Back to basics (Economics 101)

The inspiration for this post came from the fact that I’m busy outsourcing software-development work to Russia now, given that I can’t find the skills locally.

I often wonder how (and when!) South Africa will become globally competitive in the internet and software sectors — the reality is that we’re not, and probably won’t be any time soon. We don’t have the manpower or skills, and the cost of running internet or software businesses are very high.

It’s very easy to just blame Telkom, and, sure, it is a huge reason why we’re suffering, but it’s not the only reason.

The reason sits firmly with our policymakers, many of whom don’t remember or have never studied Economics 101. I picked up a great blog post on how international trade promotes economic growth from the Economic Strategy Institute. It explains the basic principles of specialisation quite succinctly.

I’ve been listening to a number of hare-brained schemes for new NGOs that are aimed at promoting growth, innovation and exports for South Africa — none of which are specialised enough to create an internationally competitive sector. To quote from the blog post referenced earlier:

The specialisation of production, celebrated since the time of Adam Smith as a crucial catalyst of growth, may be a necessary, but not sufficient condition for economic growth. The Hecksher-Ohlin model of comparative advantage explains the traditional view of the benefits stemming from international trade. The character of a country’s factor endowments (capital, labour and natural resources) will determine the type of goods a country will import and export.

Countries are competitive in the factors they have in abundance, and are at a comparative disadvantage in the factors they lack. That is, a labour-rich country will export labour-intensive goods and import capital-intensive goods and raw materials. Thus, international trade serves essentially to extend the size of domestic markets, granting competitive exporters a wider range of potential consumers, and freeing labour and capital from uneconomic pursuits. As a result, both the international and domestic economies benefit from increased specialisation in goods and services, increased competitiveness and the diffusion of technology.

Well, I’m not sure where we fit in. We have lots of labour, mostly unskilled. We have many resources — and they are being exported already. We have many tech skills, left over from the dot-com collapse — much of which is stuck in old-school corporate tech departments. We have a lack of fresh new skills — our universities cannot train internationally competitive software developers at a rate that makes it possible for smaller companies to make good hires.

South Africa needs to find focus, as a country, and develop core competencies in certain industries. Right now, there is far too much unfocused economic stimulation across too many sectors, which makes us uncompetitive and limited to small, domestic markets.

We’re not going to grow our country by focusing on our domestic markets — exports are key to our growth, and technology exports are probably even more important given the market size. Software carries a virtually zero incremental cost of sale and high margins. We haven’t had a single global software giant emerge from South Africa — such as Oracle, Microsoft or Google. Perhaps we never will, given our lack of skills in this sector.

I’ve spoken to many local investors, policymakers and business people in general, and they all see the software/internet industry as high risk — and they’re right. It’s very high risk to start and run a software business in South Africa — there have been some success stories, such as Pastel, but for every one success, you’ll probably find 100 failures. It’s not a core industry, and the government is not doing anything to stimulate this sector. Fine — let’s move on and forget about internet/software. Let’s assume it won’t take off here — but the same principles apply.

We’re becoming less and less competitive and our trade deficit shows that. Consumers are facing higher prices for consumer electronics than most developed-world countries, not to mention motor vehicles. Isn’t it strange that we pay more for motor vehicles than the Americans, yet we earn less than them, on average?

What do we need to do? Develop our core centres of expertise in South Africa, and start exporting more than we import. Focus on areas of high demand internationally, where we can have an edge such as our resource sector. Encourage more innovation by investing more in these sectors and strive to become globally competitive. How about focusing on making us competitive in clean energy? Sasol could play a major role in stimulating a bigger, globally competitive sector here.

As in business, opportunities in South Africa abound — it’s easy to lose focus and chase too many multiple industry objectives. Let’s rally the government to focus on our strengths, and not spend our precious taxes on our weaknesses. Yes, if that means that it doesn’t invest in building our technology sector, so be it, but find something that can put us on the map. We spend too much time building mediocre sectors — we need to excel at something!

“Only mediocrity can be trusted to be always at its best.” — Sir Max Beerbohm