How can we arrest SA's economic decline?

Shawn Hagedorn says big business certainly doesn't know what to do

Credit agencies, the IMF and others repeatedly emphasise that SA’s economic growth hinges on sweeping policy reforms. What foreign experts aren’t going to unpack is how SA’s deeply dysfunctional pol-econ dialogue precludes such reforms. This task suits Politicweb’s community.

After months of contemplating the non-viability of SA’s economic trajectory, last week the National Treasury sought to influence the country’s economic debate by emphasising the dangers of over reliance on redistribution. This shows how financial prudence is no match for policy paralysis stemming from, among other things, the nation’s political discourse being grossly inadequate.

Also last week, Kenneth Arrow, almost certainly the late 20th century’s most impactful thinker around the intersection of politics, economics, and social issues, died at age 95. That his death received scant notice in SA says much about how the nation has never adopted the diagnostic and solution design tools it requires.

Arrow had an exceptional capacity to use numbers to express ideas and develop concepts. His “impossibility theorem” employed basic mathematics to demonstrate fundamental problems with common voting challenges.

The apartheid government had strong ideas about education while seeing big business as a competing power centre. The UK’s approach to broadly educating the very top echelon of future business leaders was eschewed to embrace a more German style of focusing on technical expertise.

Under apartheid, first-tier business students were not steered toward curriculum echoing Oxford’s PPE programmes (Philosophy, Politics, and Economics) but rather toward accounting and actuarial sciences. Thus SA has exceptional accountants and actuaries and National Treasury’s budgeting process identifies that the nation’s economic trajectory is non-viable. Yet there is no plan to overcome this; nor even well-informed debates.

SA’s many individual challenges are not unique. For instance, most nations are grappling with the effects of the world economy pivoting away from industrial-led to services-led growth. The SA mix of complications is, however, particularly extreme while the national dialogue rarely advances past simplistic mantras such as: ZumaMustFall; OccupyLand; RadicalEconomicTransformation; and WhiteMonopolyCapital.

While one article can’t address all the misunderstandings and disconnects which constrain the national dialogue, a few key ones are criticised here in homage to Gordhan voicing concerns about over reliance on redistribution.

SA’s dialogue fractures along the politics of redistribution and inequality while the world economy demands integration and competitiveness. Arrow didn’t let values preclude insights. In SA, values, loyalties, and traditions are all abused politically to crowd out much-needed interdisciplinary analysis.

Inequality has become a politically potent term in many countries despite the trend toward greater equality having progressed extraordinarily over the last dozen generations. Equality has accelerated in recent decades through unparalleled poverty alleviation. Yet what is global and extends over lengthy periods can be ignored by political operatives. Political issues are framed within national borders.

Redistribution has been the cement which binds the key factions of SA’s ruling party. It has served as a perilous substitute for growth policies. Those responsible for constructing the national budget can see that while raising taxes on the rich incrementally reduces inequality, such redistribution efforts don’t reduce poverty as they undermine growth. Thus over reliance on redistribution is profoundly non-viable.

The cronies, communists, and populists have assumed that SA is a wealthy country. It is obvious to credit agencies contemplating junk status ratings that this is wrong. Historical legacies included a poorly skilled workforce and more recent policies have been woefully misguided. The nation’s assets and income are stagnating while massive social liabilities compound.

The challenge was always to diffuse skills along with access to opportunities and productive assets. Instead, workforce abilities have wallowed at a low level while a false sense of rising prosperity was fuelled by a commodity boom and much consumer indebtedness.

Mathematically, inequality can only be meaningfully reduced, given SA’s current economic policies, through financial repression of the nation’s middle and upper class leaving the nation generally poorer. Creating a large and growing middle class requires vastly different policy prescriptions supported by a well-developed national dialogue.

It is SA’s destiny to demonstrate to the world the folly of obsessing around inequality. Media and political interests cannot resist beating the inequality drum but poverty alleviation requires dancing to a more sophisticated beat.

SA has rejected almost every fundamental precept that has led to per capita income in China having increased by nearly 35 times in as many years. For example, the greatest poverty alleviator of all time famously said, “Let some people get rich first.” SA’s policies have ‘let some people get rich’ but there can now be no follow through without sweeping policy shifts.

How politicians exploit ideas around inequality and fairness are at the heart of why the SA’s future continues to dim. The political and economic disconnects are severe. It is vastly more difficult to achieve broad prosperity if the starting point is poverty and illiteracy being ubiquitous versus a mix of wealth and skills alongside a commitment to diffusion.

SA’s ruling party rejected economically efficient diffusion nearly twenty years ago when they formally sought to “unbundle” emerging businesses from those that flourished under the prior regime. This was understandable politically but economically debilitating.

SA’s economic policies have never catered for the needs of the majority. Over the past twenty years, economic policies have been routinely incoherent. Last year’s alliance of leading business executives and National Treasury was meant to overcome this.

What became abundantly clear is that none of SA’s CEOs has a plan to achieve inclusive growth which is adequate and sustainable. There are just too many misunderstandings and disconnects which must first be slayed and the country’s business executives don’t have the time nor are they trained for such tasks.

Arrow’s numerous influences spanned: helping to fuse economics with mathematical rigour; substantially advancing voting theories; and showing how social justice and commercial interests interact. SA can spawn a Mandela and a Musk yet its dialogue fails spectacularly at managing the intersections of politics, economics, and ideas around social justice.

Dialogue difficulties are exacerbated by SA’s electorate voting infrequently and indirectly whereas every economic transaction is a vote. Such votes are denominated in prices and tabulated in budgets. Then SA’s predominate political-economic exchange is the desire of the ruling party to manipulate private transactions to disproportionately benefit the poor or the newly enriched.

Such efforts, for example a minimum wage, have moral and political appeal but, for economic and mathematical reasons, they preclude adequate growth.

Among the key misperceptions which must be overcome to achieve an adequate national discourse: the problem statement reduces to one word, “poverty”, not “inequality”; the key metric is not GDP or jobs, it is middle class growth; government interventions can only be effective if they spur value-added exports as SA’s consumer spending will stagnate until exports increase markedly.

The insights of extraordinary thinkers like Ken Arrow are directly at odds with distilling multidimensional challenges to 140 characters or the width of a placard. While advancing SA’s political economic dialogue within the Politicsweb community assures nothing, as one of the most influential of Arrow’s contemporaries liked to say: “If not now, when? If not us, who?”

Shawn Hagedorn is an independent strategy advisor