South Africa’s economy is a Fiat Uno trying to be a Ferrari: economist

 ·21 Sep 2021

South Africa needs to introduce fundamental economic reform policies and focus on getting the basic right, says Dr Thabi Leoka, founder of economic consulting and advisory company Naha Investments.

Speaking at the recent Allan Gray Investment Summit, Leoka said that to turn South Africa’s economy around, the country really needs to look at the easy wins and “stop pretending to be Ferrari when it has an engine of a Fiat Uno”.

“The answers lie in fixing our education system, rolling out the spectrum in the telecommunications space as quickly as possible, and dealing with the low-hanging fruit where our economic policies are working against us,” she said.

If you drill into the numbers, economic growth in South Africa has not increased over 0.9% in the last 10 years. But, if the government together with the private sector were to invest in more infrastructure projects, South Africa could deliver growth of between 4% and 5%, she said.

“The latest GDP data shows that the economy grew 1.2% in the second quarter of this year compared to 2020. But if you compare this to pre-Covid-19 levels, the economy is actually 1.4% smaller than what it was then, which is worrying.

“We are also bound to see a decline in business confidence as economic growth declines. The current environment is simply not conducive for businesses to want to invest, given the political and economic risks at play.”

Leoka added that households have been struggling given the increases in rates and taxes, job losses, and salary cuts, which have had a major impact on household consumption.

“We need household consumption to increase, but we are unlikely to see large increases in household spending any time soon.

“Banks are not giving credit extensions to households given that they are being very cautious in the current environment, and people aren’t applying for loans because they are already over-indebted.”

Not being utilised correctly 

South Africa has a very diverse economy, that if utilised correctly, would be able to deliver growth, said Leoka.

“You cannot use a Ferrari effectively if you have an engine of an Uno in that supercar. This is our economy – we have such a wonderful diverse economy with an opportunity that beckons, yet 44% of our nation is not working. At the same time, there are solutions we can apply today, that we are not doing.”

“The problem is that the sectors that should be growing – agriculture, manufacturing, tourism – are not. Manufacturing used to make up 20% of GDP but now it is closer to 13%. If we stimulate these sectors, they can help us deal with the problems of poverty and unemployment.”

The sector that is growing the fastest is finance, which uses skilled labour, but South Africa doesn’t get revenue from this sector – unlike mining – and it is not labour-absorbing, Leoka said.

She added that South Africa produces approximately 60% to 65% of the world’s chrome, yet does not derive any benefit from using the metal in the manufacturing process on home soil – because it is exported to places like China.

“One of the examples of how our economic policy is working against us is with the export tariffs we place on the producers of chrome in South Africa. We should rather be putting import tariffs on chrome, which is done successfully with our emerging market counterparts like Brazil and elsewhere.”

Read: Introduce vaccine passports now to help South Africa deal with ever-shifting lockdown levels: CEO

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