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Daily Maverick
09-06-2025
- Business
- Daily Maverick
Capital vs trade: The stark economic divide threatening South Africa's future prosperity
Dr Michael Power recently retired from Ninety One where he was the Global Strategist for most of the past two decades. He remains a Consultant to Ninety One. Prior to Ninety One, he had worked in London, South Africa and Kenya for Anglo-American, Rothschild, HSBC Equator and Barings. He has a PhD from UCT, a master's from the Fletcher School at Tufts and a bachelor's from Oxford. His primary focus today is doing research into the emerging field of geo-economics focussing in particular on the global implications of the return of the economic centre of gravity to a China-centred Asia. In an international context and given the type of factory jobs that our pool of unemployed labour would be qualified to undertake so they might manufacture products for export, most of our available labour reserve is currently priced out of the global wage hierarchy. Last month, under the series title 'Elegy of a Tragedy Foretold ', Daily Maverick kindly published my Ninety One swansong. Central to my thesis was that the US has become addicted to breathing the heady 'Atmosphere of Capital', a dependency that has correspondingly damaged US Inc's ability to participate meaningfully in the lower pressure of the 'Atmosphere of Trade'. Result? Severe damage has been inflicted on US Inc because of capital inflows hijacking the US dollar to a far higher level than would allow US Inc to prosper in that Atmosphere of Trade. In essence, the US has contracted a severe case of the Dutch Disease. But the American variant has resulted not through exporting a commodity like oil or gas, but through exporting its currency in the form of a US Treasury Bill. In a 2019 Financial Times opinion titled ' How to diagnose your own Dutch Disease ', Brendan Greeley noted that 'around 1980 the United States discovered that it was the Saudi Arabia of money'. (To understand my American thesis more fully, it might be useful for the reader to refer back to this five-part essay which can be found here: Part 1, Part 2, Part 3, Part 4 and Part 5.) The core of my proposition is that even as the US might appear to 'win' through its capital account surplus (65% of the MSCI's ACWI equities index is weighted towards the US), America is 'losing' through its trade deficit (65% of the world's current account deficits in 2024 were created by the US). Profoundly negative Structurally, America's trade deficit losses have had a profoundly negative effect on the economic framework and wellbeing of the US… as well as visibly poisoning American politics. Indeed, as was foretold in JD Vance's 2016 book 'Hillbilly Elegy ', the divisive political tragedy now playing out in America has its roots in this capital account rich/trade account poor paradox. It has occurred to me that South Africa might have suffered a not too dissimilar fate to the US. Have we also become a country where the capital tail wags the trade dog? Despite the standard definition, our variant of the Dutch Disease has not happened because South Africa — by being mostly a commodity exporter — has caught the original version of the Dutch Disease. That occurred when a high percentage of the Netherlands' exports and so trade account earnings were commodity-related; in the Dutch case, the infection was caused by North Sea gas. In the 1970s, when an oil and gas price bonanza dramatically drove up Dutch terms of trade, so dragging the value of the Dutch guilder considerably higher as well, the industrial export sectors of the Netherlands became uncompetitive, and deindustrialisation swiftly followed. South Africa's variant of the Dutch Disease is closer to that contracted by the US. Given the precarious economic status that a liberated South Africa inherited in 1994, our recurring and so structural current account deficit has meant that, were we to avoid a currency crisis, we needed to attract meaningful foreign money inflows via our capital account to offset our underlying trade and current account deficits. The inflows we attracted have not, to any material degree, been foreign direct investment (the FDI that builds factories, so creating jobs), but rather mostly foreign portfolio investment (the FPI directed at our equity and bond markets). And a material share of these FPI inflows went into Government Bonds to help fund South Africa's ongoing budget deficit. (This speaks to why maintaining South Africa's Sovereign Debt Rating as high as possible — it is currently BB- or BB2 — is such a sensitive issue for our Treasury and Reserve Bank.) Yet for SA Inc, these foreign portfolio investment inflows have very possibly distorted the South African rand's valuation in foreign exchange markets, keeping it materially higher than it would otherwise have been had the quantum of those inflows not been forthcoming. De-industrialisation As a result, since 1994 (or more precisely 1995 when South Africa joined GATT, now the WTO, thus removing what little remaining protection our domestic industries had against foreign competition), echoing what happened in the US, South Africa de-industrialised. (So keen were we back in 1995 to fall into line with GATT's provisions to 'open up' that South African industrialist Leslie Boyd bemoaned that we 'outGATTed GATT'!) So what has been the fallout? We now have probably the highest unemployment rate in the world. Each week The Economist publishes the key economic metrics of the top 42 countries in the world. South Africa's stated unemployment rate — 32.9% — is over three times the next highest country's rate: Spain with 10.9%. I have long maintained that, in an international context and given the type of factory jobs that our pool of unemployed labour would be qualified to undertake so they might manufacture products for export, most of our available labour reserve is currently priced out of the global wage hierarchy. Like for like, South African wage rates for semi-skilled labour, when measured in Bangladeshi taka or Sri Lankan rupees, are very uncompetitive. Our minimum wages rates are 2.3x those of Bangladesh and 4.2x those of Sri Lanka. I am sure most readers of Daily Maverick will find the consequences of my logic — that even if the South African rand is fairly valued by markets in the Atmosphere of Capital, it is significantly overvalued in the Atmosphere of Trade — hard to stomach. I know — having worked in South Africa's fund management community for more than 20 years where we lived, breathed and even spoke the language of the Atmosphere of Capital every day — many of my erstwhile colleagues take issue with the implications of my reasoning. (For every 20 opinions on why the rand 'should be stronger', there was only ever one opinion about how to reduce South Africa's unemployment!) But I fear this sharp difference of opinion only goes to highlight South Africa's two-tier economy: that stark division between our 'haves and the have nots'. This gulf gives us the highest wealth inequality (as measured by the Gini coefficient) in the world. It is telling that, in that same ranking, other rand monetary area nations, Namibia and Eswatini, rank 2nd and 4th respectively; Botswana — whose currency basket is estimated to have a 50% rand weighting — is 5th. At the risk of oversimplifying, we 'haves' prefer to breathe the Atmosphere of Capital. We benchmark our values — in both senses of the word 'value' — against Western metrics. Indeed, most of us seem largely unaware that there might be another 'atmospheric pressure' out there in today's world that other regions of the non-Western world breathe. (Perhaps we might encounter that 'thinner air' — that relative cheapness — were we to holiday in Kenya or Indonesia.) Economically relevant Still, most of South Africa's 'have nots' have no option but to stay tied up in the straitjacket of the Atmosphere of Capital when — if they were to stand a chance of being globally economically relevant by securing an export-oriented job — they should instead be allowed to breathe the Atmosphere of Trade. And whether South Africa's 'haves' and even its 'have nots' realise it or not, the metrics determining the atmospheric pressure of the Atmosphere of Trade are not made in America or Europe, but in Asia or, even further north of us, in East and West Africa. South Africa is a heavily 'financialised' economy, a telltale sign that might indicate we breathe the Atmosphere of Capital rather than that of Trade. The JSE's market capitalisation as a percentage of GDP — at 321% in 2022 — is the second highest in the world. Only Hong Kong — with its raft of Chinese listings trading on the HKSE's H-share platform — had a larger ratio: 1,110%. South Africa — the world's 39th largest economy — also has in value terms in the rand, the 20th most traded currency as well as having the 21st most traded bond market. These otherwise impressive financial statistics obscure the less flattering economic metrics that lie beneath: our depressingly low GDP growth, chronically high unemployment and rising national debt. Our glossy financial ratios also offer cover to the dire status of the economic debate in South Africa: the hard truth is that it has become sterile and is running out of ideas. Judging by our recent economic performance, to paraphrase an advertising slogan from Margaret Thatcher's 1979 election campaign, 'South Africa isn't working'. Why? Because in the precise words of that slogan, our ' Labour isn't working'. Yet few economic commentators in either our public or private sectors want to risk rocking our financial boat even if, deep down, the conventional — and now ossified — economic wisdom as to how we might better run our economy is in fact a critical part of our problem. In the end, I maintain it comes down to a stark choice: Should South Africa's economy be run so that it benefits those few of us living in the Atmosphere of Capital? Or should it be run for the benefit of those many that might have a better chance of succeeding breathing the Atmosphere of Trade? The unsavoury truth is that as things stand, our economic frog is slowly but surely boiling and doing so in sterile policy water. Yet to us 'haves', were we to remove those rose-tinted glasses we traditionally use to gaze fondly upon our Western idols, we would realise that the economic debate in the West has become stultifyingly sterile too. Boa constrictor logic There, the boa constrictor logic of deteriorating demographics plus stagnant GDP growth plus rising national debt is slowly but surely squeezing the life out of many Western economies. Taking on more national debt — which even the erstwhile prudent Germans have now opted to do — is surely but another step along the West's highway to hell. And Western bond markets — including those of Japan — are starting to hint to investors of what torment lies ahead. So too is the rising price of gold. My fear is that those who count in the formulation of South Africa's economic policy might read my words and either reject them out of hand… or simply ignore them. But then that is what happened in the US when Cassandras ranging from Bob Dylan to Vaclav Smil warned what would happen if the US were to deindustrialise. Yet so few US politicians or economists paid heed! (Cassandra was a Trojan Princess cursed by Apollo to be able to predict the future accurately, but have no one believe her.) It is essential that South Africa's policy makers listen to other views on how we might chart a more prosperous way forward. Most historians agree that it was Einstein who said: 'The definition of insanity is doing the same thing over and over again and expecting different results.' DM
Daily Maverick
22-05-2025
- Business
- Daily Maverick
Murder in Middle America — designed in the US, made in China
Part 4 in a five-part series. Read Part 1 here, Part 2 here and Part 3 here. In the denouement of Agatha Christie's classic crime novel Murder on the Orient Express, Detective Hercule Poirot concludes that ALL the suspects were guilty. It was similarly the case in the demise of the US manufacturing industry. Whodunnit? Almost everyone! In alphabetical order: consumers, mainstream economics, US Congress, US Federal Reserve, US Inc, US management consultants, US tax accountants, US retail sector, US Treasury, Wall Street… all these culprits played their part in the 'murder' of US manufacturing. And this is before one points a finger at the foreign accomplices… Prospects for the investment future of US Inc With two exceptions, I do not intend to call out these culprits. The first exception is US Inc as currently constituted. I do this more to highlight the headwinds that will now face foreign investors whose default allocation to equities globally has long – and rightly – favoured US Inc. As noted previously, in December 2024, US Inc's weight in MSCI's All Country World (equity) Index was 66%, twice the rest of the world combined. In 2000, that weight was a much lower 52%. In 2009, Rolling Stone Magazine did a cover story on Goldman Sachs. In it was a colourful quote. They likened the US investment bank to 'a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money'. The uncomfortable truth is that this would not be a wholly unfair description as to what US Inc became over the past two decades, especially as it has spread its tentacles worldwide. US Inc's profit margins: Hard to see them rising from here Profits for the US's S&P 500 companies as a share of US GDP averaged about 6% from 1960 to 2000, with a dip down to 3% in the 1980s. Since China's 2001 entry into the WTO, US Inc's profits as a share of US GDP have nearly doubled to 11%. Between 2000 and 2023, US Inc's share of the global profit pool also more than doubled, from 17% to 38%. Globalisation has been a boon for US corporations since they were able to grow profits much faster abroad than they could at home. Frequently they did this at the cost of foreign competitors by cashing in on the soft power appeal of American brands like Levi's Jeans and by outsourcing production of these 'American' goods to nations with low wage costs, as Levi's did with its products to textile manufacturers in China, Vietnam and Bangladesh. Or, as Apple has said of its iPhones: 'Designed in America, Made in China.' Finished products were imported back into the US at much higher profit margins than were previously available when these products were truly 'Made in the USA'. Indeed, sometimes even these profits made from selling foreign-made products back to US consumers were still retained in intermediate holding companies located in tax havens like Eire! Products made in low-cost foreign locations were also sold – with profits accruing in tax haven-located holding companies – mainly into foreign markets able to sustain higher prices like Europe, Japan and increasingly even China. In the period since 2000, when China's WTO entry constituted a positive(!) game-changer for US Inc, the overall average earnings before interest and tax (EBIT) margin for US firms increased from 10% to 11%. All this margin increase was driven from abroad as foreign margins rose from 10% to 14% while domestic margins stayed broadly flat over the same period. S&P 500 firms did especially well in this era: their foreign EBIT margins increased from 11% to 16% over 2000 to 2020 while less-agile non-S&P 500 firms rather saw their foreign margins decline from 9% to 7%. Domestic EBIT margins stayed flat for both S&P 500 and non-S&P 500 firms. Overall, the biggest gainers were – no surprise here! – US 'manufacturing' firms outsourcing production abroad, typically paying their foreign workers in owned subsidiaries 60% less than their US workers. Those US firms that used foreign contract manufacturing companies – like Apple used Foxconn – likely compressed the wage component in their final product sales price even more. A more hostile global tax environment Note that these foreign margin increases were all achieved before tax. Add to the above, US Inc followed the judicious use of offshore holding companies to shield profits from tax: practising transfer pricing, pursuing royalty 'farming', carrying out tax planning (of which the most infamous example was dubbed the ' Double Irish with a Dutch Sandwich '), plus benefiting from the feature of the US Tax Code that allowed US corporations not to repatriate profits earned abroad and not pay tax on them until they did. Thus, one can see why the foreign profits earned abroad by US Inc rose so markedly after 2000. Also note that, for the global operations of Big Tech companies, accruing profits for the latter where it was most tax efficient to do so was often done by the press of a button. Were this foreign operating 'digital environment' to become less friendly – and the EU, via its Digital Markets Act, is on a campaign to achieve precisely this end – US Big Tech would be negatively impacted. Meanwhile, in 2020, seven countries (Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland) hosting but 6% of the foreign employees of US Inc, earned nearly half US Inc's foreign profits. At what point did profit morph into greed? Dylan's chorus again: Well, it's sundown on the union And what's made in the USA Sure was a good idea 'Til greed got in the way Granted, the American Bard (who also earned the nickname of 'The Voice of Protest') most likely used the word ' greed' for ' profit '. In US Inc's defence, in today's hypercompetitive world, it is hard to imagine that they would not pursue every opportunity to capture profit where they could, at home or abroad. However, Dylan implicitly raised the question – to echo a line used by General Motors in its heyday – ' whether what is good for US Inc is good for the USA?' Trump and his team are unequivocally answering 'no'. A rockier road that lies ahead for US Inc in its operations Looking forwards and from the perspective of equity investors worldwide in US stocks, how much of this post-2000 Golden Age for US Inc is sustainable in Trump's World? What might be the consequences of the seismic changes now taking place across today's investment landscape? How might global investors change their long-established behaviour? What do we know with some degree of certainty? The US dollar will, over time, likely continue to fall in value, especially against its Western DXY Index crosses: the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. How the US dollar might fare against Asian and other emerging market currencies is less clear… though the recent strength of both the Taiwanese and Singaporean dollars may be portents of what lies ahead; Adding to this negative currency effect, inputs imported into the US now face tariffs and so will cost more. Not all of these duties will be passed on to US consumers so profit margins for many US companies will shrink. In addition, higher end prices will almost certainly curb consumption volumes, creating a negative volume gearing effect. This will weigh on profits; A product bearing an 'American brand' wherever made has heretofore usually attracted a premium price. This advantage is vanishing and may soon be a liability: think Tesla where, in February 2025, sales in Germany plunged by 76%, in Australia by 66% and in China by 49%; If inflation leaks into the US system and interest rates are forced to rise, the cost of capital to US Inc will rise too; Foreign consumers are becoming less welcoming of US products. For example, Canadians are boycotting US products; the Chinese are cooling towards Apple, Tesla, Boeing and Starbucks. EU nations meanwhile are tightening the 'freedom to operate as previously' on US Big Tech companies; and Globally, most countries are looking to rein in 'clever' corporate tax structures that have reduced their capacity to collect taxes from foreign companies using tax havens like the Cayman Islands. US companies would especially be hit were this campaign to succeed. Only eight nations remain opposed to a UN tax convention aimed at tightening up on these practices: the five 'Anglo Saxons' – the US, the UK, Australia, Canada and New Zealand – plus Japan, South Korea and Israel. Forty-three percent of 2023's estimated tax losses were attributed to companies operating out of these eight countries. Looking forward, it is hard to see the trend by which US S&P 500 companies grew their foreign EBIT margins from 11% to 16% over 2000 to 2020 continuing in Trump's World. Given that foreign margin growth contributed ALL of the overall corporate margin growth in this period, even if this trend merely stalled and did not reverse, it would put a huge dampener on the prospects for future profit growth and so future share price performance for many of the S&P 500's leading companies. Rocky road ahead for US Bonds too The above addresses the investment prospects for the asset class that draws the lion's share of market commentary: US equities. US Bonds – which attract twice as much foreign capital as do US equities – face even cloudier prospects. After a four-decade-long bull market, from 1981 to 2020, when bond yields fell from just under 16% to just over 2%, the US bond market has since hit a four-year 'bad patch'. Non-Western central banks have been diversifying away from US Bonds into, among other assets, gold. If US inflation were to rise, prompting the Fed to raise rates, and if the US dollar were to continue to see its value erode, foreign investors in the US Bond market might yet conclude it was losing its historic attractiveness. Were the US dollar's 'store of value' attributes to be compromised (and if the idea of Stephen Miran, chairperson of the Council of Economic Advisers, that foreign holdings of US financial assets should be taxed would do just that), this would further weaken its reserve currency status. Threatening to confiscate US dollar assets, as the US did to Colombia, will not help either. Any weaponising of the US dollar will detract from its 'store of value' attractiveness. Mea culpa: 'I' did it too! The other actor I must call out who played a part in the Murder of Manufacturing in America is… 'myself'… or at last the profession of which I am a part: economics and the mainstream thinking that it has proselytised after World War 2. This thinking has especially dominated Anglo Saxon practice and, as it is now becoming clearer, it has a lot to answer for. In a word, modern macroeconomic thinking has been shot through by what is called 'Keynesianism'… except that the current manifestation of the latter doctrine is not true to its academic origins. John Maynard Keynes would not have recognised the incontinence of the fiscal spending that is now the 'go to' solution for nearly all Western economic challenges. (Even previously more prudent Germany is now joining this club.) Yes, Keynes recommended unfunded fiscal spending, but only when times were bad: echoing David Hume, the matching bookend to his thinking was that once the economy improved, the prior borrowing that was needed to jumpstart the economy should be repaid. Keynes believed running the economic engine with the fiscal choke permanently pulled out would eventually flood that engine and make new economic growth much harder to achieve. Sound familiar in 2025? In 1962, Joan Robinson was the first to call out the twisted application of JMK's thinking, especially as it was manifesting itself in the universities of the US. She noted that 'the bastard Keynesian doctrine (that) evolved in the United States… (was) floating on the wings of the almighty dollar'. Her withering comment was made even before Valery Giscard d'Estaing's 1965 'exorbitant privilege' charge that the US was – by printing US dollars to cover its deficit spending, both current account and budget – living beyond its means, but still getting by courtesy of the kindness of foreign strangers/savers. In the 1960s, Britain – which mistakenly thought sterling still had reserve currency status – tried following this American example. Result? Periodic hiccoughs. The 1967 Sterling Crisis was followed by the pound's slide from 1972 to 1976 (which ended with Britain calling in the IMF) and then the sorry experience of UK currency going into (1987) and being ejected from (1992) Europe's Exchange Rate Mechanism. Together, these traumas underlined just how weak Britain's exorbitant privilege had become compared with that of the US. Still, by the 1990s, with free capital flows accepted as mainstream behaviour in much of the world, funding deficits in part by borrowing from abroad, became easier… even, by the mid-1990s, for Britain. Keynesianism as it had become was now one-sided demand management on steroids: never mind fiscal overspending if foreigners would help finance it. The demand side was all that mattered; little attention was paid to the supply side… which in any case, if regarded as industrial manufacturing, had from the 1980s rapidly migrated abroad anyway. Many Western governments paid no heed to that which was no longer there! Manufacturing was now treated as was agriculture: yesterday's focus. As Vaclav Smil was to bemoan, for the Anglo Saxons and especially the US, from now on it was to be all about services. And these services were often underpinned by government spending. In 2024, the US government provided more 'credit' (often interest free and non-repayable) than banks. Also in 2024, two-thirds of the US's 2.2 million jobs created were in healthcare and government; furthermore 80% of all post-Covid US jobs have been created directly by the US government or with its financial support. And despite claims to the contrary, those in services nearly always import far more than they can earn by selling their services abroad (even when tourism services are added in). Especially among the Anglo Saxons, as manufacturing declined and their service-oriented economies expanded, this meant they ended up running larger and larger current account deficits. DM
