Politicsweb.co.za | 21 March 2019 Shawn Hagedorn writes on the insights that could be brought to bear on our predicament

No international expert is better qualified to diagnose SA’s multi-dimensional disconnects than Francis Fukuyama. He will give a live-streamed lecture from Johannesburg next Thursday evening. The event is hosted by the CDE which previously arranged for Harvard’s highly acclaimed development economist, Ricardo Hausmann, to publically explore the country’s blockages. Our policy makers largely ignored his valuable insights. Might this time be different?

The topics Fukuyama has addressed in books and international lectures span: social justice; patronage; dignity; trust; Marxism; capitalism; nation building; political identities; human nature; and social order. It is also significant that he teaches at Stanford University which is integral to Silicon Valley.

Those with long memories will recall Fukuyama rocketing to prominence via his 1989 essay “The End of History?” which foreshadowed the fall of the Berlin Wall and the Soviet Union’s demise. He queried whether the superior real-world performance of free-market, liberal democracy over economies centrally controlled by authoritarian governments would end such ideological debates.

According to the World Bank, 38% of the world’s population was extremely poor in 1990 versus less than 10% today. Trends suggest that by 2030 less than 3% of the world’s population will be extremely poor – excluding sub Saharan Africa where 90% of the world’s extreme poor are projected to reside. To get our politicians and policy makers to listen, Fukuyama needs to explain how there is a new wrinkle which determines such disparities.

Last month a senior World Bank official stated that SA’s annual growth over the next ten years will be capped at 1.4%. That is, SA is now completing a decade of per capita income stagnation and beginning another one. This is explained by how the world economy sharply pivoted in the early 1990s and how it is currently pivoting profoundly again – while this nation’s policies remain outdated and inward focused.

Through most of the industrial era, the self-made ultra-wealthy were more likely to have struck it big in real estate or through extracting natural resources than as innovators or industrialists. That is, until rather recently, industrialisation rewarded the exploitation of shortages.

The profound global swings of the past three decades have made access to “final demand”, that is, “purchasing power” the binding constraint on global and national economic growth. The key shifts have been: from manufacturing-led to services-led growth; from hydrocarbon-fueled growth to climate change mitigation; from inward looking, nationally focused economies to global integration emphasising competition and efficiencies; from industrial economics to the information age alongside digital economics where reproduction and transport costs often approach zero; and from the economic centre of gravity drifting from the North Atlantic to the Pacific.

These trends have undermined inflationary pressures, such that, as long as asset bubbles and debt traps can be avoided, economies can expand for a very long time if they can access sufficient final demand. This, along with accelerating technological advancements, has provoked an age of disruption which further prioritises the central importance of purchasing power.

Resource extraction dominates the exports of the most vulnerable economies. Whereas shortages would often provoke windfalls for extraction focused economies, now they more frequently inspire innovative alternatives.

The rise of China has been the most historic development of the past thirty years. Common to East Asian successes has been simultaneously maintaining high growth and high savings through exporting value-added goods and services to deep consumer markets. Such countries long ago positioned themselves for final demand being the global binding constraint.

China is particularly motivated to maintain high growth to buttress the legitimacy of its authoritarian government. Its economic model favoured aggressive savings to help fund massive fixed asset expansion programmes while value-added exports fueled growth.

More recently, China’s leaders witnessed first-hand the limitations inherent to investment-led growth. This happened despite China having shrewdly created the virtuous cycles necessary for poor people to sustainably transition to middle class.

China’s understanding how final demand has become the new binding constraint is central to its new growth strategy. Unfortunately, it now uses this knowledge to seek long-term strategic advantages over developed and developing countries. Most vulnerable are resource extraction economies overly eager to access capital.

Our policy makers are conditioned by decades of resource extraction amid much political stress to see capital formation as the key to unlock economic progress. That is, SA’s history suggests economic opportunities happen when investors decide global commodity demand offsets political, production, and price risks.

This outdated, mining-shaped perception of economics was on display when President Ramaphosa, supported by senior business leaders, looked to investors to spur the economy. Conversely, China’s leaders wrote the book on sustained middle class expansion through selling large volumes of value-added goods and services to deep consumer markets.

That global poverty will be concentrated in sub Saharan Africa traces to poor governance and excessive reliance on commodity exports – rather than developing value-added export channels to wealthy nations. SA’s economic stagnation further links to a preponderance of over indebted households and regulations constraining exports – such as tourism suffering from visa and birth certificate requirements.

Countries and companies which profitably serve affluent customers can readily access capital on attractive terms. China demonstrated this on a grand scale thus becoming the world’s largest manufacturer and exporter. But being number one means low growth as there is little scope to increase market share.

China’s new economic strategy targets countries seeking investment-driven growth. China offers non-transparent loans which frequently exploit how western lenders tend to demand terms requiring rising governance standards in developing countries.

China’s aggressive lending programmes alongside strategies to capture an increasing share of the world’s final demand are seen by some as colonialism through a new variant of mercantilism. Such judgements aside, recent responses of many countries to China’s new growth strategy suddenly signal a new kind of global cold war.

While Fukuyama is exceptionally well-placed to speak to SA’s social justice and nation building challenges, his still greater relevance traces to his having framed the implications of why the last cold war ended as it did. His unique career path makes him the ideal analyst to discern SA’s risks and opportunities arising from today’s emerging cold war.

Even with a critical election looming, such necessary international insights are absent from the national dialogue. Let’s hope Fukuyama chooses to persuasively unpack them.