Factories and lower wages the cure for Dutch disease

AT THE risk of hitting the man when he is down and being sin-binned by the ref for doing so, I told you so. The Dutch disease has now collapsed the South African economic scrum and our coaches — no, not that coach, our economic coaches — seem none the wiser. But like that other coach, they are in denial, insisting this is how we have always played our economic game and this is how we will play it.

A commodity-based economy is fated to yo-yo between the good times of the upcycle and the bad of the down. During the good times, when, figuratively speaking you are winning 12-7, victory might seem tantalisingly close. And then the rain comes and a figurative 40 minutes later, you are down 20-18 and the game is lost.

Economically, SA must learn to play a different game: we do not have a large enough exportable resource endowment to cover the needs of a nation of 50-million, let alone generate sufficient jobs for our burgeoning workforce. This means, at the centre of that different game, we must allow the private sector to create lots more jobs, and specifically jobs involving the making of things for export. Vaclav Smil, Bill Gates’s favourite author, is right when he insists that “making things remains a quintessential human endeavour without which there can be no prosperous large economies and no socially stable populous societies”.

It is something East Asia deeply understands; indeed it is the absolute foundation of their economic success.

The problem with the Dutch disease is precisely when everything seems fine, when you are winning, that is when it is wreaking the most profound structural damage imaginable upon your economy. It is a destructive curse in the disguise of a creative blessing. So from 2001 to 2012, when the commodity supercycle was in overdrive and coal and iron prices were soaring, when the rand was strengthening before staying for a decade within the R6-R8 to the dollar range (with a short-lived deviation after the 2008 global financial crisis), that was when the spreading cancer of the Dutch disease was at its most virulent.

Not that most of us lucky enough to earn a salary realised it; mostly we felt on top of the world, not least because we were spoilt for choice by a cornucopia of imports that were cheaper than domestically produced alternatives.

And, paraphrasing Dick Cheney, current account deficits did not seem to matter. Wasn’t capital flooding into our stock and bond markets to fill that ever widening gap? In 2007, we even beat England in Paris to win the Rugby World Cup again.

But underneath that euphoric surface, the cancer kept spreading. What industrial base we had was being systematically destroyed, mauled by an uncompetitive rand and charged down by an onrush of imports, mostly emanating from Asia. China became our largest source of imports.

Our industrialists cried foul. But the official referee turned a blind eye. Government policy missed the point entirely by focusing on all things consumptive, while all but neglecting the productive side of our economy. Little or nothing was done to assist in the formation of a private sector-owned, export-orientated, manufacturing economy. The Reserve Bank — manacled to the misguided mandate of inflation targeting — was obliged to focus on controlling internal price rises, while ignoring the damage the rise of the country’s most important price — albeit an external one, that of the value of the rand — was doing to the fragile nonresource foundations of our economy.

Meanwhile, our domestic stock market bifurcated between the born-again resource companies and consumer-based, debt-driven counters such as banks and retailers. Consumers, spurred on by falling interest rates, turned SA into a country where that which drove demand counted for everything, while that which drove supply — such as the humble phrase “Made in SA” — counted for next to nothing.

Even SA’s economists fell into this deadly trap in their “analyses”: they repeatedly relied upon the fig leaf logic of purchasing power parity, which is and remains demand-centred. Whenever did one of them think to do a valuation of the rand based not upon consumer prices but producer wages?

A few small population resource-rich countries in which the value-adjusted volume of exported resources can sustain the lifestyles of their populace (such as Norway, Qatar, New Zealand, Chile, Namibia, Botswana and perhaps even Australia) can probably neglect the need to build up their nonresource production capabilities. But more populous nations cannot: think here of Russia, Brazil, Nigeria and SA.

So how can we tackle the issue of creating jobs in manufacturing that will “make things”, products that we can export to help pay for our imports? We must focus on the level of wages calculated in US dollars. Our wages are way above our peers, nations at a similar level of economic development competing for that same export dollar.

Every three years, UBS releases a survey that compares the prices paid and earnings made in 71 cities across the world; on the earnings side, comparison is made across 15 professions. The 2015 survey was released in September.

On average, it shows that Johannesburg dollar wages are higher even than those in Athens or Lisbon, twice those of Budapest and Bucharest, four times those of Cairo and more than five times those of Nairobi. Compared to our Brics peers, Johannesburg’s dollar wages are on a par with São Paulo and Rio de Janeiro, 50% more expensive than Moscow, almost twice Shanghai’s, almost three times Beijing and roughly four times New Delhi and Mumbai’s.

Until this glaring discrepancy is attended to, it is hard to imagine why foreign or even domestically sourced investment seeking an export base for its global production would choose SA over inside-the-EU Greece or Portugal, or an Asian Bric, let alone the likes of our African peer, Kenya. And this stumbling block differential is there even before we start adjusting for the effects the perceived behaviour of our labour force and priorities of our government might have on their decision.

When, in the 2020s, India does a China and goes through its own resource-intensive stage of economic take-off, there will probably be yet another commodity supercycle. A decade or so later, it too is likely to peter out. Until then, will SA wait in the economic shadows for the sunshine of India’s infrastructure bonanza to blaze forth … and then make the same mistakes we have over the past decade again in the next?

Or will we now seek out another way of playing our economic game? As with our approach towards that game invented by William Webb Ellis, I hope we will change our strategy. But I fear we are stubbornly stuck in the ways of the past. I will be delighted — in both instances — to be proven wrong. But my delight will fade into nothingness when compared to the good that will then flow to people of SA as a whole.

• Power is a strategist at Investec Asset Management



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