The magic pill for economic growth

2010-11-20 10:45

Full utilisation of labour and natural resources, and ­encouraging ­domestic savings, are the likely ­ingredients for a magic pill that will lead to the economy ­growing at a rate of at least 7%.

Government has identified 7% growth as the level that will allow the economy to grow in such a way as to create a ­substantial number of jobs.

Sanlam’s head of policy analysis, Elias Masilela, said: “If we were ­operating close to full capacity, it would be possible to achieve the 7% target.

“We need to improve ­coordination in the policy and ­production space to boost ­efficiency and productivity. We have a lot of underutilised ­capacity, both in terms of unskilled and skilled labour, as well as natural ­resources.”

According to quarterly ­figures released by Statistics SA in June, the economy was ­only operating at 80.6% of its capacity.

Nedbank economist Johannes Khosa said South Africa’s ­underutilisation of nearly 20% in the manufacturing sector showed there was room for growth and ­employment creation.

“If one wanted to produce 100 units of a product in a quarter and only managed 80 units, it’s an ­indication that capacity is being underutilised.

“A possible explanation for underutilisation could be a lack of skills. We need to invest more in areas such as ­education and training, as well as on fixed capital.”

Last month, government ­unveiled a new growth strategy aimed at growing the ­economy by 7% yearly in a decade, hoping such rapid expansion would enable the country to generate five million jobs over the ­period.

To reach the 7% growth target, ­Masilela, who is a former treasury deputy director-general, said South Africa needed to seriously improve its infrastructure, ­education and skills to enhance ­economic productivity.

He said another important ­factor that the country needed to address to achieve higher growth was boosting long-term domestic ­savings to reduce dependence on foreign capital inflows.

Masilela said: “If you rely on ­domestic savings, you increase the possibility of ­reinvested earnings, which means when the dividends are declared they get recycled within the ­economy.

“But if you rely on foreign ­savings, you first have to ­incentivise foreign capital to come into the economy through a higher ­interest rate structure relative to competitors. Foreign capital reduces the ­potential for reinvested earnings because when dividends are ­declared, they fly out of the country to the home country of the ­investor,” he said.

At 15% of gross domestic product (GDP), South Africa has one of the lowest savings rates in the world – by government, ­industry and individuals. Many Asian countries have ratios to GDP of between 30% and 50%.

China’s savings to GDP was close to 50%, while India’s was about 30%. In contrast, the US, which is the biggest recipient of the world’s savings, has a savings rate of 10% to GDP, with the country’s household savings close to zero.

Masilela pointed out that the East Asian Tigers managed to grow faster because they had higher ­domestic savings and therefore ­higher investment.

“The Asian Tigers relied on their own savings, but the US has always relied on borrowed capital. The US can sustain this because it is a ­preferred investor destination for countries that run surpluses, such as Japan and China,” Masilela said.

According to him, nations that have ­increased domestic savings have experienced high economic growth, higher returns for ­investors, and deepening financial ­markets.

He pointed to Australia, New Zealand and Latin American ­countries such as Chile, Uruguay and Mexico as examples of economies that have benefited from boosting domestic savings.

Masilela said South Africa could boost its long-term savings ­drastically if it introduced ­legislation that compelled economically ­active people to save.

The money could be collected by the state through payroll ­deduction and then put in a ­national savings fund, which would ­invest the money on behalf of the retirement savers.

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