By Shawn Hagedorn -Dec 15, 2021
Daily Friend
Digital technologies are accelerating the globalisation of services. Is this the area where investors can best spur growth and jobs in SA?
Our policies reflect the preferences of unionists, Marxists, and cronies who dream of creating black industrialists and abundant well-paid factory jobs. Meanwhile, services have long been the fastest growing sector of the world’s economy and the primary source of jobs. They account for over two-thirds of global output versus less than a quarter for industrial activities. Agriculture is economically significant in low-income countries, but its share of the global economy is quite modest.
Increased productivity
The growth rate has slowed sharply over the past half century, yet the global population has expanded by a factor of eight over the last two hundred years – while global output increased nearly a hundredfold. Early productivity increases reflected peasants becoming factory workers.
Over the past four decades, global supply chains have flourished reflecting technological advances and lower trade restrictions. This allows poor nations to simultaneously sustain high rates of growth and savings through value-added exporting. Famines, which have been nearly eradicated, and large clusters of poverty now require profound governance shortcomings.
Today’s global supply chains spark productivity gains through specialisation, along with the rapid diffusion of disruptive innovations. As importantly, they provide what economists call “market access”. Countries which lack a large, affluent middle class and don’t integrate extensively into global supply chains, will struggle to maintain even meagre growth.
As a stand-alone entity, South Africa’s economy is not viable. Can you imagine our vehicle manufacturing, investment or IT sectors operating in isolation? Inward focused policies, alongside debt-funded domestic consumption and an over reliance on commodity exports, swell poverty and unemployment. The pandemic has accelerated global shifts toward decarbonisation and services at the expense of mining and manufacturing.
The perception that manufacturing must drive upliftment was ruptured by recent World Bank research. Their study explains persuasively how services can generate greater growth and employment opportunities than manufacturing.
Why do we see SA in isolation?
The ANC’s isolationist biases trace to ideological indulgences and prioritising redistribution ahead of growth. But why do our top established companies and start-ups rarely see South Africa’s workers in a global context? Why do the global expansion strategies of South African companies routinely replicate their local operations elsewhere instead of hiring locals to add value to exports? Many affluent countries have too few twenty somethings whereas we debate providing subsistence payments to most of ours.
SA start-ups and market leaders rarely seek to employ South Africans to add value to goods or services for export. This largely traces to government policies and practices undermining education, infrastructure and competitiveness generally. With services, such hindrances can be less limiting.
South Africa simply cannot meaningfully reduce unemployment without achieving much greater success at value-added exporting. That this still isn’t acknowledged remains central to why none of our leaders can articulate a workable growth plan. How is this void in our national dialogue explained?
How is the void explained?
The ANC’s policies reflect its fractious leadership being morally and ideologically compromised while unwinding BEE doesn’t suit any of its alliance partners. Yet the economic hardships and risks have compounded to the point that it is in the party’s best interest to exempt value-adding export initiatives from most of their anti-competitive policies. Why are our various leaders outside of government not calling for this?
Today’s successful economies intensely integrate into global supply chains to reap their inherent advantages – which multiply as disruptive innovations accelerate. South Africa’s isolationist biases aren’t sustainable yet, geographically, no country is more distant from a top-three economy and, geologically, few countries are as resource endowed. We should also acknowledge that events leading up to, and following, the 1994 transition have induced a national disposition shaped more by value-judgements than integration.
Our highly capable asset management companies are fully integrated within the intensely integrated global investment community. Should their leaders not be advocating for SA’s policy makers and corporations to pursue far greater global integration?
Investor guidance
With tens of trillions of dollars managed under economic, social, and governance focused mandates (ESG), over the last year, the global investment community sharply curtailed funding for high carbon emitting projects, particularly fossil fuel production. Then, when pandemic restrictions were eased, higher energy prices and supply disruptions harshly impacted many low-income households.
The genesis of investor activism to advance socially desirable causes traces to campaigns to disinvest from this country. While developing this article I recalled classroom discussions, from 1979 and 1980, outlining the arguments for and against such divestments when I was a graduate student studying international business in the US. The arguments favouring disinvestments emphasised apartheid’s injustices. Those against divesting stressed South Africa being a bulwark against communism and the economic harm that disinvestments would unleash. That case was buttressed by the need for not just a political transition but a plan to achieve broad growth.
Less than a year later, the US elected a new president. Ronald Reagan wasn’t ideological by today’s standards but he was staunchly opposed to communism. His policies toward South Africa favoured “constructive engagement” over sanctions and disinvestment – echoing reasons we had discussed in class.
I also recall how the investment community in New York was a bit bewildered when in June 1987 Reagan travelled to West Berlin and famously said, “Mr Gorbachev, tear down this wall”. Many media elites branded his request as that of a naive cowboy.
End of communism
In November 1989, the Berlin Wall came down thus crashing the UK’s and the US’s support for South Africa’s anti-communist ruling party. Mandela was soon released. Communism faded. Globalisation found its stride. Over a billion people, predominantly Chinese and other Asians, escaped poverty. And today, the ongoing damage wrought by the ANC’s Marxist sympathies further evidences that ideology’s destructiveness.
Reagan’s opposition to communism seems well validated. Was he also right to oppose disinvestment in favour of keeping South Africa’s business community integrated within a broad international community? To what extent has the aftertaste of sanctions contributed to the reluctance of South Africa’s current business leaders to integrate within global supply chains, an essential requirement to surge growth and employment? As unemployment and poverty compound for lack of global integration, should we not conclude that the sanctions and disinvestment campaigns were misconceived?
ESG investors are now poised to compete with political leaders in pursuit of socially desirable outcomes. But to what extent do their mandates stem from judging others rather than seeking solutions? To what extent do they build walls rather than much-needed bridges?
Having once been a “Hollywood Democrat” and union head, Reagan was slow to judge others or to overly indulge ideals. He could see how racial prejudices varied greatly across the US and that while pragmatism and integration wouldn’t produce a utopia, it could deliver much progress.
South Africa has never been on track to achieve broad prosperity as politics have always blocked adequate global integration. Breaking the impasse requires the investment community support entrepreneurs who create jobs which add value to exports – both goods and services. Rising electoral pressures can then be channelled to provoke pro-growth policy pivots.