Few societies have ever been able to fund abundant imports through extracting below-ground riches. Such geological free lunches have recently given way to today’s prosperity-inducing free lunches – which South Africa ignores.
We should better understand how broad prosperity is achieved in the 21st century, as a majority of our young adults are unemployed, poor or both, despite South Africa having this region’s most advanced economy. While Asia had more poverty than Africa only a few decades ago, trends indicate there will be nearly ten extremely poor Africans for every similarly destitute Asian by 2030.
Elites of commodity-exporting countries are motivated, not to invest in upgrading worker productivity, but rather to concentrate wealth and political power while marginalising the majority. These biases have been amply demonstrated in South Africa, pre- and post-1994.
Dozens of countries, mostly Asian, have recognised that the global economy offers a free lunch. The world’s most advanced economies are characterised by high wages and abundant purchasing power. This provides tremendous incentives for low-wage countries to add value to exports destined for affluent nations.
When substantial efficiency gains can be consistently achieved at little cost, this equates to a free lunch. Adam Smith highlighted the efficiency gains from specialisation of labour, and David Ricardo’s ‘Theory of Comparative Advantage’ showed that countries can also benefit greatly from specialising.
Transport costs have long been declining and the internet plunged communication costs. Globalisation is rife with imperfections but it offers troubled economies a miracle path to escape high poverty and unemployment.
The sharp plunge in global poverty since the 1980s is mostly attributable to globalisation, but this doesn’t conform to narratives favoured by our governing party. They want to allocate the spoils of resource extraction while attributing our economic failures to Western colonialism. Meanwhile, countries across the East and West sharply upgrade living standards by simultaneously competing and cooperating.
Adding value to exports
The Asian growth model was pioneered in the 1950s by an island nation with modest natural resources. The Japanese focused on adding value to exports for large Western consumer markets, most particularly the US. In the following decades, Japan’s trade surplus with the US, and its holdings of dollar-denominated assets, swelled.
The US’s willingness to run oversized trade deficits suggested that the dollar would eventually drop, thus reducing the value of Japan’s oversized portfolio of treasury bonds. This hasn’t happened, due to another type of efficiency-induced free lunch.
By running very large trade deficits, the US exports jobs. Yet, even while having the population hardest hit by the pandemic, the US unemployment rate is back under 4%. As the US economy has long been efficient and dynamic, a majority of US households are now at least moderately affluent, while about a quarter are highly affluent.
Having the largest national economy remaining highly dynamic while running large trade deficits leads to a much more opportunity-rich global environment. This is somewhat analogous to older workers with high savings rates being in a mutually symbiotic relationship with young people who need to borrow for education, transportation or home-ownership purposes.
The advantages of globally integrated supply chains have become so profound that indulging isolationist policies invites declining living standards. Poor countries will stay that way unless they add value to exports destined for affluent consumers. Exporting commodities provokes patronage, not upliftment, as political elites are not motivated to invest in workforce productivity.
Asian nations have rapidly uplifted hundreds of millions of people from poverty to middle class by adding value to exports. By avoiding over-reliance on domestic consumption they could maintain high savings rates to invest in their nation’s productive capacity. Conversely, SA has shown how excessive reliance on costly foreign capital, alongside households funding consumption through expensive debt, retards development.
Transitioning isn’t easy. Commodity-exporting countries tend to be inward-focused while lacking 21st century dynamism. They are price takers. If the price of a commodity rises sufficiently, investors expand extraction operations. The reverse also holds.
Hyper competitive
Today’s global economy has become intensely integrated and hyper-competitive while transitioning away from manufacturing and extraction toward services and digital possibilities. Notwithstanding the 1990s political transformation, our economy is still designed to benefit the politically connected. To advance the majority, it must be transformed in accordance with how the global economy is advancing.
That humans are the dominant species reflects our abilities to coordinate activities among huge numbers of individuals and to rapidly diffuse productivity-enhancing innovations. South Africa’s policies and practices are dismissive of such global success drivers.
Prospects today are much worse for our median twenty-year-olds than they were in the mid-1990s. The country’s core sources of hard-currency earnings, commodity exports, have been poorly managed, while household and government borrowings have been imprudently indulged. As troubling as widespread corruption is, the sidelining of a majority of young would-be workers has inflicted far more damage to the country’s long-term potential. Our bulging unemployment overhang will curtail prospects for decades.
High on the ANC’s long list of mega-disappointments is its failure to transition from our traditional free lunch from exporting commodities. The party’s rhetoric, and its patronage-supporting machinery, impede necessary policy pivots. Yet none of our leaders can articulate a workable growth plan and this reflects a collective disregard for how rapidly the world is changing.
While anger over horrific education outcomes is fully justified, it is incorrect to conclude that education shortfalls prevent large numbers of young South Africans competing in the global economy. Elon Musk’s recent admission that creating self-driving cars is far harder than he expected reflects how the artificial intelligence community has come to appreciate just how amazing the neural networks in our craniums are.
Learned on the job
As globally acclaimed expert in economic development Ricardo Hausmann emphasises, most knowledge that people use on the job, they learned on the job. Of course, such learning requires a job. Our level of employment is in balance with our domestic purchasing capacity. Per capita income, adjusted for inflation, peaked a decade ago. Stagnant worker productivity and excessive debt burdens preclude most South African households from progressing, thus further prioritising exports.
A majority of our young adults are being perpetually marginalised because our policies are designed to favour the politically connected. This wasn’t sustainable pre-1994 and subsequent technological advances have made it even less viable today. Our young adults can adapt to the evolving demands of the global labour economy, but our redistribution-focused policies undermine competitiveness and alignment prospects.
It used to be that a few countries could enjoy free lunches in that they could fund imports through exporting commodities. Though the ANC refuses to accept it, today’s free lunches come from the diffusion of knowledge and upliftment paths that global integration offers.