South Africa must stop BEE and expropriation

South Africa should stop taxing investment capital on arrival through its current Black Economic Empowerment (BEE) scheme and secure property rights to revive its economic growth. 

This is feedback from an economist and partner at Frans Cronje Private Clients, Bheki Mahlobo, who outlined some of the steps South Africa could take to rapidly grow its economy after a decade of stagnation. 

Over the past decade, the South African economy has averaged an annual growth rate of 0.8% compared to the emerging market average of 4.5%. 

This has resulted in the country falling behind its peers, and South Africans, on average, have become poorer year-on-year as population growth has outpaced economic growth. 

The main driver of this stagnation is the country’s low fixed investment rate, which accounts for approximately 15% of GDP, compared to around 25% for faster-growing emerging markets. 

“This is effectively a reflection of the commitment by businesses to set up shop in South Africa and invest in growing in the country,” Mahlobo told Biznews. 

“The fixed investment should be much closer to 25% of GDP, which is the norm. That is where the country should be.” 

Mahlobo said that to narrow this gap, South Africa needs to make the country more attractive to foreign investors by removing barriers to entry and securing property rights. 

In particular, South Africa needs to attract American businesses to its shores, as approximately two-thirds of all investable capital globally is located in the United States. 

“To be a friend of the United States, the Americans have been quite clear on their three policy stances, which are non-negotiable from their perspective,” Mahlobo said. 

After spending time in Washington, DC, Mahlobo said Americans who are watching South Africa closely have been crystal clear on the issues in the country. 

The first is South Africa’s empowerment policy, which, from an American perspective, is seen as a tax on investment. 

This tax must be paid in the form of empowerment deals before any company can commit capital to South Africa and establish a presence in the country. 

The second major factor is the Expropriation Act, which allows for the expropriation of property, including both fixed and movable assets, at below-market value. 

Mahlobo gave the example of a house purchased for R2 million that the government then expropriates for R1 million. This means that, in effect, R1 million has been expropriated, making South Africa uncompetitive on the global stage. 

Worryingly, Mahlobo said this is not only the opinion of the Americans but is also held by other nations that look at South Africa and see that it is very difficult to invest in the country.

The third thing the Americans have been clear on is the country’s close ties with Iran and other authoritarian regimes, which it sees as a national security threat to itself and its allies. 

South Africa should copy India

Examples of countries that have chosen to make their country more investable are not hard to find, with South Africa able to copy many of its emerging market peers. 

In particular, India provides a good example of what can be achieved for an emerging market to establish a strong relationship with the United States and the potential benefits of such a partnership with the world’s largest economy. 

Mahlobo said that America could be a great friend and ally of South Africa, just like it is to India and many other emerging markets. 

The United States contributes around $60 billion of foreign direct investment into India, greatly boosting its economic growth and improving the lives of its citizens. 

This investment translates into faster economic growth, enhanced job creation, and enables the country to rapidly improve the quality of life of its citizens.

Mahlobo said South Africa could also have such a relationship with the United States if it gets those three things right. 

Crucially, India’s political leaders are careful to ensure they do not antagonise the United States by supporting its global adversaries or condemning the actions of its allies. 

“India did not go out of its way, as Mr Ramaphosa did, to condemn the United States and Israel. Rather, they were very sensible in how they approached international relations,” Mahlobo said. 

As a result, rather than having the average growth rate of emerging markets for the past decade of 4.5%, South frica has only grown at 0.8% per year. 

It has been effectively left behind by countries that were once its peers in terms of GDP per capita and global economic clout. 

Investec calculated that if South Africa had just matched the average of emerging markets since 2010, its economy would be R4.1 trillion larger and the state would have collected R5 trillion in additional revenue. 

Effectively, the country would not face the financial crisis it does, and the lives of its citizens would have vastly improved. 

The graph below, courtesy of the Reserve Bank, shows South Africa’s economic growth rate in comparison to its emerging market peers.