There is no denying that we live in the most technologically advanced era the Earth has ever seen and this is due to property rights and free trade. Removing restrictions on trade between individuals in a country is important but removing restrictions on trade between individuals in different countries is arguably even more important given the enormous size of the global market compared to any single country’s domestic market. This also means that investors are spoiled for choice as to where to put their money.
It is therefore almost suicidal that South Africa has such onerous foreign exchange regulations. These govern everything from the capital you can bring into the country to the profits you can take out. Most egregious is that these rules are often not objective but dependent on the whims of officials in the Reserve Bank and National Treasury.
It should be obvious that such an array of regulations makes it much less likely that foreigners will put their money here. Navigating South Africa’s regulatory framework - not just forex controls - is a complex task compared to countries like Ireland and Singapore. Singapore places the least restrictions on foreign investors while Ireland is the fifth least restrictive according to their rankings in the Economic Freedom of the World (EFW) index (2018) published by the Fraser Institute.
Interestingly, Singapore experienced 3.53% growth in gdp per capita in 2017 and Ireland a growth rate of 6.50%, while South Africa growth rate was a mere 0.07%. The data on gdp per capita growth comes from the World Bank.
From a data analysis I performed examining which variables in the EFW were most important in ensuring gdp per capita grow within one year, the foreign ownership/investment restrictions variable emerged as the third most important using regression analysis. Moving from the most restrictive to the least restrictive regime for foreign investors could add as much as 0.45 percentage points to the gdp per capita growth. In South Africa in 2017, this would have meant going from 0.07% to 0.52% growth. Keep in mind that growth in gdp per capita accounts for population size and growth automatically.
The EFW variable is based on a two-part World Economic Forum survey question designed to elicit executive perceptions on two aspects:
- The prevalence of foreign ownership.
- A country’s restriction of international capital flows.
The first can only be improved indirectly, but the second can be dealt with more directly by, for instance, removing the caps on foreign capital transfers.
It is not that we would be doing foreign investors a favour by removing onerous regulations. In a world where capital has gone global, it is counterproductive not to do everything in our power to attract a significant amount of that capital to this country. Doing so means significantly lessening the risks for investors by assuring them in law and regulation, of the ability to transfer their profits to whichever jurisdiction they may choose. This is important because if you are an investor, no matter how nice the current government is, you want the certainty that you will be able to protect your property by moving it offshore if a bad government were to take power.
This is especially true in emerging markets. The South African government is also currently pursuing a policy of Expropriation Without Compensation which was preceded by unilaterally cancelling bilateral investment treaties. This must be a point of concern for any potential investor.
A final point I want to make is that we are in the lucky position of having the choice to attract capital from more developed countries. That is why developing countries can become rich much quicker than what it took for the West to become rich because there was very little built-up capital then and there is an abundance of it nowadays. We should be taking advantage of this. Globalisation is good for developing countries.
Mpiyakhe Dhlamini is a data science researcher at the Free Market Foundation
Comments on Reduce restrictions on foreign business