South Africa Can Learn One or Two Lessons from Portugal’s Economic Recovery as We Debate the New Economic Strategy Aimed at Growing the Economy

The draft strategy retains the board themes of modernizing network industries to promote competitiveness and inclusive growth, lowering barriers to entry and addressing distorted patterns of ownership through increased competition and small business growth, prioritizing labour-intensive growth: agriculture and services, implementing focused and flexible industrial and trade policy to promote competitiveness and promoting exports competitiveness and harnessing regional growth opportunities.

This time, it is great to see that under each of those headings some priorities and actions are articulated. On the whole, the proposed reform actions are pretty sensible – should both short-and long-term interventions be implemented, as much as 2- to 3-percentage points could be added to GDP growth and more than 1-million job opportunities created.

However, it is too early to give a complete endorsement. There are still a lots details to be work through – particularly what exactly is going to be done and who exactly is going to do it. The good news is that we know there is lots of work still going on to determine the more specific actions. To assist this process, I’d like to offer a few unsolicited lessons that South Africa can learn from Portugal.

The Portuguese have witnessed a start-up boom over the past seven years that has, and is, supporting the country’s successful and impressive economic bounce-back.

Portugal is now one of Europe’s economic and political success stories. Just 10 years ago, however, the country was mired in a deep financial crisis. Unable to repay its government debt in 2010, Portugal received a €78bn bail-out package, which it successfully exited in mid-2014.

The country’s impressive economic recovery has since outshone fellow crisis victims Greece and Spain, largely due to Portugal’s political stability, tourism industry and technology boom, as well as a fiscal policy that has boosted business confidence, made investment easier, and accelerated growth in exports and, increasingly, services.

Subsequently, the job market has significantly improved, with unemployment falling to 6.7% in June 2018, the lowest since 2004 and a big improvement from 2013’s all-time high of 17.5%, according to research company Trading Economics. SA’s official unemployment rate jumped to 29% in the second quarter of the year, the highest jobless rate since the start of 2008.

Meanwhile, Portugal’s GDP hit 1.9% annual growth in 2016 and a 2.1% budget deficit, the lowest since 1974, according to BBVA Research. The following year witnessed the country’s highest GDP growth rate since 2000, at 2.8%, while 2018 hit 2.1%.

Foreign investment figures reflect this positive trend, with 2018 seeing the highest number of greenfield projects into Portugal since 2003, the majority of which went into software and IT services, according to Aicep, the Portuguese government’s trade and investment promotion agency.

Portuguese tech is particularly hot right now. The EU Startup Monitor 2018 says London, Berlin, Paris, Copenhagen and the Portuguese capital of Lisbon are the biggest hubs for start-ups in Europe. The past decade has witnessed rapid growth in the number of Portuguese tech start-ups.

In terms of scale-ups in ICT, Portugal grew twice as fast as the European average in 2017, according to a report from the Startup Europe Partnership initiative, which defines ‘scale-ups’ as start-ups that have raised more than $1m. International investors have played a central role in this, accounting for 62% of capital made available to scale-ups, and 86% of later stage rounds.

In the longer term, Portugal’s tech boom has been made possible by several decades of high-quality education and strategic government funding in traditional and modern engineering. In the shorter term, however, it seems that the economic crisis has been a catalyst. “The start-up economy in Portugal started with the crisis. There weren’t enough jobs, so people started to test out new ideas and companies. The push from the government worked quite well too, creating a system for seed capital, and then private players jumped in.” says Alexandre Vaz, managing director of Mercedes-Benz.io (fDi Magazine, August 2019).

Numbers talk, and the fast-rising value of Portugal’s burgeoning tech ecosystem is shown by the 15% increase in foreign tech companies active in the country, according to Aicep.

Portugal has seen four years of consecutive greenfield FDI growth in software and IT – both in capital expenditure and project numbers – with 2018 setting historic highs, according to fDi Markets.

So why are foreign investors getting involved in Portugal? “IT talent, geography, time zone and culture; everyone speaks English, and there is a nice cost [of living and of labour],” says Margarida Marques, vice-president of Hitachi Consulting in Lisbon. Talent is key, however. “Portugal’s universities are top ranking, providing a pool of highly qualified engineering talent in multiple areas thanks to government investment in a lot on tech [apprenticeships] and university courses,” adds Ms Marques (fDi Magazine, August 2019).

The National Treasury strategy is silent on how to grow the Information & Communication Technology (ICT) sector, which has a huge opportunity of creating new start-up companies and facilitate job creation. Furthermore, the E-Commerce subsector of ICT can assist South Africa attract foreign direct investment that will bring new technology and skills transfer.

Portugal has the second highest rate of engineering graduates in Europe, according to Eurostat. Portugal was ranked 17th out of the world’s 63 leading economies in IMD’s World Talent Report 2018, coming fifth in language skills, eighth for skilled labour and 14th for university education.

Mboweni’s draft strategy talks about improving educational outcomes throughout the educational life-cycle, with a particular focus on early childhood development and enhancing the relevance of education systems by better aligning learning outcomes to labour market needs.

English is widely spoken across Portugal, more so than in Spain or France, as shown by the English Proficiency Index 2018, which ranks the Portuguese 19th best in the world among non-English speaking countries. South Africa is ranked higher than Portugal at number 6. This is good for both countries as their target and attract foreign direct investment.

What’s been missing that Portugal has managed to put in place, and what I have been critical of in the past, has been a clear understanding of what I call the “strategy/policy transmission mechanism” – a precise understanding of how the strategy/policy actually “hits the ground” in provinces, cities and, more particularly, in businesses.

The Minister of Finance must lead and take advantage of the possible relationship with business in order to secure South Africa’s best possible economic future. His economic strategy can do this by Making South Africa business friendly and investment ready.

A business-friendly environment is not a ‘code phrase’ for tax holidays and low regulations. Being business friendly in a deep and true sense means learning to partner and serve businesses in order to be prepared, agile and competitive in the global marketplace. It means ongoing collaboration, relationship building, and co-advocacy to ensure that long-term interests of both government and business are achieved.

Investment readiness on the other hand means cultivating a reliable supply of opportunities for inbound capital (which match investors’ risk appetites and funding demands) and developing a credible and efficient framework and process for facilitating investment.

The relationship of government to business is like that of a computer’s operating system to its software. Government establishes the operating system by laying out a freeway, railroad or a power station. Business establishes the software: the shopping centre, the factory, the office park or residential developments.

Like a virus that attacks an operating system, any distrust or lack of buy-in from the private sector can threaten to undermine the new proposed operating system of South Africa’s economy, Mboweni’s strategy. The system could “crash.”

In the new global era, governments and businesses have become strongly inter-connected and inter-dependent. They are, and will remain, distinct types of entities. But both businesses and government can reap rewards from understanding, enhancing and utilizing their respective complementary strengths.

There is a clear need for a detailed action plan of what is going to be done, who is going to do it and how we can all work better with everybody else out there who is already “doing stuff”. This action plan also needs investment levels, timelines, milestones and accountabilities.

Potentially, the proposed economic strategy could be the catalyst behind a drive from a weak partnership model that existed before President’s Cyril Ramaphosa’s New Dawn to a strong partnership model. In a business-friendly environment, the private sector will invest more and grow the economy. Now that would be transformational!

Economic growth is the oxygen of democracy.

Thokozani Thwala is the founder and CEO of GROWTHMAP INFONOMICS. He helps his clients with economic and business growth strategies, tools, speaks at seminars and writes on macroeconomics, business internationalization, and public policy