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Growth constraint

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Growth constraint

30th September 2011

By: Terence Creamer
Creamer Media Editor

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For years, South African politicians have been playing lip service to the important role that infrastructure delivery can play in laying the platform for higher growth and employment creation. For years, though, we have been disappointed by the lack of delivery.

But in the context of what appears to be a growing risk of recession in some developed economies, the importance of getting it right and accelerating delivery cannot be overemphasised.

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The point was driven home last week by renowned economist Nouriel Roubini, who was in South Africa as part of the Discovery Invest Leadership Summit. Also known as 'Dr Doom' for his persistently negative outlook on the global economy since correctly forecasting the recent financial crisis, Roubini argued that South Africa had to hasten its investment into physical and human capital to improve on its current “disappointing” growth performance.

Such investments were also critical if the country were to have any chance of breaking free from the structural constraints that made it difficult for the country to expand at rates similar to those being achieved in fast-growing emerging markets.

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The New York University Stern School of Business professor argued that infrastructure investment was especially critical if South Africa were to begin more fully realising the full value potential of its vast mineral resources in the ground.

While cautioning that the near-term outlook for industrial commodities was being undermined by the prevailing economic uncertainties, and that prices could soften further should markets begin fully pricing in the prospect of a double-dip recession, he indicated that the longer-term outlook remained strong.

However, the current inability to export South African minerals was constraining the country’s current growth potential to around 3.5%, which was well below the 6%-type level needed to start reducing unemployment.

That is particularly serious given that South Africa’s unemployment has increased to 25.7% and could worsen given that the country is unlikely to escape the impact of a possible new recession in developed economies, the risk of which had risen materially over the past few months. In fact, Roubini was currently assigning a two-thirds probability to the likelihood that some European economies and the US would report economic contractions in the coming months and quarters.

Should he be proved correct, it is will become doubly important for South Africa to move its social and economic infrastructure into a higher gear, if nothing else as a short-term stimulus against the hard times.

Given the backlogs, especially in resources-related infrastructure, there is little risk of overinvestment and the creation of white elephants. There bigger threat is the continued under delivery, which acts as a fiscal drag rather than stimulus.

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