Ramaphosa's historic opportunity amid Covid-19

04May 2020
The Guardian
Ramaphosa's historic opportunity amid Covid-19

Our economy is broken. We have seen, not just over the past decade, but over the past 60 years, that our economy as currently structured cannot create prosperity for the majority of South Africans.

President Cyrill Ramaphosa.

By Mandla Lionel Isaacs

It can be difficult to put our economic stagnation in perspective. We’ve become accustomed to high unemployment. As the then-Minister of Planning, Trevor Manuel, said way back in 2011, too few South Africans work. We’ve become accustomed to unemployment levels which would bring down governments in many democracies: 29 per cent at the end of 2019, 41 per cent if you include discouraged work-seekers. That is almost 10 million South Africans unable to find work.

A comparison with other developing countries provides perspective. To get a sense of how our economy has failed to generate prosperity relative to other countries, I compared GDP per capita growth (purchasing power parity, in constant 2011 US dollars) against several developing countries with high growth rates. I compared 2006, the last full year before the global economic crisis of 2007-2009, to 2018, the last year for which data was available for all countries.

Over these 13 years, the average income per South African increased by just 6 per cent, or only 0.5 per cent per year on average. Over the same period, income per person increased by 153 per cent for Chinese, 126 per cent for Ethiopians, 90 per cent for Indians, 82 per centfor Vietnamese, 74 per cent for Rwandans and 63 per cent for Indonesians. The average annual increase for these countries was 5.8 per cent, more than 11 times our own growth rate. 

Thais, only 5 per cent richer than us in 2006 (earning $562 more per person), are now 39 per cent richer (earning $4,760 more), having increased their income by 41 per cent over the period.

That increased income translates into economic freedom for citizens to improve their quality of life: to afford a bigger house, pay for their children’s education or save more money for retirement. Small businesses thrive with more customers with increasing disposable income.

By contrast, our GDP per capita has actually been contracting for the last five years, as the economy has grown at just under 1 per cent annually while the population grows at around 1.5 per cent.

We were limping our way to more of the same this year before the shock of the Covid-19. Now, a virus 800 times smaller in width than a human hair, in addition to killing more than 181,000 people globally in four months – a grim toll growing by five to ten thousand souls per day – is likely to lead to South African job losses in the hundreds of thousands if not millions, and GDP contracting by as much as 7 per cent or more this year.

And yet, despite the own goals and missed opportunities of the last decade, our growth problem is not new. Taking the long view, economic research shows that South Africa has been one of the worst-performing developing countries on economic growth over the past 60 years, and arguably has been deindustrialising continuously since 1982 (the year manufacturing jobs peaked).

As the political adage goes, however, never waste a crisis.

Our economy was already broken before Covid-19 hit us, and government shouldn’t let this crisis go to waste. As the full scale of our economic challenge hits us – likely the largest GDP contraction in many decades, stretching a drained fiscus exhausted after more than a decade of economic stagnation – all of society is looking to government to chart a direction to prosperity. This is a unique opportunity for an economic reform programme.

So while the immediate economic and social response measures announced by President Cyril Ramaphosa are necessary and encouraging, the most important aspect for me was his signalling – echoing similar sentiments from Finance Minister Tito Mboweni in recent days – that in charting a course out of the pandemic, he will pursue structural reforms and a new social compact to get our economy to where it needs to be, not where it was.

Exports, exports, exports

If there is one single answer to our economic problems, it is that we do not export enough. 

“To maintain overall growth and employment, the country will need to rapidly increase its exports.”

This was the prophetic message – delivered in 2008 – from the panel of top international development economists, led by Harvard Professor Ricardo Hausmann, who gave us a comprehensive set of recommendations on how to achieve and sustain job-rich growth. The panel pointed to our poor export performance over several decades, as the single biggest contributor to our high unemployment levels and poor growth. They identified the fast growth we enjoyed in the mid-2000s as the exception, not the norm.

Export-led growth has been the roadmap followed by virtually all late-developing countries that went from poor to rich, as well as the bigger group of countries that have risen up the income ladder without yet reaching the top. Our export growth over 44 years from 1960 to 2004 was dreadful, the panel noted: the real value of our exports grew by only 34% (about 0.7% per year), compared to 238% for Australia, 385% for Brazil and 4392% for Malaysia, for illustration.

What you export also matters. It is better to export more sophisticated products, as this grows your industrial capabilities and allows you to produce different types of products. Increasing product sophistication makes it easier to build and retain competitive advantage and to achieve higher profit margins. It is intuitive. If you produce sugar, coal and T-shirts, you’re a price taker competing against dozens of countries. If you produce precision machinery and semiconductors, you can charge high margins and compete against a handful of countries.

Also, if your only competitive advantage is cheap labour enabling the production and sale of simple, inexpensive products, you will lose that advantage as you become successful and your workers begin to command higher wages.

We’ve done well to build a sizeable car manufacturing sector, albeit heavily subsidised by government. We exported $11.2-billion (R155-billion at R13.9 per USD at 2017 average exchange rates) worth of automotive products in 2017 (the most recent available year from the Observatory of Economic Complexity which offers cool visualisations of export data). Let’s compare transportation product exports (includes cars and ships) with South Korea as the benchmark – a country which was poor 60 years ago but has become rich – and two relative peers, Thailand and Malaysia. Against our $11.2-billion (R155-billion), South Korea exported $106-billion (R1.5-trillion), Thailand $26.4-billion (R366-billion) and Malaysia $3.6-billion (R50-billion). As you can see, we are far behind the leader, but we are in the hunt relative to peer countries.

Now let’s compare exports of “machines”. This includes everything from high-tech electronics to precision tools: semiconductors, centrifuges and ball bearings. Against our $6-billion (R83.2-billion), benchmark South Korea does $250-billion (R3.5-trillion) – rich country stuff – while Thailand does $84.8-billion (R1.2 trillion) and Malaysia $130-billion (R1.8-trillion). Remember the income growth comparison we did earlier? Interestingly, in 2006 our machine exports were $6.5-billion, meaning we’ve shrunk slightly – at least in dollar terms – while Thailand’s grew from $56-billion (51% total growth) and Malaysia from $109-billion (19% growth).

The conclusion is obvious. Part of the reason our economy isn’t growing and 10 million South Africans who could be working are not, is that there are missing industries. The above indicates one of these missing industries is a R540-billion advanced manufacturing industry. This is the potential GDP contribution a 2015 McKinsey Global Institute report argued South Africa could achieve by 2030.

The constraints to export growth

Why aren’t we exporting more? There seems to be a consensus that policy uncertainty, unreliable electricity availability, high logistics costs and skills constraints limit our growth potential. Treasury’s August 2019 strategy document – which seems to be gaining political momentum – highlights these in calling for structural reforms.

Make no mistake, there are big political battles underlying all of these. 

Among others, Ramaphosa and Mboweni will have to convince the ANC – and powerful interest groups in and outside of the alliance – that it can have big SOEs with monopolies over electricity generation and logistics operations, or it can have a growing economy, but it can’t have both.

But I’d like to highlight an area which requires far more attention and discussion: monetary policy. Investec’s Michael Power has argued – very convincingly in my view – that the root cause of our inability to grow labour-intensive manufacturing over several decades is that our currency has historically been too strong. Power explains that this is great for the small urban elite, but devastating for the poor and unemployed whose labour is made too expensive – on balance, as an input into export goods – as compared to other developing countries (especially fast-growing Asia). 

Our currency has historically been propped up by our mineral resource exports, while countries such as Japan and China exported their way to riches partly with the help of weak currencies. 

This is alongside the issue of the real cost of capital, which Power estimates is twice that of our Asian competitors. Many on the left also argue the need for cheap, patient money to fund developmental investments, which is one of the arguments for a new state bank.

This could explain the missing R540-billion advanced manufacturing sector we talked about earlier, the need to so heavily subsidise the auto manufacturing sector we do have, and why manufacturing has been in decline for decades despite the best efforts of generations of policymakers.

The Hausmann panel seemed to concur with this line of argument, saying: “The fact that the country has a large current account deficit and high unemployment indicates that the only way to achieve both external balance and full employment is with a more competitive real exchange rate.”

Could this be the missing variable which explains our growth puzzle? It certainly seems to be a big part of the answer.

Minerals still matter

While our focus remains on exporting increasingly sophisticated products, as Peter Bruce has argued, you can still go a long way by being among the best in the world at exporting raw minerals. The poster child for this model is Australia, which trails us slightly in export of machines (R82.7-billion to our R83.2-billion), exports only a quarter of the value of cars that we do (R40.2-billion to our R155.2-billion), but more than makes up for it by exporting $142.1-billion (R2-trillion) worth of minerals and metals annually, four times our total of $33.1-billion (R459-billion), with 40% our population.

Country exports by product, 2017. (Source: The Observatory of Economic Complexity)

Being really good at digging up and exporting minerals – especially to the nearby, rising China – has gone a long way to making Australia one of the world’s richest countries, with an economy which has grown for a record 29 straight years.

Here at home, the Minerals Council says mining “is not flourishing” and is declining in terms of its GDP contribution. What is most worrying for our discussion on expanding exports, is that greenfield exploration investment in South Africa has ground to a halt, the trickle that remains constituting only 0.1% of global greenfield exploration expenditure. This means investors are voting with their money against SA as an attractive place to start a new mine. No new exploration investment means no new mining operations, no new jobs in those non-existent operations and no new exports.

Moonshot goals

Let’s come back to the export of sophisticated products. An important recent economic study sought lessons for developing countries based on the success of the “Asian miracles”: a handful of countries which were alone in reaching high-income status between 1960-2012 without discovering large quantities of oil or joining the European Union. The Asian miracles include Hong Kong, South Korea, Singapore and Taiwan.

The authors – Reda Cherif and Fuad Hasanov, both IMF economists – argue that the core ingredient to the success of the Asian miracles was the application of “Technology and Innovation Policy” or “True Industrial Policy” (TIP). TIP is an industrial policy which: intervenes to create new capabilities in sophisticated industries; is export-oriented; and includes intense competition (domestically and externally) and strict accountability. TIP has three gears based on productivity growth, export sophistication and innovation.

What set the Asian miracles apart, the authors argue, is their successful application of the fastest growth gear: the moonshot approach. The moonshot approach pursues ambitious goals and radical changes, including in industries and sectors which are “wicked hard” to enter, where “much of the required skills and infrastructure might not even exist”.

The Asian tigers sought to produce and export sophisticated products which the country had no track record in. Writing about South Korea, for example:

“Hyundai (which was a construction company at the time) built the largest shipyard in the world (and simultaneously its first ship); and finally, the same company moved to the auto industry with no prior experience, and early on decided to build a factory the annual capacity of which would exceed the total annual sales of the whole country and set up its own networks of dealerships in the U.S., the largest and most competitive market in the world.”

What might a South African moonshot approach look like?

South Africa produces globally competitive armoured combat vehicles and helicopters (the Rooivalk), but no homegrown passenger cars. The minibus taxi is used all over Africa, the industry in South Africa alone is worth R50-billion a year.

What if the DTI took some aspiring industrialists from its Black Industrialists programme, and with cheap, patient money from the IDC and PIC, technical support and minority ownership from Denel, this consortium built the first African-designed and produced minibus taxi? The engineers could innovate based on design thinking, leveraging user feedback from taxi drivers and passengers. 

We could emulate the European Airbus model and work with leading African countries – as a flagship project under the new African Continental Free Trade Area – to share component production and assembly throughout the region to some degree.

We could implement a related project to produce batteries for electric vehicles. With Africa’s population expected to grow from 1.3 billion people today to 2.4 billion by 2050, the minibus taxi is likely going nowhere. Will those machines – and the parts to operate and maintain them – be produced in Africa or Asia?

A way forward

Ramaphosa has a historic opportunity. Covid-19 has rocked South Africa and the world, but has strengthened his hand. South Africa has appreciated his steady leadership and rallied behind him the way societies typically only do in wartime. The idea that he could fall victim to a party coup – overblown before the pandemic in my view – is fantasy today.

The pandemic has floored our already broken economy, and the president has shrewdly signalled his intention not to work to restore what was, but to build something better and stronger. In Tuesday’s address on government’s evolving response to the pandemic, he spoke of the need to “forge a new economy”, which requires a new social compact. He will never have more political capital to deploy to this effort than he has today.

As soon as is feasible, I would encourage the president to do something radical. Book a conference centre indefinitely, and announce that government, business, labour and all relevant stakeholders are invited to forge a plan for export-led inclusive growth – using Treasury’s strategy document as a base – which will help us achieve high-income status in one generation.

Do it at the University of Johannesburg’s Soweto campus. Let the greatest of our spatially unjust bedroom communities, birth the vision which will fundamentally transform our society.

Make clear, there are no sacred cows. Our economy is broken. We have seen, not just over the last decade, but over the last 60 years, that our economy as currently structured cannot create prosperity for the majority of South Africans.

We cannot keep doing the same things and expect a different result. We don’t need tweaks and new policy papers here and there. We need fundamental, structural change.

Thus, one of the problem statements which will guide the conference will be: what changes are required for us to dramatically increase our exports of goods and services by no less than 6% per year annually into the future while increasing black ownership?

Six percent is the magic number offered by Nobel economics laureate, Sir Arthur Lewis, according to Power. The President’s Economic Advisory Council can advise on whether this is the right number.

The need for black participation in ownership should be self-evident: South Africa cannot grow if 90% of the population is largely excluded from wealth creation.

All stakeholders will have to answer this question. Does Transnet’s operation of rail and ports enable us to dramatically increase our exports? Does this or that labour demand enable us to dramatically increase our exports? Do our real exchange rate and inflation targeting regime enable us to dramatically increase our exports?

Sacred cows will need to be slaughtered, or humanely put down.

The president should be clear that no economic cluster minister must leave that conference centre until we have a plan on how to dramatically increase our exports. Because what are you doing as an economic cluster minister if you can’t tell us how we will grow?

I leave you with the words Korean President Park Chung Hee spoke to a group of migrant Korean miners in Germany in 1964 (courtesy of Cherif and Hasanov):

“Looking at your tanned faces, my heart is broken. All of you are risking your lives every day as you go down thousands of meters underground to make ends meet… What poor people you are! You go through these trying times just because Korea is so impoverished… Although we are undergoing this trying time, we are not supposed to pass poverty onto our descendants. We must do our part to end poverty in Korea so that the next generation doesn’t experience what we are going through now… About 150 years ago, the industrial revolution was in full swing in Germany, whereas Koreans had no idea of how the world outside was changing. Koreans stuck to their traditional way of life without knowing what was going on outside the country. We were like frogs in a well. How can a country like Korea, which was not fully prepared for the upcoming era, be as rich as Germany now?”

South Korea, tired of poverty, dared to grow rich. South Korea succeeded. 

Will we?