SA's expanding web of disconnects
Splintering among SA's union alliances is now one of many disconnects which reflect structures and strategies being overwhelmed by economic realities. As politics and economics are inseparable, the ANC's approach for maintaining an unassailable majority through aligning with the country's top unions and the SACP was always doomed. It demanded perpetual hostility toward the sector, business, which generates jobs and taxes.
In the mid 1990s SA's economy was troublingly unique. It blended sophistication and diversification while lacking both international integration and competitiveness. Broad investments in human potential were grossly inadequate.
Much the same could have been said of a then freshly-failed former superpower. SA's business ingenuity has been impressive with the key caveat that its leaders have failed to effectively engage their political counterparts. This should become more doable now as budget constraints start to truly bite.
Among the key disconnects to be tackled:
Politics and Economics - Despite political hype, industrialisation, benefication and regional integration offer modest potential to lift SA's long-term growth prospects. The information age is here to stay; transporting commodities is cheap thus benefication happens in distant locations which have invested heavily in hard and soft assets; and SA's ability to create jobs at home by selling into the world's poorest region is inherently modest.
Corporate governance and capital market - If capital markets had not been invented and each of SA's top forty companies was owned by a family, those families would engage with SA's ruling elites much more effectively than the nation's otherwise highly capable business executives, money managers and top entrepreneurs.
Economists call this principal-agent disconnect the problem of "agency". A capital market based economy with a union-aligned government leaves national long-term interests unattended. Corporate governance guidelines do not overcome the agency disconnects.
Economic metrics - Politicians hostile to capitalism pick and choose among capital markets statistics and GDP and inflation data along side their favourite income inequality metric to convince themselves of the need for more aggressive state interventions.
The disconnect between the JSE's recent strength and SA's slow-growth economy is fully explainable - but such explanations are easily ignored. Capital market data are frequently misleading for guiding economic development. This can be a severe complication when seeking to overcome large-scale historic injustices while distortions from significant extraction-based exports require still further complex analysis.
Capital market and general economic metrics and methodologies were designed to measure "typical" industrialised countries such as the UK or South Korea; not Saudi Arabia or South Africa. Union-wedded politicians see market signals as market failures requiring state interventions.
Banking - The interests of banks and national economies have drifted apart globally and in SA. The fundamental role that consumer debt plays in an economy changes when real wage growth levels off for all but the high-skilled workers. Banks are under immense regulatory pressure globally as the industry is overgrown. There is little potential to generate attractive returns without outsmarting others - most notably, customers.
SA banks are masterful at managing high consumer debt loads. Much of it is unreasonably expensive. When the market determined that the largest of the high priced lenders was no longer viable, the government via the Reserve Bank interpreted this as market failure and risked taxpayer funds to rescue a bank which routinely impoverishes its customers' prospects.
Transformation is a "must have". But it is very expensive and it only becomes effective when the beneficiaries are accumulating assets and investing in the next generation. The capacity of high priced lending to undermine transformation remains greatly under appreciated notwithstanding abundant evidence.
Rather than rely on law enforcement and evolving social norms to constrain loan sharks, government policies have encouraged the formal lending sector to blanket low-income earners with high priced debt. This amounts to an astounding disconnect as costly transformation efforts are nullified.
Expanding into Africa - If Asian countries had over the past several decades focused on trading among themselves, the region's growth would have been sharply lower. Mathematics dictate that meaningful economic upliftment follows from selling to deep-pocketed consumers. Many of SA's astute business leaders have been piling into African markets to diversify from over reliance on the slowing SA market.
SA does not provide a sufficiently competitive environment to compete with the best from the East and the West and to sell to their wealthy consumers - though a few SA companies have succeeded against long odds. Focusing on Africa is a defensive move which in most cases is necessary and risky. It offers modest potential to spur large scale employment gains across SA.
SA versus the global trends - A market economy and capital markets are at their best when picking winners and punishing losers. SA's political elites would prefer government perform the former task and prevent the later. Meanwhile the rest of the world becomes more integrated and competitive.
Shawn Hagedorn is an independent strategy adviser.
This article first appeared on www.biznews.com
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