South Africa needs to boost interregional trade, investment and capital flows to grow economy

Posted On Tuesday, 25 November 2014 10:38 Published by
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Adrian Saville, CIO of Cannon Asset Managers, looks at ways to boost the South African economy.

 

Adrian Saville

It's no secret that the South African economy is growing at rates well below its potential. What is perhaps less well understood is that there are some quick wins which could kick-start the economy, yielding swift results. And from that position, it would be far easier to take the economy to a more elevated position, leading to more meaningful job creation.

Notwithstanding the current local slump, South Africa's growth rate for the last 20 years has mimicked world economic growth, which infers that global growth is the best indicator of what our structural growth rates are likely to be into the future. We believe that for the next 10 years, advanced economies (that make up half the world economy) will grow at 1.5%, and developing economies at 5.1%, giving an average annual global growth rate in the region of 3.0% to 3.5%.

The good news among the current gloom is that we should grow at about 3% p.a. for the next 10 years. And the bad news is that we will grow at about 3% p.a. for the next 10 years. This is well below the 5.4% rate targeted by the National Development Plan that is required to dent unemployment, dramatically reduce poverty and redress income inequality.

While the country urgently needs major structural changes to education, government economic policy, infrastructural capacity and state institutions (to name just a few problem areas) to raise our growth rate above 6%, there are two relatively easy wins we can achieve as a nation to lift us above the low-growth trap we are caught in, namely:

  • Integrate properly with Africa: Through boosting interregional trade, investment and capital flows, South Africa would be able to tap into the outstanding growth rates of plus-6% being experienced in the rest of sub-Saharan Africa.
  • We estimate that effective integration with the sub-continent could add 1.5% p.a. to South Africa's economic growth rate. While the Department of Trade and Industry has recognised this as a factor and the National Development Plan incorporates it, we have yet to see meaningful progress in this area.
  • One culprit that explains our lack of progress in accessing regional markets is our low rate of productivity. Statistics show that from a peak in 1993, output per worker per unit of capital in South Africa has fallen dramatically, yielding the lowest level in 46 years. We are below our emerging market counterparts in terms of labour competitiveness.
  • In a study conducted earlier this year, the World Bank1 found three areas of opportunity to improve our export competitiveness: boosting local competition by opening SA markets to domestic and foreign entry; promoting deeper regional integration in goods and services within Africa; and alleviating infrastructure bottlenecks. Which brings us to the second factor which would enhance South Africa's growth rate.

Meaningful roll out the R1 trillion infrastructure expenditure programme.

We believe this has the potential to enhance South Africa's growth by a further 1.5% a year. Infrastructure development has one of the greatest multiplier effects in terms of job creation, especially with regard to the promotion of low-skilled jobs.

Several studies2 have shown that investment in economic infrastructure has the capacity to act as one of the most effective policies in terms of promoting economic growth. In addition, employment is created during the construction phase as well as for operation and maintenance.

Moreover, one of the key drivers of private sector investment is public sector investment. Where the government goes, the private sector will follow. It should not be a surprise that, given the current low levels of government infrastructural investment, private sector investment in the economy is also low.

On this score, South Africa adopted the National Infrastructure Plan in 2012, whereby R827 billion would be invested in building new and upgrading existing infrastructure from 2013/14.

However, by this year's budget speech, these still were overwhelmingly plans with the low pace of delivery frustrated by the fact that some key projects that have come into being have run over capital and time budgets. In addition, sadly, some of the budgeted expenditure is being diverted just to keep the lights on during this phase of exceptionally tight electricity supply, rather than creating new infrastructure.

Despite the frustrations, our economic modeling efforts show that if harnessed effectively, these two steps of infrastructure delivery and regional integration could boost South Africa's growth rate from 3% to 6% putting us on a high road to economic and sustained social repair and upliftment.

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