State’s investment strike contradicts its employment ambitions

To create jobs SA needs to focus on investment- and not consumption policies such as the basic income grant

Investment by the general government contracted 1.4% per year on average between 2010 and 2020. Investment by public corporations contracted 5.1%, while private sector investment contracted just 0.2% over the same period. Consequently, total investment in the country contracted an annual average of 1.2%.

What these figures show is that the SA government has been on an investment strike over the past decade, which is contrary to ambitions of generating employment growth. Three years have gone by since the first investment conference, which aimed to attract R1.3-trillion. From 2018, total investment growth has gone in the opposite direction, contracting an annual average of 6.4%.

The talk about attracting investment and creating jobs has not been accompanied by deliberate action to make SA investible. The current national policy dialogue continues to focus on the wrong things, such as a basic income grant to achieve social welfare instead of creating an environment that is conducive to investment and job growth.

With Covid-19 still disrupting economic activity, the government must be bold and make vaccination mandatory to break the link between infections, hospitalisations, deaths and economic activity. If this is not done the risk is that SA will be left behind with the rest of the emerging markets and poor countries, as Covid-19 is now being weaponised in trade deals. The UK demonstrated this by keeping SA on its “red list” for travel despite our declining infection rate.

The social welfare debate continues, and rightly so given the devastation caused by Covid-19. However, the way to achieve it is not through cash transfers and consumption. The most sustainable social welfare is through savings and investment, which boost economic growth and create jobs.

So far, the discussions on policy reform have missed the point to a large extent, and our growth ambitions are way to low — lower than what is required to fundamentally deal with the unemployment crisis. An annual economic growth rate of 2% will mean the current jobs crisis continues to get worse. Our modelling suggests that SA requires an economic growth rate of 4% at a minimum to reduce the unemployment rate. Anything less is simply not going to fundamentally change the economic prospects of the country or of the majority of its people.

How do we change the current trajectory?

First, stop thinking we can generate economic growth through consumption-driven policies such as the basic income grant. SA imports most of its consumption goods, from chicken to capital goods, so consumption-driven policies will only help create jobs in countries that export their goods to us.

Second, introduce automatic enrolment to pension funds and the two-pot system proposed by the National Treasury, with the one pot used for emergency income support and the larger pot preserved to fund retirement income.

This will change the savings landscape in two ways: it will enlarge the pool of savings that will be available for investing in the economy; and with automatic preservation of contributed funds the economy will have patient capital that can be used to invest in infrastructure.

Given the changing inflation dynamic that reduces the attractiveness of traditional investments, infrastructure investment has become a perfect investment asset class that can drive economic growth and generate sufficient savings for postretirement income.

Third, fix the education sector and deal with the skills crisis. This is important, yet there is almost no discussion about how to reform the education sector to produce the skills the economy requires.

If the basic requirements for a growing economy are not in place it will be difficult to attract investment and create jobs. Two of those basic requirements are a large savings pool and a focus on investment instead of consumption-driven policies.