IT WOULD seem that the government has been drinking Moody’s KoolAid. The announcement on Monday night that the government would introduce fresh measures to breathe life into the ailing economy smacked of the same mealy-mouthed optimism touted by the rating agency the previous Friday.

Moody’s decision to hold the country’s sovereign rating at Baa2 was based on its assumption that the economy will grow enough next year to stabilise SA’s ratio of debt to gross domestic product (GDP). It also hopes that promised structural reforms will restore business confidence and that the strength of the country’s institutions will endure.

If the back-slapping and smug looks of Monday night are anything to go by, it would seem that the government — and business, apparently — think the same thing. The trouble is I get the feeling I’ve heard it all before. In its ratings report, Moody’s said it hoped the structural and legislative reforms recently agreed to by the government, labour and business would restore confidence and encourage private sector investment. This is despite their acknowledgement of the very real downside risks associated with the growth and fiscal and political outlook, and the possibility that renewed volatility in global financial markets could disrupt growth.

Talk like this is all well and good if you write reports for Moody’s global credit research division, but for anyone who actually has skin in the game, it is almost completely meaningless.

In fact, if you want to be a real cynic, you could argue that they’re not brave enough to call a spade a spade and be the first ones to break the bad news that we’re junk — and not just because the government and business can’t get along.

More to the point, it is easier for the government and Moody’s to talk up the positives and pretend there is a quick fix than to face the hard reality that the economy has more fundamental problems than those they mention. One of these fundamental problems pertains to SA’s demographics.

As fortune would have it, on the day that Moody’s released its report, I met with Amlan Roy, who heads Credit Suisse’s global demographics and pensions research team. His take on the drivers of growth in frontier and emerging economies answered several doubts I had about Moody’s belief that everything will be okay.

Demographics have for some time been considered the biggest determinant of GDP growth in emerging markets, but Roy warns that the use of broad brush strokes can make for a fool’s paradise, especially when it comes to the so-called “demographic dividend”.

Like other emerging markets, it is assumed that SA will benefit from the economic growth, or “demographic dividend”, that stems from a bulge in the number of young people entering the economy, but Roy’s research casts doubt on this theory and he argues it is insufficient simply to count people and look at their ages.

“Using demographics to predict growth requires us to understand an economy’s future consumers and producers. In order to do this, we need to consider not only how many young people there are in a country, but how well-educated they are, how many years they can be expected to work, the contribution of women to the workforce and the ability of the economy to absorb that workforce,” he says.

In other words, Roy argues that economic possibility is not just about having the right metrics, but about the characteristics of those metrics and whether they are conducive to growth. This is in line with traditional development theories that suggest the potential for growth is highest in countries that are undergoing rapid transformations of their human capital base.

It goes without saying that good governance is a necessary prerequisite in unlocking the potential of that human capital base.

With a median age of just 25 years and more than half of the population under 25, SA seems at first glance to be perfectly poised to take advantage of the demographic dividend, but when you dig a little deeper, it becomes clear that the economy needs more than just age on its side to achieve the sustained growth hoped for by the likes of rating agency Moody’s.

SA routinely plumbs the bottom of cross-national educational outcomes lists, and recent data released by Statistics SA and the Department of Basic Education suggest educational attainment in the poorest schools is failing and black youths are falling behind their peers in terms of education and employment. In the words of statistician-general Pali Lehohla: “Parents are better equipped than their children. And when this happens, you don’t have a future.”

The latest employment figures show the economy lost more than 350,000 jobs in the first quarter of the year and unemployment escalated to an eight-year high, which would seem to reinforce the hopelessness of the situation.

To make matters worse, labour-productivity growth is highest for people who have just come out of university and school. In SA, where almost half of the youth are unemployed and 57% of the unemployed don’t even have a matric, it is hard to see where we are going to attain the labour productivity growth that is so central to GDP growth.

To put it bluntly, SA is alarmingly short on human capital.

Another crude, but rather effective measure of governance and its effect on human capital is to compare a country’s average per capita expenditure on healthcare with the average life expectancy. Do this across a selection of emerging and frontier economies and you start to get a picture of who is getting the best bang for their buck.

According to Roy’s research presented last week, SA spends on average $593 per capita every year on health and has an average life expectancy of about 57. When you compare this with Egypt, which spends $151 per capita on health every year and has a life expectancy of more than 70, or Kenya, where life expectancy is 62 but spending on health averages just $45 per capita, you can’t help but wonder where our government institutions are going wrong.

I hate to point out the obvious, but in general, our institutions could do with a little work.

When looking at SA’s growth potential through the demographic lens, it is clear that the biggest obstacle is the lack of investment in human capital, not financial capital. The fixation with restoring business confidence is a useful way of deflecting attention from the shortfalls of the government, but it won’t work forever.