Issue: September/November 2008
Editorials

FIRST WORD

Back to earth, with a bump

Domestic savings are pitifully low. There’s no quick fix, so foreign investment had better be enticed and not frightened.

SA’s savings record is dreadful, and it’s getting worse. When said quickly, that the savings rate is about 14% of gross domestic product, it doesn’t sound too bad.

In fact, this savings rate is an embarrassment compared with other growth-orientated developing economies. On top of it, the savings come mainly from the corporate sector and government.

For the household sector, in the first quarter of this year the gross ratio was only 1,2%. By now, as higher interest rates take their toll and increasing numbers of people withdraw where they can from contractual vehicles, it will have deteriorated further. To all intents, the amounts being saved by households are negligible if not negative.

Why are South Africans such appalling savers? One reason, obviously, is that by the time they’ve finished spending on essentials and enjoyables, their debt commitments leave them little to save. Another is an ingrained culture of consumerism, where the high interest rates required for inflation targeting have a temporary cold-turkey effect. People might want to save, but they’ve incurred such debt that they can’t.

There’s also possibly a third and related reason, expressed in the consumer boom that was. It’s an attitude that there’s really no need to save because, at the end of the day, government will provide.

Well, even if it wanted to, it couldn’t. Its resources are too limited, without major deflections from other spending priorities, to provide for wage and salary earners what they had choices to provide for themselves. The fruits of savings cannot be produced from thin air.

More than this, governments can no more cause the upward trend in food and fuel prices to reverse than they can cause rain to break droughts. Only palookas, who lead protests such as the nationwide strikes in August that they perversely described as successful, fail to understand the damage they’re doing.

They’re creating expectations that the next set of comrades in Union Buildings haven’t a hope of satisfying, so which will backfire even on them. The message from those in power is obfuscated by those in the wings. A triumph of populism is a defeat of practicality, immensely dangerous for the national welfare.

The lower SA’s own savings rate, the greater the reliance on importation of foreign savings. Without savings there can be no investment, and without investment there can be no economic growth for job creation and poverty alleviation. In its latest review, the Reserve Bank calculates SA’s dependence on foreign capital to have reached a new record high. Dependence means seeking to encourage foreign capital, not frightening it away.

The mass actions in pursuit of futile causes serve the power ambitions of the palookas a whole lot better than those they purport to represent. When people behave in the manner of the Zimbabwe “war veterans”, making threats to kill and maligning the judiciary, it only adds to the cancers of crime and corruption that undermine the stability on which investment relies. If local communists want to get rid of foreign capitalists, they’re going about it the right way.

One secure source of local savings is, of course, occupational retirement funds. To a large extent, so long as they can’t be used as transmission accounts, they’re secure because people fortunate enough to be in formal employment have no choice other than to save through them. They’re part of the solution, provided they’re impregnable to the tampering of politicians tempted to invade the assets.

A dearth of domestic capital formation on the one hand and a diminution of foreign capital inflows on the other is to be between a rock and a hard place. A hallmark of economies that have consistently grown at 7% a year for 25 years, finance minister Trevor Manuel has noted, is forced savings. At the same time, he’s pointed out, for SA to dramatically increase domestic savings over even a 10-year period will be especially “disruptive and painful” for the lower middle classes who earn little and consume all their earnings.

Given the current level of household savings, there are real consequences. It might be no exaggeration to foresee that SA could eventually face a crisis of funding for old age that’s comparable in social ill to the Aids pandemic. The alternatives are equally “disruptive and painful”: for tax rates to shoot up, which itself discourages investment; or for longevity rates to shoot down, which follows the pervasiveness of inadequate healthcare, joblessness and poverty.

These are not matters to be politicised, as the palookas seem intent on doing. For the present, foreign and domestic investments are riding the buoyancy of commodity prices and confidence of the 2010 soccer world cup. When they’re over – and the commodities cycle will turn as surely as 2010 will pass – many “disruptive and painful” decisions will need to be made.

By whom?

Allan Greenblo
Editorial Director