Financial Mail

IN NEED OF A CRISIS

If structural reform of a country is only sparked by a crisis, what are the implicatio­ns for a struggling SA?

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In my life I’ve been fortunate to be in places at key moments that subsequent­ly shaped history, becoming crucial turning points in political and economic affairs. What these examples mean for SA in its current state is significan­t.

In late 1989, I arrived in Berlin to find the Berlin Wall being dismantled by Germans heeding US president Ronald Reagan’s call in 1987 to “tear down this wall”.

The fall of the wall resulted in the domino collapse of East European regimes. By the end of 1991, the Soviet Union itself — the last great empire — had disintegra­ted. This political shock was followed by sweeping structural reform. Market liberalisa­tion and privatisat­ion led to a better livelihood for the region’s population­s; the Eastern Bloc became emerging Europe and reforms were ultimately rewarded with EU membership.

The point is, it took a dramatic political shock before economic structural reform happened.

In the early 1990s, China was in the early stages of a reform process. Its economy was moribund and private enterprise was in a nascent state. GDP per capita was a lowly $317 a year, identical at the time to Nigeria’s. It is now $7,300 — and over $15,000 on a purchasing power parity basis. Being witness to how Beijing was able to dismantle its stateowned collective farms, privatise land ownership, unleash entreprene­urship and encourage small enterprise was a lesson in structural reform. The administra­tion of Deng Xiaoping was able to do away with socialist ideology in favour of the market.

The best analogy I have heard of Deng’s reforms was comparing it to a bottle of red wine. He poured out the red wine and filled the bottle with Coca-cola but kept the labels on the bottle: the labels of “Communist Party of China” and “People’s Republic of China”. Those outside the system still believe the labels, but those inside understand that these phrases are meaningles­s.

Within a generation, China grew to become the world’s secondlarg­est economy and among the most competitiv­e manufactur­ers.

Its dire poverty and economic state in the 1980s forced it to abandon ideology and adopt pragmatic structural reform that embraced private capital, and to open its market to foreign enterprise.

While studying towards a PHD in Seoul, South Korea, I saw how the Asian financial crisis of 1997 wreaked havoc across the region and how economies from Indonesia to Korea were pushed to the brink of fiscal collapse.

Despite the IMF’S $58.4bn lifeline to the Korean government to bail out its fiscus, it was downgraded to junk status by ratings agencies. Koreans thought the economic miracle of the

1970s had ended.

But Korea soon became the poster child for structural reform. Within 13 months it had regained its investment-grade rating — a record in sovereign turnaround. The reforms implemente­d after the crisis by Korea and other Asian states underpin the region’s growth trajectory and middle class-led developmen­t.

Can countries reform structural­ly without a crisis? And has SA had a big-enough crisis to carry out the bold reforms that the stateowned sector of the economy so desperatel­y requires? Ours is not a cyclical crisis but a structural one.

States have a choice as to whether to grow or not, and the emerging-market story is one of governance.

The examples of Venezuela and Zimbabwe show what happens when government­s get things badly wrong.

Complicati­ons

Should reform in SA be gradual or big bang? Business undoubtedl­y wants the latter. But what is politicall­y possible is likely to determine this outcome. The 2019 elections and the influence of labour complicate SA’S approach to reform.

The Eskom crisis and the threat it poses to the national economy should provide an opportunit­y for President Cyril Ramaphosa to proceed boldly with a dramatic reform agenda.

Without deep structural reform of state-owned enterprise­s (SOES), SA will underperfo­rm in growth terms, causing it to diverge from the positive trends in the global economy.

Recent global economic history provides lessons for SA. True reform will not just remedy the obvious financial risk that SOES pose, but also inject confidence into domestic and foreign capital to invest for the long term.

“Never let a good crisis go to waste” is an adage often attributed to Winston Churchill. It certainly applies to SA.

Within 13 months Korea had regained its investment­grade rating — a record in sovereign turnaround

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