Creating a potent growth plan starts with overcoming misperceptions 

Despite a growing majority of South Africans being trapped in poverty, nearly everyone chooses “inequality”, a thinly veiled reference to apartheid’s legacy, as their lead discripitor for SA’s economy. This epitomises the ANC’s success at framing issues as good-versus-evil choices. Years of compounding such distortions has incapicated our various leaders from being able to propose workable growth plans. This is no longer tenable.

The ANC’s thought manipulating efforts have warped policy perspectives by embedding profound misperceptions. Some of the more dangerous ones are confronted below. 

“Solidarity” is to be understood as submission to political power

A constructive solidarity would, rather, involve leaders outside of the ANC cohering around a commercially robust set of policy reforms which ANC moderates can sell to their comrades. Consider Tito Mboweni’s call for growth plan recommendations.

That sensible growth plans are elusive traces, firstly, to the ANC’s political strategy being incompatible with growth-focused policies, and secondly, to misperceptions about 21st century economic development drivers.

Focusing on saving jobs is another dangerous attempt to legitimise indefensible policies

Our economy’s structural deformities reflect the ANC’s successful political strategy of emphasising redistribution and making most South Africans reliant on government for vital monthly payments. Economic and political dynamics have long been deteriorating.

Efforts to sustain the status quo - disguised as efforts to preserve jobs - will almost certainly worsen unemployment and poverty for decades. Prospects for lasting damage before the 2024 elections are percolating.

Understanding the basics, seeing the big picture

Dozens of countries have imported, and adapted to suit their circumstances, the high growth model developed by Asian Tigers. Common among our diverse viewpoints are unchallenged presumptions suggesting such proven blueprints aren’t relevant here.

The differences between exporting raw materials and value-added exporting is massive. For countries with much poverty, there is an even greater distinction between seeking broad prosperity through reliance on domestic purchasing power versus export-led growth. Whether value-added exporting is centred around goods or services is a modest consideration. 

Our economic policy debates are as impoverished as a locked-down township. Political dominance has followed from downplaying growth and evidence based analysis to frame economic issues within social justice parameters. Challenging the prioritisation of redistribution is depicted as greedy and racist. Growth is sacrificed as dependency on the state exceeds its wobbling capacities. Referencing Asian growth models seems rudely inappropriate. A global perspective is lacking.

The country’s inherent wealth has long been exaggerated

The percentage of South Africans with incomes above the global average has always been small and it has long been declining. The country’s resource abundance, which peaked eons ago, is not remotely sufficient to overcome our current poverty burden. Like other overly resource dependent countries, such as Saudi Arabia or Venezuela, many factors continue to undermine the value of SA’s resource extraction sector making migration to value-added exporting an imperative.

The structure of SA’s economy makes investment led growth impossible

The structure of SA’s economy leads to investment capital being destroyed. All countries at all times harbour unsuccessful investments. The prevalence of imprudent borrowing by SA’s government and households was remarkably high pre-Covid. 

In an era with investors accepting negative yields on tens of trillions of dollars worth of debt, SA’s ability to cover its borrowing costs have steadily declined. If investors require at least an 8% annual return for lending to SA’s government for ten years, this means that SA’s nominal (includes inflation) GDP growth must exceed 8% to cover its borrowing costs.

If, say, the virus had been effortlessly dodged and inflation was stable at 5%, then growth would need to average at least 3% for a decade. Whereas February’s SONA and Budget speeches made clear that there was no growth strategy, the economy is now about 10% smaller and still contracting. Meanwhile, government’s debt load is bloating.  

Additional funding will be required to replace the aging stock of fixed investment and to accommodate shifts forced on the economy, such as those arising from more people working from home. But as domestic consumers’ and foreign tourists’ expenditures will have shrunk sharply from January 2020 into 2021, the volume of fixed investment that such spending can support will have also contracted.

“Say’s Law”, that supply creates its own demand, was firmly refuted by Keynes with reference to the Great Depression. It is even easier to refute the proposition that SA can grow through increasing investments flows - whether loans or equity investments, even including greenfield FDI investments - if such investments target the purchasing power of SA’s domestic consumption.  

Therefore, an investment drive which is not accompanied by broad structural reforms to increase SA’s export competitiveness is unworkable. This was evidenced, pre-Covid, by the reception Team SA received in Davos. Investors had grown weary of repeated attempts by President Ramaphosa’s team to attract investments with empty promises amid seemingly irreversible long-term stagnation - which traces to ill-conceived policies which the President continues to embrace.

Keynes’ remedy for inadequate consumer and business demand was to increase government spending and productivity. Pre- and post-Covid, our policy makers want to over indulge the former while avoiding the later. The still greater structural constraints peculiar to SA’s economy is enormous household indebtedness largely through loans so expensive that consumer purchasing power can’t grow. Combining stagnating domestic consumption with policies inimical to export competitiveness and over reliance on expensive debt ensures declining living standards.

Government cannot cover its borrowing costs as it borrows largely to fund interest expense, social grants and loss-making SOEs. Debt coverage is further exacerbated by seemingly perpetual economic stagnation. Meanwhile, already high tax levels greatly limit the potential to increase tax revenues.

The most fundamental flaw embedded within our economic policies is a profoundly inward focus when the primary driver of 21st economic growth remains global trade. Prioritising redistribution is fundamentally irreconcilable with prioritising value-added exporting as competitiveness is unavoidably sacrificed - international tourism had been the large volume exception. 

Uncapped volumes of attractively priced capital will flow to all corners of the world to support viable businesses and projects. The binding constraint is access to purchasing power. SA’s redistribution and dependency-creating policies block growth in domestic consumption while undermining export competitiveness thus further deterring investors.

The ANC’s successful political strategy is built on untenable economics. As it became increasingly entrenched it needed to consume ever larger volumes of capital. While some Covid-induced investment shifts will be necessary, the nation’s capacity to reward equity and loan capital is now sharply reduced, from an already overburdened level. 

To think growth can be spurred by attracting investments is a throwback to an era when cross border capital investments were unusual and SA was an internationally sanctioned, resource exporter. Then, international investments signalled confidence that the price of the commodity confirmed adequate international demand. Importantly, it also signaled that the political risks were deemed acceptable. Such outdated thinking ignores how high growth countries have achieved broad prosperity in recent decades.

SA has never been on a sustainable path toward achieving broad prosperity

SA’s poverty prevalence was so high when all-race voting began in 1994 that high volume poverty alleviation was sure to follow. Achieving moderate success was not difficult. What has been achieved is minor relative to what competent policy making would have accomplished.

GDP growth data can misrepresent. SA’s strong, five-year growth spurt to 2007 traces to China’s growth policies. As China’s policies are very nearly polar opposites of SA’s, it is irrational to conclude that SA’s best multi-year growth performance was sustainable. The more interesting argument, which the evidence supports, is that this growth spurt reduced SA’s long-term growth trajectory.

After achieving full WTO membership in 2001, China set out an aggressive infrastructure programme which spiked commodity prices leading to the rand’s value doubling versus the USD triggering lower interest rates resulting in much stronger property prices and a consumer spending boom largely funded through a surge in unsecured lending. Neither SA’s competitiveness nor its productivity were enhanced, rather, both suffered.

Not only were none of the growth drivers sustainable, the five years of nearly 5% growth created false beliefs in an economic model which needed to be upended.

SA’s volume of poverty negates focusing on inequality

SA had a massive prevalence of chronic poverty pre-covid. A majority of South Africans are now trapped in poverty and this cannot change without a major set of policy reversals.

If the national discourse was objectively grounded and solution focused, it would be obvious that the economy would need to be vastly healthier to justify focusing on inequality. Rather, the term “inequality” serves to corrupt the national discourse as it is used to insinuate that today’s rampant poverty is explained by aparthied injustices. This distracts from holding the current government accountable.

The binding constraint acting on our economy is inadequate access to sufficient purchasing power to surge employment. The remedy is to expand exports and domestic consumption. The former requires competitiveness focused policies and the latter requires households avoid expensive debt.

Globally, poverty and inequality have been plunging as technology and trade agreements have made it far easier for poor people to add-value to goods and services consumed by distant consumers with much discretionary purchasing power. Such purchases involve higher margins leading to worker gains. The upliftment potential of poor people producing basic commodities, like low-cost food and clothes, is inherently meagre.

That is, market access is key to upliftment, yet our policies lead to the economy being relatively closed. Not many of those employed add value to exports. Thus higher-income households are vital to the few upliftment paths the economy can offer. As our redistribution focused policies are inconsistent with expanding exports and growth, inequality will expand as poverty surges. To noticeably reduce poverty, exports must increase.

SA’s economy is an extreme outlier in that its policies reject the primary driver of economic development today, value-added exporting. This makes the nation’s higher-income, more productive workers even more vital. Yet the nation’s politics seek to undermine the value of their contributions without focusing on increasing the productivity of less skilled workers. Such perverted political-economic dynamics would be less suitable for broad consumption if the nation wasn’t distracted from reducing poverty by focusing on inequality.

The pain of cutting civil service wages extends beyond the workers

The rate of growth in the civil service wage bill needs to be cut but this needs to be part of a broader initiative which removes growth blockages and is accompanied by necessary debt relief. The productivity of SA’s civil service is generally low while their wages fund the workers’ household expenses, with multiplier effects benefiting formal and informal workers; large volumes of expensive personal debt; and, often, non-household family members.

The Covid crisis struck SA as Tito Mboweni’s efforts to reduce the civil service wage bill were going nowhere. The second half of this two-part series will unpack more of the policy shifts necessary to spur growth and why some of the more frequently mentioned proposals won’t work.

Shawn Hagedorn is an independent strategy adviser   shawn-hagedorn.com