South Africa’s silver bullet

The issue of the rule of law in South Africa is fundamental to the country’s economic growth, and if enforced properly, its economy can grow at 4.5% per year in the near future. 

Coupled closely with the rule of law is good governance, which creates policy certainty and an environment in which private businesses can thrive. 

Standard Bank CEO Sim Tshabalala explained that these two issues are the most important for South Africa to escape its decade of stagnation. 

While much focus is given to specific policy reform and actions from the government, without the rule of law and good governance, it will all amount to nothing. 

Tshabalala’s bank has regularly pointed to data showing that the rule of law is the main determinant in investment decisions that fuel economic growth. 

“The issue of the rule of law is fundamental to growth. Our country can grow at 4.5% a year. I am not mad in making that proposition,” Tshabalala said at the Kgalema Motlanthe Foundation Winter Seminar.

“I am not alone in saying that, and economic growth can solve many of South Africa’s problems. Making the case for the rule of law and economic growth is vital.”

Tshabalala pointed to data from the World Bank, which shows that crime and corruption cost South Africa 10% of economic output on an annual basis. 

“That is vast. That 10% of GDP is R800 billion a year that disappears. This is low-hanging fruit for an economy like South Africa,” he said. 

The International Monetary Fund (IMF) has urged South Africa to improve its governance in recent years, pointing to it as the main drag on its economy. 

IMF data shows that if South Africa improved its governance to just half as good as the average emerging market, economic growth would be 5% to 7% higher within five years. 

This would push South Africa’s projected economic growth to over 3% in the coming years, which would transform the country. 

Tshabalala explained that growth at that rate becomes self-reinforcing, with it attracting investment which further boosts output. 

Crucially, this can transform the lives of South Africans who have gotten poorer on average over the past decade. As the economy grows, their lives improve. 

“4.5% economic growth by 2030 is not a pipe dream. It is within our grasp. We must look to the central government to accelerate the necessary reforms and attract investment by buttressing the rule of law,” Tshabalala said. 

South Africa turning the corner

Tshabalala’s bank has long made the case for bolstering the rule of law and improving governance, with its experience in the rest of Africa informing this view. 

South Africa has long lagged its peers on the continent in terms of economic growth as its state institutions crumbled over the past 15 years. 

As these institutions were hollowed out and cronyism replaced competence, South Africa’s growth rate plunged to 1% on average. 

In the meantime, other African countries were executing ambitious reform programmes that attract investment, welcome foreign capital, and boost growth. All of this is based on the rule of law. 

Standard Bank chief economist Goolam Ballim has regularly repeated the claim that the rule of law is instrumental in reviving the country’s economy. 

“It may sound a little academic, but it is something that I support quite vigorously, and that is the rule of law or good governance. I treat those two as synonyms,” Ballim said. 

“By the rule of law, I am referring to the overall governance climate within a country that is vital to attract investment locally and abroad.”

Ballim estimates that 75% of investment and economic growth depends on the rule of law and good governance. The rest is capital, innovation, labour, and everything else in the economy. 

“I am making a bold statement here. I have said it before, and the data support me in saying that governance is about two-thirds to three-quarters of the economic growth of a country,” Ballim said. 

“And so, continued improvement in the governance structure will be the bedrock of enhancing predictability, efficiencies, and increased private sector participation in the economy.” 

“So, if you want to say what the silver bullet is, I’d say it is the rule of law.”

Ballim is positive about South Africa’s future economic fortunes, telling delegates at the bank’s Africa Unlocked Conference that the country has the most optionality in Africa. 

“If, over the next three years, South Africa can lock in energy security and logistics improvements continue, and confidence in political stability continues to rise, the country can reach escape velocity,” Ballim said. 

Escape velocity is broadly considered to be 2% GDP growth on an annual basis. At this level, growth can become self-reinforcing and accelerate. 

Crucially, growth at this level also creates thousands of jobs and ensures that wages grow at a faster rate than inflation. 

The ace up South Africa’s sleeve is its access to platinum and manganese, with these minerals being in extremely high demand. 

This provides short-term tailwinds that give space for reform and grease the wheels of investment through increases in tax revenue and wealth creation.