DECODING SA'S “NEW NORMAL” VULNERABILITIES

Some of today's most heralded economists insist that the global economy exited the Great Recession mutating toward a “new normal”. Yet, as China's economy now slows and rebalances, it is becoming clear that its extraordinary growth obscured deep global shifts. That is, the Great Recession appears to have been more a symptom of the new normal than a cause. A further implication is that SA's growing challenges largely reflect disdain by the nation’s political leaders for global realities.

The global economy has been incorporating the implications of the information age displacing the industrial era amid: the rise of Asia, global integration, and binding environmental constraints. The prosperity and prospects of lower skilled western workers were profoundly downgraded and they responded by borrowing imprudently, thus inducing the Great Recession. SA has travelled a related path with unsecured lending – which lacks an asset bubble's self-correcting qualities.

Digital economics are fundamentally different from industrial economics. Costs such as, education, infrastructure, research, and product design, are heavily front-loaded while reproduction and distribution costs are often zero. Thus today's leading economies are threatened more by deflation than inflation while investing effectively in people and government-investor relations have become paramount.

Whereas industrialisation often led to low-skilled workers being handsomely compensated, this doesn't happen in information focused sectors. Ever-more efficient processes, automation and the expansion of the global work force, mean this historically profound upliftment path is now a relic even in factories.

Just as China's economy could not continue to triple in size every decade through industrial exports and investments in domestic fixed assets, the global economy cannot continue to double every twenty years without downplaying industrialisation. Climate change is one of many environmental constraint factors.

Capital markets first signalled a fundamental shifts through persistently low bond yields. Commodity prices were however distorted by unsustainable Chinese demand - which is now being ratcheted down.

The broad shift toward services must expand, or global growth must slow. Either way inflation will be low, encouraging persistently low interest rates and commodity prices. To the extent that consumption shifts to services, commodity prices will further decouple from global GDP growth.

Analysing SA's politics and economics in isolation is deceitful. Post-apartheid SA has indulged the mistaken belief that the nation's public and private sectors can succeed apart from each other while the country remains largely isolated amid an intensely integrated global economy.

SA's low skilled workers have been assuaged by politically inspired hope and patronage; both fountains are now being drained by new normal economics. This will strain already expanding cracks in the ANC's hegemony with prospective outcomes ranging from odd coalitions to broad upheaval.

SA is so wrong-footed for the unfolding global shifts that, quite ironically, strategic clarity could be provoked. The days of flavour of the month policy initiatives should soon be ending.

Prospects for industrialisation or resource extraction to improve SA's economic growth trajectory have been harshly diminished. While new possibilities loom within reach for today's companies and nations that are building on changes and charging into the future, SA's future is held hostage by its dysfunctional political economics. Essential policy and structural shifts are precluded by obsolete ideologies or increasingly divisive and unsustainable patronage-focused politics along with poor government-business relations.

Such a dysfunctional political economic environment spawns parades of ideas with questionable merits and untested risks instead of identifying and implementing the required structural shifts. That the innocuous, yet constructive, National Development Plan has garnered such modest support reflects the extent to which factions undermine the advancement of shared interests.

What has now changed is that the status quo has swiftly become far less viable. Lower commodity prices and astute policy making are demanded by the new normal.

SA uniquely mixes: extreme mineral wealth; outrageous unemployment; and troubled policy making. Groping wishfully for solutions won't work. Just as trial and error in pharmacological research is ceding ground to genome decoding, SA's public and private leadership must be guided by diligently decoding the country's political economy while accepting global realities.

Imagining what might work must give way to understanding what needs to be done; and doing it. Decoding SA's political economic DNA should start with that of the dominant political party which mixes: liberation-era grudges; Marxist-Lennist ideologies; anti-western biases; and patronage based loyalties. It is difficult to overstate how out of synch this combination is with the demands of new normal economics.

Meanwhile corporate SA's DNA reflects: geographic isolation, the sanctions era, and today's blend of good governance principles interlaced with stultifying regulations. The combined effect is an obsession with competencies while the global economy fixates on competitiveness.

The rise of China over the past thirty-five years reflects its transcending such political economic DNA. This required a fundamental shift after a one-party government emerged and ruled abysmally for its first thirty years.

The aspirational DNA of SA's historically disadvantaged were impeded in various ways which have yet to be adequately unblocked. Such business people were restricted from selling to privileged South Africans under apartheid. This makes it all the more frustratingly ironic that the post-apartheid government has not followed successful former East Asian colonies in targeting wealthy western consumers.

The intellectually painful irony is that the competitiveness of SA's political economy is oppressed by a dominant political party whose unity with its constituents revolves around fairness. This is hectically problematic. Today's successful economies prioritise justice, prosperity and opportunities well ahead of fairness. The New Normal doubles down on such prioritising.

Focusing on competitiveness and global integration has lifted at least two billion people out of poverty. Conversely, political elites of resource endowed nations often exploit fairness issues to selfishly benefit at the expense of their least fortunate citizens. Media limitations combine with limited interest to deter understanding of how values, villains and victims are routinely disfigured.

Overcoming isolation through BRICS and African alignments is far from ideal. East Asia has sustained high growth through exporting manufactured goods to the West as that is where most of the world's discretionary income was – and still is.

Anti-western sentiments by SA's political elites draw on a stale blame narrative that ignores the rise of the East having relied on integrating with the West. Meanwhile, various voices across SA, Africa, and beyond, state that it is “Africa's turn” to achieve sustained high growth without contemplating the steps required.

There are two economies. The East and the West have formed an increasingly integrated and rapidly evolving core global economy that spans the planet. Conversely, most African and Middle Eastern countries are excessively resource dependent – with many being isolated or war-torn.

As China's economy grows more slowly and rebalances, SA's growth trajectory sags lower along with many of the Africa's resource focused economies. The many SA companies that explore regional opportunities should be constructively mindful that Africa is the region most vulnerable to new normal economics.

Resource endowed nations with mostly poor, rural based populations tend to be dominated by urban elites. SA's social grants in place of job opportunities displays politics inducing dependencies ripe for patronage exploitation.

The ANC inherited tremendous resources along with enormous economic development liabilities. Unfortunately, there are scant examples globally of abundant resource wealth spurring broad prosperity. Moderate progress has been made while now the value of SA's natural resources is impaired by new normal economics combined with increasingly unproductive relations between the Tripartite Alliance and investors.

SA's political economics must be fundamentally re-invented. Patronage is common everywhere but in SA it has compounded to the point that it routinely crowds out effective decision making in a world where astute policy making has become mandatory.

Poorly designed and implemented transformation programmes become increasingly costly as the world economy morphs toward information era economics. Obsolete ideologies along with excessive labour alliances must give way for SA to enhance its competitiveness.

The primary insight for SA from better understanding new normal economics is that the nation's political economy is built on policies and beliefs which stand in opposition to how prosperity is advanced in the 21st century. Until now, China's demand for, and SA's supply of, raw materials permitted over indulging patronage and state interventions.

There is no low-risk path of tweaking this and trying that. Whereas until recently China served to mask the need for SA's political economy to be re-invented, a quick look at how that nation is now scampering to restructure its economy while purging government misdeeds offers much needed lessons from East Asia to South Africa.

Shawn Hagedorn is a strategy adviser - @shawnhagedorn.

This article first appeared in Business Day.