THE Big Mac Index is an informal measure created by The Economist that compares the cost of a burger in various countries.
Published annually, it is a light-hearted guide to purchasing-power parity, the theory that currency exchange rates of currencies should move to a level where an identical basket of goods and services in any two economies is equal. So with a Big Mac costing $4.80 in the US — double the comparable price in South Africa — the proposition is that the rand is 50% undervalued.
While the index is a frivolous illustration of the relative value of a currency, it nonetheless raises a number of questions about the efficacy of our economy.
For example, using burgers that sell at half the price of the US equivalent as a proxy for a selection of manufactured goods, South Africa should be luring investors to establish factories here with the prime objective of exporting products to higher-cost markets.
On the face of it, the factors of production in South Africa are favourable. Land and labour are in abundance and are considerably cheaper than in the US and other rich economies, and with global interest rates at historically low levels, sourcing funding should not be difficult.
Finally, the wide difference in selling prices should provide sufficient margin to cover transport and other costs associated with moving goods and offer enticing returns for any entrepreneur willing to take the risk. Add to that our sophisticated financial infrastructure and high levels of corporate governance and it is bewildering that global manufacturers are not arriving here in droves, ready to take advantage of these attractive opportunities that fundamentally exist.
To begin with, they are put off by government ideology, no matter how noble the cause. Rather than bending over backwards to accommodate foreign investors, welcoming the jobs they will create and the tax revenue they will generate, our ministers lay down a series of demands that send interested parties dashing off to other competitive regions.
So with a Big Mac costing $4.80 in the US — double the comparable price in South Africa — the proposition is that the rand is 50% undervalued.
Our officials insist that a meaningful portion of any new venture be allotted to disadvantaged domestic groups, an obligation that diminishes potential returns without necessarily reducing any of the risk. And if that’s not enough of a hindrance they review the procurement of goods and services, meriting that a decent quota is acquired from parties with designated empowerment credentials, , and the composition of personnel, including management, to ensure they conform to empowerment and the country’s social demographic obligations.
Then of course there’s the country’s workforce. With a quarter of the adult population unemployed, one would imagine that labour would cherish their jobs. Instead, they spend more time is spent protesting — generally violently — outside the factory gates than is spent operating machines.
Lengthy strike action and demands for higher pay without the promise of an increase in productivity have weakened output, contributing tellingly to South Africa’s unacceptably high inflation rate and poor growth record.
There are mounds of other risks potential investors need to deliberate. Not only is electricity vital in short supply but its cost is fated to rise substantially. Rail, road and port capacity is stretched, and guaranteeing the personal safety of employees is another major challenge. Schooling, healthcare and public transport are further considerations.
Tomorrow, newly appointed Finance Minister Nhlanhla Nene delivers his maiden speech to parliament, an update on the health of the country’s finances. He couldn’t face a tougher mission.
Like his predecessors in Finance and Treasury, Nene is well regarded, although with inflation entrenched above government targets, jobs scarce, finances strained, our infrastructure decaying and the country’s growth rate half the global mean, analysts are beginning to argue about those tributes.
The government has fallen far short of its promise. Invoking political doctrines and singing the praises of former heroes has worn thin.
Stakeholders at home and abroad both in and out the country have lost patience and want, hankering a plan that will rescue the economy from a bleak future. Nene’s task is to stand up to the dogma and set the country on a course that will restore business confidence and, down the line, attract investors to open burger factories.