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Taking Stock Spring 2018

What will South Africa sell?

13 November 2018
Author: Michael PowerStrategist

This summer, wildfires were raging up and down the west coast of North America, from British Columbia to Southern California. Rightly, the highest priority was to extinguish these infernos to prevent further damage to property.

Likewise, for the past decade, wildfires have been raging through South Africa’s state-owned enterprises (SOEs), from Transnet to Eskom. And rightly, the priority has been to extinguish them to prevent any further damage to our fiscal position. Since last December, these efforts have been ably orchestrated by our firefighter-in-chief, President Cyril Ramaphosa.

While there is evidence that these SA fires have been partially contained, they have not yet been extinguished: ongoing financial losses from SOEs will continue to ravage the fiscus, and the country’s budget deficit will likely endure more hits from these conflagrations in coming years. However, there is evidence that at least losses from unauthorised expenditures have sharply diminished this year. It is only now that the flames are dying down that we can see just how serious the damage from these fires has been, and how costly the clean-up exercise will be.

Meanwhile, life in SA goes on and economic events worldwide continue to unfold. Recent months have not been favourable for SA. Following a strengthening US dollar, tightening global liquidity, falling metals prices and escalating trade wars, the economic fortunes of almost all emerging markets have deteriorated with crises enveloping the weakest links. Argentina, and more recently, Turkey are on the skids while Venezuela is on the verge of a total meltdown.

Thus far, unlike many such previous crises, the ‘usual suspect’ dominoes of the emerging market fraternity may have wobbled, but they have not fallen over. Stock, bond and currency markets for Brazil, Colombia, Mexico, SA and even India may have recoiled from their highs, but we have not yet seen contagion on the scale that happened in 2013, 2008 and, most famously, during the Asian crisis of 1997/98.

Quite possibly, this is the lull before the next storm. If it is, SA must use the time wisely to shore up the defences before it arrives. SA must start to think very seriously about the economic world we will be inhabiting after the SOE fires. We need to think deeply about what sort of economy we must build and what industrial shape it must take.

Restoring the status quo ante 2008 is not enough, and it would be downright wrong. The world has moved on in the past decade and we require a material transformation of our economic development model. Since 2008, new competitors have emerged in Vietnam, Bangladesh, Kenya, Ethiopia – and from robots. With hindsight, what SA was trying to do before 2008 was almost certainly not the right thing.

No further evidence is needed – though plenty is available – than the fact that, outside of government, no jobs on a net basis were being created even before the fires. Today we have a workforce that is one-third unemployed, with most of the jobless at best semi-skilled. How can we compete on a world stage when our US dollar wage rates for semi-skilled labour are materially higher when compared to the peers cited above?

Since 2008, the unemployment situation has worsened. Now the bedrock upon which the SA economy was built – mining – is crumbling. A recent report found that less than 20% of SA’s gold mines are profitable.

If, as I strongly believe, the SA economy has been ravaged by the Dutch disease since the turn of the century as a result of the massive growth in China’s resource appetite, is it not now ironic that the cause of that disease – the resource industry on which SA relied so heavily for its exports – should be the Dutch disease’s ultimate victim?

We need to think deeply about what sort of economy we must build.

Robert Louis Stevenson wrote: “Everybody lives by selling something.” This universal truth applies not just to individuals but to nations too. And in constructing a future economic strategy for SA, the most pressing question is what exactly we should sell to the world. What goods and services will make us economically relevant in the global market? In the answer will lie a strong pointer as to where the jobs so desperately needed are going to have to come from.

If we do not answer this question, sooner or later, with SA’s growing external funding requirements and rising foreign debt to GDP ratios, even as unemployment levels increase and economic growth remains stalled, we should not be surprised if a future fire in the emerging market fraternity claims us as a victim. Turkey’s now exposed Achilles heel was its dependency on foreign financing for its deficits; could SA be similarly cursed and, in due course, laid low?

In the 25 years I have been in SA, I have only heard a handful of mostly foreign commentators try to answer this “What should we sell?” question. Two of the most prominent were economists Ricardo Hausmann from Venezuela and Dani Rodrik from Turkey. Most SA economists see us as an economy driven by consumption with production (for the domestic market, let alone for export) reduced to a junior afterthought. They see the current account deficit as structural and unavoidable. Such a prioritisation is a luxury we cannot afford. To buy from abroad, we must first sell something abroad to be able to fund foreign purchases, or just get progressively poorer so that we can no longer afford them – ask an Argentine!

By definition, SA’s current account deficit means we must, on a net basis, consume the savings of others more than generate our own. By default, this means we put our consumptive cart before our productive horse. Why then are we surprised if, in economic growth terms, we appear to be going nowhere fast?

President Uhuru Kenyatta of Kenya has championed four big ideas that he wants to characterise his second term in office. Headlining his list is export-oriented industrialisation through manufacturing. Through this, he envisages financing his other three priorities: the promotion of food security, the development of affordable housing and the provision of affordable healthcare.

What might President Ramaphosa’s four big ideas be? And, in particular, if a South Africa of 56-million people is to thrive in this fast-changing world, what is the 2020 vision of what we will be selling? If we can start to answer this latter question, it will help light our way going forward and even help extinguish the fires of today that are still holding us back.

Michael Power
Michael Power Strategist


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