Ten irrefutable laws of economic success

I’m perturbed by the “capitalism versus socialism” debate, taking place in our country. Every few days I see an article by some newly minted economist lauding the benefits of socialism, devoid of the practical ingredients of basic economic success. Apparently, according to these pundits, South Africa has to do one simple thing in order to resolve all its economic woes: nationalise everything!

In fact, it reminds me of my daughter’s favourite Barbie episode where the Barbie princess sings, “if I had magic…”, on repeat… “magic, magic”, socialist magic. If South Africa had economic magic, we would overnight turn our stagnant and exclusive economy into a thriving industrial hive of inclusivity and shared prosperity, they imagine.

The difficulty of course, is that we do not have magic, we have an economy with a particular structure and legacy, and if we are going to have a different economy we will have to build it, business by business, road by road, technology by technology, innovator by innovator.

It is understandable why many in South Africa today see capitalism and free market economics as suspicious or even evil. Our history of oppression has, for the most part, coincided with a version of extractive capitalist economy. The Afrikaner nationalist government did use a partially socialised form of state development to favour the white minority, but the core economy that made white Afrikaners wealthy was a capitalist one, with a housing market, labour exploitation and a generational shift in education at its centre. We have now inherited that economy, in a now de-industrialising, increasingly services-orientated form.

In order to escape the fairy-land of socialism as a panacea, we have to take account of some of the irrefutable laws of economic success. Here are a few to contemplate:

We cannot borrow ourselves out of sovereign debt

In the Zuma–years South Africa sovereign debt went from under 15% to over 50%. This coincided with ballooning state dependence in the form of a bulging public service wage bill as well as the social grant system. While we should be proud of the social safety net we have created for the poor, we are now in a situation where we have no choice but to sell off some of our national assets in order to keep repaying our debts. We now resemble, as a nation, our indebted consumers who maxed out the credit card, furniture and clothing accounts for the jealous down benefits of short-term pleasure in return for long-term pain.

Why did this happen? Put simply, because the Zuma administration wanted to have a lavish socialist party without the tough 9-to-5, Monday to Friday of economic productivity that produces the income, to afford the benefits. They tried to borrow our country out of structural exclusion, and predictably failed, worsening the burden that is now passed on to the poor and working class in the form of a VAT increase.

We cannot procure ourselves out of systemic exclusion

Over the last couple of years the executive has become aware of the capacity of the state to “procure” in “preferential” terms. The thinking is that we can use the levers of state procurement to create and sustain new business owned by previously disadvantaged players. The idea looks sound on the face of it and can have measured success in it’s first iterative cycle. In reality, the consequence of market interference, such as this policy is, is that of driving up costs.

This happens as middlemen and middle-woman, often without the skill to provide the actual service themselves, are window-dressed at a premium by old oligopolies who try to navigate the policy and stay in business, rather than leading to the restructuring of the industry in question. We would’ve been better off providing incentives at the base for new entrants, lowering barriers to entry and busting anti-competitive behaviour, than trying to change market structures at the later transactional end, only to pay exorbitant prices for “transformed” supplies to government. 

Ultimately, we cannot fake competitiveness through incentives or quasi-free trade zones

The factors that have made South Africa increasingly uncompetitive in global terms over the last few years have been, rising input costs such as energy and labour (which a statist approach won’t solve), declining labour market flexibility, declining availability of high skilled workers and an intensely combative and fractious political environment. These issues are systemic and will require a serious commitment from government to address. Outsiders might pay attention briefly when they hear about the creation of a free economic zone and incentive somewhere on the coast, but will eventually look at these broader structural conditions before making a long-term commitment to our country.

Investment, whether by the state, domestic savings, the private sector or foreign capital, is the bedrock of economic growth

The only explanation I can find for the putrid language I see directed at the investor class at home and abroad, is the deep sense that returns to the population are unfair and extractive. Of course labour and other stakeholders should demand a fair deal from investors. However, to imagine that one can make do without investors and then look to the state to fulfil their role, as the likes of Economic Freedom Fighters MP Floyd Shivambu imagine in their version of a sovereign wealth fund, funded from magical “surpluses” to be created by the state, points to a basic lack of understanding of the origins of economic agglomeration. States are notoriously bad at managing distribution, which is why the state-owned enterprises that do succeed, do so due to a rigorous policy of non-interference by government bureaucrats – not from state control in hyper drive.

Every policy has a consequence, often an unintended one

Our policy makers have become experts at lauding our policy goals and assuring ourselves that we can mitigate unintended outcomes, only to lament the wrongdoing of “others” for abusing the policy once it’s effects are clear. Take BB-BEE for example. Its now fashionable to criticise business for hiring and circulating a relatively small group of BB-BEE beneficiaries, but that’s what the policy called for – transformed management and ownership, and also the reason the policy has been updated, once again. Economic success requires responsiveness to the outcomes, not only the intentions of our chosen policy pathway.

A highly productive contribution by labour is a function of improved knowledge and skills, ie an effective education system

Wherever in the world one finds impressive economic performance one will find a story of long-term human capital development. South Africa has a long history of the neglect of the majority’s human capital development, and more recently a self-imposed legacy of mismanagement of our human capital system. In an era where knowledge is widely available, education is globalised and a single smartphone can contain more information than any university professor could accumulate in a lifetime, this is not only an indictment of the administrators who have presided over the system but perhaps an indication of our own national apathy.

The rule of law, integrity of institutions and security of rights form the basis of trust on which economic exchange takes place

Business has a fancy term for this called “policy certainty“, but it’s really more comprehensive an idea than simply referring to what policy statements come out of the African National Congress (ANC). For our shortcomings in this area I lay the blame squarely at the feet of an ANC whose response to every “radical” idea has been “to deliberate, at length, about every possible policy option”, in an attempt to maintain its so-called broad-church, while re-deploying lawbreakers and in the process, undermining it’s own integrity.

What this has done is to split the country into fragments of non-conformity and discontent, where every marginal voice is a policy-maker with a megaphone. It has made the ANC appear to be unwise and uninformed, a party without a policy perspective of intellectual spine, as the smart, informed and measured voices have been drowned out. A better way to unite the party and lead the nation would have been by raising the party’s performance in office and building loyalty through delivery on promises made, rather than making new promises that can never be entirely kept in practical terms (read EWC).

Wealth is created when value is added

Vast parts of the African continent are a perfect example where very wealthy people in terms of available naturally endowed resources, still live in abject poverty due to a lack of value-addition. The current economic debate is obsessed with old wealth and amassed wealth at the top of the greedy genie coefficient, while the real crisis we face is how to develop new wealth in an inclusive way. The only way to do so is to find new ways of adding value to our resources, or through innovation on existing products. In that sense, South Africa’s handful of true entrepreneurs should be the heroes to who we look for leadership. To do that some who have political power but lack economic know-how, might have to admit that they don’t understand how wealth is created and partner with those who clearly do.

Market economies outperform planned ones, usually, because they are more efficient at moving capital and goods to where the market demands the.

South Africa has, sensibly, held onto our basic free market approach. What we have done wrong is take an increasingly interventionist posture by government, as opposed to an increasingly enabling one. We’ve strangled the golden goose because she’s not delivering her benefits more widely, rather than rearing her chicks in an inclusive way. As the World Bank rightly says,

“Low growth perspectives in the coming years suggest poor prospects of eliminating poverty by 2030 as envisaged in the National Development Plan. Looking ahead, accelerating poverty and inequality reduction will require a combination of policies that seek to unlock the full potential of labour markets and promote inclusive growth through skilled job creation.”

The Chinese cannot come and save us, we need to help ourselves

Our Sino friends, after decades of low labour costs and high productivity levels and savings, have saved cash to burn as they seek to extend their foreign influence and secure resource supply chains. This makes us somewhat attractive to the Chinese for investment in lieu of future trade. However, to imagine that BRICS (an international relations club with a diverse face and Chinese wallet) will somehow save South Africa from economic stagnation, is to misunderstand that the Chinese will at some point want a return on their investment. Ultimately they are not in BRICS for us, but for themselves.

They cannot do for us the things we can only do for ourselves – such as develop our people as they have theirs. If we imagine ourselves as equal partners on the international stage, we have serious work to do to get our house in order, or we will become a satellite station for Chinese internationalisation, with Sandton as a mere lighthouse pointing the way for Asian giants hungry to explore and exploit the rest of Africa.

If South Africa is to craft an economic future that is equitable, inclusive and sustainable, it will have to take account of these non-negotiable fundamentals. When the political and other elites, the academics and the labour unionists through the media, tell the population that “capitalism is the problem and socialism is the solution”, they are misleading the public. They are scape goating good actors instead of introspecting responsibly about poorly conceived actions on their own part.

Every successful socialist economy globally has at its core a set of free market arrangements that take advantage of the benefits of mobilised capital, including fixed capital in the form of enabling assets, human capital and financial capital. In many cases an important differentiator and competitive edge is the social capital between the social partners. That, in an unequal society such as ours, will require a long term, inclusive view, by all. No amount of socialism in a Marxist sense will magically produce the desirable society our constitution dreams of.

Of late the ANC has been under increased pressure to deliver magic-wand solutions. The latest include of course the commitment to expropriation without compensation (EWC), a newly tabled sovereign wealth fund and other fairy dust ideas. Let’s be clear, land ownership patterns must be drastically improved and a sovereign wealth fund, if well funded and used to create wealth, is a good idea. However, neither of these strike at the heart of South Africa’s economic problems. They might go to the heart of some of our historic problems.

But the heart of our economic problem is this: two few people work, because there are too few jobs available, because there are too few companies to hire workers, because there is too little investment taking place, because there is too little prospect of return on investment (either for the individual or from the state), and that is because of our self imposed complexity, both political complexity and from a regulatory and policy point of view, that has made most investors say, “South Africa is just too complicated”.

Now if we had the best skills in the world, they would be willing to accept “complicated”. If we had the strongest institutions in the world they would be more accepting of our idiosyncrasies. If we had close proximity to the wealthiest markets in the world, there would be more tolerant. If we had a track record of good governance, professionalism in our dealings and a high-performance population of skilled workers eager to contribute, they would be patient with our internal squabbles, as many have been. But the Madiba magic has worn thin.

For all our exceptional attributes, South Africa is really a small middle-income country at the tip of Africa. This means that we have enormous long-term potential but significant short and medium term contradictions. It means we have to make ourselves more attractive compared to our emerging market peers. It means we have to get these basics right. We have to set aside the socialist gene-in-a-bottle, that has been tried and found to be an empty promise, and get down to pragmatic economics. Other African states such as Rwanda and Ghana, have woken up to this strategic reality, and they are producing results. This really is not rocket science, but will require some tough trade-offs and as always, decisive leadership.

As a citizen who would love nothing more than to see South Africa succeed, in increasingly inclusive ways, I wait with baited breath for those setting our direction as a country, to articulate a strategic vision that takes account of the here and now and over time, an audacious pragmatism to make our country a more successful one in economic terms. DM

Marius Oosthuizen is a member of faculty at the Gordon Institute of Business Science, University of Pretoria. He teaches leadership, strategy and ethics. He oversees the Future of Business in SA project which uses strategic foresight and scenario planning to explore the future of South Africa