SA business climate ‘favourable’

15 December 2005

A joint survey by the World Bank and Department of Trade and Industry has found the investment climate of South Africa to be “favourable” in comparison to that of other African countries, and other middle-income countries throughout the world.

Conducted by Cape Town-based Citizen Surveys, the survey asked 800 South African enterprises to assess specific factors that shape opportunities and incentives for firms to invest productively, create jobs, and grow. These were benchmarked against countries at the same level of development, such as Malaysia, Kenya, Brazil, Poland and China.

“On many dimensions, South Africa has a good investment climate,” the World Bank said. Legal protection of property, labour productivity, low tax rates, reasonable regulation, a low level of corruption and good access to credit were seen as factors contributing to the country’s investment climate.

But challenges remain.

“Firms appear to be particularly concerned about at least four areas: skills and education of workers, labour regulation, exchange rate instability, and crime,” said Vijaya Ramachandran, a World Bank enterprise development specialist.

“These are problem areas the government is aware of and has already targeted in its overall development planning.”

Property, power and productivity
According to the survey, most firms believe the courts in South Africa are able to protect their property rights and court cases are quickly resolved.

Losses to power outages in South Africa were modest in 2004, and the cost of power low by international standards. The country’s tax rates are low and have been declining over time. Although the burden of regulation is not particularly low, it is comparable to that in most middle-income countries.

Few firms reported paying bribes to get government services or win contracts in South Africa. And most of the large formal firms in the survey did not see access to finance as a serious concern, with few reporting that they were credit constrained.

South African firms were found to be more productive than those in other countries where World Bank surveys have been conducted. According to the survey, the country’s labour productivity is far higher than in Senegal and Kenya, the most productive low-income countries in sub-Saharan Africa.

Labour productivity in South Africa
Labour productivity is higher in South Africa than elsewhere in Africa and is higher than, or comparable to, other middle-income economies and the most productive areas of China. (Source: World Bank)

South Africa’s labour productivity also compared favourably with other middle-income countries such as Lithuania, Brazil, Poland, and Malaysia – all of which, other than Brazil, have higher per capita income. Productivity was also found to be over three times higher than in China, although slightly lower than in the most productive cities in that country.

The challenges
“Although the investment climate for large formal firms in South Africa appears favourable 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 found that while the cost of crime in South Africa is lower than in the worst performing middle-income economies, it remains higher than in many of the country’s competitors.

“Addressing these issues will help towards achieving the target growth rate of 6% per annum to stimulate development and job creation,” Reinikka said.

Labour costs and skills
Most managers said worker skills were a serious obstacle to their operations and to growth. Despite South Africa’s greater productivity, the cost of labour is high – over three and half times that of the most productive areas of China, two and half times higher than in Brazil and Lithuania, and 75% higher than in Malaysia or Poland.

Wages are particularly high for highly skilled workers and managers. An additional year of education is associated with an 11% to 12% increase in wages in South Africa – compared to about 5% to 7% in developed countries.

The 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, managers’ wages are over two and a half times as high in South Africa.

Labour regulation
According to the World Bank, rigid labour regulations can discourage the hiring of new workers and slow employment growth. Close to a third of surveyed managers said labour regulations were a problem. Labour regulation is more rigid in South Africa than it is in many other middle income countries, the World Bank says.

In the most recent global Doing Business report, a World Bank report that compares the burden of regulation across countries, South Africa ranked 28th in the world overall – higher than many developed economies. But in the areas of regulations related to hiring and firing workers, South Africa ranked 66th.

Exchange rate
Despite South Africa’s relatively strong macroeconomic performance – GDP growth and moderate inflation – about a third of managers said macroeconomic instability was a serious problem. This is due to exchange rate instability. This is particularly problematic for exporters, who are paid in dollars or euros, but must pay their workers and suppliers in rands.

Close to three-quarters of enterprises that export to the US – the country whose currency has been most unstable against the rand – rated macroeconomic instability as a serious obstacle.

Enterprises in South Africa also rated crime as a major problem. Direct losses to crime and the cost of security were found to be 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 in South Africa, it was found to be less problematic than in the middle-income countries of Honduras, Guatemala, Nicaragua or Ecuador.

  • Download South Africa: an Assessment of the Investment Climate in PDF format from the World Bank website. reporter