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SA’s structural weaknesses : what we need to overcome in order to reach a new growth path

14 June 2018Yolanda Naudé, Citadel
Yolanda Naudé, Head of Fund Research and Portfolio Manager at Citadel.

Yolanda Naudé, Head of Fund Research and Portfolio Manager at Citadel.

The South African economy has displayed average annual growth of a mere 1.1% over the past four years, while, at 1.6% per year, our population is growing faster than this. Clearly, the economy is not growing sufficiently rapidly to absorb new entrants into it and, on average, the population is growing poorer over time.

It is often believed, mistakenly, that fiscal and monetary policy can rescue the situation and set the country on a sustainably better growth path. It can’t. Both fiscal and monetary policies are cyclical tools which can’t deal with structural impediments in an economy. Other remedies are required for that.

There are several structural weaknesses within the local economy ensuring that it is still trapped in a low growth state. Here, we examine five of them:

1. Low savings rate: The household savings rate in South Africa for the fourth quarter of 2017 was a mere 0.2%. While this does represent an improvement over the past three years, it falls well below the level needed to support higher investment spending and it compares unfavourably to other emerging market countries, as well as to the developed world. For example South Korea has a household savings rate of 8.8%, Mexico is at 20.6%, the US at 2.8%, the Euro area 12.2% and the UK is at 5.3%.

It is savings that create the capital for investment spending and without investment, an economy will not create new capacity and build infrastructure for future growth potential.

2. Weak education system: South Africa regularly scores near the bottom in all the global measures of education achievement. We are ranked 75th out of 76, in the ranking table of education systems drawn up by the Organisation for Economic Co-operation and Development (OECD) in 2015 and SA’s education system was rated 114th out of 137 in the World Economic Forum (WEF) 2017-18 Global Competitiveness Report. Our learners also show very poor scores in the TIMSS (the Trends in International Mathematics and Science Study) and PIRLS (the Progress in International Reading Literacy Study) results.

The lack of a skilled workforce is rated by the WEF as the third-most problematic factor for doing business in South Africa and is clearly a hindrance to economic progress and performance. This is particularly important as the Fourth Industrial Revolution sweeps the globe.

3. Constraints on small and medium-sized enterprises (SMEs): SMEs are recognised as being vital contributors to overcoming unemployment, creating economic participation and transforming an unequal society. Some surveys put SMEs as representing over 90% of enterprises in all economies, including South Africa. High levels of government bureaucracy, a substantial tax burden and restrictive labour regulations contribute to unnecessary restrictions placed on SMEs and prevent them from being greater job creators than they currently are.

4. Weakness of the state owned enterprises (SOEs): For about a decade, we have witnessed South Africa’s SOEs in a state of decline. They have succumbed to operational inefficiencies, financial mismanagement and governance lapses. From Eskom, to Prasa, to Sanral and SAA, inefficient boards, tender rigging, project delays and state capture have resulted in inadequate service delivery and robbed the country of billions in opportunity costs.

Developmental potential has been lost as resources have been shifted away from creating value for the South African public to swelling the coffers of a select few. Although addressing the problems at the SOEs is high on the priority list of President Cyril Ramaphosa, turning them around will be time-consuming and is bound to be met with resistance.

5. Ease of doing business in South Africa: South Africa was ranked 82 out of 190 countries in the June 2017 World Bank Group Ease of Doing Business Index. This might sound positive, given that we were ranked towards the middle of the pack, but if we consider that just 10 years ago, in 2008, the country was rated number 32, we can see how far and swiftly we have fallen. It also highlights how much hard work lies ahead to make it simpler for potential new investors in South Africa to start their ventures, register properties, enforce contracts, trade cross border, deal with construction permits and so on.

For South Africa to propel itself to a higher growth path, it will need to resolve a significant number of structural difficulties, a few of which were described here. Without courageous leadership and dramatic changes to our economic and educational framework, the country will drift along a low growth path, with poverty likely to rise. If, however, we are able to address these issues, the country can find a new base and create a healthier and wealthier society for all.

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