Hagedorn: Nigeria, SA can work together to beat OPEC, Eskom challenges

Shawn Hagedorn takes a rational look at challenges which face Africa’s two biggest economies and draws some interesting conclusions. One, that moulds need to be broken. And, two, if they are, the potential benefits from disruptive creation are enormous. But to get started on a new road to prosperity, a new way of thinking is required. The big question is whether the incumbent political leaders have the humility to admit their mistakes and the contrition to now consider an updated approach. – AH

By Shawn Hagedorn*

SAOngoing OPEC and Eskom fiascos make clear that Africa’s top two economies lack viable strategies due to political dynamics undermining growth prospects. In response, politicians refloat old ideas including improved regional integration. Nigeria and SA can lift growth trajectories through greater cooperation but the most promising paths are not likely to be considered.

Today’s sharply lower oil prices reflects an inversion of the 1970s oil embargo when industrial economies had no alternatives but to pay-up when OPEC curbed oil production. Technology, ingenuity and persistence have since spawned various innovations which are finally becoming competitive.

Investing heavily in skills and technology while integrating into the global economy through value-adding activities is essential yet this is the antithesis to the OPEC-inspired approach of politically clustering resource wealth. Broad prosperity follows investing in minds not mines. For decades technologists have been pitted against OPEC’s model. Booming demand from China camouflaged how a tipping point was triggered within the past few years. Innovation has gained the upper hand.

In a fundamental shift, high oil prices have become inherently much less attractive to low-cost producers with huge reserves. Peak oil concerns are giving way to producers worrying that much oil and coal will be left in the ground as consumers across the world are now tempted by numerous alternatives. Yet they all involve switching costs.

The Saudis understand that cheap oil slows innovations such as  electric car sales and the roll-out of high speed charging stations. Deflation worries by leading central bankers further highlight the risks of prolonged soft commodity prices. Among the key drivers: technological advances, ecological concerns, and generally lower rates of economic growth.

Consumer behaviours are shifting while options are expanding. Accelerating these shifts poses grave risks to countries highly dependent on exporting a narrow range of commodities. Tightening fiscal budgets limit response options to Arab Spring styled insurrections thus tempting authoritarian reactions amid the world’s least stable countries and regions. Meanwhile, risks of company and country debt defaults climb.

When OPEC initiated its oil embargo in 1973, average per capita incomes were higher in Africa than in mainland Asia. Waves of eastern nations chose industrialisation just in time as that era has been giving way to the information age. Economic success now requires a front loading of heavy investments in education which is more manageable for industrialised nations.

Eskom’s ongoing woes spotlight how SA’s political and economic shortcomings are comparable to Nigeria’s. Neither SA’s current ruling party nor its predecessor resisted the temptations of OPEC-styled political economics. Twenty years ago the current government inherited a substantial economy that needed to adopt a competitiveness focus while advancing a massive socio-economic transformation. Both of these very difficult and seemingly incompatible objective were must-haves. Today, SA does not enjoy cost competitiveness in a single core input area. As the the 21st century arrived, electricity was the sole bright light in terms of SA’s international cost competitiveness; it is now expensive and unreliable.

The tripartite alliance continues to emphasise transformation while resisting necessary competitiveness enhancing measures. Thus the country’s best-case trajectory is woefully inadequate to sustain large-scale transformation. More likely scenarios suggest some transformation gains will be reversed provoking further political tensions.

Old style government-led development initiatives such as lowering regional trade barriers and benefication initiatives are worth pursuing but their potential is modest. Low-income economies which are predominantly extractive and agricultural focused cannot meaningfully spur growth through increasing trade with each other and SA is the region’s only economy with a substantial industrial sector. Most benefication arguments remain delusional as transporting raw materials to high skilled centres is usually inexpensive. Even the intercontinental transport costs for the iron ore to build a car are typically under $10.

Policy makers in Nigeria and SA will soon be forced to acknowledge that their political-economic systems preclude sustained high growth. Patronage is inherent to political systems yet SA always needed to focus much more on creating jobs through bulking up on competitiveness while relying less on buying voter support through housing and social grants – their humanatarian value is limited by their sustainability whereas competitiveness and jobs build lasting prosperity. Coordination between Abuja and Pretoria could create exciting opportunities, for example, the combined clout to play East off West perhaps leading to new types of currency and trading regimes. However, in the absence of robust growth strategies, such government interventions are of little value.

Collaboration initiatives are essential to sustaining high growth but they must accommodate answers to questions such as: How can African strengths be most relevant amid today’s rapidly changing global environment? The response will need to be grand in scale and thus profoundly disruptive. The current political-economic structures which prevail across the continent are inherently hostile to such commercially robust – and politically demanding – initiatives. Working together, Nigeria and SA could begin to change this.

* Shawn Hagedorn is an independent strategy adviser