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13 December 2005

The Assessment of the Investment Climate in South Africa done by the dti and the World Bank brings encouraging information as well as challenges as South Africa prepares to embark on the Accelerated and Shared Growth Initiative, with a target growth rate of around six percent in the period 2010 to 2014. The full report “South Africa: An assessment of the Investment Climate” is available on the internet at http://www.thedti.gov.za or http://www.gov.za.

The analysis of constraints faced by businesses in South Africa places South Africa in comparative perspective, by using the World Bank’s Investment Climate Database, which contains standardised company data from around the world.

Results from the 2004 South Africa Investment Climate Survey show that South Africa’s Investment Climate — the location specific factors that shape opportunities and incentives for firms to invest productively, create jobs, and grow — is favourable when compared to the Investment Climates of other countries in Sub-Saharan Africa and other middle-income countries throughout the world.

Most firms believed that the courts are able to protect their property rights and court cases are resolved quickly. The cost of power is low by international standards. Tax rates are low and have been declining over time. The burden of regulation is comparable to the burden in most middle-income countries. Few firms report paying bribes to obtain government services or win government contracts. Finally, most of the large formal firms in the Investment Climate Survey did not see access to finance as a serious concern and few reported that they were credit constrained. In summary, on many dimensions, South Africa has a good investment climate.

Consistent with this view, large South African firms are more productive than firms in other countries where Investment Climate Surveys have been conducted. Labour productivity is far higher in South Africa than in the most productive low-income countries in Sub Saharan Africa such as Senegal and Kenya. Further South Africa compares favourably with other middle-income countries such as Lithuania, Brazil, Poland, and Malaysia - all of which, other than Brazil, have higher per capita income than South Africa. Productivity is also over three times higher than in China, although it is slightly lower than in the most productive cities in that country.

Although many areas of the investment climate are favourable, some problems remain. Firms appear to be particularly concerned about four areas: skills and education of workers, labour regulation, exchange rate instability and crime.

Skills and education of workers: More enterprise managers said that worker skills were a serious obstacle to their enterprises’ operations and growth than any other area of the investment climate. Consistent with this, per worker labour costs are very high in South Africa - over three and half times higher than in the most productive areas of China, over two and half times higher than in Brazil and Lithuania and over 75 percent higher than in Malaysia or Poland. Despite South Africa’s high labour productivity, high labour costs undermine South Africa’s competitiveness, according to the survey.

In this regard, it is important to note that labour costs include the costs for skilled workers and managers. Although wages are relatively high for all types of workers in South Africa, they are particularly high for highly skilled workers and managers. An additional year of education is associated with an 11 - 12 percent increase in wages in South Africa - compared to about five to six percent in developed economies. The high premium paid for education results in salaries for skilled workers and managers that are high by international standards. Although wages are similar for unskilled workers in Poland and South Africa, managers’ wages are over two and a half times as high in South Africa.

Exchange Rate Instability: Despite South Africa’s relatively strong macroeconomic performance - modest Gross Domestic Product (GDP) growth and moderate inflation - about one third of enterprise managers said that macroeconomic instability was a serious problem. This is due to exchange rate instability - in real terms the Rand has been one of the most unstable of the world’s major currencies. This is particularly problematic for exporters, who receive payments in dollars or euros, but must pay their workers and suppliers in Rand. Close to three-quarters of enterprises that export to the United States - the country whose currency has been most unstable against the Rand - rated macroeconomic instability as a serious obstacle.

Labour Regulation: Close to one-third of enterprise managers said that labour regulations were a serious problem. Consistent with this, objective indicators suggest that labour regulation is more rigid in South Africa than it is in many other middle-income countries. In the most recent Doing Business report, a World Bank report that compares the burden of regulation across countries, South Africa ranked 28th in the world overall - higher than many developed economies. However, in the areas of regulations related to hiring and firing workers, South Africa ranked 66th.

Crime: About 30 per cent of enterprises in South Africa rated crime as a major or very severe problem. Direct losses due to crime and the cost of security were higher in South Africa than they are in some middle-income countries such as China, Poland, Brazil and Russia. Although this suggests that crime is a serious concern, it is less problematic than in some middle-income countries such as Honduras, Guatemala, Nicaragua or Ecuador. The report suggests that crime “is an important, though not critical, problem”.

In summary, although the investment climate for large formal firms in South Africa appears favourable in many ways, some challenges remain. Addressing these challenges will help towards achieving the target growth rate of six percent per annum. These issues, and several others identified by government, are being addressed within the Accelerated and Shared Growth Initiative for South Africa.

Enquiries: Ravi Naidoo
Cell: 082 334 7210

Issued by: Government Communications (GCIS) on behalf of Department of Trade and Industry
13 December 2005