Voter surveys proved surprisingly accurate yet their deeper insight was that the ANC’s prospects for a late surge in support were scuppered by President Ramaphosa’s NHI announcement. Having recklessly overindulged patronage the ANC is now squeezed from all sides. Accordingly, its interests are best served by working with the DA, among others, to spur rapid job creation.

The ANC, along with its main offshoots, the MK and EFF, have long chanted about inequality to enthuse their particular brands of identity politics. This was used to justify rampant patronage benefiting the politically connected at the expense of the majority of South Africans who are poor and whose loyalty is to be purchased with meagre grants. ANC splintering has hastened such predatory politics becoming nonviable.

The NHI announcement backfired as it ridiculed aspirations while echoing earlier empty promises. Most eligible adults didn’t vote whereas many of those that did, and were swayed by patronage’s appeal, particularly in KZN, abandoned the ANC. 

Centre-leaning parties favour upliftment paths which begin with political fixes that should then improve state governance leading to higher economic growth that spurs job creation and eventually raises living standards. Those struggling to buy food are not easily wooed by such trickle-down solutions. 

Pursuing investment-led growth is beneficial as it seeks to align interests while remedying many of our economic choke points. However, best-case expectations for investment-led growth would not tame our obscene youth unemployment before today’s school leavers are middle aged. 

Situational awareness

We didn’t create the world’s worst unemployment crisis suddenly. SA has never been on a path which could wallop poverty. Even at the height of our commodity-induced economic boom of two decades ago, upliftment paths were elusive for typical South African households. 

Our economy now resembles a 4x4 whose chassis is clenched by mud. Imprudent navigation followed by wheels spinning got us stuck and we won’t get unstuck by fine tuning the motor. GDP growth is insufficient. Both traction and prudent navigation have been lacking.

Our unfolding political dramas should jolt us into acknowledging that SA has never been on a path which could produce a generally prosperous middle class society. Our current economic malaise is comparable to the Great Depression of nearly a century ago when the US unemployment rate was perilously high for over a decade. Whereas it peaked at 25%, ours is currently over 40% - and that understates the risks and challenges.

As the idea of growing GDP was too abstract to resonate politically during the Great Depression, US politicians prioritised creating jobs. But, like SA today, too many Americans were unemployed or poor because their economy lacked the consumer spending power needed to create large numbers of jobs.

Another similarity to our current situation is that the US had unleashed trade restrictions resembling our “localisation” regulations to protect domestic interests. As other countries responded in kind, the Great Depression became deeply entrenched.

Conversely, after the Berlin Wall fell, countries, companies and workers across the world embraced hyper globalisation triggering three decades of extraordinary upliftment across many developing nations. As SA rejected such integration to favour localisation and redistribution, the result has been widespread patronage entrenching the world’s highest unemployment. 

Economic principles

The prevailing wisdom had reflected Say’s Law, ‘supply creates its own demand’ until the Great Depression inspired John Maynard Keynes’ to write “The General Theory of Employment, Interest and Money.”  Keynes made a compelling case for governments to run deficits to counter weak consumer demand. What eventually pulled the US out of the Great Depression was its industrial response to the Second World War.

It’s easy to justify infrastructure projects which expand our commodity exports. But even a doubling of such revenues would create relatively few jobs. Rather, grants would increase as employment multiplier effects would be deadened by heavy household indebtedness.

Accumulating onerous debt loads is easier for governments of resource endowed nations and it can even offset, for an extended period, low growth and low workforce participation. Then, amid declining productivity, real rates of interest drift higher, reflecting tightening access to credit, until a credit crisis erupts.  

An IMF-styled set of solutions for SA could combine sweeping pro-growth policy reforms with the writing down of government and consumer debts. Such financial repression would harm many investors, particularly bank shareholders. The pros and cons of such debt restructurings have long been understood by bankers and investors; it is far wiser to preempt their being needed. 

Our new political dispensation must incite a pivot from patronage toward growth that lifts the majority of SA households which are mired in poverty. That requires an enormous increase in jobs.

Writing down current debts and then providing fresh loans could spur considerable short-term growth. This would not however make SA’s struggling households affluent. Most will remain poor until we mimic successful developing countries by having many school leavers integrate into global supply chains, particularly through new avenues which are emerging.

By harnessing the torque of international consumers through value-added exporting we could pull the 4x4 out of the hole. Unfortunately however, our outdated clutch slips too much to climb the long mountain pass that leads to broad prosperity and, ultimately, full employment. 

Market forces

Various left-leaning commentators ridicule the accommodation of market forces which is central to pursuing investment-led growth. Their Marxist sympathies are unhelpful but where they have a point, though most don’t seem to recognise this, is that there are no plausible scenarios where investment-led growth will meaningfully reduce our enormous unemployment bulge before most of this decade’s school leavers are permanently marginalised. 

The link between market forces and employment creation can be directly observed on the first Friday of each month when the US Labour Department releases the prior month’s employment data. If the change in the number of jobs is different from expectations by just a hundred thousand, in a country of well over three hundred million people, interest rates, share prices and currency pairs shift sharply. 

There is nothing similar to observe here as the relationship between our GDP and employment is incidental. Our economy has never been designed to grow jobs and now we have an enormous labour surplus. When the motor revs the wheels struggle to gain traction while the clutch smokes.

Demand

Keynes’ insights shifted the focus from supply to demand while cautioning that demand can remain deficient for a very long time. He also recognised the “paradox of thrift.” The tougher the economic conditions, the more those with discretionary spending power will choose to save - and this will further deter growth. This equates to 4x4 drivers not wanting to slow down to help those stuck for fear of getting stuck themselves.

Thrift has been unpopular in our public sector and among most of our households. The national debt grows steadily faster than GDP and there is little by way of intergenerational wealth transfers. Rather, there are more than ten million funeral policies. It is our companies that have been thrifty, but only because they can’t justify spending to increase their output when the country’s purchasing power stagnates.

While the US government and many of its households are also overly indebted, such similarities coincide with circumstances quite different from those prevailing here. As US Treasury Secretary Janet Yellen told CNBC a few days ago, “If the debt is stabilised relative to the size of the economy, we’re in a reasonable place.” “The way I look at it is that we should be looking at the real interest cost of the debt.” 

Many large economies can sell bonds internationally denominated in their domestic currencies at low inflation-adjusted rates. Whereas the largest companies in both the US and SA tend to be well capitalised, a critical difference is that SA employers cater for customers with far less purchasing power. 

Yellen’s “reasonable place” assessment mostly reflects expectations for continued strong growth in the earnings of large US companies. While unemployment is at 4% and US ten year bonds yield about 4.25%, inflation nears 2%. What offsets much US government profligacy is that its tech behemoths, like Microsoft, Apple, Meta, Alphabet, Nvidia, and Amazon, are profitably reimagining global commerce in ways which meaningfully boost productivity. 

It is telling that our most valuable JSE companies are not reliant on SA consumers. Meanwhile our inflation-adjusted interest rates are too high and our productivity gains too elusive. We are in an unreasonable place.

Fifty years ago, SA was well positioned when commodity prices boomed. But as commodity wealth encourages patronage, it is very difficult politically and economically to use commodity wealth to drive poverty alleviation. The term “resource curse” corresponds with 85% of the world's least developed countries being classified as commodity-dependent.

Out of sync

Argentina, a geographically-isolated commodity exporter comparable to SA, was extremely wealthy just over a century ago. It has however never recovered from the Great Depression. Patronage politics deprioritised productivity as fiscal and monetary mismanagement routinely provoked hyper inflation and credit crises. 

Our economy is similarly out of sync with both economic fundamentals and 21st century success factors. Hyper globalisation explains how global poverty plunged over the past few decades. Our policy makers drifted from sanctions being lifted to localisation policies. Both choke growth. The new cold war and AI will be harder to navigate. 

The second quarter of the 21st century will soon begin with AI gathering momentum as birth rates in wealthy countries ratchet ever lower. By midcentury about 40% of young children will be in Africa. Globalisation is shifting toward services. Market forces will pressure leading companies to team AI capabilities with school leavers in poorer countries to serve the growing portions of supply chains which are digital and thus largely location agnostic. 

The backlash from the NHI announcement signals that the ANC can no longer rely on its central strategy, patronage. It must team with its new governing partners by concertedly seizing an enterprising spirit to expand new job channels. Collaboration must uplift South African households through digitally integrating dusty roads with the evolving global economy. This is difficult, necessary and doable.

@shawnhagedorn  shawn-hagedorn.com