Reforming policy, governance framework key to attracting investment – IRR

South Africa could become an attractive investment destination, provided a suitable policy and governance framework is put in place, according to a new report by the Institute of Race Relations (IRR), “Open(ing) for business: South Africa’s investment malaise and how to escape it."

This is an existential issue for South Africa’s economy, its future as a constitutional democracy and its prospects for future societal cohesion.

The report details South Africa’s failure to attract investment, domestic and foreign − drawing attention to the disastrous gap that has opened up between it and its emerging market peers − and proposes five steps to restore investor confidence.

“World Bank statistics tell a worrying story,” says author Terence Corrigan. “Middle-income countries as a group have been the biggest winners of the past two decades as globalisation has opened up enormous opportunities for jurisdictions with competitive costs structures and upwardly mobile populations. South Africa’s performance has been dismal. While middle-income countries are seeing a sustained level of investment in excess of 30% of GDP, in South Africa it has been around 15% for the past few years. You have to go back nearly two decades to see a level of investment breaching 20%.”

This indicates a long-term crisis in the South African economy. Without investment – deploying capital in ventures to earn a return – economic growth is stunted, employment creation will remain anaemic, and the wellbeing of society in general will be depressed.

Through neglect and deliberate policy choice, South Africa has created an environment unconducive to investment. Looking at a series of enablers, the report shows how key aspects from foundational conditions (such as providing security and infrastructure) through to the higher-end interventions (such as industrial policy) have been badly conceived and poorly executed.

Corrigan remarks: “Failing logistics systems and energy supply have hit even the most elementary activities hard. There are accounts of township bakers unable to produce bread for their customers, and of poor roads making it more economical to import maize to Cape Town from Argentina than to transport it from the Free State.

“On the other side, we have a nominally ‘developmental’ regime to encourage industrialisation that has skewed the market, imposing huge costs on competitive enterprises to keep less competitive ones in operation. The reality is that we just don’t have a state capable of performing this level of intervention. We are paying dearly for this unreality.”

Fortunately, this can be turned around, and some of the solutions are in principle simple and lend themselves to “quick wins”.

This will involve a combination of five paths of reform and rehabilitation:

• Get governance in order: abandon the politicisation of the state, prioritise expertise and experience over ideology, and focus on making institutions work. This is likely to be a long-term process, but even small gains to signal a commitment to undertaking this would be a valuable message to investors;
• Rebuild and fortify South Africa’s economic foundations: without solid basic infrastructure, South Africa has little hope of economic success. A dogged determination to keep the state monopolies in these fields, and the abuse of them for corrupt extractive purposes has inflicted enormous harm. Fortunately, private sector expertise and capital have recently been allowed to contribute, and this bodes well for their future functionality;
• Enhance the stock and pipelines of human capital: South Africa lacks the skills base to function as a competitive economy for sophisticated activities at a scale that middle-income countries are engaging in. This means an overhaul of the education and training system – which implies bruising political battles with teachers’ unions – as well as seriously joining the global competition for mobile, high-end skills; 
• Reform the policy and regulatory environment: South Africa’s economy is weighed down by a cumbersome and counterproductive regulatory regime, much of which cannot in any event be properly applied by an incapable bureaucracy. It is past time that the lessons of this experience be applied, and a programme of significant regulatory reduction be undertaken.
• Reset the government-business relationship: Cooperation between business and government (though not corrupt collusion) is a valuable resource for economic growth and setting up an attractive investment proposition. The relationship has been one of ideological posturing and mutual mistrust. This must change. If it is not possible to reorient actual sentiments, a new mode of interaction based on hard-nosed transactional bargaining must be adopted.

The report concludes by referring to a 1998 Wall Street Journal column, which notes: “South Africa has the biggest need for external capital and the lowest potential for attracting it of any emerging market.” This remains the situation today.

However, this need not be South Africa’s future. The report, which can be read here, is intended to contribute to the debate around creating the investment-rich environment South Africa needs.

Media contact: Terence Corrigan Tel: 066 470 4456 Email: terence@irr.org.za  

Media enquiries: Michael Morris Tel: 066 302 1968 Email: michael@irr.org.za