There's never been a better time to reshape SA's economy, says Michael Power. In this two-part series, he outlines six big ideas to get started. This is Part 1.
For two decades, South Africa has faced a seemingly intractable economic problem: how to get our nation onto a job-rich, higher GDP growth trajectory. During this period, deep-seated reform and radical rethinking has not been contemplated as it has been near impossible to overcome entrenched interests which, as lackluster as our economic status was, preferred the 'at least we know where we stand' known to the 'but it might completely uproot our world' unknown.
Now Covid-19 has completely uprooted every nation on earth's world, and not just South Africa's. And the chances of restoring the status quo ante – in South Africa, as our unemployment was 35% going into the pandemic, why would we want to do that? – are everywhere near to zero. The world has been thrown into in a state of massive flux – technologically, financially, geographically – and the new normal means that for most of the 2020s, there will be no normal.
Ironically, this means there has never been a better time for South Africa to rethink its economic model: one, which at its core and despite being a developing country, has had the consumption horse pulling the production cart, and not vice versa. Any structural solution must end up putting the job-generating production horse before the consumption cart.
Below I am going to list six big ideas around which South Africa might build an economy befitting of what lies ahead. The first is philosophical; the next three are essentially macroeconomic; the last two are more microeconomic. Together they are designed to interconnect and create a South Africa that will be more globally relevant in the Brave New World now unfolding and much more relevant than it was in the Old World now closing behind us. The list below is not meant in any way to be exhaustive; rather it is meant to create a framework from which much more micro detail can be hung. But the 5th and 6th suggestions give examples of two micro details that, whilst perhaps counterintuitive, are both specifically designed to fit South Africa very productively into that Brave New World arising.
The first and most important philosophical realisation South Africa must make is in accord with one of the most basic facts of life on earth: the Sun rises in the East and sets in the West! The last 180-year period when the West has dominated the world's economic order – beginning with Britain's victory over China in the First Opium War of 1839-1842 – is drawing to a close, and the pandemic is hastening this curtain fall. Within five years, China's economy will likely eclipse that of the United States in size.
Yes, the US will still outgun China militarily and financially, but history suggests economic power will eventually translate into financial and military power as well. South Africa must recognise this coming change of hegemon and – pun intended – re-orient itself accordingly.
In a sense, South Africa already has: China is our largest trade partner for both imports (c20%) and exports (c10%). This pattern is mirrored across Africa, where China's trade, investment and loan footprints are rapidly expanding, not least because Africa is an integral part of China's One Belt One Road vision. Likewise, our largest listed home-grown company – Naspers – is a China-play in that it is the largest shareholder in China's second largest listed home-grown private company, TenCent.
If South Africa wants to refine this Look East priority to suit our national purposes more precisely, it should accord extra-special focus on the economic prospects of the Indian Ocean basin and particularly as this dynamism impacts Africa's most dynamic sub-region, Eastern Africa with Ethiopia, Kenya and Rwanda in the vanguard. With the world's best demographics and best productivity growth prospects – in both respects, better even than China – this long-neglected region has by far the best GDP growth prospects for the 2020s. And culturally, the region is 'closer' to South Africa than China – mostly English speaking, often operating against an English commercial law background… and with cultural and sporting links aplenty too!
From having put a 'Look East' strategy at the centre of our national consciousness, the suggestions that follow give the idea not just context but justification.
The key wage benchmark: the hourly wage of semi-skilled labour measured in Renminbi
If we are to build economic relevance in tomorrow's world, the most important price in South Africa today is the monthly minimum wage of semi-skilled labour in Guangdong measured in Chinese Renminbi (Rmb 1410; Rands 3640; US Dollars 200).
Not only is such a benchmark 'outside the realm of most South Africans understanding', even once the technical definition of the measure is understood, few see why it is so pertinent to South Africa's tomorrow. But it is absolutely critical. And the workforces of Vietnam and Bangladesh – and increasingly those of Ethiopia and Kenya – understand why.
The Renminbi wage of semi-skilled labour determines where a developing nation ranks in the global hierarchy of semi-skilled labour wage rates and so whether and where a nation can climb onto the global ladder of value-adding manufacturing. Without being competitive in this space via its visible exports, a developing country is largely confined to selling abroad that which it can dig out of or grow in the ground.
With South Africa's population being 55 million – twice that of Australia, 11 times that of New Zealand – South Africa cannot begin to hope to emulate the latter duo's 'low-population-relative-to-value-of-exportable-resources' model. Consequently, South Africa needs to find a job-rich way of leveraging itself into the global manufacturing wage hierarchy otherwise it will likely never materially reduce the size of its army of semi-skilled unemployed.
Currently, South Africa's wage structure means the East London minimum wage rate (around R3700 per month) is on a par with that of the lowest wage in Guangdong. But when these two wages are adjusted for the nature of the job being performed, the R3700-a-month paying job in China is likely to be of higher value-addedness than its equivalent in East London. Having the same minimum wages is not enough if the productivity achieved for that wage in one country is still much higher than in the other country. We have to find a way to neutralise that gap: South Africa's hourly wage for doing a particular job must be competitive on a global scale.
All Chinese wages have risen materially during the past two decades. The result has narrowed the wage differential for like-for-like jobs between South Africa and China. A more competitive Rand has also played a considerable role in this convergence process.
South Africa can engineer further convergence by a combination of approaches. The most obvious three are the almost-impossible-to-do reduction in Rand wage rates, the less hard-to-do reduction in the value of the Rand, and the most feasible: government policies – mostly centred on tax reductions or incentives – that benefit both employee and employer. (See next section.)
Whilst automation threatens many manufacturing jobs worldwide, there is still a sizeable niche where human wage forces are more cost effective and flexible than machines.
Furthermore, given the determination of many countries in the West, led by the United States, to diversify their supply global chains – and in particular to reduce their dependency on the 'Made-in-China' source – there is currently new business aplenty for the fleet of foot. So far, Vietnam has moved fastest I the electronics space: Apple will now contract manufacture its new headphones there. Bangladesh has done well in the textiles sector. Non-China Asia is in the frontline of benefiting from this fall-out, but even before Covid-19, Eastern Africa was appearing on the manufacturing-for-export radar screen.
Doing as China did: Using Special Economic Zones and Open Coastal Cities
China did not invent free trade zones: the Greeks did, on the Island of Delos in 166 BCE. But few nations have transformed their economic character as much as China has done by using such zones from 1979 until today. And for South Africa to employ such a strategy would be far less philosophically radical than it was for China to do so in 1979.
But it still would not be easy. The South African Government would have to forgo taxes of all varieties, including income tax on anyone working in the zone. Red tape, including many South Africa-specific legislation, would have to be kept to an absolute minimum. Whilst there would of course be strict health and safety provisions, workers would likely be paid less; however, with no taxes to pay, all of what they would be paid would be 'take home'. Initially, a significant majority of the companies operating in these zones would be 100% foreign owned.
Even where they might be South African-owned, none of their sales would be allowed to be directed at South Africa.
There would be two overriding considerations: to create jobs and to generate exports, thereby putting the production horse ahead of the consumption cart.
Traditionally export processing zones are located – as they were in China so as to minimise transport costs to and from ports – in coastal zones and cities. And generally, they produced only physical goods for export. But in the very successful Zona America in Montevideo, Uruguay has copied the model yet built it around exportable services: the need to do this near ports is negligible. There is no good reason why service-oriented free trade zones should not be built inland in South Africa.
But for goods manufacture, South Africa should consider doing this all along its coastline where there are sufficient concentrations of unemployed, semi-skilled labour. Traditionally, the initial sectors targeted produce the likes of textiles, shoes, toys and electronics.
The idea is to create a parallel economic universe and allow it over time – via a 'show me' form of osmosis – to spread across the border into the old economic order. The most successful EPZ of all time was arguably Hong Kong: through the spill-over effects across the border into China, it shook up a fishing village which, in 1950, had a population of 3,148 rising to 58,980 in 1980. Today that former fishing village, Shenzhen, has a population of 12.5 million and is arguably China's most dynamic city.
Michael Power is global strategist for Ninety One. Views expressed are his own. Catch him live on Fin24 Speaks at 9am on Friday 29 May.