Negotiating an economic revival

Shawn Hagedorn says the ANC's dependency strategy has hit its limits

Our government policy makers will not independently change course. As in the politically perilous years preceding the 1994 transition, CEOs and other non-government leaders must use the current pandemic and the upcoming credit crisis to help chart a solution path. Lack of progress reflects their reluctance to reframe the core issues. Such reframing is indispensable.

Our leaders can’t produce a growth plan as the issues have been shaped for political advantage. The ANC dominates the national dialogue, and elections, through using social justice and ideological references to configure debates. This precludes alignment of development and commercial objectives.

ANC’s positions on issues such as property rights and labour regulations choke growth, yet, indirectly, they enjoy political support as components of a popular redistribution-focused agenda. Making inequality reduction the core objective has kept non-government leaders off balance, if not on the defensive, while providing political cover for destructive policies. This is no longer viable. Nor, however, can a new direction be charted without switching the objective and talking points away from inequality. Focusing on creating jobs would far more effectively align political and commercial goals.

To strengthen the hands of moderates, such as Tito Mboweni, sane voices outside of government must provide a commercially sensible growth plan which is packaged to accommodate political sensitivities while simultaneously reshaping the national dialogue. A jobs campaign should be marketed using unity language as business and government now need each other like never before. Major collaboration gains are both possible and required.

The ANC’s unreceptiveness to external input is now checked by a looming funding crisis and a harshly contracting black middle class. Much government and household debt will have to be “reprofiled”. If this happens without vital policy reforms, a majority of South Africans will be condemned to chronic poverty.  

It was abundantly clear pre-Covid that the economy was on an unsustainable trajectory. Yet our various leaders were powerless to offer solutions as the ANC's narrative-control followed, not from effective policies, but from defining issues. Leaders from business and other non-government communities must now provide an objectively informed solution path.

The ANC’s economic strategy intentionally made most households dependent on the state via payments or through labour legislation benefiting their support base. Policies dismissive of global trends, alongside rampant patronage and corruption, distracted from the underlying misperception: The ANC’s policy framework presumes the economy can be propelled through redistribution. The state gaining access to pension fund assets through prescribed asset legislation would be a final indulging of this destructive policy bias.

The ANC’s success at framing the economic issues tamed CEOs to where most quickly endorsed President Ramaphosa’s plan to boost growth through attracting investments. But attracting foreign capital is not an alternative to fixing the economy. Our economy is so ill-conceived that the current government debt trajectory can’t be serviced in the absence of sweeping policy reforms to boost growth.

Many warn that it is not sustainable for developing nations to have government debt approaching 100% of GDP. However, if a government’s debt is equal to its GDP but it can borrow at 2% and grow at 3%, the debt load is heavy but manageable. SA’s 10 year borrowing costs are about 9%. Economists expect inflation to average less than 5%, therefore growth in excess of 4% is needed - but out of reach. 

After the pandemic, growth is expected to again track the modest population growth rate of about 1.5%. It is not just that the debt trajectory is unsustainable; unemployment could wallow for a generation at obscene levels.

Mixing paltry growth with ongoing large deficits will precipitate a debt crisis. Much government and household debt should soon be restructured along with sweeping policy reforms to exit the pandemic with sustainable momentum. Alternative scenarios preclude meaningful growth in jobs. 

Focusing on redistribution, whether through BEE, a bloated civil service, or patronage, undermines prospects to surge value-added exports. Instead, growth becomes dependent on expanding domestic consumer spending. Households of a single country, the US, have assets exceeding liabilities by over $100 trillion. European and, increasingly, East Asian households are similarly affluent and thus resilient to downturns. Conversely, SA’s households are heavily burdened by expensive debt which has greatly constrained growth in net assets. 

Low household incomes and assets distinguish developing countries from emerging and developed nations. Our economic resilience is undermined by: low productivity; narrow international competitiveness; overreliance on commodity exports; and imprudent reliance on prohibitively expensive household and government debt.

Our economic policies are supposed to reduce inequality. Yet asset distribution among blacks is tightly clustered and now middle class jobs are contracting amid much indebtedness. Political stability will soon wobble - or worse.

Our economic trajectory was dire pre-Covid and policy input from big business had long been met with disdain, if not intimidation, from the ANC. Whereas many continued to presume, and hope, that big business leaders knew how to fix the economy, a sort of strategic appeasement with streaks of complicity evolved.

None of our leaders had a workable plan pre-Covid. While prevailing policies were destroying capital, business and government leaders agreed that attracting investment flows would remedy the situation. But the domestic economy didn’t have the purchasing power to fuel enough growth to dent unemployment and poverty.

Nor could investments in businesses targeting SA’s overly indebted consumers grow the economy. This pathway is even less viable now as the pandemic has sharply eroded our domestic purchasing power. Unemployment and poverty are spiking alongside coronavirus cases and deaths. Meanwhile, household income statements and balance sheets contract. 

While the risks today are comparable to those preceding the April 1994 elections, our current elected leaders are captured within a debilitating bubble of their own making. Again business and non-government leaders must step up to advance a constructive transition. A powerful plan will need to accompany some artful bubble popping.

My next article will outline how to achieve high growth through marrying commercial and development objectives.

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