The three issues that South Africa needs to address to boost the economy

Source: Business Tech

The government’s institutional failures, the logistics crisis, and human capital are the three major issues identified in PwC’s inaugural Productivity Potential Index (PPI).

The PPI measures productivity and takes into account a host of factors relevant to long-term sustainability. Productivity is seen as a catalyst for economic growth and development, as it allows countries to produce more with the same resources.

Productivity plays a massive role in increasing employment, leading to improved wages and better economic conditions. High productivity also allows economies to absorb unforeseen/unplanned events and recover from economic downturns.

Traditional productivity measures like GDP per employed worker ignore the assets that determine an economy’s productive capacity, as they do not, for example, include environmental impacts, erosion of trust, or the weakening of equity that a production process may generate.

Traditional productivity measurements only provide a retroactive view of productivity, lacking the forward-looking to inform policy making.

“There are key differences in the primary drivers of productivity across different types of economies. In advanced economies, inequality is the most important predictor, followed by physical and human capital,” said Lullu Krugel, PwC South Africa Chief Economist,

“In turn, physical capital, life expectancy, institutional quality, and internet access are the most important predictors in developing economies.”

“PwC’s estimates show that around 40% of South Africa’s productivity is determined by human capital, logistics, and institutions. These factors are also currently amongst the country’s biggest economic challenges.”

PwC focused on institutions as they oversee and regulate the economy, impacting productivity.

Institutional quality captures how institutions enhance incentives, governance, and protection of property rights, fostering business confidence, entrepreneurship, and innovation.

According to World Bank Data, South Africa’s current administration (Since 2018) has seen improved assessments for accountability as well as the rule of law.

On the other hand, South Africa has also seen a drop in four other aspects of institutional quality, with violence and corruption diverting state resources away from improving spending areas.

olitical instability, weak government effectiveness, regulatory burden and corruption all reduce the efficiency of public sector institutions and the support that these provide to labour and firm productivity,” PwC said.

“Well-performing institutions support productivity. Conversely, government institutions that underperform discourage business activity and innovation that could productively employ more people.”

PwC said that the public sector needs to adopt new technologies to create transparency.

Education is seen as the core of human capital development.

Although South Africa’s education spending is high (as a percentage of GDP), the return on investment is low.

“This has resulted in a skills deficit and productivity challenges in the labour market, with soft skills in particularly short supply.

“The job market is calling for a paradigm shift in public sector education curriculums.”

“Many higher education institutions (HEIs) in South Africa have recognised this. The majority of local HEIs believe that curriculum design and learning methods that are in sync with industry trends are required to deliver curricula that match the rapid pace of change in the world.”

The logistics challenges facing South Africa have been well documented, with Transnet’s rail and port issues severely hampering economic growth.

PwC said that a possible option to improve port performance is to offer a public/private ownership struggle.

Transnet has started this process by partnering with the private sector at its Durban port and opening its rail network to third parties.

THE AUTHOR: Luke Fraser

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