Capital allocation failures

Growth has failed to live up to expectations over the 24 years since the advent of democracy in SA. Real annual GDP growth has averaged just 2.9%, short of the 5% to 8% required to tackle unemployment, poverty and inequality.

The problem is even starker when compared with all emerging and developing markets. Measured in 2014, SA managed to increase GDP per capita by just 33% since 1994, in comparison with an average of 115%.

Often, labour market inflexibility is used as an explanation for the low investment levels and consequent low growth levels. However, studies have shown that wage demands in SA are sensitive to labour market conditions, although this is more pronounced among nonunionised workers. Tax and regulatory collections have regularly exceeded budgets since 1994.

It is inarguable that public-sector capital aggregation is extremely efficient. Private sector capital aggregation centres on the financial sector and includes primarily pension-fund contributions, life and other insurance premiums, bank deposits, assets with stockbrokers and collective investment schemes. From an economic perspective, private sector capital aggregation is also extremely efficient.

Much is written about the problems in publicsector capital allocation. Several themes dominate this analysis: ballooning public-sector wage bills and debt costs; overspending or inappropriate spending on capital investment; and incompetence and corruption in public procurement. There can be no debate that public sector capital allocation problems provide at least part of the explanation for poor growth in SA.

Remarkably, the inefficiencies in private-sector capital allocation are largely ignored in our national discourse. These financial and corporate sector capital allocation inefficiencies can explain a substantial proportion of our poor economic performance given that private-sector investment spending is about double that of public-sector investment spending in SA.

To tackle the lack of growth in SA, our business and economic policy thought leaders need to take a serious look at the many dislocations in private sector capital allocation. It is by far where the biggest bang for buck lies.

Dr Rabelani Dagada

Via e-mail