Document: South Africa: Second Investment Climate Assessment - Improving the Business Environment for Job Creation and Growth

South Africa: Second Investment Climate Assessment - Improving the Business Environment for Job Creation and Growth

This summary of the World Bank’s Second Investment Climate Assessment of South Africa reviews some of the key business environment constraints to growth and job creation in the country. The assessment analyzes results of a World Bank survey of enterprises undertaken in 2008 along with similar data on a group of comparators, and draws on the broader development policy literature on South Africa. It is a sequel to a 2003 assessment that examined the same issues based on a similar survey carried out by the Department of Trade and Industry (DTI) and the World Bank.

Key messages

A key message of the report is that South Africa’s overall business environment is good relative to its peer group of upper- middle-income economies, and has improved a great deal since 2003 in many respects. However, despite the advantages this should give it in export markets and as a location of investment, South Africa is exporting far less industrial output and attracting less foreign direct investment (FDI) than many in the same peer group. More significantly, it is not exporting or attracting FDI as much as it needs to tackle its twin challenges of high unemployment and widespread poverty in a reasonable time frame. A second message of the report is that South Africa needs to improve the allocative efficiency of domestic industry as a key export promotion strategy. South Africa is not doing as well as most in its peer group in terms of manufactured exports because its manufacturing productivity is relatively low, not because its manufacturers are inherently less productive than their counterparts within the peer group, but because allocative efficiency is lower in South African industry. South Africa’s poorer allocative efficiency is associated with the relatively high concentration of its industries. Improving allocative efficiency will therefore require the institution of a more activist and innovative competition policy than has been pursued so far. Excessive concentration also may have deterred inward FDI.

A third key message of the assessment is that the tasks of improving allocative efficiency and raising productivity extend well beyond the realms of competition policy into other business environment issues. These include infrastructure, skills shortages, crime, and small business access to finance. Problems in each of these areas can only work against the growth of exports and FDI since they add to the average cost of doing business in South Africa relative to its peer group. They also distort the
allocation of resources particularly at the expense of sectors that should be in the forefront of a jobs led growth process. These include labor-intensive industry sectors, and particularly small and microenterprises within those sectors.

South Africa should promote the growth and formalization of promising informal enterprises as an important tool of job creation. A key component of such promotion should be public support to the development of markets in business development services and financial products customized to the needs and capabilities of the sector. There are already important instances of these on the ground, but far more are needed to produce visible impact in terms of job creation and the growth of the small and medium enterprise (SME) sector. Access to finance is a significant business environment issue for the SME sector as well. Although this is by no means unique to South Africa, the access gap between SMEs and larger firms is far greater in South Africa than in most of its peer group.

The assessment also looked into how much businesses were investing in job skills formation and if they were being helped by Sector Education and Training Authorities (SETAs). Skills shortage came out strongly as a growth bottleneck in the 2003 DTI-World Bank survey, in which a large percentage of respondents reported that growth of their businesses was being held back by a shortage of skilled manpower. The report concludes that SETAs are clearly supporting much of the ongoing investment in job training and that there is greater appreciation of their role than was the case in 2003. However, it is also clear that the rate of investment needs to increase to attain parity with South Africa’s peer group, and that SETAs need to target their support more to smaller firms, which continue to under-invest at a rate
higher than larger businesses.