South Africa’s share of global foreign direct investment is falling off a cliff and productivity is flatlining but the government is only making the situation worse, says Daan Steenkamp, the CEO of Codera Analytics and an economics research fellow at Stellenbosch University.
"Government’s plan to arrest this decline involves doubling down on the policies that have been responsible for the country’s investment freeze and collapsing growth," Steenkamp says. "We’ve seen a steep increase in legislation and regulations increasing compliance burdens on businesses and citizens."
A recent survey by the Organisation for Economic Co-operation and Development (OECD) ranks South Africa worst among major developed and emerging markets in terms of regulations that discourage business and growth, he says.
Codera Analytics analyses macroeconomic, industry and market data to understand what’s happening in the economy. Its clients include banks, asset managers and large corporates, some of which have moved and are moving parts of their business overseas.
Steenkamp also interacts with entrepreneurs struggling to grow tech firms in a hostile investment environment.
"What worries me is that as a consequence of deliberate policy South Africa is becoming unattractive for small, innovative, globally exposed firms. There are lots of things that actively discourage the growth of our tech industry," he says.
"Outdated foreign exchange regulations and tax regulations make it very, very difficult for a South Africa-domiciled firm to attract venture capital from a foreign entity, particularly if that entity is interested in having a stake in the intellectual property (IP) that’s being created."
Even some larger companies that have tried to move their headquarters overseas have been burnt by the discretion the South African Revenue Service has over granting approval via the Reserve Bank for firms to move operations overseas, he says.
"That uncertainty disqualifies any kind of foreign investment in entities which may want to eventually globalise the assets they produce in South Africa. The Bank doesn’t want to see our tax base diminish so it has this discretion debarring you from going overseas. So it’s better for you as a small firm just to close shop and open up somewhere else if your intention is to get funding overseas."
Entrepreneurial tech firms are precisely the kind of businesses South Africa needs.
"For 20 years we have not seen growth of intangible assets in South Africa. If you look at countries that are rapidly growing such as the US, China and some other big emerging markets with Big Tech industries, you see investment in data and software, you see creation of IP," Steenkamp says.
"In South Africa we see basically no creation of IP. It means our economy is becoming less and less dynamic precisely at a time when the tech industry and things that are related to technology and use technology are becoming more and more important as drivers of growth."
Codera’s estimate of the potential growth rate of the South African economy is effectively zero. On a per capita basis it’s shrinking, and OECD predictions have this continuing for the next decade, he says.
"We’re stuck on a low growth path when all the fundamentals are there for us to be really growing fast. We have the highest terms of trade. The value of the stuff we produce naturally here is at near historical highs. We have a young population that is growing. The fundamentals are there for us to do well, to develop as an economy, and we’re doing the exact opposite. We’re literally doing all the wrong things.
"Exchange control and investment regulations throw sand in the wheels of every cross-border transaction. It makes it really unattractive to run a tech company, particularly if you have ambitions of going cross-border."
These companies are key to South Africa’s economic future, he says. They might be small in scale individually, but there are many of them, and they’re labour intensive.
"How do we create large-scale employment if we are not going to be embracing the technologies that are driving down costs of production? We really need to integrate ourselves in the global economy, make it possible for firms to benefit from the technologies that are being created overseas and enable firms to figure out how to use those technologies in our local conditions. That’s how countries have grown rich and caught up with industrialised economies."
South Africa needs to be part of global value chains, but because its industrial sector has shifted to less-sophisticated export products South African manufacturing has become less integrated in global value chains.
"In an environment where there’s increasing technology behind the industrial growth we are seeing in fast-growing economies, South Africa is becoming more dependent on commodity exports, raw stuff. We’re beneficiating less, so we’re not only deindustrialising but the little bit of manufacturing we actually do is shifting to more and more basic processing."
Most beneficiation projects have been "a complete failure", for which he blames the government’s fixation on centralising, planning and controlling it.
The government needs to get out of the way and "basic stuff" such as unreliable electricity and lack of municipal services that make it extremely difficult and unattractive to have a factory in South Africa need to be sorted.
"Our real problem is unemployment, and there’s not a single thing I can think of that’s being done in that space," says Steenkamp.
Employment equity quotas that came into effect last month are going to make it much worse.
"Any company that employs just below 50 or just above is either going to stay that size or they’re going to shrink. If you’re a multinational company with headquarters overseas you’re not going to be allowed to do the things that the legislation requires so you may just decide to withdraw from South Africa. There’s going to be South African companies that don’t have a choice. If you’re an 800-person company threatened with a 10% of turnover fine, you are in trouble."
Eventually there’s going to be a realisation that the employment legislation is unworkable, but meanwhile it will have "very severe negative consequences" for FDI, growth and jobs.
"None of what we have to do is rocket science. A good start is just to do what is international best practice. Doing the things we’re doing is moving us away from this. We actually have a very serious burning platform here. And just fiddling around the edges as we’re doing is not going to save us."
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