Exceptional problem solvers, like Musk, or Einstein, who frame issues by focusing on first principles, would fix our economy by focusing on jobs, not GDP or investment flows.
Higher growth must come from increasing either domestic consumption or exports. For instance, SA’s GDP trajectory can, and should, be pushed meaningfully higher through mobilising capital to increase commodity exports. This could create, directly and indirectly, many tens of thousands of jobs. Yet we lack many millions of jobs.
There is also the all-too-real risk that boosting commodity exports could deter high-volume job creation through reducing political pressure to pivot toward policies that could encourage a vastly higher rate of job creation. That is, success at attracting capital to increase GDP by increasing commodity exports could quite possibly worsen our jobs shortage.
If, alternatively, the trajectory of our GDP is increased by expanding domestic consumption rather than commodity exports, there would be a far greater increase in employment. Unfortunately, however, we have very little capacity to increase domestic consumption as most SA households are poor, over indebted, or both. Recent legislation allowing early access to pension funds further evidences financially weak households. Improvements are destined to remain elusive as ANC policies have entrenched the world’s most severe youth unemployment crisis − a harsh drag on growth.
Well-managed economies steadily increase worker productivity while workers save adequately and invest prudently. Within a decade of leaving school highly productive workers who save adequately should be able to buy a home and then pay it off over the remainder of their working careers. Alternatively, those who several years after leaving school have never been meaningfully employed (in the sense of having employers significantly invest in them to increase their productivity) probably never will be. Their prospects will further decline if they live in a low-growth economy with very high unemployment. Employers will routinely favour more recent school leavers or older workers with experience. Thus, roughly half of our young adults are being condemned to life-long poverty for lack of job opportunities.
Our employed workers aren’t, on average, highly productive and, as we have very high unemployment, our overall workforce productivity is quite low. This, combined with most households being financially constrained, means our national purchasing power is also quite low relative to our population. This can’t be fixed through attracting foreign investment in companies who serve our domestic consumers.
Ongoing stagnation
Just as our per capita income began its still ongoing stagnation in 2011, Walmart bought 51% of Massmart for about $2.4 billion and then in 2022 it bought out the remaining shareholders at a sharply lower valuation and delisted the company. As the share no longer trades it isn’t clear that the investment has recovered to its 2011 valuation level, whereas it is clear that had Walmart purchased $2.4 billion of its own shares at the average 2011 price and reinvested dividends, the investment would now be worth almost $8 billion.
As SA’s per capita income is expected to remain stagnant, it is unrealistic for foreign investors to be excited about growth in this country’s retail spend. We lack plausible scenarios whereby such investment flows noticeably boost our consumption capacity.
Only through value-added exporting can we rapidly create millions of jobs. Yet our policy makers’ embrace of localisation firmly rejects the upliftment escalator that has profoundly benefited billions of Asians. Localisation and BEE policies, which undermine merit, thus minimising productivity gains, are the primary reasons our youth unemployment crisis is roughly three times worse than any developed or semi-developed nation has experienced in recent decades.
Today’s highly integrated global economy offers paths to rapid upliftment while harshly punishing isolation. The phenomenal rise of Asia, arguably humanity’s most impressive accomplishment, wasn’t achieved through Asians selling to Asians, even though Asians are a majority of the global population. Rather it was achieved through lower-cost Asian workers adding value to exports destined for European and North American consumers. This allowed for far faster growth as it wasn’t necessary to grow the domestic consumption capacity of Asian nations − which would have taken many decades.
Other countries avoid extreme youth unemployment as the economic, social and political risks are so severe. The general perception here seems to be that if we can attract enough foreign capital, then we can sustain a substantially higher growth rate and this will, within a couple of decades, reduce our unemployment to something resembling a normal level. But while investment flows can increase our GDP trajectory by increasing commodity exports, only a surge in value-added exports can trigger high-volume job creation. Whereas increasing commodity exports requires large-scale capital mobilisation, increasing value-added exports is far more dependent on fundamental policy pivots.
When business CEOs began collaborating with ANC leaders to attract foreign capital it was hoped this would lead to ANC policy makers being imbued with an appreciation of how today’s most successful countries sustain high growth through integrating into global supply chains. Instead, the ANC has added expropriation without compensation to its long list of policies, which either deter foreign investment flows into SA or undermine our competitiveness.
Only a sliver
Only a sliver of our workers add value to exports as our regulatory environment decisively undermines SA’s ability to compete as a production centre for exports. Value-added exporters should, therefore, be given special dispensations from all anti-competitive regulations. This is the least politically difficult path toward sharply accelerating job creation but there is little discernible interest in moving in that direction. This further highlights how our public discourse’s situational awareness lags behind the rapid changes of the past twelve months.
The age of idealism launched by the fall of communism and epitomised by Nelson Mandela’s prisoner-to-president journey was wounded by Russia’s invasion of Ukraine and finished off by Donald Trump’s return to the White House. A hard-edged realism has arrived.
Since the early 1990s, Africa has mostly meandered while Asia has soared. South Africa’s early momentum was lost amid slow-speed wobbling.
Our youth unemployment crisis is sufficiently severe as to trigger a broad, long-lasting economic decline which could become self-reinforcing. There are no remedies to our level of youth unemployment which don’t involve either far greater integration into the global economy or a meltdown followed by a slow rebuild over many decades from a much poorer starting point.
As I have long advocated for SA to become far more globally integrated by adding value to exports, I am quite familiar with objections raised by the doubters. The primary counter argument is that our poorly educated school leavers can’t compete with lower cost, more diligent workers from parts of Asia. This is why first-principles analysis is required to overcome false assumptions.
Seek to specialise
Countries, companies and workers should all seek to specialise rather than be generalists who compete on price. Violating the first-principles approach, consider a sports analogy. New Zealand, with fewer people than Johannesburg, is not a big winner at the Olympics whereas they are routinely among the top-three most competitive nations at rugby. Perhaps Adam Smith’s greatest insight was the extraordinary productivity gains that could be attained through specialisation.
Another objection is that our school leavers are so poorly educated, yet AI and specialisation can make a poorly educated twenty year old highly productive. As top development economists routinely emphasise, most knowledge employed on the job is learned on the job.
All countries question how they can compete effectively as the global economy swiftly morphs in new directions. They have learned that they must rely on entrepreneurs to determine how and often the result more resembles a battle engaged with hordes of drones rather than a few aircraft carriers. SA is uniquely isolated to the point that we still think we can export commodities and then generate self-sustaining domestic growth. Such thinking has led to our having the world’s most extreme youth unemployment which makes such an unworkable set of assumptions even more unworkable.
Our youth should be our greatest assets but half of them are being condemned to life-long poverty for lack of employment. Meanwhile the rapid and accelerating pace of global change places an ever higher premium on youth.
Our youth unemployment crisis can, and must, be remedied. This won’t happen unless we freshly reassess the challenge.
[Image: Shawn Day on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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