DAAN STEENKAMP: Understanding SA’s investment freeze

Despite the abundance of grand economic strategies and much-publicised government-corporate “investment accords”, productive investment in SA has been slowing to a halt. South Africans are becoming poorer as a result. Our per capita income adjusted for inflation has been declining for a decade.

SA’s investment freeze reflects the effect of government intervention to make the economy more state-directed and orientated to achieve transformation goals. The government’s antagonistic stance towards business and its unwillingness to make hard decisions to address the fiscal deterioration have made things worse. Regular policy shifts related to land reform, nationalisation and mining also keep unsettling investors. One cannot subordinate all policies to public interest goals such as transformation without compromising investment and long-term economic growth.

The tragedy is that this has occurred against a backdrop of historically high prices of our major commodity exports. In the past, commodity booms have driven economic expansion. Yet SA’s mining volumes have declined for gold, diamonds and copper, and been fairly stagnant for other categories such as coal, iron ore and platinum group metals.

Why could SA not take advantage of this once-in-a-lifetime opportunity? While load-shedding played a role, the deeper cause of the mining industry’s malaise is the same structural stagnation affecting the broader economy.

SA’s investment rate has fallen towards pre-democracy lows. The dramatic decline in government and state-owned enterprise (SOE) investment contributed significantly. But private investment makes up the largest share of investment and the private investment rate has been slowing over the past 15 years. Even venture capital investment is near multi-decade lows.

The economic return on investment has been declining. The return on foreign direct investment (FDI) into SA since 2000 has been about a third of what it has been in Nigeria or Botswana. One can also see this in investment multipliers that provide a measure of how much GDP increases for every rand of investment. Before 2010 we estimate that the aggregate investment multiplier was larger than one-for-one. Since 2010 neither private nor public investment has stimulated faster economic growth. This reflects the decline in investment and economic growth over this period.

The result of a combined fall in investment and investment returns has been complete stagnation in productivity growth over the past 15 years. Estimates from Productivity SA suggest that total factor productivity growth has flatlined since 2010. This means SA’s per capita income will not increase over the long term. In plainer terms: the rest of the world will advance while South Africans will not.

This is reflected in foreign investors avoiding SA. Reserve Bank data shows that foreign investors have withdrawn from local equities and bonds over the past several years, though it is hard to quantify accurately since dual-listed shares distort the picture. However, SA’s share of global FDI is down by about 75% since 2010.

Capital stock decline

Along with the decline in investment, SA’s depreciation rate has been rising. This means the share of new investment going to replacing worn-out capital has been rising. The consequence is that the capital stock of several industries has declined since 2000. This is a major problem, as the capital stock is one of the major drivers of an economy’s potential growth. Estimates from the Conference Board show that capital deepening has historically been the most important contributor to SA’s GDP growth, and that the contribution from the quality of the labour force and total factor productivity has been negligible.

The welfare implications of this slowdown have been enormous. Had the economy continued to grow at its pre-2010 trend growth rate, real GDP per capita would have been more than 30% higher in just 15 years. The outlook has also weakened dramatically as SA’s potential growth rate has collapsed. Our estimates are that potential growth remains below 1%, while the Reserve Bank has 1.1% for this year and still only 1.4% for next year. Estimates from the Organisation for Economic Co-operation & Development (OECD) are even more pessimistic, suggesting SA’s per capita potential growth rate for 2020-30 is negative 0.1%.

The government’s plan to arrest this decline involves doubling down on the policies that have been responsible for SA’s investment freeze and collapsing growth. The root cause of our economic stagnation is a philosophy of interventionism that assumes economic growth requires redistribution, subsidies and protection.

Government policy has become steadily more anti-growth. There has been a steep increase in legislation and regulations since 2010, increasing compliance burdens for businesses and citizens. The OECD’s assessments show SA has one of the most burdensome regulatory frameworks among major advanced and emerging market economies, restricting competition and FDI.

The size of the state and associated tax burden has grown dramatically, with the tax-to-GDP ratio up over a quarter to about 27% from 21% in 1994. Subsidies and transfer payments have risen to more than 12% of GDP from 5% at the start of democracy.

A larger proportion of public spending is also being directed at industrial subsidies and support for SOEs. Between 2008/09 and 2022/23 explicit government subsidies and incentives totalled more than R450bn and recapitalisation of SOEs about R400bn. SA has spent the equivalent of 10% of a year’s GDP bailing out zombie SOEs.

It is scandalous that there is no forward momentum on labour market reforms that would make the economy more labour absorbing.

These subsidies protect capital-intensive, oligopolistic industries that do not create many jobs. And this support is becoming increasingly expensive. By its own numbers, Industrial Development Corporation co-investments cost more than R1m per job created. Tax exemptions cost the state about R350,000 per job of forgone tax for its support of the automotive industry. Corporate welfare and beneficiation policies have not only failed to create jobs, but beneficiaries have not become more competitive. In fact, our industrial sector has shifted to less-sophisticated export products over time, and SA manufacturing has become less integrated in global value chains.

The expansion of social grants has done a poor job of offsetting the impact of labour laws that discourage firms from employing people. It is scandalous that there is no forward momentum on labour market reforms that would make the economy more labour absorbing. Worse, the upcoming shift to quota-based employment equity regulations will further discourage firms from growing headcount and dramatically increase compliance costs. These regulatory settings are meant to be at ministerial discretion and sector-specific, creating a lot of uncertainty and making long-term planning difficult.

Like industrial protection, a recent Harvard Growth Lab report highlights that BEE and government procurement policies aimed at transforming society have ended up creating a patronage network that resists any changes to the status quo. These regulations also raise the cost of government services. The IMF estimates that procurement policy reforms could save the government as much as “20% of the cost of goods and services procured (3% of GDP)”.

While important, Operation Vulindlela-related reforms only address some of the symptoms of SA’s anti-growth disease. The underlying cause is increasing state interventionism, despite a collapse of state capacity. Reversing this requires a shift back to meritocratic appointments across all functions of government, privatisation of failing SOEs, prosecution of the corrupt, and structural reforms that align SA’s policy frameworks to global best practice.

• Dr Steenkamp is CEO of Codera Analytics and a research fellow with the economics department at Stellenbosch University.