Itumeleng Ledwaba LDWITU001
Unemployment in the progression of the GEAR strategy
When the new, first democratic government of South Africa stepped to duty in 1994, a lot of work needed to be done, from the building of houses for the poor to equal rights for all. Therefore, the government had to come up with strong structures or rather policies to serve and develop the new democratic country. Hence RDP (the Reconstruction and Development Programme) was adopted to do as the name suggests: to reconstruct and develop the country. In 1996, the government adopted a new macroeconomic strategy called Growth, Employment and Redistribution (GEAR). In this essay, I will analyse ...view middle of the document...
Figure:1 Unskilled and semiskilled workers
Figure1 above (source: Promoting Growth and Employment in South Africa, Jeffrey D. Lewis, June 2002) show us unemployment rate for the lower skilled labour categories. Clearly, since the GEAR policy was adopted in 1996, there has been a steady rise in unemployment, from the highs of approximately 50% unemployment rate in 1996 to approximately 57.8% in the year 2000, contrary to what was intended in the policy . The policy stated that it would create 400 000 jobs per year by the year 2000. “Almost half of the population lives in poverty, including many of the employed - the "working poor." Unemployment and underemployment are on the rise as more jobs are shed and people rely on survivalist activities to make ends meet. The complex nature of the transition emerged in deeply contradictory government policies." (COSATU policy statement, July 2001).
In the year 2000, the South African Reserve Bank (SARB) announced that it will use an inflation target policy, with a target of between 3 and 6. This rose a few eyebrows as most economically informed people know about the inverse relationship between inflation and unemployment in the short run. The public felt that inflation targeting side-lines the employment goal set out in the GEAR policy. “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.” ( Norman Lament, 1991). Nevertheless, a good rationale behind the choice is argued to be that “unemployment will only be temporary and a necessary step to overcome the inflationary pressures in the economy”.( http://econ.economicshelp.org/2008/03/unemployment-price-worth-paying-for.html ). How? If inflation is high, the economy needs to slow down in order to reduce inflation. The government planned to reduce spending and increase taxes to reduce the budget deficit. I’ll discuss the intended (theoretical) outcomes and compare them to the actual outcomes of this plan, with respect to employment or lack thereof. I shall use the AD/AS and the IS/LM models to show the intended outcomes. Consider the figures below, figure2 and figure3.
Suppose the economy is at equilibrium (point A), with a natural national output of Yn , price level P1, and interest rate of i0. When the government reduces the deficit, the IS (goods market equilibrium) curve as well as the AD (aggregate demand) curve shift leftwards to IS’, causing a decrease in output to Y’, which in turn causes a decrease in the price level and interest rate. The directions of the changes are shown by the arrows on the graphs. In the short run, the decline in output may lead to workers being laid off due to cuts in production, leaving more people jobless at these lower prices and interest rates. Because the price level decreased, the real money stock increases, causing a downward shift of the LM (Money market equilibrium) curve to LM’. So long as output...