South Africa benefits from abundant capital market expertise. Conversely, despite having the world’s most severe youth unemployment crisis, none of our leaders offers a plausible remedy. What does our economic toolkit lack?
Companies are valued highly when dividends and investments can be steadily increased due to earnings comfortably exceeding funding requirements. Without the discipline of projecting and valuing free cash flows, pricing securities and allocating capital would reflect emotive guesswork. Our economic policy debates are haphazard as we don’t prioritise the expansion of its economic development equivalent: household discretionary income.
To generate abundant free cash flows, leading companies orchestrate exceptional business models. Similarly, while successful economies’ policies support growth in households’ discretionary incomes, ours don’t.
Most of our households have low incomes or heavy debt loads that compound faster than their incomes grow. Time is not a friend. Rather, insufficient purchasing power entrenches a vicious cycle by suppressing job creation and wage growth.
Despite our per capita income having stagnated for 15 years, household consumption’s share of our GDP has risen and now accounts for two-thirds. This odd outcome reflects a sharp decline in fixed investment’s share of GDP, while the contribution from net exports since 2010 has averaged less than 1%.
We must invest to ensure reliable electricity, roads, rails and ports. But increasing fixed investment can’t counter consumers’ crippled spending. The investment spend to build a mall won’t create the purchasing power required to justify its construction.
A preponderance of financially stressed households, ultra-elevated unemployment and weak consumer spending become mutually reinforcing. To achieve a higher growth trajectory, we must increase exports.
Combining rising commodity exports with lower interest rates and declining inflation should noticeably boost our GDP growth trajectory. Yet the resulting increases in employment and purchasing power would be meagre.
Value-added exports
We can’t achieve normal workforce participation without prioritising value-added exports. We should have adopted some semblance of the Asian model when outsourcing swelled in the 1990s.
Value-added exporting through developing niches in global supply chains remains a central feature of high-growth economies. Due to localisation and BEE policies, only an insignificant sliver of our young adults add value to exports.
That our government’s policies cement rampant unemployment and poverty traces to political framing that emphasises inequality to justify patronage-enabling policies. Fixating on GDP growth further distracts from household-level realities.
We must pivot from the political exploitation of inequality to focus policymaking on household prosperity. Another highly polarised society, the US, is pivoting from diversity, equity and inclusion policies to prioritise affordability.
While diversity and inclusion are directly quantifiable and broadly beneficial, equity is an amorphous concept easily exploited by political elites. As less than 5% of our school leavers are white, all paths that accelerate job creation, productivity and wages advance diversity and inclusion.
Focusing on equity sidetracks our politics from seeking solutions while balancing competing interests. It delegitimises the interests of many productive members of society. Instead, South Africa’s economic policies should prioritise creating a large middle class, with the highly affluent outnumbering the poor. This outcome once seemed almost within reach, but now seems more distant than before.
Neither our foreign alignments nor our economic policies cater for the million South Africans who leave school annually. Most will join an unemployment queue of more than 10-million, mostly young, South African adults.
With demographic trends gathering momentum, shifting geopolitics and technologies, particularly AI, point to a sharp break with the past. Most commodity-exporting nations are poor, reflecting poor integration into global supply chains. Last year Morocco leapfrogged South Africa to become Africa’s largest vehicle producer.
The global economy is becoming dominated by services, digitalisation and new forms of integration. This continent’s untapped global relevance is its youth. Africa will soon account for 40% of the world’s births.
How this region’s relevance will be expressed is an unknown to be discovered by entrepreneurs. Success requires that they target distant households with abundant purchasing power.
• Hagedorn is an independent strategy adviser.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.