04 SEPTEMBER 2015 – 07:55

SA’s policies stand in opposition to how prosperity is advanced in the 21st century, writes Shawn Hagedorn

SOME of today’s most heralded economists insist that the global economy exited the Great Recession mutating towards a “new normal”. Yet, as China’s economy slows and rebalances, it is becoming clear that its extraordinary growth obscured deep global shifts.

The Great Recession appears to have been more a symptom of the new normal than a cause. A further implication is that SA’s challenges largely reflect disdain by the nation’s political leaders for global realities.

The global economy has been incorporating the implications of the information age displacing the industrial era amid the rise of Asia, global integration, and binding environmental constraints. The prosperity and prospects of lower-skilled western workers were downgraded and they responded by borrowing imprudently, thus inducing the Great Recession.

SA travelled a similar path with unsecured lending, which lacks an asset bubble’s self-correcting qualities.

Digital economics are fundamentally different from industrial economics. Costs such as education, infrastructure, research, and product design are heavily front-loaded while reproduction and distribution costs are often zero. Thus today’s leading economies are threatened more by deflation than inflation while investing effectively in people and government-investor relations have become paramount.

While industrialisation often led to low-skilled workers being handsomely compensated, this doesn’t happen in information focused sectors. Evermore efficient processes, automation and the expansion of the global workforce, mean this historically profound upliftment path is now a relic — even in factories.

Just as China’s economy could not continue to triple in size every decade through industrial exports and investments in domestic fixed assets, the global economy cannot continue to double every 20 years without downplaying industrialisation. Climate change is one of many environmental constraint factors.

Capital markets first signalled fundamental shifts through persistently low bond yields. Commodity prices were distorted by unsustainable Chinese demand, which is now being ratcheted down.

The broad shift towards services must expand, or global growth must slow. Either way, inflation will be low, encouraging persistently low interest rates and commodity prices. To the extent that consumption shifts to services, commodity prices will further decouple from global gross domestic product growth.

Analysing SA’s politics and economics in isolation from the rest of the world is deceitful. Postapartheid SA has indulged the mistaken belief that the public and private sectors can succeed apart from each other while the country remains largely isolated from an intensely integrated global economy.

SA’s low-skilled workers have been assuaged by politically inspired hope and patronage; both fountains are now being drained by new normal economics. This will strain already expanding cracks in the African National Congress’s (ANC’s) hegemony with outcomes ranging from odd coalitions to broad upheaval. SA is so wrong-footed for the unfolding global shifts that, quite ironically, strategic clarity could be provoked. The days of flavour-of-the-month policy initiatives should soon be ending….

PROSPECTS for industrialisation or resource extraction to improve SA’s economic growth trajectory have been harshly diminished. While new possibilities loom for companies and nations that are building on changes, SA’s future is held hostage by its dysfunctional political economics. Essential policy and structural shifts are precluded by obsolete ideologies or increasingly divisive and unsustainable patronage-focused politics along with poor government-business relations.

Such a dysfunctional political economic environment spawns parades of ideas with questionable merits and untested risks instead of identifying and implementing the required structural shifts. That the innocuous National Development Plan has such modest support reflects the extent to which factions undermine the advancement of shared interests.

SA has a unique mix of extreme mineral wealth, outrageous unemployment and troubled policy making. Groping wishfully for solutions won’t work. Just as trial and error in pharmacological research is ceding ground to genome decoding, SA’s public and private leadership must be guided by diligently decoding the country’s political economy while accepting global realities.

This should start with that of the dominant political party which mixes liberation-era grudges, Marxist-Leninist ideologies, antiwestern biases and patronage-based loyalties. It is difficult to overstate how out of synch this combination is with the demands of new normal economics.

Corporate SA’s DNA reflects geographic isolation, the sanctions era and today’s blend of good governance principles interlaced with stultifying regulations. The effect is an obsession with competencies while the global economy fixates on competitiveness. The aspirational DNA of SA’s historically disadvantaged have yet to be unblocked. The postapartheid government has not followed successful former East Asian colonies in targeting western consumers.

The irony is that the competitiveness of SA’s political economy is oppressed by a dominant political party whose unity with its constituents revolves around fairness. This is problematic. Today’s successful economies prioritise justice, prosperity and opportunities ahead of fairness. The new normal doubles down on such prioritising.

Focusing on competitiveness and global integration has lifted at least 2-billion people out of poverty. Conversely, political elites of resource-endowed nations often exploit fairness issues to benefit selfishly at the expense of their least fortunate citizens.

Overcoming SA’s isolation through Brics (Brazil, Russia, India, China and SA) and African alignments is far from ideal. East Asia has sustained high growth through exporting manufactured goods to the West.

Antiwestern sentiments by SA’s political elites draw on a stale blame narrative that ignores the rise of the East. Meanwhile, voices in SA, Africa and beyond state that it is “Africa’s turn” to achieve high growth without contemplating the steps required.

The East and the West have formed an integrated and rapidly evolving core global economy that spans the planet. Conversely, most African and Middle Eastern countries are excessively resource dependent — with many being isolated or war-torn.

As China’s economy grows more slowly and rebalances, SA’s growth trajectory sags lower along with many of Africa’s resource-focused economies. The many South African firms exploring regional opportunities should be mindful that Africa is the region most vulnerable to new normal economics….

RESOURCE-endowed nations with mostly poor, rural populations tend to be dominated by urban elites. SA’s social grants instead of job opportunities displays politics inducing dependencies ripe for patronage exploitation. The ANC inherited tremendous resources along with enormous economic development liabilities. Unfortunately, there are scant examples of abundant resource wealth spurring broad prosperity. Moderate progress has been made but now the value of SA’s natural resources is impaired by new normal economics combined with increasingly unproductive relations between the tripartite alliance and investors.

SA’s political economics must be fundamentally reinvented. Patronage is common everywhere, but in SA it has compounded to the point that it crowds out effective decision making in a world where astute policy making has become mandatory.

With new normal economics becoming increasingly pronounced, the day of reckoning for exuberant patronage fast approaches. Poorly designed and implemented transformation programmes become increasingly costly as the world economy morphs towards information-era economics. Obsolete ideologies along with excessive labour alliances must give way for the country to enhance its competitiveness.

SA’s policies stand in opposition to how prosperity is advanced in the 21st century. Until now, China’s demand for, and SA’s supply of, raw materials permitted overindulging patronage and state interventions. Whereas until recently China served to mask the need for SA’s political economy to be reinvented, a quick look at how that nation is now scampering to restructure its economy while purging government misdeeds offers much-needed lessons from East Asia to SA.

Published in Business Day