Government interference, a high risk labour market and social unrest are all contributing factors are leading South Africa’s failure to effectively create wealth for its citizens.
This is according to the South Africa Wealth Report for 2016 by wealth research firm, New World Wealth (NWW).
The group also highlighted a number of risks in the country that are pushing investors away, most notably a rising level of government regulation, rising number of strikes and labour disputes and endemic corruption in government.
Social issues also play a role, with a high crime rate, a high prevalence of HIV/AIDs and the recent student protests all serving as push factors for investors – while also causing wealthy individuals leaving the country.
The group has created a scorecard of the main factors that encourage wealth creation in a country – and South Africa has failed on all but two subjects.
According to the group, there are eight key factors in creating wealth:
- Strong ownership rights.
- Strong economic growth.
- A well-developed banking system and stock market.
- Free and independent media.
- A low level of government intervention.
- Low income tax and company tax rates.
- Ease of investment.
- A low level of trade union involvement.
In the South African context, NWW states that the country is failing at every turn, with the only exceptions being its well developed finance system and its (current) levels of media freedom.
Everywhere else, we’ve dropped the ball – with the country achieving a total overall score of 4/10.
South Africa’s wealth creation scorecard
Strong ownership rights – 4/10
According to NWW, ownership rights are becoming a contentious issue in South Africa – where many feel that white-owned land and businesses should be distributed back to the African majority. Compulsory BEE ownership undermines ownership rights, it said.
Not taken into account in the NWW report, is that the National Assembly has just passed the Land Expropriation Bill, which allows for the expropriation of property not only for the public purpose, but also in the public interest, to speed up land reform.
Strong economic growth – 3/10
While South Africa scored moderately in the NWW report, it’s GDP projections are largely out of date.
South Africa had GDP growth of 1.4% in 2015 and NWW said that the country had a moderate growth outlook of 1.5% forecast for 2016 – however, the IMF and World Bank both peg this much lower at between 0.7% and 0.9%.
A well-developed banking system and stock market – 9/10
South Africa has the best developed banking system in Africa and a well-developed stock exchange.
“This encourages people to invest their money within the country and grow their wealth locally. It also ensures that any economic growth filters through to wealth creation,” NWW said.
Free and independent media – 8/10
South Africa has a well-developed free media including major independent publications such as the Beeld, the Sunday Times, the Business Day and the Mail & Guardian.
According to NWW, this prevents government from getting away with wrong doing. It also sets South Africa apart from most other African countries.
However, the country has the controversial “Secrecy Bill” looming over its head, while recent moves by the communication department to clamp down on freedom of speech online will undoubtedly count against us here.
Low level of government intervention – 2/10
NWW said this is arguably the largest problem in South Africa, as the “ANC government increasingly tampers with the business sector”.
“Ongoing issues include: government owned monopolies such as Eskom, BEE ownership and compulsory Affirmative Action hiring requirements enforced by government. All of these factors create large inefficiencies within the economy,” the group said.
Low income tax and company tax rates – 1/10
South Africa has high tax rates when compared to other emerging markets in Africa and abroad. This deters business formation and expansion of businesses, NWW said.
Finance Minister Pravin Gordhan is expected to exacerbate this particular aspect of wealth creation in his budget speech later on Wednesday, where more taxes are set to be introduces to bolster tax revenue for the country.
Ease of investment – 2/10
South African exchange controls are a legacy of the Apartheid government. They make it difficult and complicated for foreign companies to invest in South Africa, NWW said.
The group noted that they also discourage local companies and individuals from doing business abroad and, perhaps of most concern, they show that the local currency cannot be maintained without interference.
Low level of trade union involvement – 1/10
South Africa’s unions have become increasingly active over the past five years, which has driven up wages and hence pushed up unemployment and inflation.
It has also resulted in the closure of several mines and discouraged new business formation. The recent postal and platinum strikes lasted almost five months.
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