Investors must promote productivity enhancing transformation
Adjusting to SA’s political economy has become nearly as demanding for investors as negative interest rates in other regions. But it can be far more rewarding. Pursuit of better returns, alongside fiduciary obligations to mitigate risks, should now motivate investors to promote productivity enhancing transformation.
The ruling party’s policy mix has long been destined to produce miserable results. Slow global growth has brought forward the day of reckoning. With political reverberations from entrenched economic stagnation compounding, the ANC’s confidence in maintaining its majority in 2019 has been rocked by August’s local election results.
Corruption busting is currently media’s ”flavour of the day” but by 2019 the ANC will project new faces and updated messaging. Their more enduring threat will be household stresses rendering party loyalty unaffordable. The era of ANC economic policies lacking electoral consequences has closed with immediate effects.
Irrespective of how “white”, “black”, or “monopolistic” SA’s capital is, it also needs to proactively respond to today’s swelling economic and political stresses. SA’s business and investor communities cannot afford to be targeted as the blame game advances.
Global money managers have invested trillions of dollars in government bonds with negative yields. In SA, non-financial companies horde hundreds of billions of rands. The common causes trace to low growth as the new normal.
The binding constraint is stagnating consumer incomes; not access to capital. Economists concur that growth is held hostage by stagnant productivity. Industrialisation overcame such chains simply by marrying machines and workers. Such possibilities continue to fade.
Commensurate with wallowing wages, real rates of return have trended sharply lower in major markets. This reflects how difficult it can be to improve productivity. Global economic growth is slow as catalysts remain elusive.
In SA the challenges are far more manageable. SA uniquely combines resource wealth; massive poverty; sophisticated and diverse companies; and divisive, anti-business politics. The extent to which SA’s economic policies are ill-conceived is particularly unusual.
For experts in economic policy making, such as those who direct research at the IMF or credit agencies, it is not difficult to envisage policy reforms provoking a steady reduction in SA’s unemployment and poverty. The more difficult public and private sector success factors are largely in place.
Few countries could benefit as much, or as quickly, from simply shifting to economic policies which resemble those of successful nations. Conversely, SA’s transformation challenges will remain intractable if economic policies are not overhauled.
The point has often been made that roughly two decades ago large numbers of SA’s best teachers were unbundled from the education system. What is far less appreciated, but currently features on the Department of Trade and Industry’s website, is that at about the same time: “Tenders were ‘unbundled’ into smaller tenders to allow smaller enterprises to tender for work.” This may seem innocuous but it has been at least as deleterious as undermining teaching resources.
The goal, favouring young black companies over established white companies, was understandable but success always hinged on effective diffusion of knowledge and resources. Necessary collaborative solutions were rejected in favour of regulatory diktats. Costly inefficiencies have proliferated in every direction.
Government inspired small business lending programmes have generated extreme losses in seeking to overcome resource shortfalls while inadequate knowledge and efficiency has been countered by regulations to downplay price competitiveness. Transforming SA’s economy is a tall order but this approach - which is antithetical to success - must be replaced.
To his credit, Gwede Mantashe, a former head of the SACP, summarised in 2012 that BEE companies must “stop using the State as their cash cow by providing poor quality goods at inflated prices”.
Policy shifts necessary to unlock SA’s innate ingenuity are now within reach given that the ANC suddenly has to avoid being sunk in 2019 by an economic malaise. It is not however reasonable to assume the ANC can easily discard over twenty years of policy biases.
Investors must provide the analytical leadership by strategically supporting creative pilot projects which fuse transformation and productivity tools. Business-government dialogue should build around how such projects can be broadly replicated through various policies being reconceived.
SA’s business efforts to blend transformation and commercial objectives peaked long ago. They were suffocated by increasingly prescriptive policy directives.
SA’s government policy makers overcompensate for creativity and business acumen shortcomings with regulatory assertiveness. Business leaders should arm solution-minded politicians for policy skirmishes by showing what could happen if policy blockages were lifted.
Socially responsible investing in SA today is mostly about private sector redistribution efforts to mitigate poverty symptoms. They are often non-viable independent of concessionary funding. It is time to update the assumptions underlying such investment mandates with a view toward diffusing knowhow along commercially natural paths that uplift productivity.
In today’s newly competitive political environment, sweeping policy swings have suddenly become plausible. The alternative is years of meagre momentum.
Meanwhile, the limits of redistribution are nearing. Thus productivity and competitiveness must be improved to spur value-added exports. Instead, SA’s public policies and practices undermine productivity and competitiveness. Meaningful inclusive growth is contingent upon these objectives being aligned.
Blending commercial and transformation goals is doable, difficult, and necessary. Now is the time for private investors to become more purposeful toward such initiatives while practical voices advocate for policy shifts to unlock the nation’s growth potential.
South Africa needs to reconsider what is possible.
Shawn Hagedorn is an independent strategy advisor
This article first appeared in Business Day.