Strap yourselves in for a long junk-status ride – Shawn Hagedorn

CAPE TOWN — Bureaucrats overwhelmed by ideological delusions and beholden to self-serving politicians; that’s how policy is carried out in South Africa, says independent strategy adviser, Shawn HagedornThe result? An unworkable growth model that prioritises correcting historical wrongs at the expense of global integration and encouraging value-added exports – which can easily embrace our lower income groups. Hagedorn says identifying large and small export opportunities just isn’t happening. SA’s policymakers conflate being “highly supportive” with enacting more race-based legislation and associates supporting entrepreneurs with being anti-big-business. SA’s most promising growth prospects involve aligning the complementary strengths of the country’s large and small businesses to compete effectively internationally. Instead, we repeat the mistakes of our history; legislative madness, isolationist, introspective and out of step globally. Déjà vu; a repeat outcome; once again we’re the pariah of the international business community. This time it’s not apartheid, it’s corruption that makes the cover of the Economist in the form a snake in the colours of our national flag. It’s going to take more than a Cyril Ramaphosa to help us regain anything resembling our immediate post-94 stature, morally and economically. – Chris Bateman

By Shawn Hagedorn*

Despite a modest debt load, SA’s credit rating is set to be junk rated for many years. Credit agencies have been explicit that this stems from the absence of a workable growth model. This requires liberating exporting opportunities from redistribution focused regulations. The underlying blockage is that SA’s politics place the country within a narrow historical context thus precluding a global outlook.

Shawn Hagedorn

Zimbabwe’s recent inviting of white farmers to return should incite fresh realism. Whereas SA’s policymakers believe they can achieve an equitable society through legislative fiat, global experts know this is delusional.

The global economy has hundreds of times more discretionary income than SA. Successful emerging economies focus on expanding value-added exporting. SA’s policymakers don’t want to pursue this path as they relish the power to regulate consumer and business activities and their rulemaking authority is bounded by the country’s borders.

SA is a special country but it is more isolated – emotionally and physically – than it is special. Every country is unique. Thus blending their diverse inputs to form a massively integrated global economy has provoked tremendous prosperity benefiting legions of lower-skilled workers.

SA’s massive poverty is firmly entrenched because policymakers reject global integration. As the governing party’s legitimacy is tied to righting historical wrongs, it prioritises redistribution at growth’s expense. This can’t work.

SA’s policymakers, and others, also persist with the false notion that SA is a wealthy country. Rather, ongoing credit downgrades, notwithstanding a modest overall level of debt, reflect resource wealth being offset by social liabilities arising from a majority of South Africans being extremely poor. Such extensive poverty can only be remedied by high growth and this requires surging value-added exports.

SA’s populist politics are particularly problematic. Those with the most formal skills and resources, whites and large corporations, are seen as legitimate targets to be discriminated against. Whether or not this is morally justifiable, it has become fully unaffordable. It has served the short-term interests of various politicians, and the predilections of developmental state policymakers, but SA’s excessive emphasis on redistribution is deeply counterproductive. It entrenches the extreme poverty which characterises a majority of South African households.

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White Zimbabwean farmers being invited back to ‘their’ land is a bad example. There is only so much land whereas the new economy, which is rapidly arriving, thrives not on scarcities but rather on innovations and abundance. When someone invents or downloads a WhatsApp-like product, other users are better off.

If Apple or Amazon wanted to leave California for SA, their focus on global sales would justify their being exempt from BEE and other forms of redistribution regulations which undermine competitiveness. There is no justification for discriminating against any group that is focused on value-added exporting as the global economy can accommodate all South Africans, as well as both its big and emerging companies – but it won’t tolerate anti-competitive, anti-business policies.

SA is limited not by its past but by its isolationist thinking. The common denominator among successful countries is that they have become fully integrated into the global economy – through competing with all the other nations.

If all of SA’s white males were successfully focused on increasing value-added exports, limiting them through race-based legislation would clearly undermine poverty alleviation as broad prosperity requires a growing economy. SA’s policies are focused on how SA’s existing wealth is domestically distributed whereas desperately needed growth relies on intensely competing on the global stage. Neither mining nor agriculture, which benefit from scarcities, is associated with provoking broad prosperity.

SA’s policymakers are predominantly bureaucrats overwhelmed by ideological delusions and beholden to self-serving politicians. They can’t accept that relaxing their counterproductive legislative indulgences would unlock SA’s value-added export potential. SA would become just another democratic, capitalistic, successful country with low levels of poverty and unemployment. Their vanguarding slogans would, finally, be dispatched to the museum of failed notions.

It is fanciful to presume SA can become a stable, prosperous country through easily imagined shifts like Cyril Ramaphosa ascending to the presidency and corruption being sharply curtailed. SA must massively mitigate corruption while exempting all new export initiatives from anti-competitive regulations, of which there are many.

BEE and anti-inequality legislation are, in effect, taxes. As currently construed, they undermine this country’s potential to tap into the world’s massive pool of purchasing power – which is necessary for SA to dodge a grim future.

A sharp improvement in SA’s consumer and business sentiment is unlikely and unsustainable. Being isolated from the rapidly evolving global economy precludes SA from achieving adequate consumer income momentum – and the nation’s current purchasing power is very modest relative to its volume of extreme poverty.

The lack of business investment is a symptom of stagnant purchasing power. SA’s consumers addiction to expensive debt is only part of the problem. In the old SA, investor commitments were pivotal. A deep mineral deposit might need a price of $300 an ounce to attract the volume of investment necessary to extract it. If the price dropped to $250 once the mine was running, investors would suffer, but the mine would likely stay open.

Today there is a surfeit of global investment funding. What is crippling SA is that its businesses lack access to deep reservoirs of purchasing power.

Policies targeting redistribution must now accommodate growth policies as the rest of the world cannot be forced to support redistribution in SA. Rather this country, like all the others, must compete by adding value. SA’s prosperity path begins with special dispensations for new exporting initiatives.

In addition to accepting this reality, SA’s policymakers must not delude themselves that they can determine SA’s sources of comparative advantage. This role is performed in today’s rapidly evolving, highly globalised economy by hard-driving, highly disruptive entrepreneurs.

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SA must become highly supportive of the multitudes of entrepreneurs who can identify, large and small, export opportunities. Unfortunately, SA’s policymakers confuse being “highly supportive” with enacting more race-based legislation and they associate supporting entrepreneurs with being anti-big-business. SA’s most promising growth prospects involve aligning the complementary strengths of the country’s large and small businesses to compete effectively internationally.

Contrary to local conventional wisdom, many of SA’s lower-skilled workers will become far more employable if, and when, SA fully integrates into the global economy. A poorly educated Italian who is great at cooking Italian food, will be far more employable if he or she migrates to a country with a shortage of Italian restaurants.

Many poorly educated South Africans have skills and perspectives which can be incorporated into products and services for distant markets. What are these products and services? This question must be answered by unshackled entrepreneurs.

Such entrepreneurs come in all shapes, sizes, and colours. If they are focused on exporting, they must be allowed to hire and fire, and invest in employees, with the goal of achieving global competitiveness.

Unlocking SA’s potential begins with adopting a 21st-century global perspective.

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