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.

Join the conversation! encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions. publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Inside News24

Traffic Alerts
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.