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(UN)COMPETITIVENESS: SOUTH AFRICA'S

ECONOMIC (DIS)ADVANTAGE

Yolanda Naudé

Investment Strategist and Portfolio Manager

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Attracting investment can be equated to an economic beauty contest. Countries need to stand out amongst their peers and make themselves as attractive as possible to global investors. As South Africa seeks to transform its economy it has to start putting its best foot forward in order to come out tops on the emerging market investment stage.

 

To do this, the Department of Finance published an economic policy paper entitled Economic transformation, inclusive growth & competitiveness: Towards an Economic Strategy for South Africa in August 2019. The proposal mentioned the word “competitiveness” no less than 75 times! It stressed the need for reforms in order to create a globally competitive domestic economy, and listed five strategic building blocks of sustainable long-term economic growth. Of these, two specifically focus on competitiveness:

  • Modernizing network industries to promote competitiveness and inclusive growth

  • Implementing a focused and flexible industrial and trade policy to promote competitiveness and facilitate long-run growth.

 

The policy document further discusses different ways in which a country’s competitiveness could be measured; and noted labour productivity, total factor productivity, or the competitiveness of specific markets - for example how deep and liquid its financial markets are - as possible approaches to use.

 

In support of this economic policy paper, the International Monetary Fund (IMF), in their late-November 2019 review of the domestic economy, recommended timely implementation of the suggestions contained in Finance Minister Tito Mboweni’s policy proposal in order to lift the domestic economy from a low growth trap and address the country’s dire fiscal situation and the looming credit rating downgrade.  

IMPORTANCE OF COMPETITIVENESS

  • For a developing economy like South Africa, that is heavily dependent on foreign investment in order to ignite economic activity and stimulate job creation, advantageous peer-relative competitive positioning would bode well for the country looking to attract global investments and human capital. In April 2018, President Ramaphosa announced an ambitious target to raise US$100bn of new investments into the domestic economy over the following five years. To put that into context, US$100bn is equal to more than 30% of the current size of South Africa’s economy, which is significant and should make a marked difference. 

 

  • During the first SA Investment Conference of 2018 companies pledged investments to the value of R300bn over the next 10 years.  By November 2019, about 80% of those projects had already been either completed or were being implemented. During the 2019 conference, companies pledged an additional +/- R360bn in investments. In just two years, new investment to the value of about R660bn has therefore been pledged.  If all of these investment projects are implemented over the next five years, it should create hundreds of thousands of permanent jobs; thereby contributing to the uplifting of the country’s large number of poor and unemployed people.

 

  • During the 2019 conference, the President also announced his objective for the domestic economy to rank amongst the Top 50 countries on the World Bank's Ease of Doing Business Index in the next three years. In 2009 South Africa was ranked 32, but dropped to 82 out of 190 countries based on its 2019 assessment. Currently New Zealand tops the ease of doing business rankings, followed by Singapore and Denmark. 
     

  • Some of the ways in which South Africa could improve its ease of doing business is by focusing on simplifying and speeding up processes like starting a business, registering property, dealing with construction permits, getting electricity, getting credit, paying taxes, and trading across borders. If South Africa were to reach its Top 50 goal in the next three years, it should positively contribute to the country’s new investment targets, as well as the overall economic growth aim.

MEASURING COMPETITIVENESS

The World Economic Forum (WEF) is well known for their detailed work on global competitiveness, with their first research on the topic published 40 years ago. Over the years the WEF has become a definitive voice with deeply insightful opinions on global competitiveness. Their Global Competitiveness Report 2019 covers 141 countries; analyses 12 different pillars and 103 individual indicators per country. 

 

The WEF sees their annually updated competitiveness index as a gauge for countries’ policymakers to look beyond shorter-term action and reactionary measures and to instead assess their progress against the full set of factors that drive productivity, growth and human development. According to them, the ultimate aim of the WEF’s Global Competitiveness Index is to assist policymakers, business leaders and other stakeholders in shaping their economic strategies in the era of the 4th Industrial Revolution.

 

In their own words: “The Global Competitiveness Index (GCI)… aims to measure the drivers of ‘Total Factor Productivity’ (TFP), the part of economic growth that is not explained by the growth in the factors of production. TFP can be interpreted as how smartly these factors are used and is the main determinant of long-term economic growth. To put it simply, how efficiently units of labour and capital are combined for generating output”.

Figure 1.2: COMPETITIVENESS AND INCOME

SOURCE: WORLD ECONOMIC FORUM; WORLD BANK, WORLD DEVELOPMENT INDICATORS DATABASE (ASSESSED 10 JULY 2019).

Notes: GNI = Gross National Income (Atlas method). Data for Barbados, Iceland and Iran is from 2017; data for Venezuela is from 2014. N = 141, R2 = 0.81.

SOURCE: WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT, 2019, P18

HOW DOES SOUTH AFRICA RANK?

From a relatively good ranking of 45 out of 133 countries in 2009, South Africa’s competitiveness ranking has fallen to 56 out of 144 countries in 2015 and to a low of 67 out of 140 countries in 2018.  However, with the change in the political landscape, South Africa’s ranking has improved by seven places to 60 out of 141 countries in the WEF’s 2019 report.

 

Some of the prominent domains in the domestic economy that stand out for their relative excellence where South Africa is ranked in the top +/- 30 countries (out of 141 surveyed countries) in the world on the Global Competitiveness Index for 2019 that specific area of the economy/country include:

SOURCE: WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT, 2019, P534-537

And those areas in the report that were highlighted as being some of the most troublesome or challenged components of the South African economy include:

SOURCE: WORLD ECONOMIC FORUM, THE GLOBAL COMPETITIVENESS REPORT, 2019, P534-537

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The content of the two tables above highlights both the beauty and some of the real challenges facing our two-tiered economy.  The domestic economy clearly has a number of excellent institutions, for example South Africa is the financial hub in the region, and the domestic equity, insurance and credit markets all achieved top scores, but a number of other aspects continue to hold back the economy.

 

In particular, South Africa’s labour setup continues to present various challenges; and it is precisely in this area where Government needs to take a tougher stance if it wants to transform the country’s state owned enterprises so that these entities could assist in enabling much needed domestic socio- and economic development and progress.

 

In addition, although steps are being taken to correct this, it currently takes 40 days to open a business in South Africa, while it takes half a day in New Zealand and five days in Mauritius? Why is it so difficult to hire foreign labour if our economy is starved of skills? Why are relationships between labour and employers so uncooperative?

 

If South Africa wants to enter a new higher growth trajectory going forward, crucial reforms are required in multiple areas of the economy, urgently, especially in terms of labour; as highlighted by the country’s weak global competitiveness ranking in this component. 

 

Not easy to do, but if there is a will there is a way.

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