SHAWN HAGEDORN: Calculating SA’s growth limits

Many believe that to overcome our unemployment crisis, SA must sustain high growth. This is not true — nor is it doable.

Improving living standards requires raising a workforce’s productivity by increasing the percentage of people employed, average worker productivity or, preferably, both. Exploiting natural resources distracts from this core reality without significantly altering it.

If you know a company’s profit margins, its working capital terms and its borrowing costs, you can calculate the maximum rate it can grow without having to attract more equity funding. If a retailer lacks access to credit and pays for its stock on delivery, its growth rate will be constrained by its profit margin and how quickly it is paid. These will reflect inventory turnover and payment terms.

Access to credit will increase its maximum growth rate only so long as the profit margin exceeds borrowing costs. If, say, a highly specialised company keeps in stock a year’s worth of inventory, and its profit margin resembles its inflation-adjusted borrowing costs, it would need equity funding to grow. 

As such circumstances reflect weak pricing power, such funding would be elusive because the company would struggle to keep up with industry developments and broader shifts in the commercial environment. It would probably close its doors or be taken over by a competitor.

Such parallels between companies and countries are imperfect. While countries don’t go bankrupt, in earlier eras those with inferior economic models were at risk of being taken over — that is invaded — by neighbours or imperial powers. Now, amid a new Cold War, their leaders can play geopolitics and align with the authoritarian anti-West axis.

Countries that are significant commodity exporters are a special category. When the leaders of such countries choose patronage over productivity, living standards decline while domestic politics fan “if only” hopes, such as, “if only we could unearth more below-ground minerals or hydrocarbons”. The harsh reality is that most South Africans who have left school over the past 10 years will never be meaningfully employed and the trajectory of our economy’s productivity will remain dismal under all currently envisaged plans. 

We latch onto misperceptions while defying the indisputable mathematics that shows our global integration is woefully inadequate. Prohibitively high borrowing costs greatly exceed our meagre productivity gains. We can’t increase productivity meaningfully — like we can’t increase jobs — as we can’t increase our domestic spending power. Our domestic market is too small, too overfished and too stagnant to inspire meaningful overseas equity flows.

The paradox is that substantial commodity export earnings buy time, which deters course corrections. Running the numbers clarifies how the ANC exploits this through localisation policies to entrench its patronage-reliant electoral strategy. Thus, time is not our friend. 

SA’s domestic growth potential is sacrificed to fund grants to feed millions of permanently idled would-be workers. Conversely, today’s high-growth emerging nations achieve rapid middle-class growth through adding value to exports bound for affluent countries, most of which are in the West. 

This model requires constant productivity-enhancing innovation, which is very much what our global economy delivers. Whereas continuous creative destruction had become routine, artificial intelligence (AI) is now poised to abruptly reset the global economy. Much will change and tremendous opportunities will arise as large-scale creative destruction unleashes huge opportunities for laggard economies — so long as they have rejected localisation policies.

The ANC’s global engagement prioritises commodity exporting and aligning with the anti-Western autocrats who run Russia, China and Iran. Its support of Hamas prolongs the suffering in Gaza, which is consistent with ANC policies condemning a majority of born-free black South Africans to perpetual penury.

Social justice and identity politics have been conflated to the point of undermining governance accountability in various jurisdictions around the world. Yet nowhere are the opportunity costs nastier than in SA.

Horrific educational outcomes must not lead to our rejecting the mathematics that explains why we have the world’s highest youth unemployment and why the crisis is so entrenched. Our economic debates must not tolerate financial illiteracy.

• Hagedorn (@shawnhagedorn) is an independent strategy adviser.