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‘There are free economic lunches’

On the back of the GDP contraction, Adrian Saville from Genera Capital says one ‘quick fix’ is [easily implementable] policy reforms that have no cost to Treasury.

SIMON BROWN: I’m chatting now with Dr Adrian Saville. You’ll find him of course at Genera Capital. Adrian, I  appreciate the early morning time. GDP came out yesterday – contracting 1.5% for the third quarter of 2021. Obviously it includes the July riots down in KZN which were happening during the period. At the time expectation was that that would take half, maybe a full percent off GDP. Did those riots have a bigger impact than we thought, or is our economy just really in a tough place?

ADRIAN SAVILLE: Good morning. I got you, and I got your question. What was disappointing out of the GDP number was the extent and the nature of the step backwards – that six of 10 sectors went backwards, so it was broad based, to use the industry term.

It wasn’t out of line with the expectation; perhaps modestly sharper than many had anticipated, but that’s really in the size of the step, not the nature of the step. I think what is especially concerning is that it remains the productive sectors [that are beleaguered]. From a production side of the economy it’s the manufacturing sector that remains beleaguered, and from the spending side of the economy it’s the export and investment sectors that remain in the doldrums, or being pushed backwards.

SIMON BROWN: We’ll get a decent number for the year because of course there’s base effect and the like coming through. If we then pull in the unemployment data from last week, we have an economy that, to be blunt, is on its knees, as you say. It’s our manufacturing. It really is an economy that is in trouble, big trouble.

ADRIAN SAVILLE: Simon, to talk about the nature of the recovery, not to be misled by growth numbers when we anticipate that the economy will grow by something in the order of 5% – the exact numbers are coming in closer to 4.5% now – even so, that growth of 4.5% for 2021 is not growth per se; it’s climbing your way back to where you were at the end of 2019.

On that measure we think that it will not be until 2024 that the economy has got its way back on a per-person basis to where it was in 2019.

That’s a very long time for an emerging market to spend on the back foot, and it is translating, as you point out, into even more deeply entrenched unemployment numbers. These are among the worst in the world, and it’s not just broad-based unemployment that’s of concern. I think it’s specifically concerning that the unemployment rate impacts in particular the youth sector. The youth are the future production engine of the economy, and they sit now with a more than 60% unemployment rate.

It’s absolutely eye-watering and it can take me to only one conclusion – that structural reforms are urgently needed.

SIMON BROWN: Is there a quick fix? If the president phoned you this morning and said, ‘Dr Saville, you’re in charge for the day,’ is there something that we could do as a quick fix, or is this going to take time?

ADRIAN SAVILLE: Well, I have had the good fortune of being in conversations with the president and pointed to what I would call ‘free lunches’, that there are free lunches available. The bad economic [maxim] is ‘there’s no such thing as a free lunch’. You’ll remember that from your Economics 1 class. [But] there are free economic lunches, and I think that there are a couple in the South African landscape. Arguably the most obvious is going for quick policy reforms that have no cost to Treasury; if anything, they might have a net positive on the fiscus and are easily implementable.

A second is there’s a large body of evidence that suggests in the South African circumstance – and this isn’t specific to South Africa, but it does hold for South Africa – that the private sector follows the public sector.

If the public sector takes the lead on fixed investment the private sector is likely to follow. That’s what experience in this economy suggests.

And then the third is transparency and clarity and communication. We’ve got another set of pronouncements or announcements out about land reform. What investors are allergic to globally – not unique to South Africa – is uncertainty.

SIMON BROWN: Yes. I like that. Certainty, even if you don’t like what it is, just certainty. Know that it’ll be the same in the morning. There’s always better.

ADRIAN SAVILLE: Know what the rules are and we can work with that.

SIMON BROWN: I like that a lot. We’ll leave that there. Dr Adrian Saville from Genera Capital, I appreciate the early morning.

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The free market is a risky and uncertain environment. Entrepreneurs are used to uncertainty and even thrive under it. Successful entrepreneurs identify risks, embrace those risks, and implement proven mitigation strategies.

The same risk acts as a barrier to entry for some while providing a moat around their business model for others. Consider the 4th generation farmer who operates under the uncertain and unpredictable environment of changing climate, unfavorable weather patterns, currency movements, interest rate changes, and changes in consumer habits. These factors that cause the failure of 95% of new and emerging farmers, assure a profit margin for the operator who is able to manage these risks. Uncertainty and risk remove competition.

This brings us to the point. ANC leaders are dependent on the support of the cadres. They have to keep the supply lines of the patronage network open and running, or lose their elitist positions. They bribe the members of this criminal organization with promises of BEE opportunities, loaded tenders, free land, local beneficiation regulations, emergency tender opportunities, land reform, minimum wages, labour laws that enable and protect exorbitant wage demands, the Mining Charter and profitable and preferential contracts from government monopolies. The ANC operates in the interests of connected cadres, and they don’t care about the “people”. The social grant is a bribe to shut them up while the looting goes on unabated.

These factors act as a barrier to entry for white entrepreneurs and as a moat around the business model of exploitative cadres. The ANC manifesto is about the redistribution of the economy, not about building the economy. There is no uncertainty about that. Foreign investors know this and stay away. Local investors see this and go offshore.

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