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Tragic data shows capital fleeing along with jobs

The big exporters of capital are generally rich countries with a high standard of living – so why is South Africa in this mix?

South Africa attracts far less fixed investment as a percentage of GDP than any other emerging market.

According to data from the UN Conference on Trade and Development (Unctad) for 2017, South Africa was the third biggest exporter of capital as a percentage of GDP in the world.

Foreign direct investment (FDI) is an investment made by a firm or individual located in one country into business interests in another. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, such as a controlling interest in a foreign company. FDI is distinguished from portfolio investments in which an investor merely purchases equity in foreign-based companies.

FDI is a vital part of overall fixed investment (investments into actual land, buildings, machines and inventory). It is a long-term investment and a good indicator of confidence in a developing country.

Fixed investment has had the closest relationship with job creation in the formal sector in South Africa since 1967. In larger developing countries, FDI makes up well over 35% of investment stock.

Net FDI is simply the difference between what the home country receives in fixed investments from foreign countries and what it invests in other countries. Almost all countries ‘import’ and ‘export’ fixed investment.

Only the tax havens of Luxembourg and the Netherlands exported more net FDI as a percentage of GDP than South Africa.

South Africa has larger outward fixed-investment stock as a percentage of GDP than Switzerland. That means it exports more fixed investment to other countries than Switzerland does.

South Africa is the lone emerging market economy in the world’s largest net exporters of FDI. Of 157 countries analysed, only 22 are net exporters of fixed direct investment. Only four are emerging markets, and some of these are at war, which encourages capital flight.

Even Zimbabwe has more net FDI than South Africa – mainly by South African firms – but that story we leave for another day.

Emerging markets have an average net foreign fixed investment stock of 12% of GDP, while developed markets are the main exporters of fixed investment. The world is of course neutral, but suffice to say that generally big exporters of capital are rich countries with a high standard of living that are looking to diversify their investments, export their technology and so on.

Net foreign direct investment stock as a percentage of GDP

Source: Unctad for fixed investment data and World Bank for GDP data. (Note on emerging markets: Libya is in a civil war, Angola is seen as corrupt and run by one family, and Togo has little in the form of human or property rights and is ruled by a dictator.)

In US dollars, South Africa is the ninth-largest net exporter of FDI at $120.3 billion (R1.7 trillion as at the end of 2017).

The country has more net outward FDI stock (fixed capital stock) than Finland, Norway and Ireland combined.

This from a country that had the highest unemployment rate in the world in 2017.

FDI is one of the most important factors in creating jobs in many countries and governments fall over themselves to attract it.

The above is not a quick survey or a spreadsheet by a think tank. It represents real money flows and investments into productive investment. The labour numbers come from the International Labour Organisation. These are hard numbers from the real economy.

Foreign fixed investment is an investment in real companies, buildings, technology, and jobs. The lack of foreign fixed investment translates into real job losses and impoverishes real people by the millions. Yes, it takes profits home, but it allows our firms the opportunity to compete at home against some of the best. It enhances skills and productivity.

Fixed investment flows from developed countries to emerging markets where economies attract capital in the form of fixed investment due to higher growth and expectations of growth.

Using the average emerging market as a measure (average is taken as 12% of GDP as calculated), SA should have had R2.2 trillion in extra fixed investments by the end of 2017.

Measured as a percentage of South Africa’s total fixed investment stock of R11.2 trillion, this would imply about 20% more capital.

Assuming that the capital and labour ratio stays the same, this would have meant about 3.1 million more jobs. The net foreign investment stock is hard data collected by Unctad as well as the South African Reserve Bank. Other international bodies show similar declines and comparable trends.

However, this is private sector fixed investment we are talking about. The R2.2 trillion would have been about 32% more at private-sector level. Using the same capital/labour ratio assumption, the number of jobs in the private sector would have been 4.5 million more. That means SA would have halved the unemployment numbers from close to 10 million to about five million. (State-owned enterprises are also investing outside of SA, which is also a source of concern as others see this too.)

But as SA had a high point of 24% of GDP, the job-creation numbers could have been higher. Also, remember that much of the foreign direct investment came about due to headquarters shifting from Johannesburg or Cape Town to London or Amsterdam.

Anglo American, SA Breweries/SABMiller, Investec, and Steinhoff are still some of the biggest investors in SA, but these multinationals were ‘built’ in South Africa.

There is nothing wrong with companies looking for new opportunities – it’s just that ever since the days of sanctions, South Africa has not had a great track record in attracting foreign firms (other than in the subsidised motor manufacturing industry).

Unnecessary unemployment

Adding the old South African companies that became foreign companies into the mix means that the ‘missing’ net foreign fixed investment stock is closer to R4 trillion today. If South Africa attracted more FDI and kept its homegrown firms here, the country may have had an unemployment rate about a third of today’s number!

Next time someone asks why only three of every 10 adults have jobs in the formal sector, ask what their country did to scare investment and jobs away. In total, only four out of 10 adults are employed in this country – including domestic workers and the informal sector.

The result of the outflow of FDI is the 10 million unemployed who are the real victims of this tragedy.

Our general economic welfare in the form of less income, higher crime, and massive unemployment can in large part be blamed on this.

This should be the only election issue – jobs, and why we have 10 million people in the unemployment line.

Mike Schüssler is chief economist at Economists.co.za.

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At least we are in the top 3 of something!

the capital flew into my daughter’s private high school scholarship(hundreds of thousands of rand) & is currently fleeing into her varsity bursary(hundreds of thousands of rand).

I am not surprised that companies rather invest outside the country. What is surprising that some still invest in SA. BEE means that you put up 100% of the capital but keep only 70-80% of the business. Add to this the other race requirements like AA and the return on capital has to be much higher in SA than in other countries to justify local investments.

THE ARTICLE MISSES THE MOST CRITICAL ELEMENT.

South Africa is the greatest welfare state on earth. The parasite is not only bigger than the host – it is around TEN TIMES BIGGER.

Less than ten percent of SA’s population is financing the rest (and the ten percent is falling fast).

It does not matter how much you invest in SA – it is doomed. You can create millions of fake salary-takers and call it jobs – the fact remains: ninety percent of SA’s workforce cannot compete.

Over the long term, the difference between two currencies, depicts the difference between the productivity of the two countries. The glaring example is the value of the rand versus US and European currencies since the middle of the seventies.

ANC Manifesto: ‘Transform the structure of the economy’.

Ie – transform from a structured economy to a subsistence economy without any structure. Functioning examples are on display to the north of SA.

Duane, I recognize your frustration, but South Africa is not doomed. The problem lies not so much in the millions, they are for the most, good, honest and hard working people, all of who want to lead a normal civilized life. The problem lies in the leadership of this country and the people must be made aware of how they are being abused, disinformed, manipulated, deliberately misguided, socially polarized (even to the extent of buying polarization) etc. This is also our task, yours, mine, everybody. Be positive, point out the bad, point out the good, make people think who they vote for and what the consequences are. Everyone in this country will suffer the effect of bad governance…everyone.

dear Ludwig – in SA we are confronted with a SOFT reality (your point of view) as well as a really HARD reality as described by Duane above. considering that the 4th industrial revolution is upon us, and that SA is only now currently trying to revitalize it’s industrial capacity (second revolution) it is clear to see that we are far far behind. so your soft approach will not/can not work unless SA only plans to compete against itself in which case SA is actually doomed as Duane rightly pointed out. Trump, China, India, Europe don’t care whether most of us are good, honest or even hard working – question is can we compete against them with price, quality, productivity ? That’s what they care about !

Excellent comments Karl and Duane. I agree, hard option 100%. SA will feature alongside Somalia and Afghanistan when the 4th revolution robo-chickens come home to roost. We will be at best a place where stuff is pulled out of the ground. Tourists will only go to gated, secure places. Can still have a great life here for as long as we can, just build a life boat and an exit plan (mine’s already done). Until then enjoy the great things SA has to offer.

Excellent article! Mr. Schussler is at the top of his game. This is further proof that Luthuli House is the head office of the largest trading company in South Africa. They export investment capital, employment opportunities and the tax base to our competitors. At the same time they import unemployment, a shrinking tax base and poverty from our competitors.

The ANC removes the competitive edge from local companies by enforcing labour laws, BEE, AA, unaffordable electricity costs and cadre deployment. They export this competitive edge to the international competition who do not suffer from the socialist mindset disease.

In fact, the ANC is the biggest supporter and benefactor of foreign WMC. The ANC uses the “invisible hand” of the economy to steal from locals to support the bottom line of foreign WMC. This is treason. The ANC should face the firing squad.

Thank you. I also feel that government is more often than not thinking about the pockets of the powerful and not souls of the people. They use the poor and the hungary by pointing in the direction of the main thing that can help the poor – investment capital. That investment capital is fearful and stays away or runs as quickly as posible.

S.A.’s largest export commodity is not gold or platinum but tax payers.

Name one thing worth investing in SA!

Plus add in the number of people emigrating – you will be stunned by the number of skilled people leaving this dump

Figures I came across is upwards of 1000 emigrating per month.
Professionals immigrating I don’t know.

Rooibos products for one. Many agricultural products. Unfortunately ongoing ANC policy uncertainty in agriculture and many other sectors remains one of the biggest frustrations.

Too late for me to leave but I’m using every spare cent to get my kids out of here.

Indeed, I came across so many expat Saffas during my various overseas sojourns. Some in the most unexpected places. And let´s not ignore Mauritius. The island is teeming with expatriate South Africans. A case of ´anywhere but SA will do just fine, thanks.´ It is no longer simply ´emigration´. It now qualifies as a haemorrhage.

If SA created a net new job every minute of every day it will take 18 years and seven months to bring unemployment to zero. If one assumes that around 400 000 net new job seekers enter the market every year then it will take over 40 years to clear the backlog. Something like 45 years!

Yes SA has to create a new job every minute for over 40 years to bring unemployment close to zero!

Thanks Mike, excellent stuff but are you able to do a correlation between employment and crime please? Because the way I see it and I hope I am wrong, is that SA is in a crime/ unemployment spiral. The security industry, both informal(car guards, street guards, etc) and formal(security companies) has to be the largest employer in SA! So my reasoning is that if crime were to be reduced it follows that unemployment will increase!!! In order to create jobs an environment of safety/ low crime needs to be created as well so a massive catch22 is in play here in my simple view!!?? Your thoughts please?

Great article, no fluff and just the facts.

SA should really be top of the pile, instead I have heard of foreign capital declining to invest in highly profitable projects in SA simply due to the lack of certainty on industry specific policy, lack of any form of control over labour, high wages etc etc and therefore even at high returns, the risk is too high.

Seems such a simple thing to correct, yes it will be unpopular in the short term but longer term, it would lead to big improvements in the fundamentals and a base to grow from there.

Unfortunately the ANC are only concerned about staying in power and taking home as much as they can. Race baiting and other deflection tactics while they keep the large chunk of unemployed people hungry, poor and uneducated, the perfect mix to ensure the cycle continues for as long as possible.

And in other news, water is wet.

Is anyone surprised? Investment advisors have (correctly) been advising people to get their money out of the country for years.

Capital will seek to move to where it can get the best return. Considering our sliding exchange rate, how restrictive it is to run any going concern, and the government’s open disdain for business (i.e. wealth creators), it should come as absolutely no surprise that capital is moving out of the country to places where there will be a better return.

100% correct, regarding the ANC to cling to power (and let economy suffer).
Exactly like Zimababwe with Zanu-PF in control for 30 yrs, despite all their citizens’ hardships. Copy/paste for Mzansi.

Interesting article Mike. How to reverse the net outward FDI flow is the question. Everyone knows that this is a direct result of racially based economy interventions by the government, in an attempt to rectify injustices of the past. Rectifying injustices of the past, and creating a better life for all of the peoples of South Africa is not a “government idea”, it is the vision of 99.9% of SA citizens. The government seems to think it is their idea and responsibility. What is amazing however, is that the government fails to see the failure of this enforced, synthetic approach, which in fact debilitates the economy and cause social fatigue within the fabrics of society. They should free the economy, free the people, and life will change. The SA citizen is very reluctant to start any form of business, or invest internally, as there is great internal resistance to support an obviously morally degenerate government that has become a control freak, with more freakish bills in the making, and has long ago crossed the border between responsible governing and self-serving irresponsibility. There are those in the government who recognize this, but they remain quiet, subdued and sheepishly follow the wrong track. How do we wake SA to take control of the future? This country is the economic hub into Africa, but other countries are taking over that roll, even from far-away continents. We are letting bad government policies, however well intended, ruin the lives of rich and poor, and destroy the prospects of the current generation and future generations.

He he I think Mike answered that in a radio interview (correct me if wrong). He said lower tax rates, incentives, no BEE etc. He won’t get a Christmas card from the ANC – if they heard, listened or even understood.

Not sure if I understand the implications of lack of FDI correctly here. How are our big corporations supposed to sustain growth in a $360bn economy? I mean, the combined sales of 2 of the biggest JSE listed companies (SAB and BAT) combined make up roughly a 3rd of our entire GDP.

I think it is positive for such a small economy to have such global investment potential. The real questions I think are a) why we have such a small GDP? And b) how can we as a country better repatriate earnings from our foreign investments? Surely there must be clever tax incentive mechanisms that can be put forward to have foreign invested companies from either having HQ’s here, or better incentivised to repatriate earnings locally?

A footnote. The reason companies like Anglo moved their primary listing to London was to be able to raise capital cheaply. Cheap capital can make a project fly whereas expensive capital sinks it. The reason capital is expensive in SA is because it is scarce and fleeing. Just another day in paradise brought to you by the ANC.

Richard, I rather think that is what they wanted everyone to believe. I think they did it strategically to get out of SA.

Well said Mike!
I have always believed that capital enters and exits South Africa too easily and that some very strict investment conditions must be introduced. The emerging market crisis in early 2000’s was as a result of billions of foreign currency that left their markets far too quickly and their markets couldn’t fill the gap that it left.
The ANC’s Socialistic modes operandi and laws ensured International investors and Banks that they will be subject to unreasonable labour laws, BEE, AA, sky high electricity costs and cadres that are employed, mostly to ensure that they are protected/supported by their ‘’payslip’’ – as service delivery is non- existent hence all the strikes etc.
The Socialistic ANC policies was the main driving force why FDI dropped 70 % in 2010 – most huge investments into SA comes through mergers and acquisitions, but government policies (talk of nationalisation, restitution of land without compensation systematically made foreign investors nervous.
Government policies, the spectre of nationalisation, regulations and more government intervention have been very unpopular with foreign investors. Amazingly the ANC doesn’t want to listen to reason and don’t want to admit that we don’t have a fertile environment for FDI.

This ‘tragedy’ is brought to you courtesy of the ANC.

In short, too many South Africans consume, destroy and steal more than what they produce and contribute to others. They get violently indignant and self-righteous against the idea that nobody owes them a living. People with capital are turning their backs on this nonsense perpetuated by the ANC.

What a pleasure to read an article with facts and enormous insight of the facts by the author. The fellow sees both the macro and micro issues, applies them with sterling insight and communicates them in a manner that even an old fart like me can understand.

Great work Mike-but a sad content!

South Africa’s political know-it-alls are something to behold. They cannot even take any lessons from our neighbour up North (when they should in fact be the leading experts on why African countries fail). They follow polices that are proven failures. They believe success can be fast-tracked based on race. Precious capital is fluid, dynamic and wont tolerate South Africa’s anti-capitalist sentiment. It won’t tolerate South Africa destructive unions and poorly educated workers. Capital will flow to where the hassle factor is low and where the returns are likely to compensate for the capital at risk. This is how the world works whether the ANC likes it or not. South Africa’s political know-it-alls don’t even know this!

This is what happens when a country turns towards socialism. No profit, no investment, no jobs, no economic growth.

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