Beware the signals we send…

Capital investments, much like water, follow the path of least resistance. CHRIS HATTINGH warns that if policies and legislation make bureaucratic processes unnecessarily difficult, capital will likely try to find other avenues.

Should a country adopt policies that discourage the formation of capital from both local and foreign sources, it will likely experience lower levels of investments in things such as infrastructure and new business formation. The downstream consequence of this is a lower level of job creation, and the stagnation or decline of citizens’ average quality of life over time.

South Africa has become relatively well-practiced in the art of the own goal. From expropriation without compensation to consistent electricity outages, the South African operating environment has become home to myriad factors that disincentivise capital from flowing here. A further potential barrier is the government’s current stance on the 2022 Russian invasion of Ukraine. The most immediate concern and risks are that South Africa will lose the benefits from the African Growth and Opportunity Act (AGOA). The wider, even more concerning risk of losing these benefits is the signal it will send to other governments and potential investors.

Under AGOA, numerous South African companies and products enjoy duty-free access to US markets. In 2022 South Africa exported roughly R178 billion worth of goods to the US; 35% (R62 billion) of this enjoyed the duty-free access afforded under AGOA. South Africa is the largest of the 35 countries that benefit from AGOA, accounting for 40% of all the exports that enter the US under the Act. In the South African economy, the biggest beneficiary has been the automotive sector, with agriculture and chemicals as well as manufacturing also playing a major role.

Let us assume South Africa’s benefits as part of AGOA are not renewed. The next deadline for renewal is 2025, but the US Congress can decide to remove a country before then. Nor does it require approval from the president to make decisions regarding AGOA. Should South Africa’s preferential trade terms under AGOA fall away, trade with the US will not disappear by any means; it would not mean the immediate end of the wider relationship between the two countries. Perhaps other trade agreements could be pursued later down the line, especially in the context of the Africa Continental Free Trade Area (AfCFTA).

The more fundamental issue would be the signal this will send to the rest of the world. In a global context of low growth, stubborn inflation, and an increasing number of risk-averse investors, those countries that send out the wrong types of signals will find it all the more difficult to attract investment and skilled workers and professionals.

Overall, the trade and economic benefits South Africa derives from the AGOA agreement far outweigh those that the US enjoys. To reiterate, however: the economic aspects of AGOA are not the ultimate end. Should the US decide that South Africa ought not to benefit from AGOA any longer, other governments’ confidence in trade agreements with South Africa could also take a hit.

The South African Reserve Bank, International Monetary Fund, and other international institutions have expressed various levels of negativity regarding South Africa’s expected GDP growth for 2023 and the next few years. The country may well be considered lucky to breach the 1% growth mark this year. One of the best paths to achieve more meaningful levels of growth – alongside the concomitant job creation that is so sorely needed – is for government to avoid alienating the more advanced economies of the world and discouraging investors from exploring opportunities here.

South Africa has seen an uptick in the number of skilled people leaving the country to work elsewhere. That phenomenon, coupled with the country’s poorly performing public education system, means those skills need to be replaced or built up again. This cannot happen without the sharing of skills between people from other countries and South Africans. Should South Africa become a more difficult place for companies from more developed economies to do business, the wider skills and capital implications outside losing the benefits of AGOA will be especially dire for our future.