Sustaining advantage: What former powerhouse Argentina can teach us

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A century ago, when British retailer Harrods decided to set up its first overseas emporium, it chose Buenos Aires. In 1914 Argentina stood out as the country of the future.

Its economy had grown faster than America’s over the previous four decades. Its gross domestic product per capita was higher than Germany’s, France’s or Italy’s. It was the powerhouse of South America.

There are still many things to love about Argentina today, but the country is a wreck. Harrods closed in 1998.

Argentina is once again at the centre of an emerging market crisis. This one can be blamed on the incompetence of President Cristina Fernández, but she is merely the latest in a succession of economically illiterate populists, stretching back to Juan and Eva “Evita” Perón.

The danger is that South Africa inadvertently might become the Argentina of the 21st century.

Let us look at the performance of South Africa over the past 20 years. I got most of the information from the Goldman Sachs report “Two decades of Freedom”.

We are the powerhouse of Africa.

It has been a good performance in many respects, but there are warning lights. If you compare the past five years to the previous 15, you get a different picture. The five-year performance was not so great.

Slipping casually into a steady decline would not be hard.

Extremism is not a necessary ingredient, at least not much of it: weak institutions, lazy dependence on a few assets and a persistent refusal to confront reality will do the trick.

The only sustainable and desirable form of sovereign organisation is a government of laws, built on thoughtful legal structures, including meaningful checks and balances on unbridled power.

But laws are not self-executing. The infinite range of human behaviour creates ambiguities and the need for interpretations and enforcement of the law by people who will handle those responsibilities with honesty and intelligence.

Tolerance for leaders who abuse their discretion and selectively enforce the rule of law, interpret it in illogical and corrupt ways, or use the law to benefit their cronies and punish those who do not play ball is the road to ruin, autocracy and/or revolution for any democracy.

Lawlessness is a slippery slope. If a little “excess discretion” is used for a purpose deemed worthy, or a law is distorted far beyond any possibility of its meaning or stretched and ignored in thousands of subtle ways, then over time the rule of law will be replaced by corruption and whim.

As in any other country, Argentina’s story is unique. It has had bad luck. But it did not promote open markets and privatisation in the 1990s and it pegged the peso to the dollar. The crunch, when it came in 2001, was particularly savage.

In its economy, its politics and its reluctance to reform, Argentina’s decline has been largely self-inflicted.

Commodities, its great strength in 1914, became a curse. A century ago the country was an early adopter of new technology – refrigeration of meat exports was the killer app of its day – but it never tried to add value to its food. Chile opened up in the 1970s and pulled ahead. Fernández’s government does not just impose tariffs on imports, it taxes farm exports.

Argentina did not build the institutions needed to protect its young democracy from its army, so the country became prone to coups.

Argentina did not develop strong political parties determined to build and share wealth: its politics were captured by the Peróns and focused on personalities and influence. Its supreme court has been repeatedly tampered with. Political interference has destroyed the credibility of its statistical office.

Graft is endemic: the country ranks a shoddy 106th in Transparency International’s corruption perceptions index.

Building institutions is a dull, slow business. Argentinian leaders prefer quick-fix charisma, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools.

Argentina’s decline has been seductively gradual. The country has suffered nothing as monumental as Mao Zedong or Joseph Stalin. Throughout its decline, the cafés of Buenos Aires have continued to serve espressos. That makes its disease especially dangerous. It happens unnoticed, like ageing. We have our braais in South Africa. Meat is still available but the country has become a net importer of food from a net exporter.

Even on Europe’s southern fringe, governments and businesses have avoided reality with disdain. Italy’s petulant demand that rating agencies should take into account its “cultural wealth”, instead of looking too closely at its dodgy government finances, sounded like Fernández.

The bigger danger, however, lies in the emerging world. Too many countries have surged forward on commodity exports, but neglected their institutions. With China less hungry for raw materials, our weaknesses could be exposed, just as Argentina’s were.

In his book What’s Gone Wrong, Alex Boraine argues that South Africa could become a failed state if the ruling party’s obsession with power is not checked.

After the ANC was banned and exiled for so long, it seems to have a pervasive fear of losing power, therefore it should grab all power. If a government is obsessed with power, it engenders a culture of suspicion, distrust and extreme intolerance.

This was evident in the period of exile and accounts today for the ANC’s disenchantment with the Constitutional Court and much of the media.

In exile, it could be argued that the ANC had good cause to be paranoid and lacking in transparency. But nearly 20 years later the same phobias exist. The ANC is more concerned with the state of the party than with good governance for all South Africans.

The ANC should relax. It is a very strong political party and if I were a betting man I would predict that it will rule the country for a long time. It does not need to be paranoid. Focus on good government.

South Africa does have, however, so many positives. Good monetary policies. Beautiful tourism. Infrastructure (which is not properly utilised).

So what do we need?

The most important policy tool needed is strong deregulation of world labour and product markets, whose restrictions have pushed down growth and raised unemployment for decades.

Only substantial domestic reform – delivering freedom in the marketplace, less legislation, more transparent markets, greater competition – will be the driver of growth.

The only way we can create jobs, the only way we can have fiscal repair, the only way we are going to deliver prosperity is to improve growth everywhere, not just to a select few.

There is a very clear message that I want to make. The more regulated the labour market, the higher the unemployment will be. It costs people their jobs and it means that young people, in particular, lose the opportunity of any job at all.

Massive public-private infrastructure investment is long overdue, with concerns about deficits modified by understanding the constructive role of productive investment. The government must run a “good” deficit.

How is this applicable then to the challenges being faced by the Afrikaanse Handelsinstituut (AHI) today?

We all live in South Africa and the fate of South Africa will affect us all.

Clem Sunter recently published an interesting article in which he talks about the economic liberalisation of the Afrikaners. I quote from his article.

“It is an ironic twist of fate that so far the real beneficiaries of the end of apartheid are the people who were supposed to have benefited from it while it was in existence – the Afrikaners. During the years of apartheid, there was a culture of entitlement. After 1994, all these expectations came to an end.

“Suddenly Afrikaners were out of power. They had to take a leaf out of Steve Biko’s book: you are on your own and you will have to fend for yourself.

“And they have done so. The fastest-growing element of the JSE is companies owned and run by Afrikaners. The whole coast north of Maputo in Mozambique is now a string of safari lodges and dive shops established by entrepreneurs from Pretoria.”

Sunter calls this phenomenon the great trek into business. Adapt or die. The Afrikaners voted for the first option individually and collectively. Nothing wrong with that.

Like the Jews in America, the Pakistanis in London and the Chinese in Australia, Afrikaners have a collective consciousness, which is the spiritual foundation of an effective commercial network. Language, religion, culture and a common outlook on life bind them into teams that are almost unbeatable when challenged by less cohesive competitors.

Afrikaners have become entrepreneurs.

South Africa needs an entrepreneurial state in contrast to a developmental state.

This is where the AHI can play such a great role. Support, networks, reality checks and a voice of reason – critical ingredients for an entrepreneurial culture and environment.

Rob Stokes, the founder and chief executive of Quirk, made a speech to parents and children (not very well received by the parents, as he admitted). He said to them: do not go and look for a job, build a job. When you are young, the risk-reward relationship is a lot different from when you are 40. Entrepreneurs are generally happier and more satisfied with life than people in corporate life. It is like a drug, the highs are a lot higher and the lows a lot lower than corporate life.

It would be a real shame if, by replacing one entitlement culture with another, we undermine the truly entrepreneurial spirit that South Africa undoubtedly possesses in its population as a whole.

AHI needs to embrace innovation and entrepreneurship.

Big companies destroy jobs. Small companies create jobs. A growth rate of 3 percent is not good enough to reduce poverty and unemployment. We need at least 5 percent. It comes only with innovation, efficiency gains, support of small business and a cohesive voice on behalf of communities. That is where you can make a difference.

Let us encourage the children of South Africa to go and build their own jobs in a country that supports an environment where our new-generation children will flourish.

* Jannie Durand is the chief executive of Remgro. This is an adapted version of the speech he gave at the AHI’s Business Network Evening in Cape Town last week.


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