MARTYN DAVIES: Should reform in SA be gradual or big bang?
If structural reform of a country is only sparked by a crisis, what are the implications for a struggling SA?
In my life I’ve been fortunate to be in places at key moments that subsequently shaped history, becoming crucial turning points in political and economic affairs. What these examples mean for SA in its current state is significant.
In late 1989, I arrived in Berlin to find the Berlin Wall being dismantled by Germans heeding US president Ronald Reagan’s call in 1987 to "tear down this wall".
The fall of the wall resulted in the domino collapse of East European regimes. By the end of 1991, the Soviet Union itself — the last great empire — had disintegrated. This political shock was followed by sweeping structural reform. Market liberalisation and privatisation led to a better livelihood for the region’s populations; the Eastern Bloc became emerging Europe and reforms were ultimately rewarded with EU membership.
The point is, it took a dramatic political shock before economic structural reform happened.
In the early 1990s, China was in the early stages of a reform process. Its economy was moribund and private enterprise was in a nascent state. GDP per capita was a lowly $317 a year, identical at the time to Nigeria’s. It is now $7,300 — and over $15,000 on a purchasing power parity basis. Being witness to how Beijing was able to dismantle its state-owned collective farms, privatise land ownership, unleash entrepreneurship and encourage small enterprise was a lesson in structural reform. The administration of Deng Xiaoping was able to do away with socialist ideology in favour of the market.
The best analogy I have heard of Deng’s reforms was comparing it to a bottle of red wine. He poured out the red wine and filled the bottle with Coca-Cola but kept the labels on the bottle: the labels of "Communist Party of China" and "People’s Republic of China". Those outside the system still believe the labels, but those inside understand that these phrases are meaningless.
Within a generation, China grew to become the world’s second-largest economy and among the most competitive manufacturers. Its dire poverty and economic state in the 1980s forced it to abandon ideology and adopt pragmatic structural reform that embraced private capital, and to open its market to foreign enterprise.
Within 13 months Korea had regained its investment-grade rating — a record in sovereign turnaround
While studying towards a PhD in Seoul, South Korea, I saw how the Asian financial crisis of 1997 wreaked havoc across the region and how economies from Indonesia to Korea were pushed to the brink of fiscal collapse.
Despite the IMF’s $58.4bn lifeline to the Korean government to bail out its fiscus, it was downgraded to junk status by ratings agencies. Koreans thought the economic miracle of the 1970s had ended.
But Korea soon became the poster child for structural reform. Within 13 months it had regained its investment-grade rating — a record in sovereign turnaround. The reforms implemented after the crisis by Korea and other Asian states underpin the region’s growth trajectory and middle class-led development.
Can countries reform structurally without a crisis? And has SA had a big-enough crisis to carry out the bold reforms that the state-owned sector of the economy so desperately requires? Ours is not a cyclical crisis but a structural one.
States have a choice as to whether to grow or not, and the emerging-market story is one of governance.
The examples of Venezuela and Zimbabwe show what happens when governments get things badly wrong.
Should reform in SA be gradual or big bang? Business undoubtedly wants the latter. But what is politically possible is likely to determine this outcome. The 2019 elections and the influence of labour complicate SA’s approach to reform. The Eskom crisis and the threat it poses to the national economy should provide an opportunity for President Cyril Ramaphosa to proceed boldly with a dramatic reform agenda.
Without deep structural reform of state-owned enterprises (SOEs), SA will underperform in growth terms, causing it to diverge from the positive trends in the global economy.
Recent global economic history provides lessons for SA. True reform will not just remedy the obvious financial risk that SOEs pose, but also inject confidence into domestic and foreign capital to invest for the long term.
"Never let a good crisis go to waste" is an adage often attributed to Winston Churchill. It certainly applies to SA.
• Davies is MD for emerging markets & Africa at Deloitte