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South African economic growth constraints

06 September 2006 Pieter Laubscher, Chief Economist

The rapid growth of the South African economy over recent years is increasingly exposing key constraints in the economy, which may deter South Africa from attaining even higher economic growth rates over the medium to longer term.

The ASGISA strategy identified six broad economic growth constraints, ranging from infrastructure and logistics deficiencies to regulatory constraints and skills shortages, the removal of which is hoped to improve SAs long-term sustainable rate of growth.

In order to gain some understanding of the business sectors experience of these identified economic growth constraints, the BER conducted a special survey during the second quarter of 2006.

It emerges that in order of importance regulatory constraints (labour regulations and official red tape), state leadership and capacity (policy support and municipal services), infrastructure deficiencies and costs (electricity supply problems and communications costs) and labour skills are key issues hampering business activity and by extension economic growth in South Africa.

Between 30-45% of all the respondents rated these factors to be serious to debilitating issues in terms of the operation of their business. The four individual surveyed factors that feature at the top of the list in terms of their constraining impact are labour regulations (45% rating this as a serious or debilitating constraint), electricity supply problems (42%), official red tape (39%) and government policy support (32%). The breakdown of municipal services (29%), highly skilled labour shortages (33%) and high communication costs (27%) also featured as key problem areas.

A second tier of constraints can be identified, namely, the volatility and (strong) level of the exchange rate, lack of competition (e.g. monopoly pricing), tax administration and road travel deficiencies between 17-22% of all the respondents regarded these factors to be of a serious constraining impact.

At the bottom of the list are rail travel deficiencies and port facility bottlenecks; however, specific factors influence the results here (e.g. the composition of the sample, current macro-economic conditions and structural changes in the mode of transport). The government may accord the removal of these constraints on economic growth lower priority; the former-mentioned constraints require higher priority.

The analysis across firm size groups, sectors and regions reveal interesting patterns. Small firms are often at a disadvantage (labour regulations, exchange rate volatility); large firms suffer relatively more in terms of infrastructure deficiencies and skilled labour shortages.

Manufacturing firms report serious problems regarding the strong rand and monopoly pricing, building & construction firms suffer extreme skilled labour shortages and services firms have more serious problems with high communications costs and electricity outages.

The Western Cape and to a lesser extent the Eastern Cape reported the most serious impact from electricity supply problems, but generally the Western Cape reported less serious growth constraints compared to the other provinces. Gauteng reported the most serious impact in terms of labour regulations; KwaZulu-Natal firms noted monopoly pricing and exchange rate volatility as serious issues and the smaller provinces reported road travel deficiencies and lack of municipal services as key issues.

Given the evaluation by business executives of the listed growth constraints, the intensity of most of the factors is such that any relief in any of these areas is likely to contribute positively to economic growth. It can only be concluded that the government is on the right track by addressing these constraint areas in terms of its ASGISA strategy.

However, what the overall survey results suggest, is that great urgency is required, particularly regarding the governments interface with business labour regulations, official red tape, tax administration, government policy support, municipal services, competition policy and infrastructure & logistics deficiencies are all factors holding back SAs economic growth and employment creation potential.

Furthermore, a more competitive currency and skills training can go a long way in improving the economys growth rate.

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