Official Use Only Report No: 125838-ZA Public Disclosure Authorized Republic of South Africa Systematic Country Diagnostic Public Disclosure Authorized An Incomplete Transition Overcoming the Legacy of Exclusion in Public Disclosure Authorized South Africa April 30, 2018 Public Disclosure Authorized i South African Government Fiscal Year April 1 – March 31 Currency Equivalents (Exchange Rate Effective as of March 18, 2018) Currency Unit = South African Rand (R) US$1.00 = R12.00 ABBREVIATIONS AND ACRONYMS AIDS Acquired Immune Deficiency Syndrome ANC African National Congress AsgiSA Accelerated and Shared Growth Initiative for South Africa BBBEE Broad-Based Black Economic Empowerment BEE Black Economic Empowerment BRICS Brazil, Russia, India, China, and South Africa CGE Computable General Equilibrium CODESA Convention for a Democratic South Africa EPWP Expanded Public Works Programme FDI Foreign Direct Investment GDP Gross Domestic Product GEAR Growth, Employment, and Redistribution HIV Human Immunodeficiency Virus ICT Information and Communications Technology JSE Johannesburg Stock Exchange LGBTI Lesbian, Gay, Bisexual, Transgender, and Intersex NDP National Development Plan NEDLAC National Economic Development Labour Council NHI National Health Insurance NSFAS National Student Financial Aid Scheme OECD Organization for Economic Co-operation and Development PEMANDU Performance Management Delivery Unit RDP Reconstruction and Development Programme RHS Right Hand Side SAA South African Airways SADC Southern African Development Community SADTU South African Democratic Teachers Union SCD Systematic Country Diagnostic SEIAS Socioeconomic Impact Assessment System SMME Small, Medium, and Micro Enterprise SOE State-owned Enterprise StatsSA Statistics South Africa TB Tuberculosis TVET Technical and Vocational Education and Training YES Youth Employment Service IBRD IFC MIGA Vice President Makhtar Diop Sergio Pimenta Keiko Honda Regional Director Oumar Seydi Country Director Paul Noumba Um Saleem Karimjee Merli Baroudi Task Team Leaders Marek Hanusch Rajeev Gopal Moritz Nikolaus Nebe ii This Systematic Country Diagnostic (SCD) was led by Marek Hanusch (Senior Economist, World Bank) under the guidance of Paul Noumba Um (Country Director, World Bank) and Saleem Karimjee (Country Manager, International Finance Corporation). The SCD was peer reviewed by Shantayanan Devarajan (Senior Director and Acting Chief Economist, World Bank), Albert Zeufack (Chief Economist of the Africa Region, World Bank), and World Bank Group departments. The SCD team included the following World Bank Group staff. World Bank: Country Management Unit (AFCS1): Ivan Velev, Catherine Tovey, Paolo Belli, Sébastien Dessus, Mokgabo Molibeli, Chrissie Kamwendo, and Emmanuel Ngankam. Macroeconomics, Trade and Investment: Jose Guilherme Reis, David Bridgman, Jane Bogoev, Yashvir Algu, Charl Jooste, Jakob Engel, Martha Licetti, Sara Nyman, Asli Senkal, Yong Jae Lee, Seidu Dauda, and Faya Hayati. Poverty: Victor Sulla, Precious Zikhali, and Samantha de Martino. Finance, Competitiveness, and Innovation: Alejandro de la Campa, Julie Dana, J. Gabriel Goddard, Ellen Olafsen, Jiyoung Choi, Julian Koschorke, Wayde Flowerday, Gunhild Berg, Catiana Garcia-Kilroy, Sunita Kikeri, and Ayanda Mavundla. Education: Toby Linden, Yoko Nagashima, Andreas Blom, and Deon Filmer. Social Protection and Jobs: Jamele Rigolini, Bongisa Lekezwa, Reyes Aterido, Arvo Kuddo, Dino Merotto, Robert Palacios, and Michael Weber. Social, Urban, Rural, and Resilience: Olivia d’Aoust, Carli Venter, Yan Zhang, Helidah (Didi) Ogude, Somik Lall, Yaa Pokua Afriyie Oppong, and Margarita Puerto Gomez. ICT and Transport: Tim Kelly, Gershwin Lesley Fortune, Ramon Munoz-Raskin, Fatima Arroyo Arroyo, Edward Andrew Beukes, and Ben Gericke. Health: Thulani Matsebula, Melusi Ndhlalambi, and Maria Ngarachu. Governance: Gert van der Linde, John Sikazwe, Kathrin Plangemann, and Patrick Kabuya. Treasury: Fritz Bachmair. Energy and Extractives: Sheila Khama, Arsh Sharma, and Reynold Duncan. Water: Chris Heymans. Environment: Andre Rodrigues Aquino. Agriculture: Guo Li. Climate Policy, Analytics, and Advisory: Michael McCormick. Gender: Daniel Kirkwood. Infrastructure Finance and Public-Private Partnerships: Cledan Mandri-Perrott. Development Economics: Ha Nguyen and Julian Jamison. External Relations: Zandile Ratshitanga. International Finance Corporation: Rajeev Gopal, Jan Schwier, Stephan Vermaak, Zano Mataruka, Frank Douamba, Vincent Floreani, Stephan Dreyhaupt, Kristina Turilova, Ken Osei, Stefan Schweitzer, Hassan Kaleem, and Sanjay Kalpage. Multilateral Investment Guarantee Agency: Gero Verheyen and Moritz Nikolaus Nebe. The following consultants contributed to the SCD: Nicola Viegi, Vincent Dadam, Emmanouil Noikokyris, and Georgios Chortareas (macroeconomics), Landon McMillan (microeconomics), Rodrigo Valdés (fiscal policy), Haroon Bhorat, Jörg Langbein, and Adrian Scutaru (labor and jobs), Blessing Mudavanhu (finance), Leon Lourens (agribusiness value chains), Michael Aliber (land reform and rural development), Servaas van der Berg (education), Peter Delius and Nicoli Nattrass (history), Slava Mikhaylov (quantitative text analysis), Kate Philip (informal sector, public works, and cooperatives), Andrew Kerr (minibus taxis), Kanishka Kacker (poverty), Kecia Rust (social housing), Richard Calland (political economy), Hope Muronga (youth outreach), and Colin Mitchell and Keneilwe Sekgopi (workshop facilitation). Tutwa Consulting conducted supporting research into manufacturing value chains. The SCD was prepared under a memorandum of understanding in collaboration with the National Planning Commission, in the context of the National Development Plan, and with a large number of government counterparts. The team would like to express special thanks to the following: National Planning Commission: Elias Masilela, T. Mazwai, Tessa Dooms, JP Landman, Miriam Altman, Sue Bannister, Frank Dutton, and Jarrad Wright. National Treasury: Dondo Mogajane, Monale Ratsoma, Ian Stuart, Simon Qobo, Duncan Pieterse, Catherine Macleod, Konstantin Makrelov, Roland Hunter, Nandi Mkunqwana, Victor Luvhengo, Aalia Cassim, and Andre Steenkamp. Department of Planning, Monitoring, and Evaluation: Tshediso Matona, Ashraf Kariem, Rudi Dicks, Ahmedi Vawda, Thabo Mabogoane, Tsakani Ngomane, Mthokozisi Tshuma, Ziphezinhle Mzobe, and Lusanda Batala. South African Reserve Bank: Chris Loewald and Rashad Cassim. Competition Commission of South Africa: Tembinkosi Bonakele and Liberty Mncube. Export Credit Insurance Corporation: Ben Fugah. iii Participants shared many helpful insights in four consultation workshops on “Skills and Jobs,” “Poverty, Jobs, and the Spatial Economy,” “Business and Jobs,” and “Macroeconomic Volatility and Social Cohesion” between March and November 2017. The team is also grateful to many South African business leaders who participated during several outreach events conducted in close partnership with Moeletsi Mbeki, and for constructive consultations with South African youths in Thokoza, KwaMhlanga, and Umlazi, facilitated by Youth Lab. Several members from South African trade unions also shared insights that are gratefully acknowledged. Generous funding was provided through the Global Facility for Growth and Development by the Ministry of Strategy and Finance, Republic of Korea. The team acknowledges close collaboration with the following international partners: Korea Development Institute: Song Chang Hong, Hea Weon Choi, and In Hae Noh; Korea Tech: Soobong Uh; Korea Fair Trade Commission and the Organization for Economic Co-operation and Development: Soohyun Yoon. The team also thanks colleagues from the International Monetary Fund, Montfort Mlachila, Nasha Mavee, and Marcos de Carvalho Chamon, and acknowledges various constructive interactions with members of the diplomatic corps in Pretoria. Helpful comments and suggestions were also provided by Johannes Koettl, Attie van Niekerk, Richard Damania, Michael Sachs, Majbritt Fiil-Flynn, Charlotte Vuyiswa McClain-Nhlapo, Clifton John Cortez, Heleen Hofmeyr, Sizwe Mbele, Rosi Meier, Khulu Mbatha, Melanie Veness, Stefan Schirmer, and Yonnique Goliath. Close collaboration with faculty members from the University of South Africa, including Professors Deon Tustin, Paul Kibuuka, and Carel van Aardt, is also gratefully acknowledged. iv Table of Contents Executive summary .............................................................................................................................. iii Chapter 1: An incomplete transition: Poverty, inequality, and the legacy of exclusion in South Africa ................................................................................................................................................ 6 1.1. A history of exclusion in South Africa ............................................................................................ 6 1.2. Exclusion in land markets and restrictions to free movement ......................................................... 8 1.3. Exclusion in labor markets ............................................................................................................. 12 1.4. Exclusion in capital and product markets ...................................................................................... 15 1.5. Progress since 1994 to reduce poverty and inequality ................................................................... 21 1.6. Overcoming exclusion and strengthening resilience to sustainably reduce poverty