The silver bullet to save South Africa’s economy

South Africa must focus on the rule of law and good governance to sustainably drive faster economic growth in the country and improve the quality of life of its citizens. 

The rule of law and good governance, particularly policy certainty, are significant factors in attracting foreign investment to a country. 

Currently, South Africa has relatively low policy certainty compared to some of its peers and developed economies, with the rule of law coming under strain during the era of state capture and ongoing corruption scandals. 

This is feedback from Standard Bank’s chief economist Goolam Ballim, who told Daily Investor what the one thing South Africa and other African economies need to drive faster economic growth on a sustained basis. 

Ballim admitted that his answer of rule of law sounds quite academic, but modelling by the bank has shown it to be vitally important in attracting investment. 

“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.”

Analysis from Standard Bank’s economics unit shows that around three quarters of investment and economic growth hinges on the rule of law and good governance. 

The remaining one quarter is made up by capital, innovation, labour dynamics and everything else in an economy, reflecting just how important the rule of law is. 

“I am making a bold statement here. I have said it before, and the data supports 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.”

For investors to commit substantial sums of money for a significant period of time, they have to be confident in the environment remaining stable and being predictable for their investment cycle. 

Without this confidence, significant amounts of capital are unlikely to be committed to the country to drive economic growth. 

South Africa is its own worst enemy

In this regard, South Africa can be its own worst enemy as the rule of law and good governance are entirely internal matters. 

Ballim said that improved governance and the rule of law is something easy to say and call for, but is practically very difficult to implement. 

In South Africa, this proves particularly difficult as many of those responsible for defending the rule of law may be working to undermine it. 

“It is easy to say and sometimes it has even been done, but sometimes the very politicians responsible for the rule of law are also the ones who seek to preserve their patronage networks and so forth,” Ballim said. 

“This has been a crime on society for a length of time, and it is one of the things that we should continue to talk about as policy advisors and as citizens.”

The continuous improvement in governance and the rule of law must be coupled with the structural reforms that are being undertaken in South Africa. 

These not only improve business confidence but also greatly increase the role of the private sector in the economy, driving economic growth. 

Furthermore, they open the door for private investment to flow into critical sectors of the economy, such as electricity and logistics. 

As network sectors, these have an outsized influence on the economy’s performance as they are universal inputs into production. 

Significant progress has been made in this regard, with reforms to create an open, competitive electricity sector gaining momentum. 

Similar progress has been made with regard to logistics, with the private sector players set to be able to operate some of the country’s key rail corridors and port terminals. 

Crucially, these reforms appear to have a momentum of their own and cannot be undone by the will of one President or minister. 

This creates greater certainty in the future of these industries, enabling companies to commit capital for a long period of time and drive economic growth.