Infrastructure spending is no magic bullet without a feasible growth plan
None of our leaders has produced a viable growth plan, yet many support ramping up infrastructure projects to spark jobs and growth.
While it is unrealistic for any country to expect infrastructure investments to spur growth without a plan, SA has special challenges. If we view the global economy as a computer network, the cost of upgrading SA’s hardware is high, whereas exceptional performance gains are to be had through better network integration.
That all of today’s successful economies are extraordinarily integrated into the global economy highlights SA’s central political-economic disconnect. Our governing party’s electoral success largely reflects the dependencies it has created through emphasising redistribution. The resulting policy framework is incompatible with pursuing global integration. Yet our only path to sustained high growth is through expanding value-added exports.
The country’s meagre growth prospects are due to over-reliance on domestic spending, despite most households being poor. Government efforts to induce growth have been expensive, ineffective and unsustainable. In the decade preceding the Covid pandemic, household and government budgets became over-burdened with servicing expensive debt, while GDP growth barely tracked population growth. We are far along the path of triggering mutually reinforcing debt and poverty traps.
Today’s successful economies are constantly adapting to remain competitive. Conversely, our policymakers focus on redistribution not competitiveness, correcting legacies not embracing possibilities, and debating the imperfections of successful economic policies rather than adopting them. Growth opportunities are constantly missed, thus entrenching rampant poverty.
A modestly priced computer with high-speed bandwidth can be much more valuable than one costing many times as much using a dial-up modem. Such investments should be guided by a plan that clarifies what is needed.
The world has never been more awash with cheap capital. SA’s core growth blockage is access to affluent consumers. Without policies prioritising global integration such access will continue to elude us.
Many nations in Asia and elsewhere have recognised that widespread poverty can be remedied only by swelling value-added exports as this avoids the trap of funding domestic consumption with debt. Export-led growth can accommodate sufficient savings to steadily expand the middle class. As Asia lifted more than a billion people out of poverty, its middle class bulged.
Taiwan, South Korea and Japan captured large portions of the extremely capital-intensive semiconductor chip production market due in large part to their having low capital costs, reflecting high savings rates. That SA’s cost of capital is so high further undermines hopes that significant infrastructure spending can induce growth and jobs.
European countries today have issued trillions of dollars in bonds, which trade at negative yields. They, like many countries in Asia and elsewhere, see access to cheap funding as a strong incentive to pursue growth through infrastructure spending. SA’s funding costs are much higher for the worst reasons.
Investors see SA as nearly five times more likely to default in the next five years than Greece and 10 times more likely than Spain, a somewhat typical European country but with high debt and high unemployment.
Our inflation also raises our funding costs, yet most of it is neither cost push — reflecting a tight labour market, though there is inadequate skilled labour — nor demand driven, reflecting an overheating economy. Much of SA’s high inflation traces to inefficiencies, reflecting low competencies and corruption at state-owned enterprises. This further traces to failures at managing infrastructure investments.
Long-term planning requires taking a view. Countries, like companies, must identify which products and geographic markets they expect to drive their growth.
The global economy is on a substantially more green trajectory than even a year ago. Just consider the announcements from leading car manufacturers about phasing out internal combustion engines, or environmental, social & governance investment influences on resource extraction companies.
That China is balancing away from fixed investment and exports to emphasise domestic consumption-led growth is also generally negative for commodity demand. SA will probably benefit from rising demand for some commodities, such as platinum group metals, while losing out as long-term demand for thermal coal declines. Commodity exporting will generate few jobs.
As long as SA’s economic policies prioritise redistribution, growth will be limited by stagnating domestic spending. Many household budgets are constrained by heavy debt servicing and little capacity to absorb increases in living costs or interest rates. National government’s excessive indebtedness is forcing it to approach big businesses and investors differently. This path requires a manageable plan that is widely agreed.
Value-added exports can accelerate without requiring the ANC to categorically renounce its devotion to redistribution. The political-economic disconnects that preclude adequate growth can be managed. Hoping they can be sidestepped is unrealistic.
Funding massive infrastructure programmes without a politically and economically feasible growth plan is imprudent. If such a plan isn’t soon developed, credit markets will have the final say.