Advice to Cyril’s new advisor; risk opprobrium for long-term recovery

CAPE TOWN — Cyril Ramaphosa’s new economic advisor, Trudi Makhaya, an expert on big business dominance, must fly in the face of widely-held South African beliefs if she is to fulfil her considerable potential. That’s the opinion of independent strategy advisor, Shawn Hagedorn, who says South Africa’s currently politically-expedient redistribution chokes off growth in favour of accelerating equality. Somehow the 40-year-old new incumbent will have to confront this debilitating society-wide pretence, aggravated by an isolation mentality born of decades of apartheid sanctions. We still think of ourselves as outliers in the global economy and it becomes a self-fulfilling, guiding belief as we ironically – and ineptly – try and integrate domestically by addressing our vast, racially-based income gaps. With the IMF exhorting us to make broad policy shifts, our transitional and current leaders have so far relied on international investment instead of boosting our global trading capacity. High flying nations, especially developing nations, have over the last 25 years prioritised growth ahead of equality and thrived – the long-term outcome being that the inequality curve suddenly gets pulled up by the growth. A hard nettle to grasp, some would say politically impossible in SA, but the alternative is an enduring flat-lining economy, argues Hagedorn. – Chris Bateman

By Shawn Hagedorn*

Trudi Makhaya’s writings and credentials, along with her relative youth, confirm that she is a superb choice to advise President Ramaphosa on fixing the economyYet blocking her success is nothing less than the need for the national dialogue to be reconceived.

Shawn Hagedorn

It is obvious to global experts at the IMF and credit agencies that SA requires sweeping policy reforms to achieve even moderate growth. What no one is keen to unpack is how the policies which must be reformed reflect beliefs that unite the ANC, and are largely shared by big business, and other key role players, including most voters. In effect, SA is constituted under unworkable pretenses.

The importance of management diversity and more equitable outcomes is widely accepted. The core difficulty, which must be clear to someone with Makhaya’s economic background, is that there are short- and medium-term trade-offs between maximising growth and accelerating equality. Over the long-haul, the two objectives align, whereas in the nearer-term a balance must be shrewdly managed. This has gone badly.

With 1994 being the starting point, the long-term has arrived evidencing that SA’s growth has increasingly under performed most emerging economies. It is now equally clear that SA has never been on a path which would lead to a modest level of poverty even by mid century! With her development economics training, Makhaya must dissect this routinely dodged issue.

The world’s many high flying nations of the past quarter century prioritised growth ahead of equality, while SA has increasingly favoured the opposite path. Given the nation’s long history of the majority being oppressed, this is politically and morally justifiable – but the results are neither. SA’s inequality and poverty prevalence are now entrenched at exceedingly high levels as per capita income growth has been basically flat for a decade. IMF forecasts to 2023 indicate more of the same.

Makhaya’s appointment was disclosed alongside the announcement that SA will host a major investment conference with the objective of attracting a $100 billion in new investments. Believing foreign investments unlock SA’s growth potential is a hold over from the sanctions era. This further highlights the need for a national dialogue reset.

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Prior to 1994, the economy was designed to benefit a narrow minority and its growth relied heavily on demand for extracted commodities. Thus, a binding constraint was long-term funding commitments for mining and infrastructure projects. The country’s all-race democracy now requires the economy cater for a vastly larger population than what SA’s considerable resource wealth can underwrite. Meanwhile, prospects for growth in domestic consumption are dim due to over indebted consumers plus few workers are integrated into the faster growing global economy – with tourism being a notable exception.

SA’s economy can only sustain high growth by boosting value-added exports. This requires a more refined balance and better coordination between commercially robust policies and politically necessary redistribution. Yet, irrespective of how redistribution efforts are structured, they are taxes. Thus there is a point where over reliance on such measures chokes off growth more than it redistributes income. SA is entering that zone while the percentage of South Africans living at, or only modestly above, a subsistence level has only decreased from about 80% in the early 1990s to around 60% today.

Read also: Reversing SA’s disinvestment flood into an inward trickle – Cyril’s big challenge

Global investors won’t solve SA’s growth problems. SA’s current rate of fixed investment mobilisation is broadly consistent with its low growth prospects. Economic growth today is largely about technologies having pummeled communication and transport cost thus provoking multitudes of cross border trade opportunities. Most countries are now fixated on international trade as fervently as SA is focused on redistribution. That is, SA operates with a different belief system than the majority of nations which are either wealthy or quickly catching up.

While investors aren’t going to solve SA’s problems, many will reference how dozens of nations offer far more commercially attractive policy environments. Makhaya must translate such feedback so that SA’s policy makers prudently heed the IMF’s exhortations for broad policy shifts.

If a foreign company is considering SA as a production centre to serve global consumers, it makes no sense to forego such jobs due to poorly calibrated BEE reflexes. Instead, special dispensations from anti-competitive regulations are required to boost such value-added exports thus reducing poverty and advancing equality.

Read also: Seven virtuous economic goals for Cyril – Alan Hirsch

Makhaya is probably best known for her expertise on competition issues. From a closed economy perspective, her concerns regarding big business dominance in many sectors is logical. As a presidential adviser, she must appreciate that the far greater problem is that SA’s economy is too isolated amid a highly integrated global economy. Just as global gorillas, such as Google, often rely on small companies to break into the new markets, SA’s giants must get much better at working with SMEs to identify and develop new export channels. Her experience working with angel investors must now inform the policy shifts necessary to transform disconnects and blockages into linkages and growth paths.

That humans became the dominant species traces, in large part, to an ability to form very large, highly adaptive groups. Transcending kinship based groupings typically required a common threat and shared beliefs. Many nations were formed by the confluence of military needs and religious beliefs. SA is not united by kinship, foreign military threats, or a common religion. Nor does SA have neighbours which serve to challenge it commercially. Rather the country is an isolated outlier, whose enemy is its past, amid a highly integrated global economy.

While expectations of a better future for all was SA’s cohesion building glue, the country’s near and distant past, its current status, and its future are all expressed by the status and prospects of its median 20 year olds. These young adults are poor and poorly educated while their prospects are dreadful. This was not uncommon in other parts of the world in the early 1990s, but it is today.

With her glistening CV and public profile preceding her, Makhaya can engage SA’s older leaders as a highly experienced 40 year old black woman fully aware of the human impact of SA’s policy shortfalls. As SA’s youth expect a fresh national dialogue and policies to surge opportunities, her perspective should prove ideal.

  • Shawn Hagedorn is an independent strategy adviser. You can follow him on Twitter @shawnhagedorn.