SA has reached a "truth or consequences" juncture where improving economic outcomes requires the country’s economic dialogue be upgraded to grasp the big picture. Among the concepts central to policy debates that are perilously misunderstood are: "middle-class growth" and "financial repression".
Many countries have sustained rapid middle-class growth in recent decades by maintaining high household saving while steadily expanding jobs through growing value-added exports. SA’s 1990s transition entrenched a political party entrusted to achieve broad prosperity through legislative means. The resulting policies and practices have been dismissive of the truism that savings and consumption must be balanced at the household level to achieve sustained middle-class growth.
As SA’s legislative powers are bounded by its borders, its economic policies have similarly been excessively inward-focused and thus unworkable. For the vast majority of the poor to transition to middle class was always going to take at least a generation. The nation’s 1990s domestic spending capacity was grossly insufficient to fuel such an expansion. Redistribution needed to co-exist with, not undermine, high growth.
Instead of mimicking successful economies by maintaining healthy rates of domestic savings while focusing on selling goods and services to deep-pocketed foreign markets, SA inverted such policy principles. Consequently, a majority of its people are entrenched in poverty with growth paths conspicuously absent.
A country’s core economic aim should be to achieve an increasingly prosperous middle class. Debt allows wealthier, often older, households to lend money to less affluent, often younger, households. This allows meaningful wealth accumulations among huge numbers of previously poor families as home ownership provokes savings.
But many financial crises were triggered by real estate busts. The most aggressive investment decision most people make is to borrow to buy a house. The lenders are typically banks, the most levered of financial institutions. When housing prices decline amid a broad economic downturn, banks become vulnerable. It is within this context that the term "financial repression" is most meaningful. Banks must write down loans that can’t be repaid, even if this risks a systemic banking crisis. While trying to recapitalise their banks, national governments sometimes default on their debts. This is not uncommon.
The IMF can add value during such debt crises by facilitating the writedown of national debt by investors. However, SA’s circumstances pose special challenges. While debt-to-GDP is growing rapidly, it is still modest.
SA’s suffocating "debts" are off-balance-sheet obligations to support the massive volume of poverty. Unlike the bondholdings of international investors, SA’s poverty obligations cannot be smoothly restructured.
IMF restructurings often involve politically elusive austerity programmes. For SA, austerity measures would mean large job losses and the core problem would remain: how to achieve sustained middle-class growth given modest savings rates and inadequate domestic purchasing power.
Eskom provides a microcosm of what ails the broader economy. Its former CEO, Brian Molefe, asserted that the state-owned company could repay the funding of the proposed nuclear power programme through its cash generation. This perspective required the core considerations be ignored. There was never a viable path for Eskom to raise its prices faster than the rate of nominal GDP growth. Eskom was a drag on SA’s competitiveness, so economic growth would be further retarded. Nor was there an option to overcharge the historically advantaged more aggressively. And demand for Eskom’s product cannot be legislated and technological advances cannot be ignored.
A decade ago the global financial crisis substituted one form of financial oppression for another. Many low-skilled US wages were being repressed by the rise of Asia.
But as housing prices increased, they could borrow against the rising value of their homes to supplement their incomes.
SA’s policies have resisted remedies embraced by wealthier economies. A common feature of prosperous countries is an ability to look beyond past injustices in pursuit of improving competitiveness and growing prosperity.
Both the Bush and Obama administrations prioritised fixing the economy ahead of punishing perpetrators. In a new, and necessary, form of financial oppression, many millions of the US’s lower-productivity workers adjusted to the reality of their diminished prospects. As with banks and investors writing down debt, this led to the US economy becoming more nimble and thus substantially more competitive. The transition was deep and necessary.
Economic policy making is a specialised field, yet SA’s economic discussions are overwhelmed by justice debates and the growth-limiting policies they provoke. The injustices perpetrated during apartheid or recently by Zuptoid cronies are hardly small issues; unless compared to the importance of uplifting 30 million poor people.
At all the key points where there should be positive feedback loops provoking broader prosperity, SA’s economy is twisted against itself. For an economy to transition a huge number of households from poverty to middle class, there must be sufficient purchasing power to employ workers and those workers must save enough so that they accumulate meaningful assets. SA has written the book on what not to do.
Many local commentators held SA out as an exemplar for its having largely dodged the financial crisis of a decade ago. This, however, mostly reflected the nation’s low level of global integration. US housing prices in the prior five years had increased by about 50% whereas SA’s, measured in dollars, had increased by 350%. Zero-down mortgages were available in both countries. The key difference was that SA had enough broadly entrenched price inflation that housing prices could meaningfully correct without declining sharply in nominal terms.
That workers demand above-inflation wage settlements is largely explained by their being addicted to debt. The mathematics dictate that soon after their borrowing capacity is maximised, their living standards must decline. This is fundamentally inflationary. Yet, when SA faced its version of a banking crisis with African Bank four years ago, the Reserve Bank prioritised the interests of global investors to the detriment of SA’s economy and lower-income households, thus helping to bake-in inflationary forces across the economy. The recent proposal to force banks to write off many billions of rands in loans to low-income households signals a reversal of the thinking behind the African Bank rescue. Yet there are far better solutions that lever the strengths of SA’s banks and private sector capabilities.
Through good times and bad, SA’s policies have favoured redistribution ahead of competitiveness and middle-class growth. As a consequence, what is now required is a fundamental reassessment of the political economy.
• Hagedorn is an independent strategy adviser.