SA's web of disconnect continues to spread
The splintering among SA's union coalitions is now one of many separations that reflect structures and strategies being overwhelmed by economic realities. Since politics and economics are inseparable, the ANC's approach to maintaining an invincible majority through alliances with the country's top unions and the SACP was always unsuccessful. It demanded continued hostility toward the sector, business, that generates jobs and taxes.
South Africa's economy in the mid-1990s was worryingly unique. It combined sophistication and diversification while lacking both international integration and competitiveness. Extensive investments in human capacity were grossly inadequate.
The same could be said about the recently failed former superpower. SA's business acumen has been impressive with the key caveat being that its leaders have failed to effectively engage their political counterparts. This should become more possible now that budget constraints are really starting to bother me.
Among the major disconnections to be dealt with:
Politics and Economics – Despite political propaganda, industrialization, profits and regional integration offer modest potential to enhance SA's long-term growth prospects. The information age is here to stay; Transporting goods is cheap, so the benefits accrue to far-flung locations that have invested heavily in hard and soft assets; And SA's ability to create jobs at home by selling in the world's poorest region is understandably modest.
Corporate Governance and Capital Markets – If capital markets had not been invented and each of SA's top forty companies were owned by a family, those families would be more effectively aligned with SA's ruling elite than the country's otherwise highly capable business executives, money managers and top entrepreneurs.
Economists call this principal-agent problem the “agency” problem. A capital market-based economy with a federally-aligned government leaves national long-term interests neglected. Corporate governance guidelines do not overcome the agency disconnect.
Economic metrics – Politicians hostile to capitalism choose among their favorite income inequality metrics, as well as capital market data and GDP and inflation figures, to convince themselves of the need for more aggressive state intervention.
The contrast between the JSE's recent strength and SA's slow-growth economy is entirely explainable – but such explanations are easily ignored. Capital market data is often misleading when used to guide economic growth. This could be a serious complication when trying to remedy large-scale historical injustices while distortions from significant extraction-based exports still require more complex analysis.
Capital markets and general economic metrics and methodology were designed to measure “typical” industrialized countries such as the UK or South Korea; Not Saudi Arabia or South Africa. Union-married politicians view market signals as a market failure that requires state intervention.
Banking – The interests of banks and national economies globally and in South Africa have diverged. The fundamental role of consumer credit in an economy changes when real wage growth slows down for all but high-skilled workers. Banks are under intense regulatory pressure globally as the industry is highly developed. Without beating others – especially customers – the chances of generating attractive returns are slim.
SA banks specialize in managing high consumer debt loads. Most of it is unreasonably expensive. When the market determined that the largest of the high-priced lenders was no longer viable, the government, through the Reserve Bank, interpreted this as a market failure and risked taxpayers' money to save a bank that routinely screwed up its customers' prospects.
Change is a “must”. But this is very expensive and is only effective if beneficiaries are accumulating wealth and investing in the next generation. The potential of high-cost lending to undermine change has been vastly underestimated, despite abundant evidence.
Instead of relying on law enforcement and evolving social norms to curb lenders, government policies have encouraged the formal credit sector to deluge low-income people with high-priced loans. This amounts to a stunning disconnect as costly efforts at change have failed.
Expansion in Africa – If Asian countries had focused on trade among themselves over the past several decades, the region's growth would have been much slower. The mathematics dictates that selling to consumers with deep pockets is the only way to achieve meaningful economic growth. Many astute SA business leaders are investing in African markets to diversify from over-dependence on the slow SA market.
SA does not offer an adequate competitive environment to compete with the best of the East and West and sell to its wealthier consumers – although some SA companies have succeeded despite long odds. Focusing on Africa is a defensive move that is necessary and risky in most cases. This offers modest potential to increase employment gains on a large scale across South Africa.
SA vs global trends – A market economy and capital markets are at their best when picking winners and punishing losers. SA's political elite would like the government to accomplish the former and prevent the latter. Meanwhile the rest of the world has become more integrated and competitive.
Shawn Hagedorn is an independent strategy consultant.
This article was first published www.biznews.com
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