Erasing know-how and creating fictional enemies will not save South Africa

June 27th, 2017Op-ed

CDE media coverage on Business Day live‘White monopoly capital’ may sound politically alluring but it merely diverts attention from real challenges.

By depicting existing companies with their know-how and capabilities as the enemies of its people, SA risks making a historically calamitous mistake, says Ricardo Hausmann, one of the world’s leading experts on what drives economic growth, especially in developing countries.

A former minister of national planning in Venezuela, Hausmann is now director of the Center for International Development, part of Harvard University’s Kennedy School of Government. Between 2006 and 2008, he led a group of 28 local and international economists advising SA’s government on the economic policies needed to unlock the “binding constraints” on faster economic growth. The resulting reports are among the most rigorous and compelling analyses of SA’s economic challenges, though most of their recommendations have not been implemented.

He was in SA earlier in 2017 at the invitation of the Centre for Development and Enterprise, giving a series of lectures to various audiences. This is a distillation of some of the key insights offered in those lectures.

He said, historically, there have been two broad ways of interpreting life. One is epitomised by Karl Marx, who said the history of all hitherto existing societies is the history of class struggle where progress requires the success of one class at the expense of another. The other interpretation is to say the story of humanity is not primarily a history of conflict, but one of expanding forms of co-operation, and that progress has expanded that co-operation from families to bands and then to tribes, nations and international co-operation.

A country’s policies and politics are influenced by how leaders think about history. If a country’s policies are based on Marx’s ideas about class struggle, then it will leave out enormous opportunities for co-operation. The gains from co-operation are hugely important: companies work only to the extent that they are able to get their employees to cooperate with one another in ways that create value. If, on the other hand, companies are seen as the embodiment of the class enemy, then policy makers may prefer to see their activities curbed and undercut.

This latter approach is the perspective of some of SA’s political leaders. However, they ignore a compelling truth: SA’s problems don’t come from the companies that exist, but from the absence of companies that do not exist. That is where SA should focus its attention.

Making the companies that exist the scapegoats for the country’s difficulties is dangerous. It puts the emphasis on existing companies when the problem for SA is how to expand them and build many more new companies. Without this, it is hard to see how the country will create jobs for the 9-million people (and growing) who don’t work.

By setting up companies as the enemies of its people, SA risks making a big mistake.

South Africans need to tell themselves a new, more accurate story about what is going wrong and what needs to be fixed, because the “white monopoly capital” narrative, which proposes “radical economic transformation” as its solution is a recipe for failure.

There is no doubt SA needs economic transformation because there are too many unemployed people and too many people living in poverty. However, the creation of the “white monopoly capital” enemy is based on a fiction, and is counterproductive. Even if you accepted that companies were doing bad things and were the enemy, SA’s deep capital markets and billion-dollar companies mean it is not true that companies are owned by white people — 30% to 40% of JSE-listed companies are owned by foreigners and a similar ratio by domestic pension funds whose beneficiaries include millions of contributors, black and white.

Black economic empowerment (BEE) is necessary to tackle the inequities of the past, but it has been implemented in a way that is biased towards making the top of society blacker rather than helping the bottom of society get better.

Too many BEE incentives are about equity and shares, board positions and senior management, with far too little emphasis on generating entry-level jobs. BEE policy has also accentuated the country’s skill constraints by scaring off white people and increasing the premium paid for skilled black people.

What is needed is a rebalancing of the scorecard to give more credit to firms that generate opportunities at the bottom, mostly by creating the kinds of low-skill jobs that will make inroads into the employment crisis.

BEE is a partial correction for past sins, but growth comes from start-ups and new companies. Start-ups in any country typically face high failure rates. By diverting attention away from creating new companies and imposing costs on existing companies, BEE is probably causing fewer new ones to be created and making sure that more of those that do get off the ground fail. This is a very serious problem in a country where unemployment is the biggest challenge.

Of course, whether a particular set of policies sounds crazy or sensible depends on the conceptual paradigm, or belief system, South Africans use to interpret the nature of the society. And it’s easy to see why this story about “white monopoly capital” is politically attractive. But countries can take wrong turns and get into dead-end streets, and if the policies are based on this kind of false narrative, historic mistakes will be made.

There is a similarity with Venezuela, where the ideology of chavismo blamed inflation and a recession on devious business behaviour that had to be controlled through more regulation, more expropriations and more managers in jail. The destruction of people and organisations was perceived as a step in the right direction. By getting rid of those villains, the country would be healed.

While the particular chavista creed that destroyed Venezuela will probably end up collapsing under the weight of its own cataclysmic failure, the lesson other countries should learn is how costly it is to embrace a dysfunctional belief system, and how costly policies based on dysfunctional belief systems can be. In the quest to “return” the wealth to the people, you may end up impoverishing them.

The key mechanism through which poor policies generate cataclysmic results is through the destruction of know-how, the critical though often underestimated ingredient of prosperity and economic growth.

Know-how is the secret ingredient for economic success. It is accumulated and transmitted slowly, mostly on the job, through a protracted process of imitation and repetition we call learning by doing.

Writer and social critic Malcolm Gladwell claims it takes 10,000 hours of imitation and repetition to master something. This is why a large proportion of job adverts require applicants to have experience: workplace experience builds know-how that people can’t get by acquiring qualifications.

Know-how can be quickly hired, but it can’t be quickly transferred from one person to another. It certainly can’t be confiscated or extracted, like teeth, from the brains that possess it. Know-how can, however, be got rid of or fired.

This happened in Venezuela in 2003, when President Hugo Chávez fired people who had collectively accumulated 300,000 years of experience from the oil industry. The result? The industry’s output halved and the national oil company is drowning in debt. The know-how in the cement industry was also decimated and as a result, it now produces a fifth of what it did before it was nationalised.

Venezuela’s GDP declined by 4% in 2014, 10% in 2015 and 19% in 2016; inflation is expected to hit 2,200% in 2017; the currency fell 92% and 75% of people lost at least 8kg because of food shortages.

Know-how can be scared off and can also be prevented from entering a country if its immigration policies are restrictive. Both are happening in SA. In the 1970s, when SA had a net gain of people moving here from industrialised countries compared to those who were emigrating to industrialised countries, it was an importer of know-how.

This has now become a net loss, with more skilled South Africans moving to industrialised countries than those coming to this country. SA is now a net exporter of know-how. Firing people is how companies lose know-how; emigration is how countries lose it.

SA risks following countries such as Zimbabwe, Venezuela and Algeria, where post-independence or revolutionary governments inherited a stock of know-how in the brains of people the new leaders may not have liked.

“Radical transformation” may lead to the loss of know-how vital to the development of SA, through emigration and exclusion.

Ultimately, the question is whether SA, like Zimbabwe, sees itself as a black African nation with a few unfortunate impurities, or as the “rainbow nation” promoted by Nelson Mandela — a country that is stronger because it builds on its existing know-how for the whole country and celebrates its diversity.

Related posts