Economic recovery in South Africa was gathering strength, with economic growth expected to pick up to 3.5% in 2011, the World Bank’s country director for South Africa Ruth Kagia said at the release of the inaugural ‘South Africa Economic Update’ on Wednesday – the report was the first of a series of biannual reports on the country’s economic performance.

But the development finance institution warned that South Africa’s modest performance on savings and investment was not consistent with government’s objective of attaining 6% to 7% gross domestic product growth.

The South African authorities calculated that such levels of growth were needed to begin making a dent in South Africa’s chronically high unemployment rate, which stood formally at worse than 25%, but was even higher on broader definitions.

The recovery was, thus, putting the policy spotlight back on the longer-term challenge of faster, more inclusive growth beyond the 3.5% anticipated in 2011, the 4.1% for 2012 and the 4.4% expected for 2013.

The report’s authors said that, despite high and increasing returns across most major sectors, South Africa was failing to attract private investment, probably as a result of insufficient savings, rising risk perceptions and structural impediments.

“Our results show South Africa as being an attractive place for business, which has not translated into investment and growth commensurately,” Sandeep Mahajan and Fernando Im, World Bank economists and co-authors of the report said.

Weak industrial competition pointed to entry barriers that discourage new investment despite high returns, while a dearth of skills, “more contentious” labour relations relative to other emerging markets and low savings levels were also likely culprits.

Savings levels were being constrained by high youth unemployment and low rates of productivity. “South Africa will find it hard, if not impossible, to increase savings to the levels needed for target growth rates without making production more employment-intensive and enhancing productivity growth.”

There were “no quick fixes”, but a “virtuous circle” of faster capital accumulation, job creation and technological advancement required stimulus.

To “jump start” this cycle the World Bank urges policies that reflect “more effective internal integration” and “smarter regional integration”.

“A big push is needed to better integrate the advanced economy and the less-developed economy, marked by the spatially separated townships and informal settlements where the bulk of the unemployed live,” the update avers, arguing that faster growth would needed to be driven by what it described as South Africa’s “less-developed economy”.

Integrating these “two economies” would hinge materially on improvements to public transport infrastructure, implementing programmes to enhance financial inclusion and improving the cognitive and technical skills of youth.

Further regional and global integration of the economy was required to extract advantage from South Africa’s two surplus endowments in natural resources and unemployed labour.

Beside a “clear, consistent and predictable” strategy for attracting foreign direct investment, the authors suggested that “Factory Southern Africa” could underpin South Africa’s competitiveness in global markets, based on nimble “win-win regional production supply chains”.

However, this would have to be premised on dealing decisively with both tariff and nontariff barriers.