Playing chicken with the IMF (I)

Shawn Hagedorn says a lot of economic damage could be done before ANC is forced into reform (if it ever is)

Avoid making economic solutions dependent on political renewal

Our economic malaise traces to constitutional structures having been subverted by a deeply entrenched patronage network. Somewhat paradoxically, this means economic fixes must precede political remedies. That is, economic solutions must buy time through selling reality-anchored hope.

Evaluating the likelihood that the economy will be as healthy in 2050 as it was in 2010 offers a quick dive deep into the realism realm. Such estimating requires defining “healthy” and identifying success factors. An appropriately framed analysis will then spotlight why progress has been so elusive, while highlighting what needs to be done.

Measuring economic health

Among all the high frequency data series, the secular trend in private sector employment is SA’s single best gauge of economic health. In the ten years preceding the pandemic, as government debt-to-GDP doubled, unemployment had risen from 25% to 30%. Meanwhile, post-1994 gains at reducing poverty were significantly eroded as capital, and job creation, shifted from productive private sector initiatives to fund SOEs and a swelling civil service payroll.

Per capita income trends are important but the tendency is to place excess reliance on GDP patterns and their subsets. Our economy grew at nearly five percent per year for the five years ending in 2007. However, this potent performance traced to strong global commodity demand and a surge in consumer borrowings. Neither can sustain long-term growth. Worse still, that impressive growth spurt discouraged necessary structural shifts.

The objective must be broad prosperity and this is inextricably tied to sustained high growth in private sector employment. 

Identifying the primary growth driver

President Ramaphosa’s pre-Covid growth strategy emphasised attracting investment capital. That the focus has since narrowed to favour infrastructure investments reflects an inability to answer: Who is to buy what?

If SA’s economic growth is to primarily target South African consumers, then we can confidently predict that our economy in 2050 will be less healthy than it was in 2010. From the time SA was subjected to international trade sanctions, global poverty has plunged as massive volumes of poor people have gained employment within international supply chains. This employment path has been the common denominator among high growth emerging economies but it is rejected by our policy makers whose beliefs in state-centrism and redistribution reinforce their isolationist biases. 

In the absence of expanding exports, an economy’s growth is restricted by its ability to enlarge domestic consumer spending. This requires increasing both productivity and household savings. Productivity increases are mostly about swelling private sector employment of people and capital alongside technology and education gains. This has gone poorly in SA while household savings have been retarded by excessively large and expensive debt burdens.

Thus, pre-Covid economic growth had slowed to a crawl and our various leaders then, and now, have lacked workable growth strategies. The mathematics are irrefutable: SA can only achieve adequate employment growth through steadily increasing exports. Unfortunately, policies to achieve export-led long-term growth run counter to the ANC’s state-centrism and redistribution focus. However, turning the corner is possible without full-scale policy shifts.

Market access to discretionary income is the magical ingredient that drives upliftment. Unfortunately, the discretionary income of SA’s consumers has long been stagnating and, as it is now down at least 10% from last year, a rapid rebound is not plausible. 

If SA pursues strategies which are inversions of those followed by high growth countries, such as import substitution or focusing on selling to low-income neighbouring countries, our economy will inevitably be less healthy in 30 years than it was ten years ago. Adequate growth can only be achieved by adding value to products and services destined for large and affluent consumer markets that can accommodate substantial operating margins.

Political blockages

As helpful as it would be to weed out patronage and corruption, this would be insufficient to remedy SA’s dangerous economic trajectory. The globally dominant upliftment path, value-added exporting, is directly at odds with the ANC’s political and economic strategies. Thus, the ANC’s policies have precluded a pivot from SA’s traditional positioning as an isolated economy reliant on commodity exports. 

SA’s growth blockages have deep roots. The ANC’s redistribution policy focus is inherently isolationist, and it has bred myriad barriers to global integration, while being central to both the ruling party’s electoral success and its patronage network. Yet economic success is now dependent on the ruling party’s redistribution-focused strategies accommodating the prioritising of competitiveness and integration into global supply chains. The path which navigates this central dilemma is narrow.

Without rejecting the status quo, it could take many years for SA to return to its early-2020 pace of economic output which was already hampered by long-term stagnation, high household and government reliance on expensive debt, 30% unemployment and rampant poverty. Even if the pandemic disruptions rapidly abate, waves of defaults risk exacerbating unemployment thus further eroding consumer purchasing capacity.

The ANC most clearly displays its indifference toward economic growth fundamentals when it seeks to have the government’s role in the economy expand to forestall high profile redundancies. Big business has tended to play along as demonstrated by its support for resurrecting African Bank and its seeming passivity toward efforts to revive SAA.

As depicted by credit rating downgrades, the deterioration in our stagnating economy’s ability to cover its borrowing costs was accelerating pre-Covid. The long-term damage to the economy by ill-considered lockdown measures now precludes a sharp post-Covid bounce. 

Financial repression

The well-known variety of cures for too much debt and too little purchasing power falls under the heading, “financial repression”. In short, savers are made to suffer to benefit borrowers and consumers. The common tools have been: inflation, forced investments, and debt write-downs. 

SA’s misaligned political-economy has long been careening toward a day of reckoning. An “IMF bailout” is a popular yet misleading expression. What is required is an orderly reprofiling of much government and household debt accompanied by sweeping policy reforms to abandon the destructive overemphasis on redistribution to instead focus on integration into the global economy. 

Ideally, such IMF-led negotiations would coincide with a national election. This was the path SA was on pre-Covid, reflecting perilous debt and growth trajectories. Those trajectories are now much worse yet the ANC has signalled that they will not initiate sweeping policy reforms. 

The required policy pivots are directly contrary to the ruling party’s political strategy and anathema to its alignment partners. This means our ruling party will “play chicken” with the IMF with everyone knowing that the ANC is quite willing to sacrifice the economy’s long-term prospects. Forcing pension managers to fund government deficits, with further assistance from the SARB, might buy two or three years. Alternatively, a seismic credit event could suddenly trigger a funding crisis.

By the time prescribing assets and central bank options are exhausted, the country’s savings pool will have been severely depleted. It is only then that the IMF and external creditors will be able to drive a hard bargain. But by then the cracks at the foundation of our constitutional democracy may have given way leading to one-party rule immune to the pressures of legitimate elections. 

Maintaining a long-term view has never been more critical. Writing-off a great deal of government and household debt might appeal to ANC leaders as it could lead to new borrowings thus spurring immediate consumption to provoke a short-term sugar high. The existential risk is that such write-offs unaccompanied by the policy pivots necessary to access international purchasing power, would be the equivalent of slaying the livestock while consuming the seedstock. The country would then have no chance of being better off in 30 years than it was ten years ago.

Part II will set out how the economy can be put on a long-term growth path while minimising reliance on the ANC.

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