Global integration makes it impossible, while economic resiliency depends on many other factors

19 NOVEMBER 2020 – 18:46 SHAWN HAGEDORN Business Day

Crisis management demands objective awareness whereas SA’s economic decline traces to misperceptions. A sovereign debt restructuring looms while we associate IMF assistance with a loss of economic sovereignty. Believing in economic sovereignty is like a gateway drug. It inspires further delusions while reinforcing our governing party’s worst policy instincts.

Economic independence ceased being a viable option as global integration and technological advances became the world’s dominant growth drivers over the past 40 years. Previously, economic sovereignty was associated with self sufficiency in terms of food production and natural resource endowments, with SA scoring exceptionally well — except for the lack of meaningful oil or gas fields. 

The current pandemic highlights both the value of “economic resiliency” and the dangers of pursuing economic sovereignty. Even if we were to soon discover sufficient oil and gas deposits to become energy independent, economic resiliency would still require policy pivots alongside decades of strong growth.  

Standard metrics don’t capture our economic plight. Youth unemployment is destined to stay dangerously elevated for at least a decade. Much of the working-age population will cease being young while never having been formally employed. Their already bleak odds then plummet of ever finding meaningful employment. Such damage becomes irreparable.

Most countries across the West and East are vastly more resilient than SA as they pursue not the insidious notion of economic sovereignty but rather broad prosperity through increasing global integration, worker productivity and household savings.

Our politics, reflecting widespread poverty and grave historical inequities, prioritise redistribution over growth. This prompts inward-looking, short-term focused policies which result in unsustainable reliance on the state and a poorly skilled workforce. The day of reckoning was postponed through borrowings but now the finances of average households are buckling, along with the government’s, from high volumes of expensive debt.

A country’s sovereign debt can reach 100% of GDP without triggering instabilities if most households have accumulated considerable wealth. By definition, this is not the case in developing countries. Conversely, European countries can borrow at very low rates and their workers can add value to goods and services desired by resilient buyers. Many such consumers are domestic while others are accessed through regional and global integration. 

SA’s 10-year government debt trades near 9% versus less than 1% for many countries with high debt loads. This huge differential is partially explained by our much higher inflation — which doesn’t stem from strong consumer demand but rather from public sector inefficiencies, as epitomised by Eskom.

Countries across the West and the East have rejected outdated notions of economic sovereignty to pursue the economic resiliency only broad prosperity can offer. Stringing together healthy GDP growth figures is not sufficient. The Mbeki-Manuel era was fiscally prudent yet too inwardly focused. Had there never been a president Jacob Zuma intent on creating a huge patronage network, progress towards expanding the middle class would still have hit a wall. There was never an inward-focused path for SA to achieve broad prosperity by midcentury. 

If SA households had been saving for the past 20 years to accumulate wealth, growth would have suffered. Instead, growth was spurred by unsustainable reliance on expensive government and household debt, thus making a mockery of economic sovereignty while undermining resiliency. Meanwhile, many Asian nations were rapidly achieving broad prosperity through growing value-added exports while maintaining high household savings rates.

It doesn’t matter whether access to capital comes from discovering underground riches or borrowing from foreigners, SA’s economy is not designed to build household wealth. 

If a country with a large, well-educated middle class, such as Taiwan or Norway, suddenly discovers a hugely valuable deposit of natural resources, the politics are fully manageable and the main effect is that taxes decline a bit. In SA, economic policies must accommodate the politics of a large majority of citizens being poor and having been oppressed. The ANC’s economic impulses reflect these underlying political realities and this leads to inward-focused policies.

But this is unworkable as the world economy dictates terms very favourable to nations that embrace global integration while dooming those that indulge fantasies of economic sovereignty. 

For millennia, wealth and power were tightly clustered by controlling land. Industrialisation then prioritised energy and mineral deposits. These days, services continue to grow faster than manufacturing while the world hectically transitions into a green, digital era where the politics and economics are very different.

Reproducing and distributing a million, or a billion, copies of a powerful software solution costs essentially zero with negligible environmental consequences. Key economic drivers of the past, such as scarcity and transaction costs, have lost much relevance. Likewise, the relevance of borders keeps declining. 

The situational awareness we need to navigate out of this crisis must be grounded by an up-to-date global perspective. Once we purge outdated notions, such as pursuing economic sovereignty, designing and implementing solutions will become manageable.