayment relative success or failure of loan schemes, including rates and are more equitable since graduates pay a design considerations relative to the interest rate and fixed portion of their income and are exempted from administrative costs, the strength of its leadership, repaying if they are unemployed or if their income is the quality of management systems, and the ability below a pre-determined ceiling. Experience in Australia to react rapidly and flexibly to economic or social and New Zealand with contingent loans are discussed problems affecting the repayment capacity of in Box 2.5. South Africa could consider extending such graduates. The decline in recovery rates started in loans to most affluent students, whose probability to 2008 with the financial crisis and a period of protracted repay is highest, as underlined in the rate-of-return slow economic growth (Figure 2.7). However, there analysis, while confining grants to highly vulnerable may be scope to strengthen the scheme rather than and under-privileged students. 42 Chile recently experienced a similar issue, with the level of indebtedness of poor students becoming unsustainable, eventually prompting the abolition of tuition fees following protests that started in 2011. As in South Africa, Chilean student loans administered under the state-guaranteed scheme were not income-contingent. Chapter 2 | South Africa Economic Update 12 | 56 Box 2.5: Income-contingent loans in Australia and New Zealand From the late 1980s, Australia and New Zealand has moved away from market-based principles by started to raise tuition fees while introducing loan increasing subsidies, including exempting more low- programs that allow students to pay tuition fees over income students from making repayments and forgiving an extended period, based on their incomes once they interest on most loans. As a result, borrowing has have completed their education. But their approaches grown substantially. The overriding policy concern now differ with respect to income-contingent loan schemes. is that high debt levels are causing a growing number of graduates to emigrate from New Zealand to avoid In 1988, Australia chose an innovative approach to their loan repayment obligations. The government has cost sharing through its Higher Education Contribution responded by making repayments for borrowers who Scheme. Faced with prospective widespread student remain in New Zealand interest-free since 2006. opposition to tuition fees, Australian policy makers decided to use public funds to pay the tuition fees while Australia’s system on the other hand, created a fiscal students were enrolled. All students participating in challenge at first as a growing number of students higher education were then obligated to repay the fees enrolled in higher education without having to pay fees as a percentage of their incomes after completing upfront. To reduce pressure on the budget, Australia their tertiary education. Students with below-average moved in 1997 toward the market-based approach incomes were exempted from repayment. by reducing subsidies and introducing three bands of tuition fees as well as reducing the level of income In 1990, New Zealand took the more traditional approach exempted from repayment. In addition, more market- of imposing tuition fees to be paid by students when based loan programs have been developed for the more they enrolled. Beginning in 1992, students could borrow than one-quarter of students who do not participate to cover the cost of these fees as well as a substantial in the higher education contribution scheme, including amount of living expenses. Repayment of these loans growing numbers of foreign students and domestic would then occur through the income tax system based students enrolling in fields of study not covered by the on a percentage of a student’s income once they have scheme. In 2016, the government closed the loophole completed their education. that allowed Australians living abroad to leave their debt unpaid while away from Australia. The two countries have moved in different directions since they first adopted their income-contingent loan Thus, as Australia has moved to a more market-based schemes. New Zealand began with a more market- student loan system, New Zealand has moved away based approach in which virtually all borrowers (who from a market-oriented approach. But in both cases, then constituted a small share of students) repaid the income-contingent loan system has contributed to on the basis of their income, with interest rates significant increases in coverage and improved equity, slightly below market levels. Over time, New Zealand at a fiscal cost lower than that of extending grants. Source: Chapman et al. (2014); Salmi and Hauptman (2006). Another important policy issue to consider is that of and developing alike — where government and/or the fees regulation. Until a few years ago, the government parliament determine the yearly increase that public of South Africa was careful to respect the institutional universities are allowed to implement, if any.43 autonomy of its universities, including in setting tuition fees. Since the beginning of the #FeesMustFall In countries where fees represent a significant movement, however, the government has stepped in to proportion of public universities’ income, control fee increases proposed by public universities. regulating fees can create a tension between This is common practice in most countries — industrial equity considerations and the degree of autonomy 43 In Azerbaijan, the government also strictly regulates the level of fees in private universities. Other countries do it in an indirect manner. In Chile and Côte d’Ivoire, the government establishes a reference price that is used to calculate the amount of the scholarships for low-income students enrolled in private institutions. Similarly, in Colombia, the government fixes the maximum loan amount any student can obtain. In Mexico, private universities are free to set tuition fees as they see fit, but by law they must offer full scholarships to at least 5% of their students. 57 | South Africa Economic Update 12 | Chapter 2 that tertiary education institutions need to offer An interesting approach worth considering is that quality programs and research. In South Africa, of the United Kingdom government, which recently where the state is now responsible for paying the fees started to link fee increases to the quality of teaching of students from families with an income less than and learning achieved by British universities. In 2016, R350,000 per year, there will be a strong incentive to the UK government launched the Teaching Excellence keep the fees from rising to reduce the burden on the Framework which aims to provide incoming students with National Treasury. This may have an adverse effect more objective information about the quality of programs on the historically disadvantaged universities that offered by British universities, thereby encouraging them need significant additional investment to improve to improve the effectiveness of teaching and learning. quality, as well as on the top research-intensive While participation in the framework is voluntary in universities that seek to maintain or increase their principle, in practice institutions must make a submission research expenditure. in accordance with the framework if they want to raise tuition fees in line with inflation. In the future, fee At the very least, the government of South Africa increases may be directly linked to results as measured should make sure that fee increases match annual in the framework (Ashwin, 2017). The framework relies inflation rates to avoid a deterioration in the on three sets of data: student evaluations of the quality financial position of the country’s tertiary education of teaching coming out of the National Student Survey, institutions. When this principle is not applied, the dropout rates, and rates of employment of graduates. risks to the entire tertiary education system are high. Universities receive a gold, silver or bronze award As an example, the deteriorating funding situation based on their performance benchmarked against the of the University of California system, once hailed as characteristics of their students. Interestingly, in the first the best tertiary education system in the world in all round of evaluations carried out in 2017, the top research aspects, is a sober lesson for all countries (Douglass universities achieved the lowest results in terms of and Bleemer, 2018). quality of teaching and learning (O’Malley, 2017). CONCLUSION There is a strong rationale to support financially among potential students, many of whom will be poor students to pursue post-school education barred from entering the PSET system, despite now and training. This would significantly contribute to being eligible for financial support. reducing income inequalities and would magnify the parallel efforts to improve learning outcomes at school. To sustainably and equitably expand PSET Converting loans to grants and covering the costs of enrollments, South Africa could be inspired by a few studying beyond tuition will significantly encourage models successfully tested in other developing and matriculants from poor backgrounds to enroll in public developed countries. This could include: (i) diversifying TVET institutions and universities. A more generous from the university sector to TVET and to community financial support structure could also help reduce colleges; (ii) revamping the distance learning model; dropout rates while improving completion rates. (iii) encouraging greater private sector participation in PSET, starting with non-profit institutions; (iv) At the same time, extending such support to too raising the quality of education, as measured by the large a pool of students will diminish the public employability of PSET students and graduates, through resources available to admit more students into stronger quality assurance mechanisms, financial PSET. Our analysis suggests that more than 90% of incentives to meet quality standards, and closer potential PSET students could benefit from the new linkages with employers; (v) enlarging other potential NSFAS criteria. This would in turn put a huge strain sources of resources for PSET while regulating tuition on the fiscus, equivalent to about 1 percentage point fees; and (vi) revisiting the student financial aid scheme of GDP, leaving fewer public resources to increase to make it more equitable and through greater risk admission capacity without compromising education sharing, protect it against the contingencies suffered quality. This imbalance is likely to create frustration by individual students. Chapter 2 - Conclusion | South Africa Economic Update 12 | 58 REFERENCES Amra, R., M. Hanusch and C. Jooste. 2019.“When the Cycle Becomes the Trend: The Emerging Market Experience with Fiscal Policy during the last Commodity Super Cycle”, Policy Research Working Paper WPS8712, Washington, DC: World Bank. Ashwin, P. 2017. “Making sense of the Teaching Excellence Framework (TEF) results”. Policy Briefing No. 1. Centre for Global Higher Education. Botha, B., S. de Jager, F. Ruch and R. 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World Bank. 2018d. “South Africa Diagnostic Review of Consumer Protection in Non-Credit Financial Services: Key Findings and Recommendations”. Washington, DC: World Bank. World Bank. 2018e. www. worldbank. org/humancapitalproject. Washington, DC: World Bank. World Bank. 2018f. “World Development Report 2019: The Changing Nature of Work”, Washington, DC: World Bank. References | South Africa Economic Update 12 | 60 ANNEX PSET Statistics Throughout the report, the following decomposition of PSET by grade, both for enrollment and academic attainment is used, using categories retained in the National Income Dynamics Study (NIDS). Table A1: Academic classification Technical studies (TS) Undergraduate studies (US) Graduate studies (GS) NTC 1 /NCV 2 Certificate requiring Grade 12 Bachelor’s Degree and Diploma NTC 2 /NCV 3 Diploma requiring Grade 12 Honors Degree NTC 3 /NCV 4 Bachelor’s Degree Higher Degree (Masters, Doctorate) Certificate not requiring Grade 12 Source: World Bank staff decomposition based on NIDS. Combining administrative and NIDS data allows us to estimate the following breakdown of enrollments by PSET institution type, age, nationality and household incomes in 2015. In 2015, there were 2.204 million students enrolled in PSET institutions (excluding SETAs), out of which 25.3 thousand poor South Africans aged 18-25 enrolled in graduate studies in public PSET institutions. Table A2. PSET Enrollments in 2015 Technical studies (TS) TS US GS Total 1,108,907 889,270 205,936 Of which aged 18-25 864,396 625,551 147,620 Of which South African nationals in public PSET 575,225 500,772 118,174 Of which eligible for NSFAS new scheme 521,737 433,507 111,375 Of which poor 175,555 175,205 25,270 Source: World Bank staff calculation based on NIDS and DHET. Notes: Public PSET institutions under TS only comprise TVET, as community college students are currently not eligible for NSFAS. Using NIDS data allows us to compute unemployment rates according to academic achievement, and economic background. In 2015, the unemployment rate of individuals having achieved undergraduate and graduate studies was statistically significantly lower than that of individuals with no PSET. There was in the same year no statistically significant difference in the unemployment rate of individuals according to their economic status of origin (poor or not), for the same academic achievement. In other words, graduates from different economic origins could expect the same probability of being employed. 61 | South Africa Economic Update 12 | Annex Table A3. Unemployment rates by academic achievements for active population aged 18-25 (%) TS Total No PSET TS US GS Poor origin 22.7 25.5 20.1 11.3 3.3 Total 21.7 25.9 21.1 12.1 1.2 Source: World Bank staff calculation based on NIDS. Note: Individuals of poor origin are defined as having parents who were classified as poor in 1994. Using NIDS data allows us to estimate the additional wage income of employed individuals aged 18-25 in 2015 stemming from various characteristics, compared with that of a black female with no PSET residing in the Limpopo province (reference group), at same age and with same household size. For instance, a coloured male having achieved undergraduate studies and living in an urban zone in the Gauteng province was earning R9,373 (1041+2043+5213+1417-341= 9,373) more than the reference group. Table A4: Additional monthly wage income stemming from individual characteristics (rands 2015). Location Demographics Race PSET Education Urban 1,417 Western Cape -1,951 Eastern Cape -1,211 Northern Cape -1,119 Free State -474 Kwazulu Natal -607 North West 1,383 Gauteng -341 Mpumalanga 461 Male 2,043 Household size -39 Age 209 Age squared -2 Coloured 1,041 Indian 4,338 White 4,080 TS 1,691 US 5,213 PS 12,677 Source: World Bank staff calculation based on NIDS data. Note: Coefficients estimated on 9,003 observations, with an adjusted R2 of 0.41. All coefficients are statistically significant, with P-values below 1%, but that of Free State (15%), Gauteng (12%), Mpumalanga (8%) and Household size (4%). Annex | South Africa Economic Update 12 | 62