The Keynesian and Neoclassical Paradigms of South Africa Rising Unemployment

South Africa is considered to be the ‘land of promises’ in the African region being rich with natural resources and human capital, yet it has failed to reach its economic prosperity at times even stability. South Africa’s history of wars and corruption from different government policies have resulted in setting back its economic growth to its full potential. Still relishing from its ‘apartheid days’ that dates back to the 1990’s, it suffers today of extreme poverty and inequality. These critical issues have caused unemployment, rising inflation and foreign debt accumulation. “ ” and the government alone cannot combat these issues. Regardless of government policy or lack of it to maintain a surplus on the current account of the balance of payments in order to meet the Country’s debt repayments, a growing unemployment and ever-growing poverty remains to stay. Several policies developed in south Africa such as ANC, GEAR AND RDP have resulted with little success. This essay aims at analyzing the unemployment issue through the eyes of neoclassical theory followed by Keynesian paradigm and concludes with a policy recommendation.

Neoclassical Paradigm

To relate the neoclassical paradigm to the current situation in south Africa is rather tricky, due to what’s considered unrealistic assumption that any unemployment that exists in the economy would be short lived and the movement of the free market forces will resettle full employment in the economy organically and on its own. With high percentage of the population under poverty line, they are hardly in a place to be fussy about their means of income when they’re trying to make ends meet but under this assumption unemployment in an economy is voluntary. One can argue, should government interfere or let the market forces play its magic? However, unemployment in south Africa is chronic that government intervention is a must at this point, but this will heavily oppose the neoclassical theory assumption that government intervention is destructive in the long run rather than constructive and it should be all means not get involved. Under this paradigm, the government would have to leave it up to firms to maximize their profits and households to provide the labor and work together in cohesion to reconcile any mismatch between the two components. Assuming, that they will reach an equilibrium and the economy will act as an agent for shocks that could unsettle its stability. Under this assumption, unemployment is caused by rigid wages and labor market failure. The assumption sees that if inflation is reduced that will lead to reduction in unemployment which is not the case in south Africa, therefore neoclassical approach to resolve unemployment in the context of south Africa would be void. South Africa has a lot of catching up to do in regards to its development aspects in terms of education, infrastructure etc. for this assumption to relate to its current state.

Keynesian Paradigm

In theory, Keynesian paradigm could hold a closer resolution to south Africa’s unemployment problem in comparison to the neoclassical theory, but how realistically applicable are expansionary fiscal policy or a monetary policy that Keynesian would advise to a constrained south Africa. To start with the basic, The Keynesian theory of unemployment hypothesized that unemployment arises due to insufficient aggregate demand (Keynes, 1936). Thus, an explanatory fiscal policy such as reducing taxes or increasing government expenditure would cause an increase in aggregate demand. Therefore, stimulating consumption and in turn investment resulting in creation of jobs. However, the job creation would be in the formal market, neglecting that due to historical issues that south Africa has inherited there is a huge shortage of skilled labor to fulfill the jobs created. This shortage means that a great amount of south Africans population hasn’t attained sufficient level of education to secure jobs in the formal market and remain in the informal market. Hence, this policy is only applicable in the formal market which only leaves out a vast majority of the south African population to drown in their “poverty trap”. To argue the paradigm furthermore, financing the fiscal policy within itself Is an issue for an indebted south African economy that cutting taxes and increasing government spending would possibly be a policymaker last resort given that the taxes are the government current source of revenue. Under this paradigm, Keynesian would argue that the government should spend since the south African population falls under poverty line and are incapable to spend to stimulate the economy. furthermore, the determinant of involuntary unemployment is aggregate demand, which requires a sort of equilibrium with supply. In order to reach this equilibrium as discussed earlier, Keynesian would advise for the use of expansionary fiscal policy to shift the aggregate demand curve to the right. The assumption here is if government intervene by cutting taxes or increasing expenditure this will cause a direct increase in funds in consumers hands, leading them to increase consumption which then causes an increase in investment because supplier will try to meet the increase demand to maximize profit also known as the multiplier effect.

Policy Recommendation and Conclusion

Thus far, the paper concludes that the Keynesian holds more concrete solution using expansionary fiscal policy then neoclassical to south Africa’s unemployment. South Africa could immaculate brazils successful labor market socio economic schemes such as Bolsa Familia and BPC head on targeting the unskilled and poor. Furthermore, there should be a support plan for labor market policies to be more flexible to stimulate small and medium enterprises hence increasing employment and investment. Government expenditures should heavily focus on fighting crime, improve infrastructure and overall healthcare status to attract investors and create further employment. the government should by all means avoid taking further external debts, unless it will be spent on a liquid and concise project where the returns on investment and benefits are guaranteed and exceed cost of burrowing. Once these resolutions are implemented and the socio-economic status of south Africa is transformed only then will employment be increased.