Getting firms and entrepreneurs, be they local or foreign, to commit their money to the country will be an indispensable part of building a worthwhile future. This, arguably more than any other single dynamic, has been South Africa’s fatal failing.
The National Development Plan envisaged investment reaching 30% of GDP by 2030, which would be necessary to push annual growth up to 5.4% – but it has never come anywhere close to this in the period after 1994.
This week’s South Africa Investment Conference is the latest iteration of President Cyril Ramaphosa’s drive to turn this around. Two such events have been held previously, and the president has also sent high-powered envoys abroad to spread the word of what South Africa has to offer.
In his weekly newsletter on Monday, the president was optimistic about the prospects: ‘The conference will demonstrate that South Africa remains an attractive investment destination, and will show the progress we are making to improve the business climate. It will build on the positive momentum in investment in the years before the onset of the Covid pandemic.’
This claim is questionable. Investment peaked at 23.5% of GDP in 2008 and has been on an overall decline ever since. In 2015, it stood at 20.3% (not a bad level by South African standards, even if it is below what is needed), falling to 19.4% in 2016, to 18.8% in 2017, to 18.2% in 2018, and to 17.9% in 2019 – not much more than half of what was required.
The figures seem to have been moving in the wrong direction.
This might be said of the conference too, as well as the government’s overall investment strategy. For a start, it fails directly to tackle the reasons why investment flows have been falling. There is no mystery here – investment comes where businesspeople see an opportunity to make money and where the prevailing conditions in the market enable them to do so. Where it fails to come, it’s a safe bet that the target market is not likely to reward investment.
South Africa is a middling proposition. Its consumer market is small, even if free trade agreements have potential in future. It has a debilitating crime problem. Its infrastructural deficiencies are not only a frustration, but incur massive additional costs. Skills shortages are matched by a hostile immigration regime.
Add to this an extended list of governance pathologies: corruption, bureaucratic incompetence, unstable policy.
But perhaps most damaging to South Africa has been its insistence on a policy agenda poorly aligned to its economic and developmental needs, if not overtly hostile to them.
Thus, as the state wrestles with capacity constraints (in some parts, wholesale dysfunction) to fulfil its most elemental responsibilities, the ruling party maintains a counter-constitutional practice of ‘cadre deployment’ to maintain party political control over a nominally politically neutral state machinery. This guarantees not only corruption but administrative breakdown.
South Africa has also laid no small burden on itself by its insistence on race-based employment and empowerment legislation. Demands for companies to cede tranches of their equity, and to be subject to intrusive inspections to determine whether the racial mix of a company’s employees is acceptable do nothing to make South Africa more attractive.
Indeed, a recently-published study of European firms operating in South Africa flagged empowerment ownership demands as the central disincentive to investing in the country. This mirrors concerns previously expressed by such companies in 2018.
Beyond this, South Africa has since 2018 loudly proclaimed its intention to seize property without compensation. No policy intervention is more likely to dissuade investment than to threaten property rights and the security of assets. Yet doing so is a signature policy. (Economist Azar Jammine remarked that the cost of this was the loss of a potential Ramaphoria windfall. These decisions have consequences.)
The government is well aware of this. The impact of the Expropriation without Compensation push was noted by its investment envoys as a matter of grave concern. Responding to this, the president’s economic advisor, Trudi Makhaya, said that the government just needed to ‘be frank’ with investors. Explain it, and people would be put at ease.
This week’s conference was probably intended to carry this logic forward. This is not really possible, since the endgame of EWC has never been set out. All we’ve had is a vague plea for trust and an even more vacuous assurance that it won’t be damaging. The government has promised that everything will be done within the constitution and the law – a dreadfully misleading argument, since both the constitution and the law will be changed to accommodate the policy. The current Expropriation Bill goes a considerable distance in removing the courts from expropriation processes – and before the pandemic hit, the ANC indicated that it wanted the constitution amended to ensure that the executive rather than the courts were dominant here.
Besides, not all policies lend themselves to being ‘explained’. (This, by the way, was a mistake that the National Party made, assuming that if only it could set out its case, international opposition would die down.) EWC is inherently and intrinsically hostile to investment. It is in this respect a bad policy.
All of this makes the country a difficult sell. This is especially the case in a capital-hungry world where any number of alternatives are available: rapidly growing markets in Asia and Africa, for example. To be sure, they all have their own challenges, but they offer promises of exciting returns. This appeals to both foreign and South African businesspeople.
Investors are aware of this. Their decisions will be based on the extent to which a good business environment with profitable opportunities exists. South Africa’s official path has been to push ahead with policies that make this unlikely if not impossible. And to hope that clever words and dazzling presentation can obscure this.
Martin Kingston of Business for South Africa said of the conference: ‘South Africa is going to have to move fast to demonstrate that we are the right environment for people to be able to put long-term investment.’
Just so. This will be a matter of actions rather than words. Make the necessary changes first, then promote them through conferences and envoy missions. Alter the basis on which businesspeople make their decisions. Investment can be enticed into a market. But it will not be persuaded into it. What is being done now is back to front. The sooner the government accepts this and takes a new policy path, the sooner South Africa can realistically hope for the investment it needs.
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