Protecting private property rights, encouraging free trade, and keeping inflation in check are the easiest ways for South Africa to grow its economy.
This is feedback from Efficient Group chief economist Dawie Roodt, who outlined why South Africa’s economy has been stagnant over the past decade and how it can be revived.
The local economy has averaged less than 1% GDP growth on an annual basis over the past decade.
Coupled with a population growth rate of around 1.6%, South Africans are getting poorer every year, and the economy cannot absorb a growing workforce.
This can result in significant problems in the future, where South Africa has a growing number of individuals who are stacking up at zero.
Some organisations, such as the United Nations Development Programme, have warned this is a ticking time bomb that may result in widespread social unrest.
In a recent interview, Roodt outlined three things South Africa needs to ensure its economy grows sustainably and can absorb a growing workforce.
1. Private property rights must be protected
The most important thing for an economy to grow, according to Roodt, is the protection of private property rights.
Private property rights should also be broadly defined to include not only physical property but also one’s life and labour.
“All those things must be protected, and the primary function of the state is to protect me and my property,” Roodt said.
However, Roodt explained that in South Africa, private property rights are not fully protected, partly by design and by incompetence.
The looming threat of expropriation without compensation (EWC) does not give certainty regarding the government’s approach to private property.
Furthermore, the lack of safety and security in South Africa shows that the government is unable to protect these rights.
2. Free trade
The second ingredient needed to bake the economic cake is free trade, which enhances the economy’s efficiency and makes it more competitive globally.
Roodt said there must be no obstacles to the movement of goods, people, capital, and ideas. There should only be regulations in certain circumstances to prevent bad outcomes, whether intentional or not.
Free trade is crucial to making South Africa more competitive globally, as it would reduce the input costs for manufacturing goods in the country or for offering services.
It would also make it easier for people to participate in the local economy by making it easier to conduct business and employ people.
Roodt’s broad definition of free trade includes the removal of onerous regulations that make it difficult to open a business and conduct trade.
It also applies to heavily regulated costs for administered services such as electricity, water, and medical aid.
3. Sound money
Roodt explained that sound money refers to low inflation. This means the currency’s value is protected and, in some cases, enhanced.
This is key to providing certainty for foreign individuals looking to invest in the country, particularly foreign businesses that may commit capital for decades.
Without a stable currency, it is unlikely that South Africa can become an attractive destination for foreign investors as the return on investment cannot be guaranteed.
Central to having a stable currency is having an independent Reserve Bank that can implement sound monetary policy without government intervention.
Roodt said the Reserve Bank is doing very well in difficult circumstances, but South Africa still has relatively high inflation.
This is largely due to repeated above-inflation price increases for administered costs, such as electricity, and excessive government spending.
“If you have these three things, I promise you that the economy will grow,” Roodt said.
The reason why South Africa does not have these three things and a growing economy is that the dominant political force, the ANC, does not align with these three ideas.
“We have a government following the wrong ideology that results in the state wanting to own large parts of the economy and centralise state functions.”
“This is a state that is not aligned ideologically with private property, free trade, or sound money.”
