Stephen Koseff’s Speech From The ANC Policy Conference Breakfast On July 4 2017

Growth AND transformation: “It always seems impossible until it’s done.”
Steven Koseff, chief executive of Investec.
Steven Koseff, chief executive of Investec.
Investec

South Africa once again finds itself at a critical juncture. While we may dream of a better future for all, we are a long way off from the country we aspire to be. Despite democratic freedom and social progress achieved since 1994, economically we remain one of the most unequal societies in the world, with an unemployment rate of 28 percent (or 36 percent under the broad definition and at 63 percent for the youth). Unemployment disproportionately impacts black people, with one-third of South Africans depending on social grants.

This is a ticking time bomb that must urgently be defused. Simultaneously, we must also root out the scourge of corruption and inefficiency. It's a shame that the National Development Plan is not being implemented at the pace intended. The NDP's vision for 2030 outlined critical interventions needed to build a professional service and capable state. The commissioners understood that neither social nor economic transformation was possible without an effective state that provided the institutions and infrastructure needed for society to thrive.

They recognised that what we contributed through our taxes, society would get back through high-quality public services: good clinics with caring doctors and nurses; schools and libraries in each community with well-trained teachers who loved teaching and learning; an upright police force and more. We have failed dismally in this regard. People's sense of hopelessness at the unfairness of their situation and their frustrations at broken promises are boiling over, as shown in the continuous service delivery protests around our country.

And while many of us feel deeply despondent as we "connect the dots" of leaked emails, more evidence of corruption, and attacks on our critical democratic institutions and the Constitution, we cannot watch our country continue to falter. This is not government's problem alone but a societal one, and one that business too has an important role in addressing. We must find common ground and put our differences aside. We have a lot of work to do and no time to waste.

Business Is Part Of The Solution

An economy cannot grow without a strong private sector or pro-business government policies. I worry when I hear some players make business the scapegoat for all of the society's ills, particularly when slogans like "white monopoly capital", fake news and alternative narratives are used as a ruse – a distraction to enable rent-seeking and looting. Business is not the enemy. It is key to creating jobs and enabling transformation. It is for this reason that business, labour and government must partner to create the right kind of growth that achieve desired outcomes.

Business Unity SA (BUSA) has outlined where we need to get to – which is to create a deracialised vibrant, diverse and globally competitive economy that enables all South Africans to have the opportunity to participate in the economy and earn a sustainable livelihood. Some will call this inclusive growth, while others prefer the more loaded term radical economic transformation. While these mean different things to different people, ultimately the task is to ensure accelerated inclusive growth – one that supports transformation and job creation.That's what's needed to uplift the majority of the population out of poverty.

Let's Build On The Success

SA has a strong and vibrant democracy, a free media, disciplined macroeconomic policy, and an independent judiciary and central bank, which has done an admirable job of keeping inflation in check (remember what happened to Zimbabwe with hyperinflation). We have a capable private sector and developed financial markets, which weathered the 2008 global financial crisis. Our institutions must be protected. They are our country's immune system; crucial in fighting the self-replicating virus of corruption, poor governance and ineptitude.

It was not long ago that SA celebrated the creation of a new middle class. The number of black African people with jobs increased from 5 million in 1994 to 12 million in 2015. Between 2000 and 2016 the number of black professionals grew 176 percent, with black managers increasing 191 percent. As a result, many more people were able to buy homes and send their children to better schools. This newfound prosperity fuelled consumption. While there were still far too many poor people, millions were able to aspire to more. By 2014, 70 percent of the university population was black African, and another 12 percent coloured and Indian.

There has been progress. The current negative narrative should not be allowed to stall the progress achieved thus far.

Education, Skills Development, Competitiveness

Together we must address the structural impediments that cap our growth levels. This includes promoting competition; improving education quality; providing practical vocational skills; support for entrepreneurs; championing local yet scalable initiatives, particularly in township economies; and importantly, removing onerous regulations and trade barriers. At the same time, we cannot be oblivious to the impending fourth industrial revolution, where innovations in robotics and artificial intelligence will fundamentally change the workplace. We must equip our young people to compete in this changing global economy to avoid compounding economic exclusion well into the future.

Don't think this is only a worry for mining and factory workers, professionals are already being affected. Areas where we need to focus are in the key service industries: tourism, education and healthcare. Sandton is already the head office for many companies operating in the rest of Africa. Let's make it easier to do business here. We must also move into the tech space more strongly - 25 million coding jobs are leaving India. And why not speed up the creation of special export zones, which would absorb low skilled workers?

As part of the CEO Initiative, I spend a significant amount of my time thinking about these issues and working on initiatives together with the national treasury, the department of trade and industry, and labour. The workstream I co-lead is finalising the business plan for the Youth Employment Service (or YES) programme. We will soon launch a pilot with large corporates and intend to provide internships to one million youngsters over three years.

This is just the start. Jim Collins, the author of Good to Great, uses the analogy of getting a flywheel turning. We have started to push, and now we must keep pushing harder so that the flywheel can start to move a bit faster until, at some point, we have a breakthrough. The momentum will work in our favour and the flywheel's speed becomes unstoppable. This is the momentum that SA needs to drive growth andjobs.

Don't Make A Big Mistake

Yes, there are challenges with aspects of capitalism but, to date, the free market system has fared best. Populist policies are absolutely not the way to go. While they may be politically expedient in the short term, they will have disastrous long-term repercussions. It would be a tragedy if we blindly followed outdated and failed ideologies.

On his recent visit to SA, the former Venezuelan Cabinet minister and prominent Harvard economist Ricardo Hausmann cautioned SA against making a "historic mistake" by following the example of his home country. Let's not prove him right. The political ideology known as Chavism has resulted in catastrophic meltdown in Venezuela, with rampant inflation of over 2,000 percent, a currency collapse, food and medical supplies in short supply and an increasingly impoverished population. Months of protests have led to many fatalities and injuries. And this in the country with the largest proven oil reserves in the world.

Redistribution at the expense of growth always results in a few benefiting at the expense of the majority. And it is poor people who end up suffering the most from an ever-shrinking economy. SA can – and must – do better than this! Academic and Investec economist Brian Kantor, in his book Get South Africa Growing, makes a compelling case for better and less intrusive government. I urge you to read this. He points to numerous global studies, which have found that countries with more economic freedom exhibit higher investment, economic growth and income. They experience faster reductions in poverty rates. Chile, South Korea and Mauritius are just some to have achieved economic miracles by following this model.

Brian Kantor is not the only one to highlight that SA's current model, which concentrates economic power in the hands of the state, is susceptible to corruption and allows for inefficiencies and poor service. What's required is good business and management skills to be employed in the public sector, with incentives to provide excellent customer service.

Telkom, with its independent board and competent executive team, is a blueprint for public-private partnerships. The government owns 40 percent of Telkom, yet there has been no reliance on the state for funding. Telkom's robust financial performance has been reflected in the rising share price and this year shareholders were rewarded with a 56 percent higher dividend. This is in stark contrast to other state-owned enterprises, the most egregious of which include SAA, Denel, SABC, Eskom and Transnet.

Economists Jagdish Bhagwati and Arvind Panagariya in their book, Why Growth Matters, make the case for the free market, highlighting it as the only proven strategy in a democracy that can uplift millions of people out of poverty. Using India as a case study, they show that since independence in 1947, the country has experimented with a range of economic policies, from strict government control to pro-market and outward-oriented, with varying degrees of success. This is relevant for SA as, like India, we need to reform and grow within a democratic system. (This not the case for those promoting the Chinese example).

Our economy is completely integrated with the global economy and increasingly reliant on foreign capital. Foreign investors have substantial interests in South African businesses.

Hence it is deeply disappointing to see SA flip-flop on policies. Chaotic regulations and policy uncertainty are frightening off investors. I need not point out the impact on the Rand as a direct result of the public protector's call for changes to the mandate of the Reserve Bank, which would require changes to the Constitution, or the confusion created by the revised Mining Charter, which resulted in R50 billion being instantly wiped off JSE mining shares and which is now likely to languish in the courts. All of this has real consequences. Look at credit rating downgrades, these will see higher borrowing costs and further dampen investment and economic activity.

With debt more expensive, companies in capital-intensive sectors are reviewing investments. Thousands of jobs will continue to be impacted by mining and manufacturing. If this continues, government taxes will fall sharply, impacting social grants, funding for healthcare, education and other services. I don't need to tell you that the PIC, which invests government employee pensions, is the biggest shareholder in South African companies. When mines, banks and manufacturers suffer, pensioners do too – that is your money.

And, unless you want to tell your constituents that SA can no longer increase grants, deliver more services or that we have lost our economic sovereignty, then we need change - and fast. Turning around investor confidence is critical if SA is to return to prosperity. Our economy is completely integrated with the global economy and increasingly reliant on foreign capital. Foreign investors have substantial interests in South African businesses and also own more than 35 percent of government's rand-denominated debt. If they pull out, or if the local currency rating is downgraded to junk, we will see massive outflows of funds.

Conclusion

In light of this current malaise, there is an urgent need for a new social pact that transcends ideologies and backgrounds. We need to rebuild trust. Let's not fall prey to the negative narratives that are designed to divert attention from the real issues. Instead, let's rather reframe the challenges facing our country within the lens of shared values.

We must unite under a common goal and tackle the problem with innovative thinking, and bold and pragmatic leadership. We must agree to simultaneously grow and transform our economy. We need a vision for well beyond December 2017 or the 2019 national elections. This is a vision for SA that allows us to innovate and build new skills to meet current and future challenges. The National Development Plan provides a framework that we should build on.

Together, under the banner of a common purpose, there are no limits to what SA can achieve. It is only by doing this that we can live up to the dreams initially sketched by Nelson Mandela and achieve the impossible. As Madiba stated at the advent of SA's democracy, 'It always seems impossible until it's done.'

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