Creating a potent growth plan starts with overcoming misperceptions (II)

8 June 2020

In hindsight, it is easy to argue that our leaders outside of government should have developed the ability to design a national growth strategy long ago. As priorities go, this was important but not urgent. Now it’s urgent. 

The second half of this two-part series further addresses key misunderstandings. 

The structure of SA’s economy precludes inclusive growth

Inclusive growth requires sustained growth well above the growth in the population, about 1.6% per year. Yet the ANC strategy of prioritising redistribution while expanding dependency on government has been successful electorally despite provoking a decade of per capita income stagnation pre-Covid.

Inclusive growth also requires healthy household savings rates. Thus, SA’s massive volume of excessively expensive consumer loans precludes meaningful inclusive growth.

A follow-the-money analysis shows how huge sums of money are redistributed from the more productive segments of the economy to benefit the politically connected and the marginalised. Emerging households, the frontlines of inclusive growth and broadening prosperity, then very often become overly reliant on excessively expensive debt. The bad debt components are, in effect, paid for by the community of emerging sector borrowers while the profits benefit the distant lenders.

SA’s emerging workers advancement possibilities are greatly constrained by policies that limit their market access to affluent foreign consumers. The collapse of international tourism will take its toll. There are too few affluent South African consumers purchasing the types of higher-margin goods and services which spur upliftment. Meanwhile, low income workers are continually solicited to borrow from lenders whose shareholders and managers reside in distant, well-off communities. At the most basic level, SA’s economic structure is an inversion of the Asian high growth model. 

SA cannot increase per capita income without surging value-added exports

The country’s pre-covid domestic purchasing power was clearly inadequate to fuel healthy growth as per capita income had been stagnating for a decade. This contributed to the volumes of expensive consumer and government debt becoming increasingly prohibitive prior to the viral outbreak.

Infrastructure spending cannot spur growth; policy shifts can

Focusing on improving infrastructure is very popular politically - in SA and in most jurisdictions. Focusing on infrastructure absent the ability to articulate a growth strategy is, however, reckless. Most countries have a working growth strategy, SA does not.

Ideally, a country seeks sustained high growth through pro-competitiveness policies leading to entrepreneurs carving out multitudes of value-added export channels. For policy makers to stay on a path which precludes growth and competitiveness while borrowing aggressively to fund infrastructure is consistent with exacerbating worse case outcomes. This is particularly risky when policy makers wax lyrical about outdated and discredited growth paths while firmly embracing growth blocking policies.

SA prospects to take market share from Asian manufacturers is modest whereas most foreign nationals working in Dubai offices would rather be in Cape Town. What prevents the later is not major infrastructure bottlenecks but rather policies which can be changed rapidly and at little or no economic cost.

Contrasting the Asian growth model with SA’s redistribution model

The key elements common to high growth Asian countries include focusing on: value-added exporting to affluent consumers; skill building; competitiveness; productivity; innovativeness; global integration; a stable, competitiveness-enhancing currency; high household savings rates; and foreign policies which advance value-added exporting. In each case, SA’s policy is antithetical.

Expanding regional integration and trade cannot increase SA’s growth trajectory

Our neighbours suffer from the same core growth blockage we do: woefully inadequate integration into the global economy to be able to sell to affluent consumers and to import critical knowledge and skills. As our neighbour’s lack of access to adequate discretionary income is worse than SA’s, seeking growth through a regional focus is a classic beggar thy neighbour policy. 

Import substitution is fully unworkable

SA’s share of global GDP is less than 0,50% and the forty-year downward trend of this metric is set to continue. SA’s share of global discretionary purchasing power is significantly lower. 

As recently as a generation ago, the vast majority of the world’s discretionary purchasing power was concentrated in the West. As many Asian countries achieved sustained success at selling to affluent western nations while maintaining high household savings rates, they achieved broad prosperity and now that region is also home to much of the world’s discretionary income.

Monetary policy cannot be manipulated to overcome a structurally dysfunctional economy

Whereas monetary policies need to adapt to certain environmental shifts, even the most capable of central banks cannot offset structural deficiencies. 

Justifying beneficiation proximity to raw materials

In global financial capitals and major universities, no-one ever hears the term “beneficiation”. It is a politically contrived term devoid of economic logic. In almost all cases it makes little or no sense to locate production facilities based on the source of a raw material.

Globalisation has advanced massively over the past few decades with beneficiation arguments having virtually no bearing. Rather than gaining credence, they have, with very few exceptions, become ever less relevant.

The more formally skilled are less relevant to increasing exports

Social conditioning has induced a nearly unshakeable belief that higher levels of formally obtained skills improves workers export relevance. However, SA has a shortage of skilled workers and a great over abundance of idled lower-skilled workers. 

Seeking export opportunities which predominantly employ high-skilled workers would require those workers be sourced from other countries. Such a plan would take decades to meaningfully reduce SA’s extreme unemployment levels. There are many ways to have SA’s lower-skilled unemployed add value to exports. The primary impediments are government policies and practices.

Nor is it necessary to be the best in the world to compete internationally. Workers that are only half as productive but that will readily accept a third of their overseas counterparts’ wages can compete quite effectively. 

Blaming weak economic literacy by ANC supporters and leaders misses much

The policy shifts required to achieve healthy sustainable growth are incompatible with the ANC’s political strategy which emphasises redistribution and making a majority of South African’s reliant on government for vital monthly payments. The electoral success of this strategy is undeniable while the economic consequences have been dire and they are no longer sustainable.

The unemployed want jobs but, in the absence of fruitful employment, they fear losing government provided income. Somewhat similarly, business leaders have also been reluctant to rock the boat.

The referencing of radical ideologies creates decoys

That the ANC is aligned with fervently dogmatic organisations, and no doubt has many ideological inclined senior members, means framing issues ideologically pays political dividends. It improves party cohesion while baiting opponents to debate ideological tenets rather than facts. 

Delaying obvious legistlative measures serves to distract

Ignoring low-lying fruit remedies distracts from the policies which preclude adequate economic growth but which are very effective for the ANC electorally and which are popular with key alignment partners. The advantage of not licensing much needed added spectrum is that this shortcoming serves to consume media bandwidth - in the sense that journalists write about it rather than focusing on more crucial issues.

Saving jobs and avoiding bankruptcies

The belief that government should minimise job losses and bankruptcies is widely held in most countries. This is understandable but dangerous, particularly here.

The damage to the economy by rescuing SAA is greater than the ANC thinks. Their favouring financially engineered “solutions” such as ring fencing bad assets and bad liabilities reflects a shallow understanding of investment and economic development fundamentals. Relaunching SAA would symbolise the ANC’s contempt for responsible governance.

Every time the ANC seeks to rescue companies or jobs, the country becomes poorer. The extent to which this is true is under appreciated by the ANC and beyond. This reflects a failure to acknowledge how out of sync SA’s economy is with growth drivers which are determined globally.

Countercyclical deficit spending

Borrowing to spur demand in SA’s economy is counterproductive due to structural factors. SA’s economy is hostile to what development economists call virtuous cycles. Debt is excessively expensive while productivity is far too low. Access to large volume discretionary purchasing power is what SA’s economy desperately requires. 

Accessing capital, debt or equity, without the wholesale policy reforms necessary to unlock export growth, further undermines long-term prospects. Increasing debt without major structural reforms will inevitably lead to capital destruction amid rising poverty.

The state has very limited potential to identify export channels

Among the reasons the ANC’s leadership cannot envisage a high growth path is that it cannot accept the crucial roles played by entrepreneurs. Legions of entrepreneurs supported by appropriate government policies and practices can uncover multitudes of export channels and supply chain integration opportunities. It is irrational to expect the state to play such a role effectively.

Rampant corruption and patronage

Corruption and patronage are broadly perceived as having been primary causes of SA’s horrific economic performance over the past decade. This misses a lot. It is not uncommon for widespread corruption and patronage to accompany sustained rapid growth. China over the past few decades being a frequently cited example.

Countries that combine solid policies with corruption will do better than if they combine bad policies and no corruption. SA combines self-defeating policies with much corruption.

Growth now hinges on debt relief

Debt relief is a softer expression than write-offs, write-downs, debt restructurings or defaults.

We appear to be entering a stretch where deaths, bankruptcies and job losses all surge. The least-worst economic response would be to accept the need for a high volume of bankruptcies along with much debt reprofiling - across household, corporate and government sectors - alongside dramatic policy reversals. 

Instead, the ANC is indicating they will double down on their current policy biases and aggressively resist bankruptcies. SA’s Covid-contraction would be followed by years of stagnation as government focused on finding funding for zombie companies that the market can’t support, such as SAA.

The ANC cannot reform from within, a workable plan must be presented to them

It is not wrong to suggest that the IMF will feature in SA’s economic future. Nor is it unwise to predict that the ANC electoral dominance will recede. What isn’t adequately acknowledged is the potential for policy mishaps over the coming months to inflict severe long-term damage.

The IMF is unlikely to meaningfully influence SA’s policies any time soon. A commercially potent growth strategy must be urgently developed domestically.  This can’t happen within the ANC, yet the growth plan must be acceptable to a majority of the ruling party’s most senior leaders. 

This is fully doable. High among the reasons it isn’t happening is the collection of misperceptions outlined above.

Hagedorn is an independent strategy adviser   shawn-hagedorn.com