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Improving SA’s human capital, physical infrastructure and public institutions are key to realising the economic development benefits created by increased productivity

26 March 2024 PwC

PwC’s new Productivity Potential Index tool measures productivity by taking into account various factors relevant to long-term sustainability. For South Africa, understanding the levers that impact national productivity couldn't be more important as the country heads into its seventh democratic election.

PwC South Africa is pleased to share its third South Africa Economic Outlook report for 2024. In this edition, we focus on PwC’s Productivity Potential Index (PPI): a new tool for measuring productivity that takes into account a host of factors relevant to long-term sustainability.

Productivity acts as a catalyst for economic growth and development, enabling countries to produce more with the same resources. It plays a crucial role in bolstering employment opportunities, leading to better wages and improved economic conditions. High productivity also prepares economies to better absorb unforeseen/unplanned events and recover from economic downturns.

For South Africa, a more productive economy could also mean higher incomes that directly elevate people's standards of living and quality of life. However, research by the World Bank ranked South Africa 80th out of 170 countries for productivity growth in 2015-2021. During this period, the rate of local productivity growth – as measured by GDP per employed person – was only two-thirds of the pace seen globally.

Traditional productivity measures like GDP per employed worker ignore many of the assets that determine an economy’s productive capacity. These traditional measurements do not, for example, include: environmental impacts, erosion of trust, or the weakening of equity that a production process may generate. Furthermore, traditional productivity measurements provide only a retroactive view of productivity, lacking the forward-looking perspective needed to inform policy making.

PwC’s new Productivity Potential Index (PPI) adopts a ‘multiple capitals’ approach to defining, modelling, and measuring productivity. It firstly encompasses the traditional inputs of human, physical, innovative and other intangible capital that underpin traditional productivity measures. The PPI also incorporates additional pillars for social, natural and institutional capital. By encompassing all these capital bases, the PPI draws on a wide range of economic research and offers insights across the full spectrum of productivity policy.

Lullu Krugel, PwC South Africa Chief Economist, says:

There are key differences in the primary drivers of productivity across different types of economies. In advanced economies, inequality is the most important predictor, followed by physical and human capital. In turn, physical capital, life expectancy, institutional quality, and internet access are the most important predictors in developing economies. PwC’s estimates show that around 40% of South Africa’s productivity is determined by human capital, logistics and institutions. These factors are also currently amongst the country’s biggest economic challenges.

This report furthermore considers the current state of education, the logistics sector and public governance in South Africa, along with potential solutions for both the public and private sector, as we collectively strive for a more productive economy.

- Human capital: Education is at the core of human capital development. South Africa’s education spending is high (as a percentage of GDP), though the return on this investment is low. This has resulted in a skills deficit and productivity challenges in the labour market, with soft skills in particularly short supply. The job market is calling for a paradigm shift in public sector education curriculums. Many higher education institutions (HEIs) in South Africa have recognised this. The majority of local HEIs believe that curriculum design and learning methods that are in sync with industry trends are required to deliver curricula that match the rapid pace of change in the world.

Thaaniya Isaacs, PwC South Africa Higher Education Leader, says:

"Seven out of ten respondents to PwC’s Higher Education Leaders Survey 2023 agree that higher education institutions will become fully agile in their approach to teaching and learning, adapting to new approaches rapidly, and in sync with industry trends. All of them agree that different delivery methods for teaching and learning will have to be deployed to suit students' needs and preferences – both as individuals as well as future participants in the labour market. However, change does not happen magically. It requires intent, the ability to execute, and strategic investment. Most importantly, it requires leadership."

- Physical capital: Reliable infrastructure, well-maintained equipment, and appropriately applied technologies boost productivity. However, the state of South Africa’s port infrastructure and services has deteriorated in recent years. Data shared with PwC by the South African Association of Freight Forwarders (SAAFF) shows that the number of containers imported and exported declined from 4.42 million in 2021 to 4.18 million in 2023. Railway freight volumes also declined from 20 million tonnes/month in mid-2017 to 14 million tonnes/month during 2023. One of the options to improve port performance is a part public/part private ownership model. Globally, the trend is for governments to play more of an oversight/regulatory and ownership role, leaving some or all operational aspects to the private sector. Greater levels of private involvement open opportunities for more investments, particularly where governments are fiscally constrained.

- Institutions: Our PPI added institutions as the third new pillar to the measurement of productivity because of their essential role in overseeing and regulating the economy, thereby contributing to productive outcomes. The performance of South Africa’s public institutions – as measured by the Worldwide Governance Indicators (WGIs) – has unfortunately deteriorated since 2018. To improve the quality of public institutions and reduce the incidences of corruption, public sector entities need to adopt new technologies to create transparency and transform organisational culture to improve understanding and appreciation of why compliance is necessary. Private companies need to be proactive, agile and resilient, and react in an appropriate manner to survive the impact of economic crime like corruption emanating from the public sector and elsewhere.

By design, the PPI is inherently forward looking. Mainstream productivity analysis describes only the past and today’s decision-makers need economic indicators that can shape the future. As South Africa heads towards its seventh democratic national election, understanding the levers that impact national productivity is critical for would-be policymakers in the next Parliament if they are to achieve their economic development objectives.

Key content in this report includes:
- PwC’s Productivity Potential Index (PPI): A new way of looking at productivity.
- Multiple capital pillars: Unpacking South Africa’s productivity drivers.
- Labour and human capital: Educational systems need industry-supported curricula and teaching methods.
- Infrastructure and physical capital: New models for port management create opportunities for private sector investment.
- Public institutions: Quality governance increases service delivery and reduces corruption.
- How PwC assists our clients with workforce upskilling, supply chain optimisation and safeguards against corruption.

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