| 28 November 2021
Politicsweb
Govt’s current policies provoke mutually reinforcing debt and poverty traps
What is the likelihood that over 50% of black South Africans will be poor fifty years after apartheid’s demise? Without sharp policy pivots, this tragic outcome will soon become unavoidable.
Taking stock
Our economic perspectives are shaped by market moving metrics. The models used to price securities are, however, materially different from those needed to guide development. This is particularly problematic in SA.
Our capital markets are up-to-date and globally integrated whereas our economic policies favour isolation and providing raw materials for yesteryear’s smokestack world. Meanwhile, many development experts influencing our policy makers are ideologues dismissive of how today’s disruption-driven global economy keeps reshaping commercial realities.
Most countries continually recalibrate their economies by copying what benefits their neighbours. Both SA, this region’s long-standing economic hegemon, and the region generally, are stuck in the past.
Pricing securities efficiently is very difficult and while it spurs growth by marshalling capital, it does not deliver it. Similarly, estate agents enable transactions whereas your home was designed by an architect and constructed by a builder. The blueprints which directed the rise of Asia, rapidly uplifting over a billion people, were not guided by capital market metrics.
Two or three years of high youth unemployment during the trough of a business cycle causes shallow scarring. Like a civil war, prolonging exceptionally high youth unemployment ravages a country’s future.
Choices
Strong commodity exports paused SA’s declining creditworthiness. The current policy framework should be taking advantage of more and cheaper capital to transition toward a high growth path.
Rather, our policies provoke mutually reinforcing debt and poverty traps. This will be spotlighted when, in February, we debate extending basic income grants to healthy young adults. If commodity prices are substantially softer then, the discussion will be harder-edged but more realistic.
To improve workforce participation, countries must increase domestic consumption or exports, or both. Our domestic consumption has been excessively stoked with expensive government and consumer debt. Increasing commodity exports may temporarily improve capital market metrics but this isn’t sustainable. Nor will it address our most dangerous development constraint, sky-high youth unemployment.
In recent decades, dozens of countries in other regions have sustained high growth through developing niches within global supply chains. This blueprint is to economic success today what assembly lines were three generations ago.
Our redistribution-focused policies inflict a heavy inward bias, thus undermining participation in “global assembly lines”. Consequently, our economic growth is dependent on domestic consumption plus exporting commodities and some motor vehicles. As our per capita income stagnates while the costs of servicing expensive debt compound, isolationist-biased policies further entrench rampant poverty and unemployment.
Demand for many of our exports spiked recently as Covid restrictions eased and economies rebounded. Almost simultaneously, investor-led efforts to reduce carbon emissions have undermined the long-term outlook for our export heavyweights. Platinum Group metals and motor vehicle exports are vulnerable while prospects for thermal coal have tanked.
Not transitioning
The pandemic triggered an economic crisis, thus testing our allegedly reform-minded president’s resolve. His party’s “localisation” will unleash more inflation, unemployment and graft. Such doubling down on growth-impeding policies evidences an inability to reform.
Anti-uplitment policies are common among resource endowed nations with persistently high poverty. Resource wealth discourages ruling elites from adopting proven high-growth paths, most particularly, integrating into global supply chains followed by improving education outcomes.
The ANC’s policies are inversions of those that lead to broad prosperity. Responding to today’s economic crisis with localisation legislation underscores the need for a reframed national dialogue inspiring profound shifts in 2024.
Capital market metrics distract us from recognising how our current path sets us up for worst case outcomes. Every year hundreds of thousands of South Africans in their thirties who have never been employed become, in effect, unemployable. Every year our economy becomes further misaligned with global success drivers. Chief among them is adding value to exports within global supply chains.
ANC policies preclude meaningful growth in value-adding exports despite declining prospects for our current export roster: commodities; government incentivised motor vehicle production; and sub Saharan Africa – despite this region accounting for less than 1% of the world’s discretionary purchasing power.
Employment prospects currently rely on domestic consumption growing the economy – despite consumers being overgeared and having too little disposable income. Large volume job creation requires a policy shift to surge value-added exports. Instead our policies limit our competitiveness and investment attractiveness to the point that a majority of our young adults have become economic liabilities. Our national discourse then grossly understates the long-term implications.
Alignment issues
The interests of political parties and unemployed young adults align when high growth is achieved through value-added exporting. Conversely, when a geographically isolated country’s exports are dominated by commodities and its populace is mostly rural and poorly educated, ruling elites are motivated to act as feudal lords. Feudal structures prevailed across the globe for many centuries. Their lingering cultural norms emphasise subservience and dependence, not electoral accountability.
Scientific and commercial advances have made it easy to have even poorly educated workers achieve productivity levels far in excess of subsistence life-styles. The standard upliftment path today is for high poverty countries to have a significant portion of their workforce employed amid “global assembly lines”. This triggers a steady updating of skills and knowledge.
2024
If the 2024 national election doesn’t provoke a sharp pivot, then another five years of policies prioritising redistribution at growth’s expense will devastate SA’s long-term prospects. It will then be nearly impossible for a new government, in 2029 or later, to reverse the damage and avoid most black South Africans being poor fifty years after the end of apartheid.
The ANC’s electoral support is expected to slip below 50% in 2024. Yet reviewing electoral and economic trends suggests the wheels would have to come off – along with the lights flickering – to sideline the ANC. A new government would then likely need at least a decade to get back to where we are now.
The focus must be on achieving a 2024 governing coalition between the ANC and one or more centrist parties.
Now
The need to debate subsistence grants for millions of healthy young adults offers an ideal setting to shift the framing of our economic conversations from inequality to jobs and poverty.
While our president remains enthralled with investment conferences, attendees, like voters, are losing patience with his hollow promises. Just as global investors have moved well ahead of elected officials in developing climate solutions, we must look to investors to back small and medium sized businesses focused on ferreting out niched export channels.
If a North American company wants to invest in SA and hire South Africans to add value to products and services destined for Europe, how can it make sense to have redistribution-focused policies block such job-creating investments?
The ANC isn’t going to repeal the policy framework which supports its vast patronage network. But it’s in the party’s own interest to provide special dispensations for initiatives which create jobs through integrating into global supply chains.
Even minor success along these lines will validate that SA can adopt the growth model, integrating into global supply chains, which is common among today’s high growth nations. As the old adage goes, ‘nothing succeeds like success’.