NEWS & ANALYSIS

It’s time to prepare for transformation 2.0

Shawn Hagedorn says vast majority of SA households today are poor, over indebted or both

Transformation should be a prominent by-product of SA’s economic growth. Instead, policy makers have prioritised transformation as if it could serve as a growth substitute. As such policies continue to devastate economic prospects, it’s time to prepare for transformation 2.0.

It has been difficult for white business people to criticise transformation policies without being seen by many as greedy unrepentant racists. Now, as government’s options for funding its deficits constrict, the mood has become more urgent and less intolerant of divergent opinions. Constructive re-engagement is required.

SA’s economic challenges are routinely identified as poverty, unemployment and inequality. This chant is simultaneously credible and dangerous. Dozens of countries have pummeled poverty and unemployment in recent decades using related blueprints which emphasise global integration and household prudence. Conversely, blueprints for reducing inequality remain elusive. In fact, rising inequality often accompanies plunging unemployment and poverty.

SA’s policies and practices do not resemble those of the many countries that have slashed poverty in recent decades. Rather, focusing on redressing income inequality and historical inequities reflects a rare point of agreement across the party and among ANC alliance partners. While this bias is understandable, it has been over indulged to the point that dire consequences are looming. 

SA’s most strategic vulnerability has long been the intersection of economics and politics. This was the intersection most closely guarded during the 1990s transition. Eskom’s abundant woes evidence how economic vulnerabilities trace to widespread political malfeasance. That is, excessively prioritising transformation is particularly insidious as it systematically undermines capabilities, performance and accountability while accommodating corruption and patronage. By precluding the alignment of political and economic interests, overindulging transformation also explains the inability of leading voices inside and outside of government to produce a compelling growth plan.

The binding constraint prohibiting SA from achieving full employment and broad prosperity is access to sufficient purchasing power. A fast track path would involve an export surge being maintained for about two decades. Relying on growing domestic consumption would be a slow grind requiring generations of household austerity accompanied by steady skill building. The prudent path, followed by many nations, combines focusing on surging value-added exports with encouraging household financial prudence.

The ANC’s alignment partners, constituents and policy makers believe transformation can act as a substitute for access to adequate purchasing power. This is politically seductive but economically delusional. Indulging such policy biases provokes ghost town like effects at the national level whereby investments in infrastructure and fixed assets suffer for lack of adequate demand and an exodus of skills.

The vast majority of SA households today are poor, over indebted or both. The region is poorer still. SA’s prospects will remain grim until policies support global integration and household well-being. 

As a consultant it has been easy to warn that inadequate domestic purchasing power and households overly reliant on expensive debt would flatten the country’s growth trajectory. As some have noticed, I have been sounding the alarm to little avail for many years. For the ANC, lenders, retailers and others, preparing for prolonged stagnation is a managerial nightmare that many have been reluctant to confront.

Social and contractual obligations continue compounding briskly. If the ANC does not pivot from prioritising redistribution to emphasise growth and competitiveness, government’s prospects for issuing new debt will become dicey while an increasing number of households will be slipping into debt and poverty traps. 

A new transformation phase is beginning. Retailers and others are renegotiating leases while some Eskom suppliers have been asked to provide cost reductions. A debt relief bill is intended to resuscitate some poor over indebted borrowers. These are subtle indications of what is coming.

Eskom should be fundamentally restructured with government support being provided in return for concessions from various parties including lenders and unions. Among the reasons this isn’t happening, devising certain solution components is devilishly difficult while the ANC is at war with itself. 

National government risks similar funding challenges prior to its factional rivalries being favourably resolved. The emerging transformation phase will involve aggressive “renegotiations” via regulatory fiat.

Eskom seeking to renegotiate terms with its coal suppliers has odd similarities with the need to have lenders change how they lend to poor people. Only recently have the full societal costs of coal become broadly acknowledged alongside recognition that there are better options.  “Expensive consumer loans” can be substituted for “coal” in the prior sentence.

Just as there are many studies regarding the effects of various energy sources, a recent study by Differential Capital sets out why formal sector lending to low-income groups has been so harmful. Their report references the role expensive debt played leading up to the Marikana tragedy. I wrote about that at the time but there was little interest. The role that consumer debt played seemed to have been better covered in the UK than here. 

The work is so unattractive that even uneducated miners were paid lower-middle class wages, yet many were impoverished by interest costs and needed aggressive wage increases to remain solvent. The ideology of transformation encourages people as divergent as borrowers and lenders to ignore things as basic as long-term consequences.

SA’s economy has to be restructured. Yet the path of least political resistance involves new forms of wealth transfers soon being initiated to keep government afloat and appease protesters. Lenders are always high on such lists. Facing a sovereign debt default, government will be tempted to decree a sharp interest rate decline on new and existing lower-income consumer loans to spur consumer spending. Was the debt relief bill a beta version of such a programme?

If sweeping debt concessions were part of a major restructuring spanning SOEs and a competitiveness drive to surge exports, an IMF endorsement could follow. Lenders would grumble and take the knock. There also seems to be much probing to determine how prescribed assets could be structured to mitigate resistance.

A far better alternative would be for the private sector to present a workable plan which achieves healthy growth without destroying mountains of capital. A key impediment is fear of stating publicly that transformation must be de-prioritised in favour of boosting growth to subdue poverty and unemployment. The more voices that join the chorus the better.

Hagedorn is an independent strategy adviser shawn-hagedorn.com