Investors want to invest

Shawn Hagedorn says their current apathy is a symptom not a cause of our economic malaise

31 May 2018 

Hinting at deeper issues, S&P's recently highlighted its concerns about SA's stagnant per capita income. Somewhat similarly, President Ramaphosa's investment drive will likely soon show SA needs not a “new dawn” but a “great awakening”.

Investor apathy is not a cause but a symptom. There would be a resounding investment boom if the country was expected to achieve broad prosperity over the next two or even three decades. Yet not for ten minutes has SA ever been on such a path. The problems stem from misguided beliefs.

Pre-1994 racial exclusion provoked post-1994 policies prioritising redistribution to the exclusion of meaningful growth. Investment analysis tools, alongside SA's persistently dire unemployment and poverty data, spotlight how seeking transformation through redistribution triggers stagnation.

SA's single post-1994 boom, the roughly five years of five percent growth ending in 2007, was a consequence of surging commodity demand induced by China's growth policies – which were, and are, polar opposites of this country's. The Rand doubled in value inducing lower interest rates and ballooning consumer debt. Such a growth spike was not only unsustainable, it hobbled future growth prospects as it undermined: competitiveness; global integration; and long-term growth in domestic consumption.

A decade of no growth in per-capita income has followed. Despite SA's efforts to shed corruption and incompetence, the IMF expects meagre growth through 2023. The time has come to unpack SA's underlying disconnects.

Last year, the pioneering behaviouralist, Richard Thaler, won the Nobel Prize in Economics. Also jolting the profession are the “network thinkers” who have successfully assaulted fields as diverse as ecology and management. Such emerging analysis tools expose why and how SA's policies are distinct - and dangerous - outliers.

As “big data” machines, such as Facebook, more deeply reveal how people think and interact, economists have recognised that humans are more social animals than rational "utility maximisers". Central to network thinking is a metric, “degrees of connectivity”, which further illuminates SA's underlying blockages.

Humans can organise and adapt in far greater numbers than other creatures. But to organise beyond kinship based networks, humans need shared beliefs. Hence, the impact of religion, patriotism, and ideologies. Beliefs shape personal decisions while dominating public choice debates.

Purging SA's economic blockages requires solutions which are quite technical. Instead, basic "technical" questions are ignored, such as: 'Is the plan mathematically feasible?' As investors rely on spreadsheets, they can't escape how SA lacks adequate purchasing power to achieve sufficient sustained growth to combat unemployment and poverty. Conversely, the country's policy makers routinely ignore this.

SA's pre-1994 voters were fed a diet of "swart gevaar". That this was rapidly transformed into a sense of obligation to make amends was an impressive political feat. However, such belief-system-gymnastics came at the expense of political and business leaders tacitly ignoring central economic realities. The country shifted from being an international pariah to, briefly, being a beacon of hope as the "rainbow nation", to now being a lone - and increasingly emaciated - wolf. Meanwhile, dozens of countries learned to simultaneously compete and collaborate, unexpectedly creating a "rainbow-esque world".

Taxing whites - directly and indirectly - to make most blacks at least modestly prosperous was never doable. Yet through electioneering and elections, redistribution beliefs have been reinforced politically by their prime custodian, the ruling party. While the moral underpinnings of these beliefs seem unassailable, they have inspired policy biases which entrench the nation's hectic levels of poverty and unemployment. Normally the risk of indulging national values is constrained by competing neighbouring nations, but such influences are diluted in SA due to: geography; geology; and a national sense of exceptionalism.

Local and international investors can provide adequate capital but there has to be a plan where the historically advantaged and disadvantaged find common purpose through exporting goods and services in far larger volumes. One Asian country after another has successfully travelled this path. Unfortunately, SA's politics are still not sufficiently competitive to inspire a sufficiently supportive regulatory environment.

Alternatives are absent. Redistribution is a tax. Continually raising taxes eventually becomes counterproductive. Nor can adequate growth be achieved through middle class and affluent households increasing their spending by inflation plus 10% each of the next twenty years.

While SA's policies have been inward-facing, and redistribution focused, the world has pummelled poverty through the commercial benefits of: global integration, interdependence, and specialisation. SA can compete effectively to fully integrate into the global economy but this requires policies consistent with global norms.

There is little logic to an investment thesis of funding the least skilled and least resourced to compete for domestic market share with the best resourced and most experienced – particularly in a relatively closed economy which exhibits few signs of escaping long-term stagnation.

As today's typical South African voters are far poorer, with vastly inferior prospects, than pre-1994 voters, a redistribution policy bias is quite tempting politically; yet it has been indulged to the point that everyone is worse off. Meanwhile, dozens of countries have rapidly advanced by expanding domestic supply chains and international distribution networks to sharply grow sales to deep-pocketed markets. This requires competitiveness-focused policies aligned with international best practices. In SA, existing investments and skills must support new investments and faster skill development. The motivations must be commercially grounded and export focused; not a domestic focused, regulatory box ticking exercise.

SA's large established companies need to share their skills and resources in commercially prudent ways with creative young companies to expand exports. Seeking to simply replace older well-resourced companies with younger less proven companies will neither inspire investment flows nor reduce unemployment. No country has ever achieved broad prosperity through exclusion and redistribution.

For decades, SA's brand of entrepreneurialism has focused heavily on distributing imported goods. This was somewhat inevitable when SA's economy relied heavily on exporting commodities leading to an often strong but volatile currency. To transition past the "resource curse", SA's new breed of entrepreneurs must focus on developing export channels and, as in all high growth economies, government and bigger businesses must support such entrepreneurial verve.

With such necessary shifts, SA will awaken to an exciting future.

Shawn Hagedorn is an independent strategy adviser