South Africa’s dismal ranking at 56th in the global competitve index can be reversed, writes Chris Hart.
The annual release of the World Economic Forum’s Global Competitiveness Report reflected another drop for South Africa in its overall ranking.
South Africa is now ranked as the 56th most competitive country out of 144 assessed, behind China (28) and Russia (53) but ahead of India (71) and Brazil (57) among the Brics nations.
In Africa, Mauritius is in 39th place, well ahead of South Africa and Rwanda (62), which is Africa’s third most competitive economy. Africa’s fourth most competitive economy is Botswana (74) while its largest economy is ranked at a lowly 127th for Nigeria.
The WEF’s Global Competitiveness Ranking is based on multiple factors including financial market development (where South Africa fares well); market size; market efficiency; technological readiness; business sophistication; institutions; education and labour where South Africa fares badly).
In 2006, South Africa was ranked 40th and was the highest ranked Brics nation.
But to be ranked behind Mauritius is telling, as that country had numerous embedded competitive disadvantages such as market size and relative isolation from global economic centres and trade routes.
Care must be taken when analysing these competitive rankings. For example, in maths and science education, South Africa is ranked in last place. Last? Behind even Yemen?
This has evoked the official response that this survey is not scientific and there are problems with its methodology. That may well be so. However, should South Africa disregard the finding out of hand?
What alternative measures do the critics of this ranking use and how is it more scientific than that presented by the WEF?
Whatever the measures used and its methodology, South Africa has been slipping. Disregarding the WEF ranking because of methodological flaws might be justified in the context of that specific assessment.
But then South Africa is also slipping down the economic freedom ranking. Certainly, criticism could be levelled at the methodology of this measure as well. Similarly, for the World Bank’s ease of doing business ranking, where South Africa is also slipping.
Multiple rankings using different methodology reflect the same message – a slow deterioration.
And the deterioration shows up in the economic measures. Economic growth has been in slow decline since its pre-2008 global financial crisis peak.
At the same time, long-run inflation has been rising. South Africa has entered into a stagflation condition as a consequence.
The twin deficits of high and persistent current account and budget deficits have led to South Africa being positioned in the so-called “fragile 5”.
In addition, a household deficit places South Africa in a triple deficit condition and implies that the government faces difficulties in raising taxes to close its deficit due to an exhausted tax base. The macroeconomic deterioration has resulted in two credit rating downgrades with more to come in the absence of a turnaround in fortunes.
Government and household debts will continue to rise if economic growth languishes against relatively high inflation.
Of most concern is the rise in unemployment since the 2008 global financial crisis. Unemployment has to be South Africa’s emergency.
Yet South Africa is one of the few emerging markets where unemployment has risen since 2008. Compared with South Africa’s peers, unemployment has generally fallen. Growth in emerging markets and frontier markets has rebounded to pre-2008 levels.
And debt levels have been maintained among South Africa’s peers. In contrast, South Africa has double the debt with half the growth.
There is no doubt South Africa is underperforming compared to its peers in Africa and emerging markets. The decline in multiple rankings and weakening macroeconomic fundamentals is testimony to this. The deterioration has come slowly. In essence, this is a slow puncture.
There is a multiplicity of reasons for this.
The 2008 global financial crisis was unhelpful. The Chinese slowdown along with easing commodity prices has also provided headwinds.
However, it is South Africa’s recovery trajectory compared with its peers that point primarily to internal causes for the underperformance. This is both bad news and good news.
The bad news is that the deterioration will continue if the internal causes are not addressed.
The good news is that underlying causes are within South Africa’s own control. If the causes are addressed, improvement will be gained. South Africa remains a high potential country even if underperforming.
A strong and healthy economy is essential for South Africa to resolve its so-called triple challenge of poverty, unemployment and inequality. However, policy needs to be prioritised. It needs to be recognised that it is primarily an unemployment problem from which there is a poverty and inequality consequence. At the least, full employment will result in a massively diminished poverty and inequality problem. Lack of policy prioritisation means that obstacles are placed in the way of unemployment reduction. The recent Home Affairs visa imposition is an example. Chasing subsidiary issues, suddenly South Africa becomes a difficult place to visit.
Yet tourism is identified as an important area where jobs are going to be created.
Tourism needs tourists. For this to grow, South Africa needs to be one of the easiest places in the world for tourists to enter. For tourists South Africa needs to be a destination where visas are not required.
So what if other countries impose draconian visa requirements on South Africans?
That is their “own goal”. If South Africa’s primary problem is unemployment, then other issues should be subordinate. Whatever issues Home Affairs is trying to deal with has essentially made tourism and job creation less important.
The damage will not be reflected in any dramatic collapse. Just another sector struggling to achieve growth, which will only be apparent in a few years time – a massive lost opportunity where reforms will be an exercise in damage control.
Yet the visa imposition by Home Affairs is but one example where policy has not been prioritised and not co-ordinated.
In dealing with the triple challenge, South Africa has been making its triple mistake. Setting up an oppressive regulatory onion – layer upon layer – has been diminishing South Africa’s economic potential.
This is the first mistake.
The second mistake is labour unrest, which needs to be improved as a matter of urgency. No investor, including the unions themselves, invest in strikes.
The third mistake is the imposition of taxes that target capital formation and investment viability. This is like eating seeds but still expecting harvests.
All of these mistakes can be undone. Home Affairs has started to listen. A good sign. Both government and business have shown signs of wanting to engage and improve relations.
The ministry of SMEs also looks set to drive some reforms after consultation. It is important that South Africa becomes more business and investment friendly.
No economic activity comes into existence without investment and no wealth gets generated without some business or enterprise activity. Yet it is also important that people benefit from the economy and that business or government do not become ends in themselves.
The right economic models must be followed.
While the National Development Plan has been adopted as policy, it still requires policy prioritisation and the right emphasis. It appears that South Africa has been attracted by the recent Chinese success.
Sometimes the wrong lessons are learnt. China has not been successful due to authoritarian central planning.
It has been successful because it has been reforming that system towards greater economic freedom.
However, it is still a difficult country to access as an investor. Investors are willing to climb China’s high hurdles because of the potential behind those barriers.
The same applies for the other Brics nations like Brazil and India. In contrast, South Africa is small in global terms even if it is a big fish in the African pond.
There is no deep and extensive potential that South Africa can offer compared with the likes of China and India.
Mauritius, on the other hand, understands its position in the world. There are no natural and compelling reasons to do business there or invest.
Their approach is to be attractive because they are among the easiest places in the world to invest and do business.
And their approach has worked. In 1980, the GDP per capita of Mauritius was less than half of South Africa’s – now more than 50 percent. Chile, which has taken a similar policy path to Mauritius, presently has a GDP per capita of almost three times that of South Africa while in 1980 it was slightly less than South Africa.
Both Mauritius and Chile were less economically free than South Africa in 1980. Both are now economically free and have overtaken South Africa.
Yet South Africa has long-term economic potential well above that of Chile or Mauritius. Rwanda has recently begun to emulate Mauritius and its economy has started to boom. If South Africa took a similar approach, its potential could be unlocked.
The current path is clearly not working, yet the strategy of Mauritius has a well-established track record of success. The strategy has also reflected repeated success across multiple jurisdictions.
South Africa has another opportunity that needs to be understood and grasped. The developed world is struggling under high debt levels and low growth.
The collective policy response has been to cut interest rates to zero but also escalate its regulatory burden.
In low growth economies, resources are sucked out to meet very often pointless regulatory requirements. These are policy mistakes.
South Africa should be seeking to become a haven from these mistakes instead of emulating them.
It should have lower tax rates, lower regulatory burdens and offer a more efficient operating environment. In this way it would at least be able to attract investment in both risk tolerant and risk averse environments.
The slow puncture that afflicts South Africa is one that can easily be reversed.
It requires recognition that policy mistakes have been made but can be reversed and corrected.
It is important that the correct and appropriate economic models are applied that work.
The policies should seek to resolve problems that have been properly prioritised.
Constructive engagement between stakeholders is required but rent-seeking behaviour needs to be restrained.
* Chris Hart is Chief Strategist at Investment Solutions.
** The views expressed here are not necessarily those of Independent Newspapers.