Harnessing South Africa’s largely untapped potential for innovation could increase the economy’s productivity, propel job creation, and be of benefit to the country’s growing number of poor, according to a World Bank report released yesterday.

The report finds that South Africa’s 6% dip in overall economic productivity from 2011 to 2016 was due, at least in part, to a sharp drop, estimated by some at 40%, in private research and development (R&D) expenditure since 2009.

“South Africa’s productivity growth is diverging from global growth, and the country risks falling further behind its peers,” said Paul Noumba Um, World Bank Country Director. “This would be to the detriment of the poor for whom a growing economy is necessary for jobs and a sustainable system of social grants. In such an environment, South Africa can turn to encouraging private innovation as one of several ways in which to improve people’s lives”.

In its tenth Economic Update for South Africa, the World Bank’s projection for economic growth in 2017 is 0.6%, revised down from 1.1% in January. GDP growth is expected to pick up to a moderate 1.1% and 1.7% for 2018 and 2019 respectively, spurred on by an improvement in commodity prices and a strengthening in the balance sheets of households.

The report’s special focus section analyzes opportunities for innovation to become a more central part of South Africa’s economic model of shared growth. Simulations done for the report suggest that that innovation could propel job creation and would also raise the consumption of the poorest 40 per cent of households from its spillover effect by putting pressure on prices.

“Given South Africa’s untapped potential for absorbing and adapting foreign technologies, private R&D can be turned into a more powerful driver of corporate profitability and economic growth,” said Sebastien Dessus, World Bank Program Leader. “Innovation can help improve the lives of the poor through the provision of better and cheaper goods and services, and expand economic opportunities through the introduction of disruptive technologies that can lower barriers to competition.”

Brain drain and the slow growth of small firms were also important factors in productivity loss. The report argues that improving the business climate for startups could help South Africa harness its large innovation potential. This could be done by more effective public support for innovation, as well as by encouraging skilled immigration and strengthening competition in new emerging industries, such as Information and Communications Technologies (ICT), and facilitating trade.

Although South Africa emerged from recession in the second quarter of 2017, per capita income had barely increased in the preceding six years, leading to more than 3 million people joining the 30.4 million South Africans (of a population of about 55 million) living on less than US$2.9 a day.

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South Africa Economic Update: More Innovation Could Improve Productivity, Create Jobs, and Reduce Poverty

The tenth edition of the South Africa Economic Update, Innovation for Productivity and Inclusiveness, examines how innovation can boost economic growth and help address South Africa’s most pressing social challenges.

“In South Africa’s low growth environment, innovation can play a critical role to create jobs through increased productivity, and improve the lives of the poor through providing better products and services,” said Paul Noumba Um, World Bank Country Director for South Africa.

Recently released statistics show that, between 2008 and 2015, four out of five South Africans experienced – half permanently and half intermittently poverty – and that, between 2011 and 2016, 3 million more South Africans joined the ranks of the 30.4 million living on less than US$2.90 a day. Unemployment reached a 14-year peak of 27.7% in 2017.

The Update forecasts a timid recovery in the next three years, with the economy anticipated to grow barely faster than the country’s population, with real gross domestic product (GDP) growth projected at 0.6% in 2017, 1.1% in 2018 and 1.7% in 2019.

The report warns of considerable downside risks and argues that declining Research and Development (R&D) is an important factor behind the country’s weak economic performance and its divergence from its peers in terms of growth in technology.

R&D spending, which is essential to identify and assimilate innovations generated elsewhere to produce new products and services, has declined in South Africa over the past decade.

The report asserts that this is to the detriment of the poor because innovation strongly influences the welfare of low-income households by reducing their cost of living within sectors that have an impact on their daily lives, such as public transportation, food and beverages, agriculture and footwear.

The decline in R&D spending has happened despite a high rate of economic return when investment is made. Academia there is, but broadband is costly

With some exceptions, South Africa’s academic excellence, the report states, and strong urban networks of entrepreneurs and opportunities innovation are stifled by an unconducive business environment, expensive trading costs, and low skills base – all of which are impeding the emergence and growth of startups.

South Africa has the lowest share of young firms among emerging economies globally, where elsewhere, young, high-growth firms known as “gazelles” are playing a leading role in innovation.

“Given the transformative role of gazelles around the world in creating jobs, South Africa’s small and diminishing share of young firms is a concern,” said World Bank Lead Economist for Trade and Competitiveness, Gabriel Goddard. “Improving factors that either stifle the emergence of young firms or reduce their growth potential, could boost South Africa’s innovation capabilities and overall impact”.

The report says that Information Communications Technology (ICT) capabilities have become particularly important for innovation, enabling new business models and the emergence of new markets. Its study shows that, although South Africa has remarkable individual stories of ICT success in financial technology, education, e-health and online job platforms, the information technology industry remains relatively small, constrained by the high cost of broadband.

The report offers its considerations for policy, including fostering a business climate more conducive to both the entry of new firms and to risk-taking and experimentation, building a skills base in technical and entrepreneurial skills, and encouraging “brain circulation” into South Africa.

It also suggests improving South Africa’s connectivity to global markets and increasing the effectiveness of sophisticated support systems for entrepreneurship.

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Download: South Africa Economic Update: Innovation for Productivity and Inclusiveness (PDF, 3.88 MB)