Export-led foreign investment is the answer to SA’s economic woes
With the domestic market out of puff, locals producing services and products for foreign markets will rake in cash and boost skills
Is attracting foreign direct investment (FDI) a panacea or another flavour-of-the-day pseudo solution that distracts from unlocking the country’s growth potential? The short answer is that SA needs to attract a specific type of FDI.
This country has abundant investment capacity, while global investors are flush with cash. What our economy lacks is not access to investment capital but rather access to sufficient purchasing power. Domestic consumption can’t spur adequate growth as far too many local households are either extremely poor or overwhelmed by expensive debt.
Meaningfully reducing SA’s unemployment and poverty is only doable through private sector employers being able to sell to consumer markets with vastly more purchasing capacity than our domestic economy can provide
FDI focused on selling to local consumers through displacing incumbents or local start-ups will do little, if anything, to boost growth. Foreign investments that create tens of thousands of jobs will simultaneously destroy a similar number if they seek to take market share given SA’s low long-term growth trajectory.
What is needed is FDI that employs locals to produce products and services for foreign markets. When this is done well, as many high-growth Asian nations have demonstrated, foreign capital and know-how are imported to boost worker productivity and competitiveness. Sustained high growth then becomes possible through accessing deep consumer markets either directly or via global supply chains.
The global diffusion of export-focused FDI accompanied by cutting-edge industry expertise has been central to pummelling poverty in all other regions. Meanwhile, the “resource curse” has never been more wicked. As manufacturing-led global growth gives way to services-led growth, and as innovations advance more environmentally sustainable paths, extraction-reliant economies are becoming ever more vulnerable.
It has become abundantly clear that transformation and poverty alleviation are dependent upon achieving sustained high growth which, in turn, hinges on surging value-added exports. SA’s political turmoil reflects and explains how non-white poverty declined from about 90% during apartheid to 60% a decade ago, but is now ratcheting higher with no reversal in sight. Excluding this region, which has most of the world’s poor people, largely reflecting its lack of integration within the global economy, less than 5% of the rest of the world’s population live in extreme poverty.
It is difficult politically to acknowledge the need to surge value-added exports. Policies focused on transformation and redistribution are inconsistent with seeking to maximise competitiveness, productivity and export-focused FDI. President Cyril Ramaphosa’s response has been to recalibrate his message from audience to audience.
A post-election policy pivot is now required to attract sufficient export-focused FDI. Yet the ANC cannot easily renounce its redistribution and transformation biases — even though they devastate growth prospects, thus entrenching poverty and unemployment at politically combustible levels. A workable compromise position must be reached. This need not be difficult.
Change begins with objective acknowledgements. A majority of SA households are remarkably poor with dismal long-term prospects. The economy cannot continue to expand hardship relief without further diminishing already inadequate growth prospects. Achieving sustained high growth is only possible through surging value-added exports.
Meaningfully reducing SA’s unemployment and poverty is only doable through private sector employers being able to sell to consumer markets with vastly more purchasing capacity than our domestic economy can provide. SA’s policymakers have refused to accept this undeniable reality, as their primary output is regulations and legislation, which serve as taxes on domestic companies and consumers to advance transformation objectives. International companies and consumers cannot be forced to accept such regulations as they can simply invest in, and buy from, other countries.
There are abundant precedents, locally and internationally, for having separate regulatory regimes for investments in value-added exporting businesses. SA has “charters” for various sectors and the ANC also has a penchant for special economic zones. The charter for value-added exports should resemble a free-trade zone devoid of anticompetitive regulations. A profound advantage of export-focused FDI is that the investing companies are often integral to global supply chains. They bring not just capital but up-to-date industry knowledge alongside access to affluent consumer markets.
A workable alternative is to combine the expertise and resources of large local companies with the innovativeness of small, medium and micro-sized enterprises (SMEs) to identify and develop export channels. While SME development is one of the few things all of SA’s leading political parties agree on, failures vastly outstrip successes.
If SA were a family and not a society, its treatment of SMEs would be deemed child abuse. SMEs are encouraged to take market share from well-established, highly resourced incumbents within a stagnant economy. It is delusional to think such efforts will expand the total number of jobs or reduce poverty. Rather, capital is destroyed and dreams extinguished. SA’s SME development must focus on identifying export opportunities.
Global poverty has plunged due to poor people finding gainful employment by adding value to exports destined for affluent markets. SA’s path to broad prosperity, and thus social justice, begins by accepting that the global economy richly rewards integration.
• Hagedorn is an independent strategy adviser.