The South African economy is at a crucial crossroads and wrong decisions about the direction it takes could see the country left wallowing in low, jobless growth while other emerging markets power ahead, Investec Asset Management strategist Michael Power warned this week.
A key choice would be how the country handled its recent accession to the group of the world’s largest and fastest growing emerging markets – Brazil, Russia, India and China, Power told the Global Insights conference in London.
“South Africa must find the statesmanship to represent the continent, just as Brazil represents South America, and not just itself. This is about the interests of a billion Africans and not just 48 million South Africans, and that is what Brazil, Russia, India and China are expecting.
“The rest of Africa is now growing at twice the rate of South Africa and there are already predictions that the Nigerian economy will overtake South Africa as the leading economy of the continent by 2022. This could leave slow growth South Africa in an invidious position,” he said.
Power, who sits on Ebrahim Patel’s economic advisory panel – which advises President Jacob Zuma, told the conference of Investec clients and managers from all corners of the globe that relatively high US dollar wages in South Africa were making the country uncompetitive to foreign investors.
“South African workers get paid more than their counterparts in Singapore, while a semi-skilled South African worker gets paid four times more than a similar worker in Nairobi.
“We can probably get away with twice the wages of Kenya because we have other advantages like high quality infrastructure and advanced banking systems, but four times is too much for corporate investors to accept,” he said citing findings from the Annual Prices and Earnings survey from UBS.
“We must realise that with 25 percent or 30 percent of the South African workforce unemployed that the lucky employed sector, both unionised and non-unionised, risks becoming a salaried elite. A critical part of China’s consistent growth over the past 30 years,” he said, “is to have maintained a competitive exchange rate.
“You can’t argue with the fact that China has created 10 million new urban jobs a year. But this, of course, has happened before.
“After Germany and Japan were devastated during World War 2, the miraculous economic recoveries that followed – Germany’s Wirtschaftswunder in the 1950s followed by Japan’s “Golden Sixties” era – were both underpinned by ultra competitive US dollar wage rates.”
To industrialise, first you had to create jobs in entry industries like textiles and then, on this foundation, build via innovation and increasing the skills of the workforce, Power said, adding that this was what was happening in the East where China’s rise was being mimicked by Vietnam, Bangladesh and Indonesia.
“On-the-job training is the best way of skilling up a nation,” he said.
Power warned that the New Growth Path ambitions of creating 5 million new jobs would not be fulfilled unless significant macroeconomic policy changes were enacted including promoting the rand at levels that made South African manufactured exports far more competitive.
He stressed the importance of commodity exports, saying they had been shown to be crucial in a matrix of factors that drove growth.
However, relying on commodity exports alone would leave South Africa exposed to the Dutch Disease, in which dependence on one sector to the exclusion of others does huge harm to the overall economy. “Indeed, South Africa has already got Dutch Disease in abundance,” he said.
But there are a number of bright spots facing South Africa, especially on the Eastern horizon. The economic rise of India is one. “India has the potential to be a powerful economic driver for South Africa. It is going to be the next commodity powerhouse. It has already overtaken China as an importer of South African coal and has gone from 5 percent of South Africa’s trade five years ago to 20 percent today.”
Power told the conference that in searching for emerging market winners they should choose economies that:
- Generated 8 percent to 10 percent US dollar gross domestic product growth sustainably.
- Ran a trade and ideally a current account surplus.
- Managed their currency prudently but actively to help finesse inflation.
- Maintained export competiveness and promoted manufacturing employment.
- Were urbanising while reaping a demographic dividend of an increasingly fairer distribution of wealth.
As he spoke, many South Africans in the room must have quietly, and sadly, thought Powers’ ideal boom nation was still a long way from happening in their homeland. - Peter De Ionno