Hitting rock bottom with EWC

Shawn Hagedorn says SA should stop trying to emulate Zimbabwe, and study instead the Indian model

The EWC threat evidences a dysfunctional national dialogue

The Expropriation without compensation (EWC) debate reflects a dysfunctional national dialogue as does the lack of acknowledgment that SA has never had a growth plan that could achieve broad prosperity. SA's politics will not spur adequate structural reforms without the national dialogue being reconcstituted. Might the EWC threat unleash a freshly realistic reassessment of SA's risks and prospects or will necessary policy reforms have to wait for a harsh economic crisis?

SA is a global outlier in that it is a regional hegemon without a benchmark competitor. The nation focuses on short-term GDP fluctuations without considering that its poverty and unemployment levels would be recognised as a great depression in all other parts of the world. Comparisons to an economic cripple like Zimbabwe are irresponsible.

It is equally odd that SA policy debates reflect little expertise around how economic development objectives today are achieved through advancing global competitiveness. Thus, SA's national dialogue and politics have favoured redistribution ahead of growth to the point that a very high level of poverty prevalence has become entrenched.

India is a useful benchmark competitor in that it also quickly indulged an untenable bias toward redistribution after its colonial period ended. Also, India's caste system resembled apartheid in that it favoured minority groups ahead of the majority population and legislation was passed during the transition from colonialism to outlaw such favouritism.

SA has long produced highly competent capital market economists while the nation still has little expertise in development economics. Conversely, India was quite slow to develop expertise in capital markets economics, while it has long produced many of the world's most respected development economists.

Capital markets play a crucial role in advanced economies through pricing securities. Economists in this area are largely focused on rates of change and trends. This is radically different from focusing on how to structure an economy.

The importance of growing value-added exports has been routinely ignored despite the mathematics being clear that SA lacks sufficient final demand to overcome its massive poverty. This would be widely appreciated, if SA economic development expertise was on a par with its capital markets sophistication.

Similarly, there is scant recognition that SA has never been on a path which could lead to broad prosperity within, say, three or four decade. If this central consideration had been appreciated, then it would also have been clear that during SA's strongest post-1994 GDP growth period, the five years ending 2007 averaging 5% annual growth, the seeds for SA's current stagnation were planted. This is referred to as “immiserizing growth”.

The term was coined in 1958 by Jahreg Bhagwati. He and another world renowned Indian economists, Nobel Laureate, Amartya Sen, who was also born in 1933, have been publicly feuding for over half a century on how best to manage India's economy. Sen has had a profound impact on economics globally. How the UN's Millennium Development Goals and the subsequent Sustainable Development Goals were defined trace directly to his work. He emphasises redistribution while Bhagwati favours focusing on growth.

SA's pol-econ debates and policies are sharply skewed to favour redistribution to the point that the country's long-term growth trajectory can't support adequate job creation or ongoing expansion of social grants. SA's debates are dysfunctional as politics discourage Bhagwati-like voices advocating for broad prosperity through emphasising growth. Such counterproductive politics are compounded by the national dialogue's paper thin knowledge of how economic development happens in the 21st century.

In lieu of a workable growth plan, SA places unsustainable reliance on: depleting natural resource; consumer and government debt; and excessive redistribution. As one economist once noted, “If something cannot go on forever, it will stop.”

Science and constructive debates do not feature amid SA's politically captured economic debates. The EWC issue is as dismissive of economic development science as the “beetroot and garlic” remedies were of microbiology. One way or another, this will soon stop.

When India encountered a balance of payments crisis in 1990, reforms were enacted to pursue growth through global integration. Since then India's economy has averaged seven percent growth, mostly through focusing on service exports.

With its population growth having declined to 1.2%, if it maintains seven percent economic growth, India's per capita income will double every 12 years. Conversely, SA annual economic growth has barely kept up with the nation's 1.6% population growth rate resulting in almost a decade of no growth in per capita income.

In the absence of a benchmark competitor, SA's economy and its national dialogue have stagnated amid a profoundly inward looking perspective. The nation's declining credit rating has signaled danger ahead while the EWC debate further suggests that counterproductive policies will be pursued as a matter of political expediency until a severe credit event or a balance of payment crisis erupts. Food price inflation is also a significant risk.

SA's EWC debate could serve a useful purpose if this self-inflicted crisis leads to a reality based national dialogue. It is only natural that many reference Zimbabwe's recent efforts to pivot toward constructive policies. Yet it is the countries that have pummeled poverty, such as India, which SA must emulate. India's export focused growth reforms of the early 1990s offer the insights SA needs.

Shawn Hagedorn is an independent strategy adviser