Politicsweb.co.za 30 January 2018

Shawn Hagedorn says finding a path towards high job creating growth is essential

One metric makes SA manageable

SA’s politics-meets-economics dialogue is too distorted by unrealistic social justice notions to identify appropriate goals, policies, and progress metrics. The new ANC president must assertively chart a course and determine how best to gauge success.

Due to the country’s social justice debates being stoked and exploited, SA’s politics and economics don’t align, rather they collide. Ramaphosa can solve this by focusing policies around SA’s single most critical economic metric: the rate of poverty alleviation. All South Africans would benefit.

Idealised concepts of fairness appeared to suit the ANC as its brand is built on its social justice credentials. Yet, those credentials were established through constitutionally enshrining universal political representation. Conversely, since SA’s profound political transition took hold, global poverty has plummeted to the point that SA’s prevalence of extreme poverty is now entrenched at over five time the global average.

Policies matter. All countries must somehow accommodate populist political pressures without allowing them to undermine competitiveness and growth. That SA is so ineffective at this reflects how its history, isolation, and politics all breed divisive. Agreeing a common goal provokes cooperation.

It is profoundly imprudent that SA imports inequality arguments from countries with minimal poverty. Public health officials are not distracted by some people living to 100 when children are perishing from an epidemic. Only through transcending mental blockages around social justice issues, can SA’s economic challenges become manageable.

It is as if a sailboat’s mast was connected to its deck with a floppy hinge. SA’s policy navigation and its economic propulsion are made directionless and weak by social justice perceptions being hijacked by actors and activists. Tracking the reduction of extreme poverty toward a “normal” level, will have the effect of aligning commercial and social interest. Securing the metaphorical mast to the hull and keel empowers steering and propulsion.

Regulatory efforts to redistribute wealth are bounded by SA’s national borders. Thus the nation’s focus is highly inward looking whereas growth today requires intense global integration. This disconnect entrenches SA’s high prevalence of extreme poverty.

Since 1990, the world’s extreme poverty has plummeted from 37% to less than 10%. The comparable figures for East Asia are from 60% to 3.5%. In SA today, profoundly counterproductive policy choices have resulted in 55% of the population being extremely poor.

Excessive reliance on BEE and related redistribution-focused policies was always going to backfire. SA has far too many poor people relative to the economy’s purchasing power. The global economy has at least two hundred times more purchasing power. East Asian countries cracked this code in the 1980s and within a generation they were able to very nearly eliminate extreme poverty from a level even higher than SA’s today.

Recent global poverty alleviation is only marginally explained by industrialisation. The larger forces are specialisation, interdependence, and the commercially efficient diffusion of knowledge and productive resources. Such factors divisively challenge the ANC’s collection of factions and the party’s policy making preferences, whereas redistribution unifies them. Yet SA’s redistribution options are now declining alongside the nation’s credit ratings. Policy pivots have become an urgent necessity.

The genius of democratic systems is that electoral pressures usually lead to factions cohering within a party to advance policies benefiting a majority of voters. Until rather recently however, the ANC has been justified in presuming majority support. Thus the ANC’s lead factions could pursue policies which offered their constituents short-term gains while entrenching the majority in extreme poverty.

Earlier indications suggesting SA was on track toward eventually achieving broad prosperity were always illusionary. Many of the jobs that were created were never sustainable. SA does not need a plan to reduce extreme poverty by 10%; it needs a plan to reduce extreme poverty to 10% or less. Yet to reach even 40% is mathematically implausible without surging value-added exports.

Many believe SA can achieve adequate growth through eradicating corruption. This corroborates how South Africans interpret economic challenges within a social justice context. Reducing corruption, improving education outcomes, expanding industrialisation, and improving consumer and investor confidence are all worth pursuing. But achieving all of these objective is insufficient to meaningfully reduce the nation’s exceedingly high prevalence of extreme poverty. As others have learned from the East Asians, intense integration into the global economy through value-added exporting has become mandatory.

Metrics such as GDP and jobs sound credible but both are unreliable. SA’s GDP was unsustainably spurred by growing consumer and government debt as well as by spikes in commodity prices. Similarly, there is a world of difference between creating jobs versus lifting the economy’s long-term capacity to expand the total number of sustainable jobs.

If Ramaphosa doesn’t create a path to steadily ratcheting poverty lower, he will likely be followed by a populist and the country’s prospects will descend deeply. He must overcome SA’s politically and economically paralysing social justice quagmire by targeting a steady reduction in extreme poverty through commercially viable economic growth. This will quell populist instincts, though not immediately. Thus such policy shifts must be initiated urgently.

A surge in value-added exports can be triggered through special dispensations for exporters from BEE and related competitiveness-inhibiting policies. Government must then leave it to entrepreneurs to determine SA’s comparative advantages. Such policy pivots can be sold to voters as being pro-poor – even though they will benefit all South Africans.