SAVE TO SAVE SA
South Africa could turn its economic fortunes around if it were to increase its saving rate. This is the lens through which we should evaluate the 2024 budget
In his Nobel prize lecture in 1979, Sir Arthur Lewis observed: “Two conditions of self-sustaining growth are that a country has acquired a cadre of domestic entrepreneurs and administrators, and that it has attained adequate savings and taxable capacity.”
While countries, industries, and economies have changed shape dramatically since Lewis’s lecture, these requirements for sustained growth are as relevant today as they were 45 years ago.
When finance minister Enoch Godongwana presents the country’s budget on February 21, an element of Lewis’s dictum will be of particular importance: savings. In fact, we can view almost all of Godongwana’s pronouncements through this lens. When he announces a policy, we should ask ourselves, how does the policy affect the level of saving?
There are at least two reasons this question is intriguing and important.
First, the level of saving has a powerful explanatory relationship with prosperity. The mechanism behind this phenomenon is straightforward. Saving funds productive investment (highways, harbours,0 and hospitals). And investment generates prosperity.
That is not to suggest saving should be as high as possible. In fact, savings and investment rates above about 40% of GDP tend to translate into negative marginal returns on investment. The benefit of saving and investment wane through overinvestment. Picture China’s ghost cities.
However, at levels much below the 40% (the top end of the sweet spot), economies gain by increasing savings. As a rule of thumb, countries with savings above about 25% of
GDP reap significant rewards for quality of living though this varies with the country’s specific level of development.
Second, South Africa has a woeful saving rate. Our gross saving rate is about 15% of GDP. Compare that to champion savers such as Singapore: its saving rate has been steady at about that 40% mark for some time. It reaps the rewards, too.
Catch-22?
But, you might say, most South Africans are too poor to save. And you’d have a point. Saving is very hard for millions of South Africans. However, it has been well demonstrated that even poor countries with anaemic savings rates can turn things around.
They tend to start slowly. If 10million South Africans start saving R10 a month, that R100m a month rapidly grows into a large pot from which infrastructure projects and the like might be financed. That makes all 10-million savers wealthier, not to mention the knock-on benefits for the economy.
One key to increasing saving is a conducive policy environment. Consider Chile. In 1982 the Andean nation had a saving rate of 2% of GDP. By the mid-1990s that was up to 26%. The kicker was a 1981 Chilean law that privatised the pay-as-you-go social security system. It established a fully funded, defined-contribution individual accounts system.
Under this pension fund reform, all formally employed workers were required by law to save 10% of their pretax income. This was automatically deducted by employers from payrolls, along with an additional deduction of 2%-3% of payroll to cover the administration costs of the accounts.
By 1994, Chile’s GDP per capita overtook South Africa’s, and it hasn’t looked back.
Chile is also a cautionary tale that a winning saving rate doesn’t maintain itself. Much like any household budget, temptation to dip into reserves is ever present. Chile’s saving rate has dipped dangerously close to South Africa’s, along with forecasts for its prosperity levels.
Singapore is the globe’s saving superstar. Starved of natural resources, the tiny city state had to be smart. With its own set of policies to improve retirement savings, boost home ownership, and to educate and empower children to save, Singapore overtook South Africa’s saving rate in the mid1970s. Its savings and income per capita have eclipsed ours ever since.
In short, no country starts rich. Every wealthy country got there with a minimum level of saving and investment, fostered by the right policies and a saving culture. South Africa has neither of these at present. We don’t expect Godongwana to turn that around in one fell swoop. However, savings should be one of the keystone lenses we use to evaluate this, and any other, budget.
In assessing the upcoming budget, it is worth asking not how much will be spent, but how much will policies help us save? Where do announcements assist pots of savings to fund investment in the sorts of assets that contribute to prosperity? And which moves sacrifice savings for short-term benefits?
The CAMM at the Gordon Institute of
Business Science conducts academic