South Africa has a growth in income problem – not a lack of savings problem. The lack of growth and its consequences are plain to see. The apparent shortage of savings (the difference between domestic savings and capital formation) shows up in the current account deficit of the balance of payments and in the equivalent inflows of foreign savings.
The bigger the current account deficit, the larger the inflows of foreign savings. Without access to foreign savings, the current account deficit would be much smaller, spending on all goods and services, including plant and equipment, would have to be cut back even further and the economy would be growing even slower.
Faster growth would mean higher returns for savings, and would help attract more foreign savings and keep more domestic savings profitably applied at home.
Slower growth undermines the case for investing in the country. It will mean a weaker rand, more inflation and perhaps higher interest rates to undermine growth prospects further.
Faster growth and the profits that come with it would be retained by businesses, thus adding to domestic savings. Of the gross savings rate of South Africa, equivalent to about 14 percent of gross domestic product, more than 100 percent is undertaken by corporations that retain earnings and cash flow.
We’d like them to plough back their earnings and cash flow into additional plant and equipment and larger work forces rather than paying dividends, buying back shares or repaying debts. They’d do more of this good stuff if they were more confident about growth prospects.
The problem for any economy is not a lack of capital (savings by another name), but a want of good returns on it. Raise the returns and the capital will be freely available. The focus of attention of South Africans should not be on a lack of capital, or its reflection in the current account deficit, but on how to promote faster growth that will help raise the return on capital to attract more of it from all sources, domestic and foreign.
Deirdre McCloskey in her book Bourgeois Dignity – Why Economics Cannot Explain the Modern World makes the crucial points in the following highly individual and entertaining way: “There are many tales told about the prehistory of thrift. The central tales are Marxist or Weberian or now growth-theory-ish. They are mistaken.
“Accumulation has not been the heart of modern economic growth, or of the change from medieval to the early modern economy, or from the early modern to the fully modern economy. It has been a necessary medium, but rather easily supplied...
“The substance has been innovation. If you personally wish to grow a little rich, by all means be thrifty and thereby accumulate for retirement. But a much better bet is to have a good idea and be the first to invest in it. And if you wish your society to be rich, you should urge an acceptance of creative destruction and an honouring of wealth if obtained honestly by innovation.
“You should not urge thrift, not much… You should work for your society to be free, and thereby open to new ideas, and thereby educable and ingenious. You should try and persuade people to admire properly balanced bourgeois virtues without worshipping them. Your society will thereby become very, very rich…”
South African business has been notably innovative – hence the excellent returns on capital invested and rising share prices. The current account deficit has been financed to an important degree by reducing our stake in our excellent businesses thanks to the country’s improved status in the world and relative freedom from capital controls. Most important, while South Africans have reduced their stake in JSE-listed businesses, partly in exchange for shares in companies listed elsewhere, the remaining stake is worth a lot more than it was. The country’s share of the cake may have declined, but the cake is much bigger, thanks to innovative management, who are appreciated by fund managers abroad.
For South Africa to grow faster, the innovative power of business must be released and encouraged rather than discouraged by government interventions. Business should be treated with respect rather than the hostility that seems to be the inclination of a bureaucracy that lacks appreciation of the essential bourgeois virtues that McCloskey celebrates.
* Brian Kantor is the chief economist and strategist at Investec Wealth & Investment.