I came back from Kenya recently with two thoughts rattling around my head. The first is how much economic energy there is in East Africa. The second is how easy it is for South Africans to forget the sheer scale of what we already have.
The IMF now expects South Africa to grow by an abysmal 1% this year. Sub-Saharan Africa is forecast to grow by 4.5%, while emerging and developing economies manage 3.7%. Kenya is growing at more than four times our pace.
Yet Gauteng alone has an economy larger than Kenya’s. South Africa still holds roughly 70% of Africa’s pension assets. We have deep capital markets, sophisticated banks and insurers, enormous mineral wealth and an infrastructure base that remains far denser than most of the continent’s.
That tension came up in a conversation I had last week with Discovery founder Adrian Gore about his excellent new book, The Four Principles.
Gore has long irritated professional pessimists by arguing that South Africa is prone to a declinist view of itself. He gives the argument a behavioural frame: humans are coded to notice danger far more readily than opportunity. His answer is not happy-clappy optimism but disciplined optimism that sees the threats clearly, then forces you to look just as hard for the positive signals.
That does not mean looking away from unemployment, crime, failing municipalities or a state that can still turn any kind of permit into a hostage negotiation. Gore’s point, as I read it, is more nuanced: getting the positives right is the only durable way to deal with the negatives. Growth creates jobs; jobs broaden the tax base; investment expands productive capacity; confidence attracts more capital. And so on.
The problem is that South Africa has become rather accomplished at discussing growth while regulating the life out of it.
Economist Azar Jammine makes the point starkly: our investment-to-GDP ratio is “abysmally low and half of what it is in most other emerging markets”. The fiscal arithmetic may have improved, with four primary surpluses bringing ratings upgrades from two of the big three, but without growth it remains fragile. Commodity windfalls can flatter revenue for a while but cannot substitute for a larger denominator.
Which brings me to a proposal I made in this column four years ago: abolish exchange controls.
Outsized impact
I argued then that these relics of the crisis economy of the 1980s were increasingly forcing some of our brightest and most globally ambitious entrepreneurs to structure offshore, particularly where intellectual property and international funding were involved.
There has been progress since. Finance minister Enoch Godongwana doubled the single discretionary allowance to R2m in February. The Treasury and the Reserve Bank are developing a new “capital flow management” regime — a more permissive system in which fewer legitimate transactions require prior approval.
Good. Finish the job.
Keep tax enforcement, anti-money-laundering rules and surveillance of illicit flows. But stop treating legitimate capital movement as something requiring official indulgence. A globally scalable South African technology company should be able to raise money in New York, employ a developer in Amsterdam, structure its intellectual property where commercial logic demands and bring profits home without designing itself around the anxieties of Pretoria.
This is where Gore’s fourth principle — the Pareto tail — becomes useful. According to the Pareto principle, in complex systems a small number of decisions accounts for a wildly disproportionate share of the outcome. The government spends too much time in the fat middle of committees, frameworks, sector plans and incremental adjustments. It needs more tail decisions.
Exchange-control abolition is one of them.
So is backing high-impact scale-up entrepreneurs. As Gore puts it: “Those things that create jobs and entrepreneurship and start-ups and tech, that’s where jobs come from.” Not every start-up will become a Discovery or a Yoco. But in a power-law economy, a handful of extraordinary firms can account for a disproportionate share of new jobs, exports, tax receipts and innovation.
Business has obligations here too. It cannot spend another decade waiting for the government to deliver perfect reforms. It should invest where the opportunity exists, fund scale-ups, crowd in expertise and become more activist in holding the state to deadlines. Business-government collaboration has helped unlock electricity and logistics reform. Business should also call out policies that trap capital and deter investment.
And the finance minister should resist the opposite instinct. His description of raising the offshore investment allowance for retirement funds to 45% as a “grave mistake” points in the wrong direction. South Africa is not short of savings (our institutional savings stood at roughly R15.7-trillion in March). It is short of sufficiently attractive, scalable opportunities. You don’t create those by locking the door after the money. You create them by making investors feel welcome.
I wrote this before Wednesday’s medium-term budget policy statement, so I cannot know if Godongwana will have offered any signal in that direction. The bigger opportunity, in any event, comes in February. South Africa doesn’t need another growth strategy. It needs a few decisions in the Pareto tail. Abolishing exchange controls would be a good place to start.
