Ep 136: South Africa’s Stalling Growth: Policy vs Potential? - Neil Emerick

Michael Avery (0:00)

Welcome to The Monocle Banking Podcast, this week curated by Monocle Solutions. Fittingly, this week we're recording in Mombasa, as Kenya has just overtaken South Africa in the latest economic freedom rankings. Let's find out what's going on.

Well, as we know, South Africa has been the better part of two decades discussing structural reform. We've got commissions, we've got roadmaps, we've got summits, Operation Vulland-Lela, we've seen energy reform and rail and visa, and now another phase of Operation Vulland-Lela. The problem is that investors, allocators of capital, don't reward presentations and flowery speeches. They want to see implementation. And today we have another rather telling scorecard. The Economic Freedom of the World, 2026 Annual Report, which is produced by Canada's Fraser Institute, locally co-published by the Free Market Foundation, places South Africa 87th out of 165 jurisdictions. So bang in the middle, down from 83rd last year. Now, rankings can be crude things.

There is some improvement beneath the headlines. South Africa scores better on the size of government, on sound money, and marginally on trade.

But we're going backwards on two things that I think matter enormously to anyone deciding whether to start a business or expand a factory or risk capital. The legal system and property rights, as well as regulation. And therein lies perhaps South Africa's economic story in a nutshell. We've made genuine progress in electricity, well over 500 days, load shedding free, freight rail slowly being open to the private sector and operators. There's been progress on visas and spectrum and water licensing. Meanwhile, the economy shrank in the second quarter by 0.2 percent. Unemployment is sitting at a staggering 33.6 percent. And investment just remains far too weak. Even the IMF says the pace of reform is simply not commensurate with what the country needs. Now, Neil Emerick is Deputy Chair of the Free Market Foundation and has been closely involved with the Economic Freedom of the World Project for many years. Neil, welcome. You were saying earlier 23 years, is that right?

Neil Emerick (2:16)

Yes, 2003 I think was the first time. I was actually included in the report as one of the chapters.

Michael Avery (2:22)

Now, let's just forget the ideological debate for a moment, Neil. What is the headline here for an ordinary South African? We were 83rd, now we're 87th. Are we actually going backwards? Because intriguingly, the score itself barely changes. So have we deteriorated or is everybody else just simply moved faster than what we're moving?

Neil Emerick (2:40)

Well, we've had a bit of a roller coaster. I think post 1994, the country liberalized quite a bit and we re-entered the global economy. Then we entered the Mbeki area and actually economic freedom started to drop there, and then it became quite precipitous from about 2014 to 2020, during the late Zuma period.

Plus we had COVID, so that didn't help. We've actually ticked up a little bit since COVID, so with many other countries that have had to shut down during the COVID period, but 120 countries increased their score this year. We were in the 30 countries that lowered their score this year, but it was just a marginal dip. So we remain top of the bottom half, and in that respect, we're sort of an average country doing average things. And the disappointment is that that's where we've been stuck for five or 10 years now. So if we don't change anything, we're going to see the same results.

Michael Avery (3:30)

A little bit like a mid-table football club, not necessarily at risk of relegation, not fighting for the European places, just bumbling along in the middle.

Neil Emerick (3:40)

And not getting the best players to play.

Michael Avery (3:43)

Exactly. So let's look at where we are improving. Because as I said, we've been corking the reform game, certainly in earnest, since the Sorama pause of presidency started in 2018 It would be churlish not to recognize some progress. So where are you seeing the most positive progress?

Neil Emerick (4:00)

Well, as I said, maybe for the audience, there's five big categories. So we look at the size of government, how much money does the government spend? If they spend more than, and they need taxes to pay for it, then as an individual, you have less money. So we don't rank particularly well there. I think we're 105th overall. So the government's still spending quite a bit, but they have lowered the state ownership in that category. So we are seeing a little bit of positive movement in terms of liberalizing transnets and so on. So we would hope that that score keeps improving, and I think that has a big impact. Area 2 is the legal system and property rights. That is the one where we've dipped. Historically, we've had very good scores on the courts, but our policing score this year has dropped to a precipitous low. And I think that's borne out by what we're seeing at the Mdlunga Commission. There's this total loss of faith in the police service, and that has economic impact all the way through having to ensure your things and guard your things and so on. So we have to fix that, but it's a difficult fix, of course. The area three is sound money. A government that prints money can destroy an economy very quickly. We saw that in Zimbabwe. Interestingly, I think, is Turkey over the last five years, we're seeing them do very poorly in the scores related to money. So where we put Venezuela on the map 10 years ago saying, we can see their scores dropping, watch out, something's going wrong here. I think I can make that prediction about Turkey right now if they don't fix things.