Radical transformation versus economic reality

Shawn Hagedorn says reducing inequality requires high volume poverty alleviation maintained for decades

Economic stagnation undermines policy interventions

SA’s per capita income growth has been negative in recent years and unless the national dialogue is upgraded to inform broad policy shifts, this will become routine.

There is remarkably little awareness that seeking to reduce SA’s unemployment or poverty when the economy has entered a period of prolonged stagnation is counterproductive. The order of priorities must be: first, create policies to sustain adequate growth; then emphasise poverty alleviation; followed by ongoing efforts to improve equality.

Taking funds from sectors of the economy which are productive and competitive and directing them to less productive and less competitive sectors leads to lower growth and capital destruction. Forcing the creation of new jobs in this way decreases the total number of sustainable jobs. Thus SA’s credit rating trajectory reflects over reliance on redistribution in lieu of inclusive growth.

 SA has a clear political imperative to reduce poverty. Those in power choose to interpret this as a mandate to transfer wealth and this leads to policies which retard growth thus undermining prospects for large-scale poverty alleviation.

 As Business Day recently reported:

The drive to create a bigger black business class following the end of apartheid had been thwarted because emerging entrepreneurs struggled to obtain the capital required to finance big deals, the ANC’s economic policy head, Enoch Godongwana, said in an interview in Johannesburg on Wednesday.

"We’re talking about black people who have got to get access to the economy, but for them to get access they need to have money. These are the very people who were deprived of assets in the first place," Godongwana said.

Mr Godongwana believes emerging entrepreneurs have been thwarted for lack of capital to finance big deals. This sounds like justification for the programme to fund a hundred black industrialists - which will almost certainly entrench patronage while undermining growth and poverty alleviation.

The number crunchers at National Treasury and the credit agencies can see how a negative downward spiral is being triggered but this is lost on those who think redistribution is a substitute for growth. SA’s business leaders encourage the ruling party’s worst instincts when they support initiatives which privilege redistribution ahead of inclusive growth.

Godongwana further believes that to access the economy blacks need money. Such sentiments are telling and misplaced.

To meaningfully reduce inequality requires high volume poverty alleviation maintained for decades. Done correctly, redistribution can play a helpful supporting role. Access to the economy is described by one word but that word is not “money”, it is “jobs”.

Under apartheid non-whites were deprived of access to more valuable forms of skills, education, and opportunities. This profoundly restricted the ability of most South Africans to accumulate assets. There is however no workable option to correct this through mass redistribution. To provide adequate access to skills, education, and opportunities requires vastly different policies from those favoured by the ANC’s leadership.

It has been official ANC policy for at least twenty years to “unbundle” SA’s emerging companies from those that benefited under apartheid. Such indulging of resentments is understandable; it is not however affordable. The question now is whether the costs can be limited to just one lost generation.

For many decades, SA’s implicit economic creed has been: The world needs the nation’s minerals, therefore the country need not integrate meaningfully into the global economy. This was always wrongheaded. It became flagrantly so upon the arrival of universal suffrage with more than half the country being poor. SA simply doesn’t have the domestic purchasing power to fuel an acceptable pace of poverty alleviation.

 Even before the global economy morphed into today’s Information Age, economic development relied on the efficient diffusion of skills and knowledge. The ANC’s anti-colonial biases induce resistance to such diffusion. It's policymakers prefer to narrowly diffuse wealth. Fairness based arguments are recruited to support such interventions; yet number crunching demonstrates that such initiatives quickly become counterproductive for all but a few cronies.

 Quite ironically, Godongwa’s views about needing money for economic access is applicable to one important sector of the economy, farm ownership. Only those with deep pockets - and extensive farming expertise - should invest in farms.

 The inherent volatility of farming output amid sharp price swings greatly restricts the appropriateness of debt funding. Similarly, Godongwa along with his colleagues and SA’s banking executives also need to re-assess the appropriateness of debt funding for BEE deals generally.

 Prolonged stagnation means debt funded BEE deals for domestically focused companies can’t be made to work in the aggregate. Such support from the banking sector will hinder poverty alleviation in the absence of sustained high growth, or unless the initiatives being funded profitably increase exports.

 Agriculture is probably the best sector to gauge SA’s dysfunctional pol-econ dialogue given the OccupyLand issues and the prominence of food costs within low-income household budgets. While all countries struggle with farm policies, prosperity will elude emerging nations that can’t develop coherent agriculture policies.

 The economics and politics of agriculture mix immense complexity with various temptations. On an output-per-hectare basis, small farmers in Africa often appear to be extremely productive. Measured in terms of output-per-unit-of-labour, Canadian commercial farmers are often more than a hundred times more productive than such African small scale farmer reflecting far greater access to resources. It is labour productivity which drives prosperity.

 Farming provides upliftment escalators to very few workers. Driverless tractors are coming. Farming’s role in advancing a nation’s prosperity centres on constraining food prices.

 Of the nearly a billion people who are food stressed, more than half are in Sub Saharan Africa, and a majority are farmers. Countries are particularly susceptible to cronyism when they combine large resource endowments with a high prevalence of subsistence farming.

 Occupying land appeals to cronies and populists. Young people however don’t aspire to working small patches of land with hand tools.

 Theoretically, occupying land should work better if large farms are expropriated along with their heavy machinery. This would then be patronage not populism. The commercial and farming expertise required to successfully operate a large farm cannot, however, be accessed through confiscation. Failure, expressed through rising hunger, would follow.

 Such BEE issues are routinely mismanaged and mislabeled. Radical economic transformation of commercial farms would inflict cost not so much on the fiscus, á la SAA, but, even more than with Eskom, the effects of management malfeasance would be transmitted through rising prices, leaving the poor poorer and increasingly reliant on public support.

 The central organising principle for societies had always been avoiding starvation. Then about a dozen generations ago, two countries, the Netherlands and England, were the first to eliminate famines.

 The key principles employed - private property rights and capitalism - were then slowly diffused around most of the world. SA’s OccupyLand movement rejects such foundational precepts of poverty alleviation. The last truly extreme famine was in the early 1960s when tens of millions starved to death following China’s misconceived “Great leap forward” - a set of policies also hostile to property rights and capitalism.  

 Criticising leaders of political parties, and those who advise them on policy choices, is easy and insufficient. SA’s dialogue around how politics and economics interact must be broadly upgraded. A large number of perceptions, and thus policies, must change to avoid stagnation giving way to prolonged decline.

Shawn Hagedorn in an independent strategy adviser