Last week, I looked at the trajectory of South Africa’s economy since the 1990s, its disappointing performance and its place in the evolving economic order. Specifically, can South Africa participate in the “rise of the rest”, even rise to be “best of the rest”? This week’s contribution aims to drill down deeper into what has brought South Africa to its current impasse.
To recap: South Africa has been falling behind its emerging-market, middle-income peers for well over a decade. In headline terms, this has been expressed in the country’s deficient growth rate, which in turn arises from a deficient level of investment – and especially fixed investment. A bold march to seize the decades ahead will, therefore, demand that businesspeople be willing to sink their funds into fixed investment projects in the country.
Investment needs to be understood properly. Too often, investment is read to mean foreign investment; but local businesses make a large contribution. South Africa’s investment failings are as much a lack of domestic investment as a failure to attract foreign capital.
For years, it has been an ongoing complaint from the government that business has refused to invest – the so-called “investment strike”. This has been eagerly taken up by many of the “left”. It feeds a narrative of business as unpatriotic, selfish, and even malign. Implicitly, it suggests that business is undermining the governing order by stoking socio-economic deprivation. It is a seductive argument for politicians with a predisposed hostility to business.
This mistakes the nature of business and of investment. One thing that sensible leftist thinkers get right is understanding that business is driven by profits. Profits refer to the reward generated by a business activity, after accounting for the activity’s costs. If there is a reward that goes beyond the outlay involved in undertaking it, there is a rational case to be made for it. It is under these conditions that investments will be made. This is, however, qualified by non-financial risks that may exist (is a country politically stable, for example, or is there a danger of serious collapse?) and also by the comparative attractiveness of a jurisdiction (are the prospective rewards in one country better than those in alternative destinations, and so how would it appeal to investors alongside its peers?)
Making an assessment of costs and rewards is highly context-dependent. Extractive industries are limited by geology and nature to those jurisdictions where particular resources occur. To get at these, the costs (and risks) may well be extreme, but are taken on because of the limited alternatives available. Minerals are a prime example – think of coltan mining in the Democratic Republic of Congo. Much the same could be said of agriculture, where soil quality and climate are vital, although since quality farmland is a more widely-available resource, the constraint is less noticeable here.
Viability
As activities become more complex, a greater variety of factors influence the viability of an envisaged operation – and hence the attractiveness of a proposed investment. A manufacturing plant may not be inherently limited by geography, but factors such as the availability of water, the reliability of electricity supply, and the proximity of markets would be considerations. As production processes become more complicated, larger initial investments will be required, and the quality of skills demanded will escalate.
Technology has meanwhile made it possible to integrate production processes across the world, and to seek out efficiencies in a way that would not have been possible even a generation ago.
It is by finding advantages in this milieu that emerging economies have been able to make their progress. Simple manufacturing processes, for example, can be performed cheaply and efficiently in relatively unsophisticated markets, provided the basic inputs and logistics are in place. For this reason, many of the textiles and clothes used worldwide are produced in countries like China, India, Vietnam and Cambodia. These are hardly ideal jurisdictions to do business in – and were far less so when their economic acceleration began – but they offer sufficient advantages to make these investments attractive.
As these simpler value-adding processes endure, as the initial investments are showing their value, as authorities of the country begin to understand how their conduct impacts on economic activity, the economy in question is posed to enter a virtuous cycle. The process is termed “agglomeration”: as more companies set up shop, so too do related industries to service them. This creates not only a greater quantum of economic activity, but a greater variety of it, with a consequent demand for a wider range of skills, and for entrepreneurial thinking to catalyse innovative projects. This is exactly what has taken place in in centres like Chennai in India or Shanghai in China.
What, then, has gone wrong in South Africa?
One answer to this is simply the country’s positioning as globalisation began to accelerate. South Africa entered the 1990s with a partly isolated and protected economy, industrialised, though not fully so, and still heavily dependent on its mining sector. Fixed investment was indifferent during the early 1990s – actually falling noticeably between 1990 and 1993, which was understandable given the political turmoil and uncertainty that attended the transition. The prevailing assumption in many quarters was that with South Africa restabilised after the transition to democracy had been completed, and once more a full member of the international community, investment and growth would reassert themselves.
For various reasons, this is not what happened. Investment remained subdued for the rest of the decade, and only picked up in the second half of the first decade of the 2000s, on the back of the global commodities boom and the approaching 2010 FIFA World Cup. Nevertheless, South Africa was simply not as attractive an investment prospect as many of its peers. China had emerged as the world’s sweatshop after a decade of growth. Other countries – India, Indonesia, Malaysia, Mauritius and Vietnam – were chalking up impressive records.
Something that each of these countries had in common was a willingness on the part of their governments to learn the lessons of their own (and others’) histories, and to adapt accordingly. This meant being sometimes brutally willing to part with long-held orthodoxies. China and Vietnam, both nominally communist societies, had opened themselves up to private enterprise, albeit while keeping tight political control in the hands of political oligarchies. India steadily reformed its inefficient dirigiste economic management system – the Licence Raj – even in the face of stiff resistance from entrenched interests.
Competence in administration
Each of the world’s developmental success stories also involved an appropriate level of competence in administration. This amounted to what the Harvard Scholar Merilee Grindle termed “good enough governance”. In essence, this meant that minimum conditions for particular societal activities existed, even if they co-existed with corruption and failures: bureaucratic systems could process permissions; revenue authorities could collect taxes; infrastructure was maintained sufficiently to enable trade.
Again, what constitutes good enough governance is situational. What is adequate for one country may not work for another. Generally, again, as greater sophistication is required, better governance outcomes are necessary. For a society like China to move from low-wage mass manufacturing to an economy that is increasingly engaging in innovation has been possible because its government has been able to provide increasingly effective outcomes, for example, in terms of the execution of projects and the education of its young people.
It is precisely this that the world’s emerging economies have been able to capitalise on. They initially offered a satisfactory environment for operations that were becoming uneconomical in wealthier countries – Indonesia may not have measured up to Swedish or Canadian standards, but it was fine for producing clothing or toys. Goods could be produced cheaply and exported reliably. On this basis, and with a growing, educated middle class and expanding numbers of serious entrepreneurs, more advanced and innovative activities, such as electronics and aviation-related manufacturing, could be embarked on. Today, Indonesia’s manufacturing sector is larger than that of the United Kingdom or Russia. Its government became increasingly adept at managing the requirements of a modern economy. Making Indonesia 4.0, its current official economic strategy, sees a future in increasingly high-tech activities (including in relation to its abundant natural resources), upskilling its population, and supporting research and development.
On none of these counts did post-apartheid South Africa acquit itself well. To its great credit, the ANC through the Mandela and Mbeki years dealt cautiously with macro-economic issues: deficits were kept in check, and any urge to borrow and spend was restrained. For this, Treasury became the bête noire of the left.
But on most other matters, in the early years, the country’s political leadership was firmly focused on delivering legislative wins, its take on the economy refracted through a political lens. Thus, ambitious visions of a “transformed” economy were matched with a legislative agenda aimed at enacting enhanced labour protections, racial preferencing and extending political control over the public service and state agencies. The impact on South Africa’s investment environment was not favourable.
There was no flood of foreign fixed investment, and even local businesspeople were restrained in their investment behaviour. Indeed, the fall of the apartheid-era restrictions opened up the outside world for South African capital. The opportunities abroad – both for investment and for effective relocation (through offshore listings) – were alluring. (When I worked for a small business think tank a decade ago, I encountered a real sense of pessimism with South Africa’s business environment, and a view that many of these firms’ economic futures were likely best served by looking abroad, not least to the growing continental market.)
As Dr Mark Mobius, then of Franklin Templeton Investments, commented on South Africa a few years ago: “They’ve got to make South Africa a much more attractive place for investment… I’m not only talking about foreign investment. I’m talking about local investment.”
This is a critical insight. In the next instalment of this series, I will look at the specific constraints to investment in South Africa.
[Image: Sergio Cerrato – Italia from Pixabay]
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