Exports trump investment as growth driver
South Africans are delighted that President Cyril Ramaphosa is crisscrossing the globe and making progress towards raising $100bn in foreign direct investment to get growth going. But a deeper look at the economy suggests this could be the wrong priority.
As welcome as Ramaphosa’s investment drive is, it is based on the assumption that SA’s economic recovery will be largely led by an acceleration in private fixed investment. If this happens it would in fact be most unusual. This is because in SA fixed investment typically responds with a lag to rising demand; rising GDP causes an acceleration in fixed investment, not the other way around.
Typically, a pick-up in global growth stimulates a very strong response from South African exports. As the upward phase of the business cycle unfolds, companies’ spare capacity is used up and they respond, usually very late in the cycle, by investing in new plant and machinery to expand capacity.
Over the last few years this relationship has broken down. Despite the robust synchronised global recovery, SA’s export performance has collapsed. In 2016, exports contracted year on year by 0.1%.
In 2017, exports grew by just 1%. In fact, SA’s export performance has been deteriorating relative to its peers for the past decade. (In the decade after 2005, growth in real exports fell to 0.6% annually compared with 6.4% among other middle-income countries.)
Even SA’s “super-exporters”, which trade products that are technologically sophisticated and highly capital-intensive, have been losing dynamism and competitiveness. They have been producing fewer new products and have been less adventurous in entering new markets abroad.
This suggests that a big part of the remedy for SA’s failure to grow lies not in scouring the world to cajole foreigners into investing on the promise of a new dawn, but in understanding SA’s failure to export — and fixing the problems at home.
Chief among these is that SA’s growth and productivity have been declining in tandem since the global financial crisis.
The World Bank has ascribed this to SA’s failure to get on top of long-standing issues that have raised the cost of doing business, from logistical bottlenecks to costly inputs and slow broadband. The upshot is that SA has become less attractive and companies just aren’t investing anymore.
Across manufacturing, fixed capital stock levels have been stagnant for the past 10 years, suggesting that although investment has occurred, it has mostly gone into maintaining ageing machinery and equipment and not into creating new capacity.
Local economists attribute manufacturing’s poor performance to a toxic combination of factors, including crippling input cost increases (especially of electricity), a costly and inefficient national logistics system, the high cost and shortage of semiskilled labour and unreliable service provision by the government and municipalities.
Of these, the unreliability of service provision is for many companies where the rubber really hits the road. After all, how can business plan for load-shedding, dwindling water supplies or a port or freeway that is closed because of strikes or protest action?
Large systemic and institutional factors have undermined SA’s productivity and ability to compete, causing exports to stagnate. Addressing these structural constraints is essential if SA is to generate more growth and jobs — not just through manufactured exports but across all sectors.
Ramaphosa’s failure to tackle issues of productivity and competitiveness head-on is why business confidence is faltering, growth remains tepid and fixed investment disappointing.
It will remain so until he gets his priorities straight.