In an era of fiscal repression, formal-sector lending is the problem
Debt relief isn’t the answer because it doesn’t address the right question, which is about people’s lack of access to adequate purchasing power
Issues as diverse as the debt-relief bill, prescribed assets, fixing Eskom and an International Monetary Fund (IMF) restructuring share a common theme: capital destruction. “Fiscal repression”, a term many associate with the IMF, refers to tools that dilute investor capital to spur a growth strategy.
Having entered an era of fiscal repression without a workable plan, growth blocks must be urgently reassessed.
As redistribution was increasingly prioritised ahead of growth, policies decoupled from fundamentals. The state-capture offensive then fused transformation, patronage and populism. The required antidote is an upgrade in public awareness around what drives economic development — and acceptance that such drivers must guide our pursuit of rapid and inclusive growth.
SA’s long-term growth prospects are perilously inadequate. The blockage traces to policies. Prioritising redistribution ahead of growth cripples competitiveness thus crimping export potential. Meanwhile, domestic purchasing power is insufficient to fuel adequate growth as a large majority of SA households are poor, over-indebted, or both.
That there are about two funeral policies for every three families shows that, like national and local governments, most households are poor money managers
Apartheid generally refers to a broad set of injustices, but in a clinical economic sense it was about denying market access to the majority population. SA’s 1990s political transition coincided with Asia’s market access to Western consumers being hugely expanded. This fueled the world-changing rise of Asia.
The core constraint preventing SA from sustaining rapid and inclusive growth is still lack of access to adequate purchasing power. Instead of focusing on diffusing skills and competitiveness to integrate within swiftly expanding global supply chains, SA’s policies remain focused inward. Growth prospects still rely, imprudently, on overly debt-dependent domestic consumption.
Opponents of the debt-relief bill have argued that lending to low-income people expands inclusivity, yet households struggling to service debt is a primary cause of dismal growth prospects. Gauging excessive debt burdens requires tracking household well-being. The damage to lenders comes later. That there are about two funeral policies for every three families shows that, like national and local governments, most households are poor money managers that aren’t covering their cost of funding. Corporate finance directors avoid such outcomes, thus, with consumers now struggling, companies are slow to invest.
Credit-management proficiency has allowed lenders to profit while pervasive poverty is becoming entrenched amid prolonged economic stagnation. Fixing the economy now requires increasing exports while better managing government and household debt. Debt-debilitated households are a drag on growth comparable to mismanagement at Eskom and other state-owned enterprises.
There is much potential to freshly co-ordinate consumer lending regulations with pro-development private-sector lending practices to take costs and risks out of the system. Passing the benefits to consumers would benefit everyone.
Maximum lending rates must be low enough that responsible low-income borrowers aren’t covering the bad debts of inherently risky loans. Such a transition might entail a dip in retail sales but a steeper long-term trajectory would then follow. SA’s economy is not on the verge of a near-term collapse whereas trend lines presage grave dangers.
Pivoting policies to provoke sustained high growth is required, and should provide an immediate upward jolt. If the status and prospects of median-income 20-year-olds is a fair metric, SA’s economy is among the world’s worst managed. Modeling tools show that SA can only sustain sufficient growth to quell rising populism if exports surge while household finances advance.
Loan sharks could never have stunted growth in low-income households’ net assets to the extent that formal-sector lending has.
Economic debates leading to May’s general elections couldn’t transcend corruption accusations long enough to cobble a workable growth strategy. Household debt wasn’t a prominent campaign issue. Unaffordable consumer debt is rationalised as protection from loan sharks. That this perception wilts under scrutiny highlights a core disconnect: our national discourse demurs from unpacking issues framed in a social justice context. Consider how loan sharks are cast in a straw man argument to defend unsustainable lending.
Loan sharks could never have transferred the volume of interest payments from low-income to high-income communities as formal-sector lending has. Rather, as “informal lenders” are often relatives, employers or neighbours of the borrowers, vested interests frequently extend beyond maximising interest income. And, critically, the money circulates within the local communities.
Loan sharks could never have stunted growth in low-income households’ net assets to the extent that formal-sector lending has. It is as if pharmaceutical companies pumped normal cocaine into communities to battle a modest crack cocaine problem — with commentators nonplussed by the resulting pandemic addictions and broader implications. Loan sharks haven’t gone away despite parents and others vilifying them. Sophisticated marketing and imaging by “authorised” lenders has positioned borrowing as a right of passage.
An upgraded national dialogue must inform policy pivots such that the capital destruction of the next few years is part of a transition to sustained high growth. Just as phone apps are pummeling transaction costs, technology and creativity must be harnessed to plunge consumer lending costs. Likewise, upcoming job losses in various sectors must be offset five-fold through policy shifts to unlock export and global integration possibilities.
• Hagedorn is an independent strategy adviser.