Month: January 2020

The achievements of a few highly successful economies are highly admirable and conspicuous. Consistent growth in incomes and output over many decades has eliminated poverty. The growth has been accompanied by growing tax revenues that are easily collected, without much disturbing the engines of growth. And are then redistributed in cash and kind to provide a high measure of security for all its citizens against the accidents to which individuals and their families are always vulnerable.  Growth provides the means to fight crime, protect borders, provide roads, sewers and vaccinations, of equal value to all.  The caveat is that this historically unprecedented abundance is not better appreciated and more popular than it appears to be. Continued success can never be taken for granted.

Open access to the markets for all goods and services and for the resources, labour capital and natural resources with which to compete for custom, is a critical ingredient for success. Innovation threatens established interests and must be well recognised as a force for better. Rights that protect wealth and persons against fraudulent or violent assault and rule by predictable laws and transparent regulations are essential for success.

Competent and responsive government agencies are essential to the economic purpose. And a society, critical of government action, aware and unafraid of what a powerful government might arbitrarily do to them, makes for good government.

Harvard economists Acemoglu and Robison (A&R) have followed their influential “Why Nations Fail” with “The Narrow Corridor” [1]It explains in fascinating detail why it has been so difficult for nations to do what it so obviously takes to enter and stay in the narrow corridor that leads to economic success.

They explain the advantages of the “Shackled Leviathan” when the potential abuse of state power is effectively constrained by an empowered and critical civil society. A state very unlike the “Despotic Leviathan” that maintains essential order but does so at huge disadvantage for a cowered and vulnerable people. China, old and new, is cited as one such example. Another alternative may well be the “Paper Leviathan” an expensive and incompetent government, but only in name not in action. South America provides more than a few hapless cases of governments that serve only the people on their payrolls.

In all the many cases of national failure there is an elite who have a powerful interest in the stagnant status quo – and who resist the obvious reforms that would stimulate and sustain faster growth. Zimbabwe comes to obvious mind.

A&R also examine the potentially suffocating role of the “Cage of Norms” – well entrenched customs- that stultify access to markets and inhibit competitive forces. The caste system in India is still such an inhibitor of economic progress. Traditional land rights are a serious obstruction to producing more in SA.

South Africa, (A&R) argue, entered the narrow corridor that leads to success with the help of Nelson Mandela. They regard BEE as very helpful to economic success because it broadened the political interest in established enterprises and business practice enough to help protect them and the economy against destructive expropriation. That cutting a new elite into business success was necessary for stability and growth.

One wonders how A&R might now react to the revelations about state capture and corruption? And to the failures of the SA state to deliver satisfactory outcomes for the resources made available to it.

This raises an essential question. Will the highly transformed SA elite act in the general interest and encourage the invigorating forces of meritocratic competition for resources and customers? Or will they act to protect their gains and privileges against them?

The new elite should be aware that a failing economy will not be politically acceptable and any elite dependent on it will be highly vulnerable. They should be encouraged by our open and critical society to take the steps to get SA back into the narrow corridor that leads to economic success

[1] Daron Acemoglu and James A. Robinson, THE NARROW CORRIDOR, States, Societies and the Fate of Liberty, Penguin-Viking, 2019.

 Examining the state of the SA economy at the end of 2019 – and some suggestions for what the authorities can do to turn things around in 2020

 

South Africa is near the top of the global league – when it comes to the rewards for holding money, that is. You can earn about 3% after inflation on your cash, with only Mexico having higher real short-term interest rates.

However South Africa is close to the bottom of the global growth league (see below). This is no co-incidence, but the result of destructive fiscal and monetary policies.

 

Q3 GDP relative to the rest of the world

Source: Thompson-Reuters and Investec Wealth and Investment

 

Such an unnatural state of economic affairs, namely still very expensive money combined with highly depressed economic activity, has clearly not been at all good for SA business. The average real return on invested capital (cash in/cash out) has declined sharply, by about a quarter since 2012. Companies have responded by producing less, investing less, employing fewer workers and paying out more of the cash they generate in dividends.

GDP at current prices is now growing at its slowest rate since the pre-inflationary 1960s, at about 4% a year. This combination of low GDP and inflation below 4% (yet with high interest rates) automatically raises the ratio of national debt to GDP. And it makes it much harder to collect taxes (the collection rates are well explained by these nominal growth rates). Of further interest is that the actual growth in GDP is falling well below the forecasts provided in the Budget Survey (see figures below).

This leads to an economically lethal combination of low inflation and high borrowing costs (for the government and others).

 

Only actions by the government that clearly indicate it is heading away from a debt trap (ie printing money and so much more inflation in due course) can permanently reduce expectations of higher inflation and thus bring down long-term interest rates. Debt management is a task for the government, not the Reserve Bank.

The investors in those companies that depend on the health of the domestic economy have not been spared the economic damage. The value of these South African economy-facing interest rate plays (banks, retailers and investment trusts for example) have declined significantly and have lagged well behind the JSE All Share Index.  The JSE small cap index has lost 40% of its value of late 2016. Since January 2017, the JSE All Share Index is down by 7%. However an equally weighted index of SA economy plays is down by 22%.

Top 40 and Small Cap Indexes 2014=100

Source; Bloomberg, Investec Wealth and Investment

 

JSE All Share Index, Precious Metal Index and SA Plays (equally weighted) 2017=100

Source; Bloomberg, Investec Wealth and Investment

 

It’s against this worrying backdrop that I offer my New Year wish list for South African  business to be able to transform its prospects and with it the prospects of all who depend on the domestic economy. It is after business which is the most important contributor to the economic prospects of all South Africans.

My first wish is that those in government and its agencies should recognise that without a thriving business sector the economy is doomed to permanent stagnation. They should therefore show more respect for the opinions of business and the policy recommendations they make. Most important, they should interfere less in the freedoms of business to act as business sees fit.

Economic growth is transformational and inclusive. Stagnation is just that: nothing much happens, especially for the poor who are stuck in a state of deprivation from which it is difficult to escape. The opportunities that economic growth provides are a powerful spur to upward mobility – of which poor South Africans are so sorely lacking.

My second wish is that government turns over all wastefully managed SOEs to private control (there are no crown jewels) and in this way improve performance and generate cash and additional taxes with which to reduce national debt. Any sense from government that this might happen would bring long-term interest rates sharply lower and immediately reduce the returns required of SA business and in turn lead to more investment.

A third wish (linked to the second) for business success in 2020 is that government cuts its spending and raises revenues from privatisation, rather than raises tax rates next year. There is no scope for raising tax revenues unless there is faster growth. Higher tax rates will depress economic growth and growth in revenues from taxation still further. The wish is therefore that Treasury knows that only cutting government spending can avert the debt trap and has the authority to act accordingly.

Finally, a wish for monetary policy. South African business would benefit from lower short-term interest rates (notably mortgage rates) under Reserve Bank control. Lower interest expenses would help stimulate the spending of households, which could help get business going. It is my wish for business that the Reserve Bank will do what is most obvious and natural for it to do: to act decisively and urgently when both inflation and growth are pointing sharply lower.