ESG in Africa: Lessons from nations who put the S above the E and the G

By Manka Sebastian, Portfolio Manager at Sanlam Properties

The investment in, and development of, human capital increases the productive capacities of all the other factors that contribute to a country’s sustainability. This is the principle behind the UN Conference on Trade and Development (UNCTAD)’s Productive Capacities Index (PCI). Simply put, social success is at the centre of a nation’s overall success and sustainability.

Strong social strategies include economic structures (such as institutions, transport, ICT and the private sector); human capital (such as health care and education); and natural capital (such as mining). In Africa, several countries have benefited from taking a ‘people-first’ approach, most notably Rwanda, Mauritius and Botswana.

The PCI Index measures a country’s ability to produce and export a diversified range of goods and services that can sustainably increase its economic growth and development. It reflects the effort invested by countries to improve their ability to derive value from their economic structures, human capital and natural capital.

When the components of the PCI Index are modelled against the real GDP per capita of each country, over 95% of each country’s GDP movement can be explained by the changes in the PCI Index components. According to the World Bank, the world’s 20-year compound annual growth rate (CAGR) is 1.2% and sub-Saharan Africa’s is 0.9%. Rwanda, Mauritius, and Botswana have all delivered comparable CAGRs of 4.1%, 2.5%, and 1.2%, respectively, while SA’s CAGR is 0.9%.

In analysing the decisions made by each of these countries since 2000, it is evident that their investment in human capital has allowed Rwanda, Mauritius and Botswana to achieve above-average GDP per capita growth rates. This means that the strong relationship between human capital and the other factors mentioned is central to a country’s ability to achieve a strong productive trajectory. The correlations of other sectors such as transport and natural capital (resources such as mining) with growth are all weaker than human capital.

Rwanda

Rwanda has a similar history to SA. Both countries experienced discriminatory policies and laws that caused deep social and economic inequalities, requiring significant political and social transitions to correct historical injustices. Rwanda has made a significant investment in increasing the quality of its health care, education and basic public services.
According to the World Bank, in 2018 Rwanda’s combined spending on health care and education was 7.4% of GDP. What stands out about this spending is its focus on quality. Rwanda introduced a competency-based curriculum, teacher training and prioritised early childhood education. Its literacy rate increased from 58% in 2000 to 73% in 2019. Rwanda ‘s PCI Index changes reflect the knock-on effect of social intervention.

Mauritius

Mauritius is the highest-ranked African country in the PCI Index, at 48 out of 195 countries. As a small island, Mauritius has limited natural resources, in contrast to SA’s resource wealth. According to the latest national accounts, 69% of Mauritius’s gross value added comes from the services sector and only 4.3% from agricultural and mining activities. The country’s strong focus on services is underpinned by a highly-skilled workforce.

Its ability to achieve a high PCI Index rating with a skills-based economy is unsurprising, given the nation’s historical investment in socially-focused infrastructure. Mauritius made primary education free and compulsory in 1976 and made significant investments in educational infrastructure and the recruitment of teachers. With a GINI coefficient of 36.8, the country is attractive to the private sector and perfectly placed for the Fourth Industrial Revolution.

Botswana

Botswana and SA are both considered to be resource-based economies. However, according to the PCI Index, Botswana’s human capital measure has cumulatively gained 8% more than SA’s. In the early 1970s, Botswana invested heavily in health care and education. It implemented free and universal education, raising its literacy rate from 44% to 87%. Its commitment to human capital development has allowed it to outpace SA marginally on factors such as ICT and an enabling private sector.

South Africa

SA is ranked 74th in the PCI Index. The country’s cumulative increase in human capital ranking has been 12%. As a result, it ranks the lowest in every area except ICT compared with Rwanda, Botswana and Mauritius. This is concerning because SA’s allocation to social services is R1.35 trillion, according to the 2023 National Budget.

The difference seems to be in the quality of execution. Although SA has the highest literacy rate among the four countries, it has the lowest primary school enrolment and the second-lowest level of completion, according to the World Bank. The South African education system faces several challenges, including inadequate funding, teacher shortages, a lack of resources in schools and the challenge of having 11 languages spoken across the population. Investing in education should include providing adequate funding for schools, training and retaining quality teachers, and ensuring that all children have access to quality education, regardless of their socio-economic background.

A healthy population is a productive population. SA also has the lowest life expectancy at birth of all four countries. SA needs to reduce the significant disparities in access to health care, particularly in rural areas. Investing in health care should include building and improving facilities, ensuring that there are enough professionals to meet the needs of the population, and implementing policies that ensure equitable access to health care for all.

Conclusion

The examples of Rwanda, Botswana and Mauritius provide a path for accelerated progress for SA by investing in the ‘S’ in ESG. The focus goes beyond increasing access – it must be about quality. SA is a hybrid of Rwanda and Botswana in that it is a country with a discriminatory past that is resource-based. It is also the opposite of Mauritius, which is an island with a skills-based economy. The comparison of countries provides a spectrum of lessons that SA ought to consider.

The World Bank report, The changing wealth of Nations 2018, supports the ‘social-first’ premise. It concludes that, while other forms of economic investment remain important, investment in quality health care and education has a larger and more immediate effect in reducing poverty and inequality. The returns on investment for economies are not only higher GDP growth rates but improved social and political stability. This will create a fitting environment in which efforts to improve environmental and governance behaviour will thrive.