Import substitution and regional exporting will backfire

Shawn Hagedorn says the ANC’s shift toward localisation is profoundly ill-advised

Import substitution and regional exporting will backfire

Successful countries influence each other. Each of our leadership groups has its own reasons for not being able to offer workable economic solutions. Chief among our pervasive impediments is that our domestic politics reject global realities. 

The ANC’s branding itself as the antidote to racial inequality helped entrench its electoral dominance, despite glaring governance shortcomings. This led to widespread patronage, isolationism and hostility toward commercial principles. While big business is poorly positioned to challenge the ANC’s narrative dominance given its vulnerability to the party’s regulatory zeal, it benefits no one when it endorses unworkable policies.

Those who advocate for progress via dislodging the ANC under appreciate both the urgent need for profound pivots and the broad appeal of its racial inequality branding. Nearly 70% of blacks are now entrenched in chronic poverty whereas whites continue to benefit from generations of accumulated wealth and skills. Thus the DA’s having rejected racialism increases its vulnerability to the political milking of inequality. 

The official opposition and leading think tanks are right to reject race-based policies. However, that they advocate persuasively for well-reasoned policies and pro-growth principles as alternatives to the ANC’s economically destructive policies is valuable but  insufficient. Their having long been right on so many issues has not altered the direction of travel. The damage accumulated over many years, and amplified by the pandemic, cannot be remedied in the absence of an abrupt awakening. 

What must dawn on our policymakers, and their critics, is that economic success determinants are mandated by the global economy.  Competitive gains accruing to more responsive neighbouring countries have made most nations’ politicians accept this. The lack of a hegemonic political party also helps. When, and only when, policies are reconceived away from indulging domestic politics to align with globally determined growth drivers, do unemployment and poverty challenges become manageable.

Our current situation makes clear how focusing on solutions is a different process from elucidating prudent policy positions. A solutions focus demands not just getting the basics right but firmly grasping the big picture. 

While destitution is being eradicated in all other regions, our rampant unemployment and poverty are modestly mitigated through transfer payments. Meanwhile, the notion that SA’s debt-to-GDP can reach levels of other highly indebted nations ignores how our economy doesn’t come close to covering its cost of capital. A country’s sovereign debt equal to its GDP can be quite sustainable if its economy is growing faster than its long-term borrowing costs. Our situation is very different.

The globally proven antidote to poverty is integration into global supply chains on commercial terms. The evidence supporting this claim is the more than a billion people who have been lifted out of poverty as their nations surged value-added exports. Global supply chains diffuse skills and provide much needed market access to deep consumer markets. 

As the ANC can’t force international consumers to accept the inflated costs their policies impose on SA goods and services, the party’s prioritising redistribution ahead of growth ensures it pursues isolationist policies. However, now that the economy is truly hobbled, our ruling party finally has recognised that our domestic purchasing power is woefully inadequate to fuel adequate growth. 

That the party has built its image around fighting racial inequality is contrary to embracing our era’s primary driver of economic upliftment, global integration. Many developing nations have contended with similar crosscurrents. Those that subsequently sustained high growth chose to embrace global integration. At this critical juncture in our nation’s history, the ANC has chosen to double down in the opposite direction.

To embrace localisation and exporting to neighbouring nations is to contemptuously reject the fundamental insights which spurred the world-changing rise of Asia. SA has, at most, 0.3% of the world’s disposable income. This neighbourhood doesn’t reach 1% until it is extended to include Nigeria.

Not so long ago, this region’s per capita income was similar to much of Asia’s. The dramatic differences today trace directly to global integration. Disposable income is to an economy what fish are to fishermen. SA’s lack of adequate global integration has placed excess reliance on too few consumers relative to the number of unemployed. Too many people want to fish relative to the number of fish in SA - and the regional situation is no better. Meanwhile, our high prevalence of expensive consumer debt amounts to smaller mesh nets which reduce future harvests. 

Designing effective remedies requires identifying the binding constraint. A shortage of fish won’t be remedied by increasing investments in fishing boats. Rather, global poverty has plunged through low-income workers adding value to exports. This is similar to shifting from fishing in an overfished lake to deep-water ocean fishing.

Whereas overfishing is a global problem, an increasing number of countries are developing deep consumer markets by steadily increasing worker productivity while avoiding households becoming burdened by expensive consumer indebtedness. That SA doesn’t follow this path traces to the ANC’s policies prioritising racial inequality.

Economies with generations of high household savings can quickly bounce back from the pandemic. Conversely, this country and region were immersed in rampant poverty pre-Covid. What is nearly as troubling as our ruling party’s newly expanded contempt for economic development fundamentals, is the modest rebuke it has drawn from our leaders outside the party.

While all economies will be permanently altered to some extent by the pandemic, it seems exceedingly likely that the enduring costs to this region will be vastly higher than the global norm. This region’s development has long been impeded by meagre transportation capacity. Elsewhere, populations are clustered either around coastlines or navigable river networks fed by snow covered mountain ranges. This region’s population dispersion and landscapes have always deterred long-distance trading.

The Covid crisis has accelerated how digitalisation reduces distance’s relevance. It is more sensible for outsourced jobs that can be done from home to reside in Cape Town than Dubai. Conversely, it is delusional to expect expensive infrastructure projects to reap near-term economic benefits in countries with high capital costs which aren’t focused on exporting to deep-pocketed consumer markets.

The ANC always needed to astutely blend the political demands for redistribution with the economic challenges of sustaining high growth. Now that it needs to urgently pivot to embrace pro-business policies and global integration, the party is paralysed by factionalism. 

The party’s shift toward localisation and exporting to neighbouring countries is profoundly ill-advised and such thinking should be much more assertively contested. Our only rational path is to emulate successful emerging nations.

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