Nov 15, 2021

Daily Friend

How should South Africans interpret Elon Musk suggesting he would give the UN six billion dollars if it knew how to end poverty?

A best-case interpretation would be that Musk’s conditional offer is a prelude to his announcing a plan to end poverty. While this is neither preposterous nor likely, we should consider why our growth, employment and poverty blockages would seem far less daunting to him.

Musk understood better than anyone how to fast-track scientific and commercial breakthroughs to make electric cars competitive. His being quick to see the enormous advantages of initially competing in the luxury segment made the auto industry’s other executives look foolish. 

The relevance to South Africa of how Musk accelerated adoption of electric cars, by roughly a decade, is that our policies continue to place imprudent reliance on our beleaguered domestic consumers and exporting commodities and agricultural products. Both offer meagre employment and long-term growth prospects.

The discretionary purchasing power of global consumers is about 300 times greater than South Africa’s. It will more than double over the next twenty years, whereas South Africa’s is at risk of declining.  

Dozens of countries have trounced poverty in recent decades with little reliance on aid. Their solutions frequently emphasised competing in niched segments to integrate deeply into global supply chains.  

The two essential ingredients for broad upliftment which elude South Africa and most sub-Saharan Africa nations – sustaining high growth and a healthy household savings rate – are mutually exclusive unless a country consistently exports more than it imports. However, when commodities dominate exports and the population is mostly poor, elites are incentivised to maintain their privileges through keeping the economy relatively closed and the population poor and uneducated. 

This echoes traditional agricultural societies when feudal structures were the norm globally. It doesn’t take long for patronage networks to become ubiquitous in such settings, and within diverse societies, such patronage, and political parties, will tend to cluster ethnically. Ruling party elites are then structurally discouraged from supporting broad upliftment.

Replay

The ANC’s political machinery and policies are designed for a replay of the last half of the last century with a different – though still narrow – set of beneficiaries. Exporting is to remain centred around minerals, agricultural products and some cars. 

High upliftment trajectories elsewhere point toward Africa being home to nearly 90% of the world’s extreme poverty within a decade. Along the way, climate change issues will provide pressing challenges with intense complexities.

While it’s not obvious, as the two are tightly interwoven, South Africa’s compounding economic failures are explained more by policies than corruption. Dozens of countries are rated more corrupt than South Africa, yet almost all are better at the 21st century’s prime driver of long-term prosperity – integrating young adults into the global economy – and many have sustained impressive growth, such as China. 

Over the past year the investment community has unexpectedly exerted tremendous pressure to alter how the world sources and uses energy. This has harmed lower-income households through surging energy prices. There is suddenly much greater global public awareness of the trade-offs among socially desirable outcomes.

While commodity exports are currently strong, our general economic positioning is incompatible with how the global economy will be shaped by the end of this decade. Demand for thermal coal, and probably the products made with it, will decline. The global trends favouring electric vehicles threaten demand for PSG metals and South Africa’s auto manufacturing operations. 

While today’s strong demand for commodities bolsters our fiscal position and trade balance, the broader effects are negative. The inflows are buying time, yet time is an enemy. The country’s failure to adequately employ young adults is a ticking time bomb whose destructiveness bulges ever more menacingly. 

Cheap Capital

Our political leadership would have us believe investment-led growth is possible –even in the absence of required reforms. Notwithstanding business leaders playing along, it isn’t. The world is awash with cheap capital searching for credible investments. Our economy’s binding constraint is lack of access to customers with abundant purchasing power. 

The only plausible path for South Africa to sustain high growth in jobs is to pursue a variation of the model which unlocked the potential of so many Asian nations. Low-skilled workers must be able to add value to exports destined for affluent markets. 

Instead of pivoting policies to integrate our workforce into the global economy – as is standard among rapidly developing nations – Ramaphosa’s disappointing investment drive provoked a doubling-down response. His party’s ‘localisation’ policies will generate more inflation and patronage while further reducing competitiveness and growth.

Musk’s conditional offer not only spotlights how combining noble intentions and lots of cash won’t solve difficult challenges without a plan. Its timing coincides with global leaders being accused of hypocrisy and incompetence. They are asking OPEC to pump more oil to counter the energy poverty their blunt anti-fossil fuel efforts have caused. 

Asia’s great development successes required the insights and coordination that for-profit commercial operations provide. The same can be said for Musk’s success at reinventing how most new cars will soon be propelled. NASA’s outsourcing much space travel to SpaceX is equally telling.

Our president still seems to think investment conferences can trigger growth. The next one, in March, will be preceded by debates over subsistence grants for millions of healthy young adults. This provides a perfect backdrop to shift our economic conversations from inequality to unemployment and poverty. 

Activist’s enthusiasm

Also, between now and then, we should develop an activist’s enthusiasm to push for the conference to be as much about backing small and medium-sized companies developing niched, value-adding export channels as it is about traditional infrastructure. 

Musk’s conditional offer should be interpreted as: Don’t seek funding until you have a credible plan. That is doubly true in South Africa, as we must establish growth opportunities to inspire required policy shifts.