South Africa’s prospects

Image courtesy of www.lowveldnet.co.za

The Economist (14 Jan 2006) carries a report on investment in South Africa. They suggest: “Spend more but wisely” (read the full story here – login required).

Simply put, the article points out that South Africa’s economy is in good shape:

• Our tax collection service is the best in the world, and the government coffers are bursting
• The government is embarking on massive public works programmes (R 400 billion in the next 5 years)
• Inflation is low – 3.7%
• Current growth is 4.2% (officially, many suspect the actual rate of growth is higher) – the stated government goal is 6% within a few years from now
• Business confidence is exceedingly high – see previous post
• The business climate (legal, government, admin, finance) is better than most other developing countries, including places like Malaysia, Brazil, eastern Europe and China.
• Electricity is the cheapest in the world (the Economist just says, “comparatively cheap”)
• “Taxes are fairly low”
• “Red tape is no worse than in countries with similar GDP per capita”
• “Labour productivity is higher than in Brazil, Poland, Malaysia and even China”
• Most SA firms find it easy to borrow money, and are more profitable than most comparable companies, and have more cash reserves

With all this good news, why are many SA firms “so grumpy”, and why is investment only at 16% of GDP (the lowest in the list of comparable developing countries)?

The answer lies in a number of familiar areas:

• Top of the list is restrictive labour regulations. Although government red tape is not as entangled as some comparable countries (according to a World Bank report last year), South Africa is one of the hardest countries to hire and fire employees. (As I have previously point out, the paradox of a country with 26-40% unemployment is that we should protect employees LESS)
• Many companies cite the “wobbly exchange rate” producing uncertainty (these people should wake up – it hasn’t been wobbly for half a decade, and it has acted entirely predictably for the past 10 quarters in a row).
• Crime is another pain (officially, security and crime losses accounted for 1% loss in GDP – higher than Brazil or Russia. Yet, interestingly, there is no culture of protection money as there is in these two countries, and through eastern Europe and Asia)
• “But the worst drawback for South Africa is its scarcity of skills”
• – > South African firms spend less on training than virtually any other comparable country.
• – > Labour costs are nearly 3 times higher than best parts of China and 75% higher than Malaysia or Poland. The gap is especially wide for highly qualified workers. In other words, leaving averages aside, lower skilled workers are paid roughly the same in SA and Poland, but managers in SA are paid twice as much as their Polish counterparts.
• –> An extra year of school in South Africa brings about a 12% increase in salary (whereas workers in developed countries will see only a 5% increase).
• –> This is all indicative of the scarcity of skills, and the market’s willingness to pay for it.

The article concludes: “”With government finances now in order, the problem is not money but the ability to spend it. Many municipalities are not spending their investment budget because they have too few qualified people to design and manage projects. Now that the government is willing to spend more, it is unclear how fast – and how well – the huge dollops promised by Mr Mbeki can actually be invested.”

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