SA has a growth in income problem – not a lack of savings problem. The lack of growth and its consequences are plain to see. The apparent shortage of savings (the difference between domestic savings and capital formation) shows up in the current account deficit of the balance of payments and in the equivalent inflows of foreign savings.
The bigger the current account deficit, the larger the inflows of foreign savings. Without the access to foreign savings, the current account deficit would be much smaller, spending on all goods and services including plant and equipment would have to be cut back even further and the economy would be growing even slower. Faster growth would mean higher returns for savings and help attract more foreign savings and keep more of domestic savings productively applied back home. Slower growth undermines the case for investing in SA. It will mean a weaker rand and more inflation and perhaps higher interest rates to undermine growth prospects further.
Faster growth and the extra profits that come with it would also be retained by SA businesses, so adding to domestic savings. Of the gross savings rate of SA, equivalent to only about 14% of GDP, more than 100% is undertaken by corporations that retain earnings and cash flow. We would like them to plough back their earnings and cash flow (after paying taxes) into additional plant and equipment and larger work forces, rather than paying dividends, buying back shares or repaying debts. They would do more of this good stuff if they were more confident about the growth prospects.
The problem for any economy is not a lack of capital (savings by another name), but a want of good returns on it. Raise the returns and the capital will be freely available. The focus of attention of South Africans should not be on a lack of capital, or its reflection in the current account deficit, but on how to promote faster growth that will help raise the return on capital to attract more of it from all sources, domestic and foreign.
Deidre N. McCloskey in her book Bourgeois Dignity – Why economics cannot explain the modern world (Chicago University Press 2012) makes the crucial points in the following highly individual and entertaining way:
“There are many tales told about the prehistory of thrift. The central tales are Marxist or Weberian or now growth-theory-ish. They are mistaken. Accumulation has not been the heart of modern economic growth, or of the change from medieval to the early-modern economy, or from the early modern to the fully modern economy. It has been a necessary medium, but rather easily supplied…The substance has been innovation. If you personally wish to grow a little rich, by all means be thrifty, and thereby accumulate for retirement. But a much better bet is to have a good idea and be the first to invest in it. And if you wish your society to be rich you should urge an acceptance of creative destruction and an honouring of wealth if obtained honestly by innovation. You should not urge thrift, not much……………You should work for your society to be free, and thereby open to new ideas, and thereby educable and ingenious. You should try and persuade people to admire properly balanced bourgeois virtues without worshiping them. Your society will thereby become very, very rich. American society nowadays is notably unthrifty. The fact is much lamented by modern puritans, left and right. Yet because the United States accepts innovation and because it honors Warren Buffett it will continue to be rich, in frozen pizzas and in artistic creativity and in scope for the average person.” (pp 166-167)
South Africans are also notably unthrifty, understandably so, given the transformation of the middle class who achieve this status with little by way of household capital. Get a good job and the financial system will arrange for a house and a car on credit, as it should. The problem now is not too much credit, but rather too few jobs and the income that comes with employment and so the capacity to borrow.
But South African business has been notably innovative – hence the excellent returns on capital invested and rising share prices. The current account deficit, that is the consumption propensities of South Africans, has been financed to an important degree by reducing our stake in our excellent businesses (many of which have become plays on the global economy) thanks to SA’s improved status in the world and relative freedom from capital controls. Most important, while South Africans have reduced their stake in JSE-listed businesses, partly in exchange for shares in companies listed elsewhere, the remaining stake is worth a lot more than it was. The share of the cake may have declined, but the cake is a much bigger one, thanks to innovative management who are appreciated by fund managers abroad.
For SA to grow faster, the innovative power of business must be released and encouraged rather than discouraged by government interventions. Business should be treated with respect rather than the hostility that seems to be the inclination of a bureaucracy that lacks appreciation of the essential bourgeois virtues that McCloskey celebrates.
June 5, 2012 at 4:16 pmThis so makes me think of The Happiness Project! She has resolutions each month and a chart she uses to keep track of preosgrs. A gorgeous chalkboard like this would at least make the reminders lovelier. For June I’d like to shoot more & sit at my office less. Dream more and complain less. Smile more and worry less. Reply
After reading this article, I have become more aware of the financial state of the South African economy. As a young person in South Africa, I do not tend to read anything informing me about the South African economy and what happens in its markets. Reading a blog written by one of the most influential economic/financial professors makes me aware of the happenings in our economy. It is even better knowing that there may be a solution to South Africa’s economic problems, but it will take very long to initiate this solution.
This article has been informative as it helps realise the real reason behind South Africa’s problems with growth. I was unaware that the reason behind our lack of growth was due to income and not savings. I agree that the points listed to help increase growth would be helpful for South Africa. His point indicating that South Africa needs to focus more on promoting growth than on our lack of capital to increase the return on capital is important for South Africans to realise.
This article has boosted my interest in South Africa’s economy. It is written in a simple jargon which can be understood buy a normal person. Thank you for sharing this information