Dismissing discredited ideas

29 March 2016

SA's top business leaders are a diverse bunch with a shared core trait: extreme determination. The executives who have chosen to work with the nation's political leaders to fix SA's economy will have to plumb the depths of such grit.

Recent events have made clear that SA’s economy and politics are both broadly ill-conceived. For over a quarter century, prospective remedies have focused narrowly while jumbling symptoms and causes along with values and emotions.  To engage effectively with their political counterparts, SA’s business leaders must slay major misconceptions which impede SA’s politics and prospects. Half measures are the enemy.

The current chapter in SA’s evolution has begun with a team building exercise. It is in everyone's interest to avoid having SA's debt downgraded. This was sensibly selected as a shared goal but as the credit rating agencies and others have made clear, the challenges greatly exceed prudent budgeting. The credit rating agencies have highlighted the lack of a growth model, yet this too is symptomatic of deeper disconnects.

For far too long the public discourse has orbited around what growth rates need to be achieved while skipping over basics, such as, who is going to buy what. It is now clear that SA’s households are too indebted to spur domestic consumption led growth and that export growth requires diversifying beyond raw materials.

The path to broad upliftment is through adding value to goods and services destined for the world’s biggest, most demanding, markets. As has been demonstrated so formidably across East Asia, this is best done through integrating into international supply chains. For decades, this path has been impeded by government policies and, while there are certainly exceptions, SA’s private sector mostly focuses on domestic and regional markets or raw material production.

The extent to which SA’s politics and economics antagonise each other is exacerbated by the degree to which SA’s political economics refute those of advancing nations. The political imperative of transformation is becoming ever more difficult to reconcile with global economic dynamics.

The African National Congress (ANC) consists of various factions, all of which favour redistribution policies. SA’s business community has also supported redistribution efforts. The moral and political justifications for redistribution policies are strong but the economics can easily become counterproductive. The level of redistribution is a separate issue. At some point such policies were always going to have to recede for SA to succeed. Rather they have become politically entrenched.

SA does not have a growth model because so many of the nation’s consumers are overly indebted while so few of its workers and companies are globally integrated and competitive. The decline in commodity demand has accelerated recognition that the economy is not tenable.

Geology, geography and politics have always discouraged SA’s economy from being globally integrated and competitiveness focused. The ANC’s redistribution biases have created compounding obstacles to exporting value-added goods and services nearly as formidable as the sanctions inspired by the prior regime. Meanwhile, the world economy keeps changing in ways adverse to the interests of the ANC and many of SA’s big businesses.

It is because redistribution policies are so economically dangerous yet so politically appealing - given the country’s massive clusters of poor, unemployed and historically disadvantaged voters - that there should have been, in an ideal world, an agreed expiration date for redistribution policies. As a close substitute, the credit agencies are now saying the economy can’t grow fast enough to meet its expanding liabilities. SA business leaders are going to have to explain how over emphasising redistribution has undermined policy-making to the detriment of all.

In SA’s early transition years, redistribution policies were necessary to maintain political calm. Thus, such transactions were consistent with increasing the size of the pie. Growing the economy while continually expanding the range of beneficiaries was always going to be intensely difficult.

Global economic growth has become ever more reliant on blending collaboration and cooperation. SA’s business leaders must help identify policy shifts which will improve competitiveness and advance integration into the global economy. Yet such policy pivots will not lead to near term life-style upgrades for SA’s huge clusters of economically marginalised voters.

Blending economic and upliftment objectives into today’s policy framework can lead to tremendous benefits in ten years and phenomenal improvements over twenty or thirty years. Yet the near term implications are not appealing to today’s senior politicians.

Large numbers of low-income households across SA will experience set-backs over the next few years. This will play to the ambitions of populist politicians in the ANC and rival parties. Nonetheless, continuing to ignore the economic penalties for overemphasising redistribution policies is not viable.

Information age economics are fundamentally different from those of the industrial era. Diffusing knowledge does not deplete its availability, rather it increases it. Rural land, commodity deposits, and even machines are becoming less able to convey wealth. The potential for redistribution policies to redress historical inequities is in steady decline.

A simple quiz question helps to distinguish between accounting wealth and financial wealth. When two companies are both expected to produce R20 million in profits growing at the same rate and one’s primary asset is R100 million of machinery and the other has only R1 million in assets, which company is more valuable?

A company that requires a large asset base to produce its profits is, of course, less valuable. The value of Microsoft first exceeded that of any industrial company long ago as it can earn large margins without having to continually reinvest in fixed assets.

The ANC’s factions include communists, unionists, cronies, and populists. They have all favoured controlling assets over investing in minds. This bias is decades out-of-date and such thinking undermines policy effectiveness. Similarly foreign investments are prized more for the capital that they bring than the access to specialised knowledge, and distant markets, that they offer.

SA’s big businesses also frequently favour asset accumulation. Access to greater resources can provide competitive advantages over smaller rivals. Were SA focused on meaningfully integrating into the global economy, such biases would recede as capital is very expensive in SA relative to many other jurisdictions.

Focusing on redistribution of assets provokes compounding negative economic consequences. Most of the world’s food stressed people are smallholding farmers whereas larger commercial opperations are better able to cope with threats such as droughts. Most smallholding farmers would prefer a formal sector urban job – though their local schooling is unlikely to be adequate.

Wars used to be initiated to capture large tracts of farmland or commodity deposits. Today, most failing economies focus on food production or extraction activities. The risks of invasion have been inverted. Refugees from such poor countries pour into prosperous nations. The politics of SA’s redistribution focused policies cannot be reconciled with their economic effects. The policy-makers bet on a global economy that no longer exists.

Given SA’s history and geology, the greed and divisiveness of its political processes could be worse while transformation to achieve a vastly more inclusive economy is good for business and smart politics. The country’s most valuable assets are its youthful minds not its aging mines.

Shawn Hagedorn is an independent strategy adviser. He can be followed on Twitter @shawnhagedorn

This article first appeared in Business Day.