We need to realise that South Africa is not special and should not aspire to be special, says Pietman Roos.
Johannesburg - Unlike the Soccer World Cup, economic development is not a winner-takes-all paradigm. This is why Nigeria’s unseating of South Africa as the biggest economy in Africa is not a problem, as both countries can grow rich off each other through trade and investment.
Since 2005, South African exports to Nigeria grew annually by an average of 8% to $803 million in 2013. More importantly, whereas motor vehicle exports to Nigeria only totalled $7.5m in 2004, this figure increased to $215m last year, making up more than 25% of the export bundle. Last year, Nigeria was our 10th biggest export destination for motor vehicles.
A few years ago South Africans were excited by trade prospects that joining Brics (Brazil, Russia, India, China and South Africa) provided. China imported $71m fewer motor vehicles than Nigeria last year, even though they are our biggest trading partner and the second biggest economy in the world.
Size does matter, but how the economy is managed and the deep-seated fundamentals are far more important determinants of growth and return on investment. For example, the size of GDP to government debt is a much more important indicator than GDP size per se.
Some commentators see the Nigeria GDP story as a sign that South Africa’s economy has weakened, which does not necessarily follow. There are of course domestic issues, like industrial relations in the platinum mining sector, that keeps us from growing faster. But the Nigerian economy is larger than ours because of its own fundamentals, like a 160 million-strong population and oil reserves, among others. By the way, South Africa is still richer per capita.
The other fear is that Nigeria’s economic size may divert funds that would otherwise have flowed here. This is something of an insult to the intelligence of investment professionals. International investment is not like placing your bets on red or black at the casino.
There is more depth to the analysis than finding out who is biggest, and there are more than two economies in Africa.
Nigeria’s geographical proximity to South Africa and the rebased size of its economy should actually improve South Africa’s investment climate. A large neighbour with a growing taste for South African manufactured goods means that our export markets have diversified and is therefore a stabilising influence.
And even if South Africa loses some investor funds on the margin to Nigeria, the good news is that the wealth can still eventually reach our shores. More money to Nigeria means that the demand for manufactured goods will increase; meaning South African exports to Nigeria will increase.
Whichever way you look at it, South Africa stands to gain from a stronger Nigeria.
It also illustrates how international trade and finance is not a zero-sum game, but in reality unlocks synergies and lets the market do what it does best: create wealth. The next step after recognising that South Africa can actually benefit from a dynamic neighbour just north of our border is to improve trade relations.
South Africa’s geopolitical activities can rightly be refocused to ensuring that Africa starts to function as a single market.
South Africa recently embarked on the Tripartite Free Trade Agreement (TFTA) that seeks to co-ordinate trade policy among three existing economic communities. The TFTA is planned to cover 26 countries with a combined GDP of about $1 trillion. In such a big market, the relative economic size of the member countries is even less important.
The current sovereign debt crisis in the eurozone is a shame since it exaggerates the risks of economic integration against the benefits of a freer movement of goods and services.
But it also helps to provide some warnings on the road to greater integration that Africa may follow.
To think that euro-style economic integration in Africa is unfeasible and overly optimistic is a misplaced critique; it is really the logical conclusion to continually improving trade relations between countries with dynamic economies. And there is no economic reason why trade and investment between South Africa and Nigeria cannot keep on improving.
Grand schemes for economic integration should however not blind policymakers to the fundamentals of trade. Domestic companies are largely shut out from the African growth story if a truckload takes days to pass a border post.
Similarly, good economic policy begins at home.
The Nigerian GDP story is an important backdrop to voice domestic concerns about our business environment; like the labour market, the infrastructure network and mining regulation. All of these policy issues affect our competitiveness and in turn investor confidence.
But these concerns can be diluted even further as a message to government to renounce its belief in South African exceptionalism.
Ironically, the subtext to the concern that South Africa is no longer the biggest African economy is that we are no longer special. We need to realise that South Africa is not special and should not aspire to be special.
We are not special because poorly designed regulations and interventionist policies that failed overseas will fail here as well. If you increase administrative burden and regulatory uncertainty in any economy, the economy will grow slower and investors will look elsewhere.
Recent policy proposals like the Security Bill, the Investment Bill and the draft Employment Equity regulations all increase uncertainty and weaken investor confidence. Similar policies have failed overseas and hurt real people, but our government seems to believe that we can invert the laws of economics and buck the trend.
The broad definition of a security company in the proposed Private Security Industry Regulation Amendment Bill will force multinational electronic companies like Apple, Sony, Samsung and Panasonic to sell 51% of their ownership to domestic shareholders. The property rights infringement and vague scope of application cannot be said to be rationally linked to the goal of improving the regulation of South Africa’s private security industry.
The Promotion and Protection of Investment Bill will allow government to take private property without having to pay compensation, since the Bill gives the power to define unlimited array of government actions not as expropriation.
The Draft Employment Equity Regulations apparently requires employers to set their employment equity targets based on the national demographic profile, as opposed to regional.
This is really the main message to the Nigerian GDP story; the realisation that South Africa is not exceptional. Many South Africans may feel Nigeria overtaking us should spur us to overtake them, as if there is an end-state when awards will be given for the biggest economy. What is certainly true is that the Nigerian GDP story is a wake-up call; not to outgrow anyone, but to grow up.