Shawn Hagedorn: Escaping SA’s poverty trap requires global integration

The definition of madness is doing the same thing over and over again and expecting a different result, and some may attest this to government. Much of the conversation amongst the community has been looking at government policy and how there is a dire need for a change if South Africa is to navigate the current landscape and come out the other side in a good state. Strategic advisor Shawn Hagedorn joins this choir and says there are ways to escape the current poverty trap but it involves integrating with the global economy. – Stuart Lowman


by Shawn Hagedorn*

Skilled professionals continue to depart beautiful and temperate South Africa for Dubai and Abu Dhabi. How is this explained? For Asians unaffiliated with SA’s history or ethnic groups, it is easy to see that the Suez Canal, built 150 years ago and recently expanded, limits SA’s current potential at least as much as apartheid’s significant residues.

The United Arab Emirates and neighbouring Qatar could not have hoped to mimic the Singapore growth model were it not for the canal. Like SA, these nations need to overcome the “resource curse” which undermines investing in people and competitive enterprises. Unlike SA, these countries are run by monarchs who are taking a long view. Manufacturing does not offer realistic development paths for them – or SA – while the canal upgrades their shipping and trading relevance at SA’s enduring expense.

Shawn Hagedorn, strategy advisor
Shawn Hagedorn, strategy advisor

SA’s economy withstood isolating sanctions under apartheid through focusing on developing broad competencies. Meanwhile Asian growth was surging based upon global integration, competitiveness, and specialisation. When the ANC came to power, they showed little interest in global integration and specialisation as this required an emphasis on competitiveness which was anathema to their Tripartite Alliance partners. Achieving international competitiveness is a much higher bar than simply being competent

It is time to accept that SA has entered a poverty trap reflecting how both the former and current political regimes chose political patronage reliant upon resource extraction instead of supporting broadly empowering growth models in accord with global conditions. The costs of isolation are again threatening a breaking point.

SA’s extreme levels of unemployment, poverty, household debt and now prolonged low growth are symptoms evidencing a poverty trap. Compared to recessions, poverty traps are far less common, less well defined, and much harder to escape. The causes of SA’s poverty trap trace to policies and positioning which place the nation at odds with the demands, and opportunities, of today’s highly integrated and ultra demanding global economy.

Binding constraints, such as Eskom’s production woes, limit per capita income growth to, at best, 2% a year for the next several years which is insufficient to alleviate poverty or unemployment. That SA’s economy is held back by an expanding parade of binding constraints points to deeper difficulties.

Sixty percent of the people in the world are Asian and from their perspective, SA’s Europeans and Africans are collections of tribes which have long been wrestling to control SA’s natural resources without ever having focused on producing value-added exports. Conversely, the spectacular rise of East Asia is the story of nations importing manufacturing know-how and then successfully competing globally. This growth model has never taken hold in SA, a land profoundly endowed by nature and hectically isolated. Both characteristics arrest competitiveness. The much-celebrated political transition of 1994 led to a lifting of sanctions yet the trajectory of SA’s integration into the global economy remains woefully inadequate.

The value of resource endowments has recently taken what is quite likely to be a lasting hit. The information era and climate change concerns are combining in ways which can permanently downgrade industrial and extraction prospects.

Technological advances are combining with commercial ingenuity such that renewable energy options are achieving decisive cost advantages. Various energy crossover points are being traversed. Many advances compete with each other but generally they combine to threaten the value of energy deposits. Coal deposits litter the frontlines of casualties.

While energy is consumed, metals can often be recycled. Driverless cars have greater disruption potential than cell phones. They will be lighter and far fewer of them will be needed per passenger kilometres traveled. As cars, machines and building are retired, they will compete ever more effectively with mines as sources of raw materials.

Mind boggling volumes of poverty alleviation have been achieved globally over the past generation. The base formula distils down to: diffuse knowledge from richer countries to poorer nations so that they can compete effectively at selling goods and services to wealthy consumers. The ANC’s Tripartite A lliance has been seduced by redistribution’s allure while they find focusing on competitiveness as appealing as a cold bath in winter.

Manufacturing employment growth will remain elusive while exporting services requires a much greater front-loading of skills. Such investments are common among high growth countries whose successes begin with their governments investing in people while inspiring investor trust.

It is unusual for a country to become so deeply gripped by a poverty trap. More typically, banks or the country will default thus triggering constructive policy reforms. SA’s banks, capital markets, and natural resources have provided a dangerous, but false, sense of resiliency. The real economy is in real trouble. Households are overly indebted and very few are headed by globally competitive workers. The ANC, along with various analysts, misjudged the economy’s capacity to fund redistribution programmes. The patronage focused state has discouraged investments to extract buried wealth while failing dismally to unite knowledge and aspirations to successfully compete and collaborate globally.

See also: Gerhard Papenfus: NDR – a path of disempowerment, uncertainty & poverty

There are ways to escape the nation’s poverty trap but they involve doing something that SA has never done: integrate within the global economy through achieving competitiveness across a broad range of specialised activities. The political-economy transformation of the 1990s remains half done.

* Shawn Hagedorn is a strategy adviser @shawnhagedorn

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