NEWS & ANALYSIS

A council isn't the answer to our economic challenges

Shawn Hagedorn says President Ramaphosa's task is to apply international best practice to our situation

That President Ramaphosa committed in his State of the Nation Address to create an advisory council which “will draw on the expertise and capabilities that reside in labour, business, civil society and academia” makes clear that he is flummoxed by the nation's economic challenges. If prospective council members had compelling growth plans, they would not have kept them secret. While councils can advance political compromises, they are more likely to smother than spur bold shifts. Conversely, a recent proposal by global executives offers the solution path required.

Why has SA never been on a path that could deliver broad prosperity? The post 1994 factors trace to SA's politics and economics being undermined by unrealisable social justice expectations. People believe SA is a depository of great wealth and that democracy should provoke equitable outcomes. The reality is less sanguine and as redistribution is a form of taxation, over reliance on it has stifled growth.

The value of SA's considerable natural endowments is offset by its poverty and isolation. Unlike emerging nations in other regions, SA lacks a regional rival. Thus the best indicator that SA is on a perilous path has been credit rating downgrades.

Government's obligations to the majority of voters who are poor are, in effect, senior to bondholder obligations. SA would default on its debts before allowing the poor to starve. Thus SA's debt achieved junk status despite a quite moderate debt-to-gdp level. The other huge “credit negative” factor is that the national dialogue is lacking a workable growth model.

SA's credit ratings clearly convey that there is no path to adequate financial recompense for the injustices of apartheid. That this is not accepted – by any major elements of society – precludes the political realism required for effective policy making. Rather, the country continues to over emphasise redistribution to the point that per capita income growth has stagnated for nearly a decade. Thus, everyone suffers, particularly the poor. Purging corruption is insufficient to change this.

Today's high flying emerging economies are not strangers to massive historical injustices. Yet having to compete with their neighbouring nations has forced them to move on. Isolation breeds delusions. Hundreds of thousands of South Africans died horrific deaths before the beetroot and garlic myths were expunged. That today tens of millions of South Africans are condemned to poverty, and the entire nation is held back, traces to false economic beliefs. For SA to succeed it must move beyond its divisive past. Yet, by itself, unity at home leads nowhere. Without pivoting decisively toward global integration, the nation will hopscotch from one crisis to the next.

The costs of SA's political-economic linkages being overwhelmed by unrealistic reparation expectations is multiplied by various forms of isolation. No country is as distant from a top three economy. No successful nation shares SA's isolationist mentality.

Apartheid's lingering political implications are irreconcilable with the core precepts of this era's phenomenal global successes at eradicating poverty and advancing broad prosperity. The global economic drivers are not going to change to accommodate SA's self-defeating perceptions. SA's outlook must shift.

Fairness-focused tensions amplify the resentment of state capture. Yet while Jacob Zuma's regime redirected and destroyed much wealth, the nation's balance sheet deterioration mostly traces to policy errors. For decades, SA's policies have undermined its ability to sustain high growth.

The four groups Ramaphosa mentioned will not miraculously upgrade their solutions cabilities. Labour union preferences are sharply at odds with the policy pivots required to unlock far higher workforce participation.

SA has many truly exceptional business people. Unsurprisingly however, none of them has offered a potent growth model. Knowing how to build a successful business is different in kind from knowing how to build a successful economy. By way of comparing health and wealth systems, when SA was being devastated by AIDS, it was not surgeons or senior hospital managers that tamed the threat. Rather it was specialists in virology. SA's economic challenges require commercially robust expertise in economic development.

“Civil society” ranges from church groups to think tanks. Theologians don't divine economic solutions. SA's think tanks and academics do exemplary work. None of them, however, has employed the right methodologies to accurately unpack SA's challenges and provide built-for-purpose solutions.

Recurring methodological shortcomings include insufficient rigour in interrogating base presumptions combined with inadequate commercial instincts and lack of a global orientation. It is the basics of SA's economy which preclude broad prosperity. Resisting global integration today is the equivalent of opposing urbanisation a century ago. Such insights are obvious to foreigners who can resist the pull of SA's social justice vortex while combining much local knowledge with the ability to realistically assess development drivers.

Chief among the complications, popular economic metrics are often highly misleading in SA. If the speedometer says 120 kph yet the car is headed in the wrong direction, 120 misstates the rate of progress.

A related consideration is that almost all countries in other regions subscribe to an economic model which emphasises: specialisation; hyper competitiveness; and global integration. That is, most countries employ a model which expands prosperity. Conversely, SA's redistribution predilections can't be reconciled with building competitiveness and productiveness through specialisation and global integration.

This country's politically induced commitment to redistribution biases reject what works elsewhere, yet SA is unable to produce a viable alternative. Thus, rather than expanding prosperity, SA relies on unsustainable growth substitutes: depleting natural resources; redistribution; and debt funding. The standard toolbox of metrics mustn't be casually relied upon under such circumstances.

Consider how StatsSA's data shows poverty declining from 66.6% in 2006 to 53.2% in 2011 and then rising to 55.5% in 2015. The reflex reaction is to believe that SA's economy was on track and then came off the rails due to Zuma's policies and looting. This ignores the core reality that SA's economy has never been on a sustainable path toward achieving broad prosperity. Such sidestepping precludes solution enabling analysis – as does the rarely interrogated presumption that SA can afford its isolationist outlook.

In 2002, China achieved full acceptance into the World Trade Organisation. This provided much impetus to its formidable growth model, a blend of: value-added exporting, a cheap-but-stable currency, high savings, and massive investments in factories, homes, and infrastructure. Much of East Asia was pulled along and demand for commodities surged. In SA this led to commodity exports, housing prices, consumer demand, and demand for expensive consumer credit, all spiking as the rand soared allowing interest rates to be ratcheted lower. That period's growth spurt borrowed from the future leading to the current decade of no growth in per capita income.

That is, five years of roughly five percent GDP growth was highly inconsistent with SA pursuing a path to broad prosperity. Yet those “boom years” inspired various efforts to boost social grants, thus poverty declined. None of the standard metrics expresses how this period was undermining SA's prospects. As SA's policies refute China's, opposite results should have been anticipated.

SA's obsession with social justice provokes a reflex reaction to presume that looting was the cause of SA's reversal of fortunes. This is evident today as many think its only fair to retain the senior comrades who didn't loot - even if the policies they authored did far more damage than state capture.

In a fit of social justice delusions, such policy makers sought to coerce global automakers to cede meaningful ownership stakes in their local operations to blacks. Whether such companies had benefited from apartheid did not appear to matter. Rather, they were seen as captive targets. The automotive executives responded in a way that has alluded the groups Ramaphosa presumes can cobble solutions. The car executives proffered a powerful solution path consistent with today's global realities.

Rather than surrendering to government's ill-conceived coercion efforts, the automaker executives propose to provide the up-to-date knowledge and investment funding to expand SA's automotive supplier network in ways which would be commercially robust and inclusive. This blueprint is precisely the antidote required for SA's hopelessly misguided policy adventures.

Consider how roughly half the revenues for SA's largest companies are derived internationally whereas only a small fraction of SA's workforce contributes to value-added exports. (The vehicle manufacturing sector is the prominent exception.) Such deeply entrenched growth impediments trace to misconceived policies.

The inescapable reality is that SA's economy must be fundamentally reconceived to focus on value-added exports as the nation's purchasing power is woefully insufficient to remedy its extremely high poverty prevalence. Very nearly every other country has learned this essential lesson. It must be said: SA's social justice delusions form a sort of collective learning disability. This must be overcome urgently.

SA's leaders from labour, business, civil society and academia should respond to President Ramaphosa's invitation:

Dear President Ramaphosa,

Please don't create a committee to reinvent the wheel. Import the world's best ideas to fix the economy and then encourage local experts to tweak the basic outline.

SA's economy will never deliver broad prosperity without first overcoming its isolationist biases.

Hagedorn is an independent strategy adviser

@shawnhagedorn