South African Investment Climate Favorable But Challenges Remain: World Bank

Contacts:
in Washington:
Vijaya Ramachandran: (202) 687-2146
vramachandran@worldbank.org 

George Clarke:  (202) 473-7454

gclarke@worldbank.org

in Pretoria:

Mallory Saleson (011) 731-3087, 082-570-6470

msaleson@worldbank.org

PRETORIA, December 13, 2005 – Results from a joint Department of Trade and Industry and World Bank Investment Climate Survey show that South Africa’s investment climate is favorable when compared to the investment climates of other countries in Sub-Saharan Africa and other middle-income countries throughout the world.  The 2004 survey of 800 enterprises carried out by Cape Town-based Citizen Surveys examines the location specific factors that shape opportunities and incentives for firms to invest productively, create jobs, and grow.

“Although the investment climate for large formal firms in South Africa appears favorable in many ways, some challenges remain,” said Ritva Reinikka, the World Bank Country Director for South Africa.  “Wages for managers, professionals, and skilled workers are high by international standards, eroding South Africa’s competitiveness.  Exchange rate volatility makes exporting difficult─and yet for a high growth rate exports are critical.”  The survey finds the cost of crime, although lower than in the worst performing middle-income economies, is higher in South Africa than it is in many of its competitors.

“Addressing these issues will help towards achieving the target growth rate of 6 percent per annum to stimulate development and job creation,” Reinikka notes.  To help achieve this goal, the DTI and the World Bank carried out an analysis of the constraints faced by businesses in South Africa.  This analysis places South Africa in comparative perspective, by using the World Bank’s Investment Climate Database which contains standardized firm data from around the world.

On many dimensions, South Africa has a good investment climate.

According to the survey, most firms believe that the courts are able to protect their property rights and court cases are resolved quickly.  Losses due to power outages were relatively modest in 2004 and the cost of power is low by international standards.  Tax rates are low and have been declining over time.  Although the burden of regulation is not particularly low, it is comparable to the burden in most middle-income countries. Few firms report paying bribes to obtain government services or win government contracts.  Finally, most of the large formal firms in the Investment Climate Survey did not see access to finance as a serious concern and few reported that they were credit constrained. 

Consistent with this view, large South African firms are more productive than firms in other countries where Investment Climate Surveys have been conducted.  Labor productivity is far higher in South Africa than in the most productive low income countries in Sub-Saharan Africa such as Senegal and Kenya.  Further South Africa compares favorably with other middle-income countries such as Lithuania, Brazil, Poland, and Malaysia—all of which, other than Brazil, have higher per capita income than South Africa.  Productivity is also over three times higher than in China, although it is slightly lower than in the most productive cities in that country.

Although many areas of the investment climate are quite favorable, challenges remain. 

“Firms appear to be particularly concerned about at least four areas: skills and education of workers, labor regulation, exchange rate instability, and crime,” say George Clarke and Vijaya Ramachandran, World Bank enterprise development specialists who led the analytical work on the survey.  “These are problem areas the government is aware of and has already targeted in its overall development planning.”

Skills and education of workers.  More enterprise managers said that worker skills were a serious obstacle to their enterprises’ operations and growth than any other area of the investment climate.  Consistent with this, per worker labor costs are very high in South Africa—over three and half times higher than in the most productive areas of China, over two and half times higher than in Brazil and Lithuania and over 75 percent higher than in Malaysia or Poland.  Despite South Africa’s high labor productivity, high labor costs undermine South Africa’s competitiveness.

Although wages are relatively high for all types of workers in South Africa, they are particularly high for highly skilled workers and managers.  An additional year of education is associated with an 11-12 percent increase in wages in South Africa—compared to about 5-7 percent in developed economies.  The high premium paid for education results in salaries for skilled workers and managers that are high by international standards.  Although wages are similar for unskilled workers in Poland and South Africa, managers’ wages are over two and a half times as high in South Africa. Despite government programs designed to encourage training (e.g., SETAs), fewer firms have training programs than in other middle income countries, and there is only mixed evidence that training successfully increases worker productivity.

Labor Regulation.   Rigid labor regulations can discourage firms from hiring new workers and can slow employment growth. Close to one-third of enterprise managers said that labor regulations were a serious problem.  Consistent with this, objective indicators suggest that labor regulation is more rigid in South Africa than it is in many other middle income countries.  In the most recent Doing Business report, a World Bank report that compares the burden of regulation across countries, South Africa ranked 28^th in the World overall—higher than many developed economies.  However, in the areas of regulations related to hiring and firing workers, South Africa ranked 66^th. 

Exchange Rate Instability.  Despite South Africa’s relatively strong macroeconomic performance—modest GDP growth and moderate inflation—about one third of enterprise managers said that macroeconomic instability was a serious problem.  This is due to exchange rate instability—in real terms the Rand has been one of the most unstable of the World’s major currencies.  This is particularly problematic for exporters, who receive payments in dollars or euros, but must pay their workers and suppliers in Rand.  Close to three-quarters of enterprises that export to the United States—the country whose currency has been most unstable against the Rand—rated macroeconomic instability as a serious obstacle.

Crime.  Enterprises in South Africa also rated crime as a major problem.  Direct losses due to crime and the cost of security were higher in South Africa than they are in other middle income countries such as China, Poland, Brazil and even Russia.  Although this suggests that crime is a serious concern, it is less problematic than in some middle-income countries such as Honduras, Guatemala, Nicaragua or Ecuador.