This is the second article in a two part series. The first can be read here.
With a majority of voters and big business accepting its management of the economy, our ruling party morphed into a massive patronage network dependent on the same policies which are now smothering growth prospects. Navigating towards a sustainable growth path is still possible but it now requires minimising what is asked of our political leaders.
Offering a solution path
The pandemic has made placing one’s hopes in the 2024 elections recklessly unrealistic. The damage from postponing a substantial economic rebound would be unaffordably dire while the scheduled elections could be postponed or subverted. They could also be as inconsequential as last year’s.
Hopes that our ruling party would respond to today’s profound crisis by rehabilitating itself have been proven naive. Because the ANC’s change capacity is so modest, it must not only be narrowly directed, its leaders must be persuaded that they can have their cake and eat it. That this is our least awful option is testament to misconceived economic policies and an incoherent national dialogue.
Key growth drivers
The ANC always needed to pivot policies to spur growth through value-added exporting if there was ever to be any hope of achieving broad prosperity by 2050. This, however, requires a policy framework prioritising competitiveness which is fully irreconcilable with policies emphasising redistribution. The moderate minority in the ANC has no hope of swiftly swinging the majority decisively away from their allegiance to redistribution policies.
What is new is the simmering risk of a sovereign debt default as access to capital markets has become a dubious presumption. Just as Argentina has recently defaulted and is negotiating a debt restructuring, other nations will follow. SA is high on the list of likely defaulters.
In the absence of adequate policy shifts leading to many new export channels, a severe credit event could be held off for, at most, a few years. During that time the foundations of the economy would endure severe harm.
Domestic consumption versus exports
If, say, a Canadian company wants to hire South Africans to add-value to exports destined for Europe, it makes zero sense that such hiring should be blocked due to our redistribution-focused policies undermining competitiveness and inciting fears of property confiscation. Coherent arguments can be made for redistribution-focused policies only if the customers are affluent South Africans. Yet value-added exporting is the cornerstone of our era’s extraordinarily successful global economic development.
At the centre of SA’s pol-econ disconnects are two profound delusions which, oddly, can be made to largely cancel each other out. The 1990’s political transition was underwritten by a redistribution creed. Redistribution would overcome the injustices of the past thus providing upliftment to the previously disadvantaged and absolution to those who had benefited from the prior regime but had endorsed the transition through staying.
The moral case for this creed seemed unchallengeable until it was overindulged to the point of undermining growth while fueling patronage and corruption. That redistribution could serve as a substitute for growth has proven to be a tragic delusion. As importantly, the belief that SA is a wealthy country has also been debunked.
Growth enabling compromise
As significant growth requires expanding exports, the ANC can maintain most of their counterproductive redistribution-focused policies for now, so long as they provide special dispensations from anti-competitive regulations for new export initiatives. That such dispensations would be for fresh initiatives which otherwise would not happen, means this costs them less than nothing.
As it was always too difficult politically to shift economic policies toward advancing value-added exporting, it must now begin amid a crisis. The country will remain in some version of a crisis mode until much greater global integration - and the resulting surge in private sector employment - is achieved through adding value to exports. Until this happens alongside healthy household savings rates being maintained for multiple decades, economic health will be reliant on growing exports.
Similarly, until there is a successful debt reprofiling of much sovereign and household debt alongside substantial policy reforms, domestic purchasing power will continue to stagnate and the rand will remain weak. A weak rand will discourage importing of discretionary products while supporting export competitiveness.
Value added exporting
While having devastated SA’s already crippled economy, the pandemic must be seen as a crisis opening a path to overcome the policies which preclude adequate growth.
The loss of international tourists
The one compromise between BEE policies and accessing international purchasing power had been international tourism. The resulting hole in the economy is massive and it will have to be filled in terms of jobs, growth impetus and foreign exchange.
SMME development is SA’s safe assemblage zone
Even the EFF has formally endorsed the importance of SMME development.
Yet there simply is not the domestic purchasing power to support an adequate rebound in the SMME sector. Futuregrowth, perhaps SA’s leading impact investing house, has recently spotlighted exporting’s relevance to SMME development - this must become a common refrain.
Worldwide SMMEs ferret out export opportunities
The global norm is for smaller companies to pioneer national export channels.
In addition to myriad small volume export initiatives, there is much potential for SMMEs to assist large SA corporations in identifying export opportunities.
It is not the job of consultants or bureaucrats to identify untapped growth areas; that is what entrepreneurs do. Maybe Sun City or SA’s success in the film industry seem like obvious winners now, but it took entrepreneurial vision to bring them to life.
Special Economic Zones
The ANC likes SEZs but they think in terms of defining them geographically. Rather, all new export initiatives should enjoy sweeping dispensations from regulations which undermine competitiveness. This should be sold politically as an SMME development initiative designed to bolster big business support for SMMEs while mobilising domestic and international capital.
It can be demonstrated mathematically that SA’s economy cannot sustain even modest growth without some combination of surging value-added exports and reducing the country’s prohibitively expensive government and household debts.
There are just too many poor South Africans while the middle class and government are too indebted to spur growth.
The primary impediment to fixing the economy is that the ANC is not going to reinvent itself.
Yet the ANC can maintain, for now, the core of its redistribution biases as the domestic economy can’t fuel adequate growth in any event.
The current objective must be to limit the damage of today’s long-brewing economic crisis. The most damaging growth blockages must be greatly mitigated while setting precedents for coordinating commercial and political possibilities.
Two near-term developments can pivot the economy toward achieving broad prosperity without making this desperately needed step conditional on the ANC meaningfully upgrading its policies and practices. As a backdrop consideration, such a pivot would likely enthuse the atmospherics of IMF discussions with some much needed agreement on how to spur sustainable growth.
First, a pathway to much greater international integration must be packaged to align political, commercial and development objectives.
SMME development and replacing foreign tourism can offer packaging “wrappers” to overcome political resistance.
Providing the necessary regulatory dispensations can also be packaged as working with the IMF to exit the Covid crisis.
Second, financial repression options must be astutely managed by further demonstrating how political, commercial and development objectives can be aligned. This complex conversation has been avoided whereas it must soon be engaged earnestly.
Shawn Hagedorn is an independent strategy adviser shawn-hagedorn.com @shawnhagedorn