Capital vs trade: The stark economic divide threatening South Africa's future prosperity

Daily Maverick

2 days ago

Dr Michael Power recently retired from Ninety One where he was the Global Strategist for most of the past two decades. He remains a Consultant to Ninety One. Prior to Ninety One, he had worked in London, South Africa and Kenya for Anglo-American, Rothschild, HSBC Equator and Barings. He has a PhD from UCT, a master's from the Fletcher School at Tufts and a bachelor's from Oxford. His primary focus today is doing research into the emerging field of geo-economics focussing in particular on the global implications of the return of the economic centre of gravity to a China-centred Asia.
In an international context and given the type of factory jobs that our pool of unemployed labour would be qualified to undertake so they might manufacture products for export, most of our available labour reserve is currently priced out of the global wage hierarchy.
Last month, under the series title 'Elegy of a Tragedy Foretold ', Daily Maverick kindly published my Ninety One swansong. Central to my thesis was that the US has become addicted to breathing the heady 'Atmosphere of Capital', a dependency that has correspondingly damaged US Inc's ability to participate meaningfully in the lower pressure of the 'Atmosphere of Trade'.
Result? Severe damage has been inflicted on US Inc because of capital inflows hijacking the US dollar to a far higher level than would allow US Inc to prosper in that Atmosphere of Trade.
In essence, the US has contracted a severe case of the Dutch Disease. But the American variant has resulted not through exporting a commodity like oil or gas, but through exporting its currency in the form of a US Treasury Bill. In a 2019 Financial Times opinion titled ' How to diagnose your own Dutch Disease ', Brendan Greeley noted that 'around 1980 the United States discovered that it was the Saudi Arabia of money'.
(To understand my American thesis more fully, it might be useful for the reader to refer back to this five-part essay which can be found here: Part 1, Part 2, Part 3, Part 4 and Part 5.)
The core of my proposition is that even as the US might appear to 'win' through its capital account surplus (65% of the MSCI's ACWI equities index is weighted towards the US), America is 'losing' through its trade deficit (65% of the world's current account deficits in 2024 were created by the US).
Profoundly negative
Structurally, America's trade deficit losses have had a profoundly negative effect on the economic framework and wellbeing of the US… as well as visibly poisoning American politics. Indeed, as was foretold in JD Vance's 2016 book 'Hillbilly Elegy ', the divisive political tragedy now playing out in America has its roots in this capital account rich/trade account poor paradox.
It has occurred to me that South Africa might have suffered a not too dissimilar fate to the US. Have we also become a country where the capital tail wags the trade dog?
Despite the standard definition, our variant of the Dutch Disease has not happened because South Africa — by being mostly a commodity exporter — has caught the original version of the Dutch Disease.
That occurred when a high percentage of the Netherlands' exports and so trade account earnings were commodity-related; in the Dutch case, the infection was caused by North Sea gas. In the 1970s, when an oil and gas price bonanza dramatically drove up Dutch terms of trade, so dragging the value of the Dutch guilder considerably higher as well, the industrial export sectors of the Netherlands became uncompetitive, and deindustrialisation swiftly followed.
South Africa's variant of the Dutch Disease is closer to that contracted by the US. Given the precarious economic status that a liberated South Africa inherited in 1994, our recurring and so structural current account deficit has meant that, were we to avoid a currency crisis, we needed to attract meaningful foreign money inflows via our capital account to offset our underlying trade and current account deficits.
The inflows we attracted have not, to any material degree, been foreign direct investment (the FDI that builds factories, so creating jobs), but rather mostly foreign portfolio investment (the FPI directed at our equity and bond markets).
And a material share of these FPI inflows went into Government Bonds to help fund South Africa's ongoing budget deficit. (This speaks to why maintaining South Africa's Sovereign Debt Rating as high as possible — it is currently BB- or BB2 — is such a sensitive issue for our Treasury and Reserve Bank.)
Yet for SA Inc, these foreign portfolio investment inflows have very possibly distorted the South African rand's valuation in foreign exchange markets, keeping it materially higher than it would otherwise have been had the quantum of those inflows not been forthcoming.
De-industrialisation
As a result, since 1994 (or more precisely 1995 when South Africa joined GATT, now the WTO, thus removing what little remaining protection our domestic industries had against foreign competition), echoing what happened in the US, South Africa de-industrialised. (So keen were we back in 1995 to fall into line with GATT's provisions to 'open up' that South African industrialist Leslie Boyd bemoaned that we 'outGATTed GATT'!)
So what has been the fallout? We now have probably the highest unemployment rate in the world. Each week The Economist publishes the key economic metrics of the top 42 countries in the world. South Africa's stated unemployment rate — 32.9% — is over three times the next highest country's rate: Spain with 10.9%.
I have long maintained that, in an international context and given the type of factory jobs that our pool of unemployed labour would be qualified to undertake so they might manufacture products for export, most of our available labour reserve is currently priced out of the global wage hierarchy.
Like for like, South African wage rates for semi-skilled labour, when measured in Bangladeshi taka or Sri Lankan rupees, are very uncompetitive. Our minimum wages rates are 2.3x those of Bangladesh and 4.2x those of Sri Lanka.
I am sure most readers of Daily Maverick will find the consequences of my logic — that even if the South African rand is fairly valued by markets in the Atmosphere of Capital, it is significantly overvalued in the Atmosphere of Trade — hard to stomach.
I know — having worked in South Africa's fund management community for more than 20 years where we lived, breathed and even spoke the language of the Atmosphere of Capital every day — many of my erstwhile colleagues take issue with the implications of my reasoning. (For every 20 opinions on why the rand 'should be stronger', there was only ever one opinion about how to reduce South Africa's unemployment!)
But I fear this sharp difference of opinion only goes to highlight South Africa's two-tier economy: that stark division between our 'haves and the have nots'. This gulf gives us the highest wealth inequality (as measured by the Gini coefficient) in the world. It is telling that, in that same ranking, other rand monetary area nations, Namibia and Eswatini, rank 2nd and 4th respectively; Botswana — whose currency basket is estimated to have a 50% rand weighting — is 5th.
At the risk of oversimplifying, we 'haves' prefer to breathe the Atmosphere of Capital. We benchmark our values — in both senses of the word 'value' — against Western metrics. Indeed, most of us seem largely unaware that there might be another 'atmospheric pressure' out there in today's world that other regions of the non-Western world breathe. (Perhaps we might encounter that 'thinner air' — that relative cheapness — were we to holiday in Kenya or Indonesia.)
Economically relevant
Still, most of South Africa's 'have nots' have no option but to stay tied up in the straitjacket of the Atmosphere of Capital when — if they were to stand a chance of being globally economically relevant by securing an export-oriented job — they should instead be allowed to breathe the Atmosphere of Trade.
And whether South Africa's 'haves' and even its 'have nots' realise it or not, the metrics determining the atmospheric pressure of the Atmosphere of Trade are not made in America or Europe, but in Asia or, even further north of us, in East and West Africa.
South Africa is a heavily 'financialised' economy, a telltale sign that might indicate we breathe the Atmosphere of Capital rather than that of Trade. The JSE's market capitalisation as a percentage of GDP — at 321% in 2022 — is the second highest in the world. Only Hong Kong — with its raft of Chinese listings trading on the HKSE's H-share platform — had a larger ratio: 1,110%. South Africa — the world's 39th largest economy — also has in value terms in the rand, the 20th most traded currency as well as having the 21st most traded bond market.
These otherwise impressive financial statistics obscure the less flattering economic metrics that lie beneath: our depressingly low GDP growth, chronically high unemployment and rising national debt. Our glossy financial ratios also offer cover to the dire status of the economic debate in South Africa: the hard truth is that it has become sterile and is running out of ideas.
Judging by our recent economic performance, to paraphrase an advertising slogan from Margaret Thatcher's 1979 election campaign, 'South Africa isn't working'. Why? Because in the precise words of that slogan, our ' Labour isn't working'.
Yet few economic commentators in either our public or private sectors want to risk rocking our financial boat even if, deep down, the conventional — and now ossified — economic wisdom as to how we might better run our economy is in fact a critical part of our problem.
In the end, I maintain it comes down to a stark choice: Should South Africa's economy be run so that it benefits those few of us living in the Atmosphere of Capital? Or should it be run for the benefit of those many that might have a better chance of succeeding breathing the Atmosphere of Trade?
The unsavoury truth is that as things stand, our economic frog is slowly but surely boiling and doing so in sterile policy water. Yet to us 'haves', were we to remove those rose-tinted glasses we traditionally use to gaze fondly upon our Western idols, we would realise that the economic debate in the West has become stultifyingly sterile too.
Boa constrictor logic
There, the boa constrictor logic of deteriorating demographics plus stagnant GDP growth plus rising national debt is slowly but surely squeezing the life out of many Western economies.
Taking on more national debt — which even the erstwhile prudent Germans have now opted to do — is surely but another step along the West's highway to hell. And Western bond markets — including those of Japan — are starting to hint to investors of what torment lies ahead. So too is the rising price of gold.
My fear is that those who count in the formulation of South Africa's economic policy might read my words and either reject them out of hand… or simply ignore them.
But then that is what happened in the US when Cassandras ranging from Bob Dylan to Vaclav Smil warned what would happen if the US were to deindustrialise. Yet so few US politicians or economists paid heed! (Cassandra was a Trojan Princess cursed by Apollo to be able to predict the future accurately, but have no one believe her.)
It is essential that South Africa's policy makers listen to other views on how we might chart a more prosperous way forward. Most historians agree that it was Einstein who said: 'The definition of insanity is doing the same thing over and over again and expecting different results.' DM