From the Reconstruction and Development Programme, through Growth, Employment and Redistribution, the Accelerated and Shared Growth Initiative for South Africa, the various iterations of the National Development Plan and more recently Cyril Ramaphosa’s Foreign Investment Conference alongside his foreign direct investment “Pack of Lions” tasked with hunting down investment, foreign investors have been seen as something of a panacea for driving economic growth and creating jobs in an otherwise moribund environment.

However, despite foreign investment being viewed in this light, it obscures a very evident reality: countries do not become well off through foreign investment.

As economics Nobel laureate Michael Spence of New York University asks, why has no country in the 20th or 21st century managed to go either from being poor to middle income or indeed high income through foreign investment? As any first-year economics student knows, with all things being equal, savings must equal investment. All the economic success stories of the last 120 years – predominantly the post-World War 2 “Asian Tiger” economies such as South Korea and Japan, and then more latterly China – funded the investment needed to drive growth in domestic manufacturing and export-based industries through running high domestic savings rates.

China is a perfect example of this, with domestic savings and therefore investment at around 43% of GDP. This almost unprecedented high rate of domestic savings and investment was essential for powering the extremely rapid growth experienced in the economy from the early 1980s, when it was per capita on both nominal and real terms one of the poorest countries in the world, to being currently the second-biggest economy in the world and on track to overtake the US.

The obsession of South African economic policy with attracting foreign investment is therefore not that it is seen as being the best way to drive economic progress and create jobs, but in a domestic context where savings are so low it is simply the only way – as unlikely as it might be ever to work. The issue more specifically is that in the last 30 years domestic savings in South Africa have never exceeded 20%, averaging around 16%. Indeed, one unforeseen effect of lockdowns and the uncertainty resulting from the pandemic is that households have started saving more, with the recent saving rate the highest since 2010.

Claire Bisseker, writing in Business Day this week, makes another excellent point – this comparative lack of private sector savings alongside a glut of sovereign SA borrowing means that a comparatively large proportion of savings is mopped up by government bond issuance, leaving little to be invested back into the private sector. The government, through its profligate borrowing and lavish spending, is effectively crowding out private sector investment.

Another exacerbating factor is that last week Bloomberg announced that foreign holdings of domestic SA bonds were at 10-year lows of 28% of all outstanding issuance after having peaked in 2015 at almost 40%. The corollary of depending on foreign investors, especially those with “hot capital”, is that the moment you most need them is the moment they are least likely to be around.

If foreigners are selling SA debt, then who is left to pick up the issuance? Self-evidently it must be South African savers, and clearly Bloomberg data shows that with foreign investors leaving the market, SA banks have been the biggest buyers. However, it is the banks that are the very conduit most needed for channelling those swollen post-lockdown coffers of domestic savings into the economy through loans to companies for investing in production and creating jobs. However, loan growth remains muted mainly because it is simply easier, more lucrative and from a capital allocation perspective cheaper for banks to lend to the South African government for 10 years at 10.16% than to take personal and commercial credit risk.

Of course, trying to discern whether low credit growth is a function of low appetite to borrow or the limited appetite of banks to lend, is a pointless and fraught exercise, of which the answer usually depends on whether you are talking to a man in the street or a bank CEO. In this chicken-and-egg scenario, the reality is that it is almost certainly a bit of both.

The only important thing, however, is that this is a reality, and this lack of domestic savings and investment is the critical handbrake affecting South Africa’s long-term growth path. One takeaway that is key is that the government should review its obsession with chasing foreign investment. To make a material change to the long-term economic trajectory of South Africa it would do far better to create an amenable context for workers to save, banks to lend and then – most critically – companies to invest. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.