Economists.co.za head Mike Schussler recently wrote that SA is the largest exporter of capital in the emerging world.
Roughly 34% of our GDP has been exported over the years as the business climate deteriorated. This amounts to US$120 billion (R1,7 trillion) which has been invested outside the country. Our GDP is about R4,6 trillion, so a third of that now invested abroad is a huge loss to the country.
What are the reasons for this capital flight?
Schussler says our tax rates are too high, business confidence is low and government has picked a fight with business. Weak domestic growth and hostile labour relations add to the misery. Emerging markets generally import capital. SA exports capital, and is therefore a crippled outlier in this emerging world. It’s worrying that so few businesses are interested in investing in SA (as opposed to portfolio flows), even after President Ramaphosa’s well publicised campaign to attract investment.
Another sign of weak business confidence is the massive cash stockpile held by companies in SA. Historically, this was 13-14% of GDP, but has now increased to 19%. That’s a huge amount of cash looking for a home.
On the domestic front, companies account for 16% of GDP in fixed investment, such as new plant and property. Government accounts for just 3% of fixed investment in SA. This is staggeringly low in global terms.
The private sector will always look at best opportunities for profit, and they are increasingly looking abroad. About 3m jobs have been lost due to capital outflow, and the relative absence of capital inflows.
Ethiopia is making shoes for the world, Vietnam makes clothes. These are low paying jobs of the kind that SA is trying to get rid of. What government doesn’t understand is these low paying jobs are a point of entry for millions of people into the formal economy. By refusing to create conditions for low-paying jobs, we are denying employment to millions of South Africans.
And here comes the crunch. If we want to create jobs, we will have to attract foreign investment while making the local economy friendly to business. Sooner rather than later we will have to face the fact that BEE – which is an additional tax on business – may have to be scrapped for certain types of firms. Labour laws will have to be relaxed for certain types of firms and tax rates will have to come down.
In an election year, none of this will get any serious discussion. But guaranteed the forces of economics will eventually force this reality on government.