Knowhow: the ignored factor of production
Countries like Venezuela and South Africa failed to make their redistributive policies work is because they ignored the role knowhow plays in any successful enterprise
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It has been a quarter-century since apartheid ended, and 23 years since the African National Congress (ANC) took power in South Africa. But, as President Jacob Zuma reported in his recent state of the nation address, the country’s whites remain in control.
“White households earn at least five times more than black households,” said Zuma, and “only 10% of the top 100 companies on the Johannesburg Stock Exchange are owned by black South Africans”. Whites still represent 72% of top management. The Gini coefficient, a widely-used measure of inequality, shows no sign of falling and remains one of the highest in the world.
These outcomes come after 14 years of a strong affirmative action programme known as Black Economic Empowerment (BEE), which created all sorts of incentives and constraints to foster black participation in ownership, management, control, skills development, procurement and entrepreneurship. White equity owners were required to sell shares to blacks in equity deals that were often highly leveraged and publicly financed.
But, Zuma argues, the outcomes fall short of the goal set in 1981 by the ANC’s then president, Oliver Tambo, who sought to achieve economic emancipation through “a return [sic] of the wealth of the country to the people as a whole”. This goal was to be achieved by “radical economic transformation”, which means, according to Zuma, a “fundamental change in the structure, systems, institutions, and patterns of ownership, management, and control of the economy in favour of all South Africans, especially the poor, the majority of whom are African and female”. The country needs to confront what he and others have called “white monopoly capital”.
What Zuma seems to seek is radical asset redistribution in the direction suggested by Julius Malema, leader of the Economic Freedom Fighters and an admirer of Venezuela’s chavista approach. There, Hugo Chávez and his successor, Nicolás Maduro, nationalized oil, steel, cement, telecoms, banks, agricultural land, dairy companies and supermarket chains, and invested in state-led joint ventures to produce cars, electronics, white goods, and myriad other products. Output in each industry collapsed, and the consequences for Venezuela have become catastrophic.
In a world where inequality is a major concern and appetite for radical change is high, what should the world make of these experiences? Why have both Venezuela and South Africa failed to achieve what their leaders sought?
Much of the thinking that inspired Zuma, Tambo, Chávez and Maduro goes back to Marx. For them, and for current thinkers like the French economist Thomas Piketty, the economic world consists of two fundamental substances: capital and labour. Owners of capital control the means of production, which bestows on them power over labour. Emancipation, as Tambo called it, implies the “return of the wealth of the country”—ownership of capital—to its rightful owners, either directly, or through a state that represents them.
But capital, like the future, is no longer what it used to be. It has now become a cheap and abundant commodity. If you don’t own it, you can rent it.
The 40 largest firms listed on the Johannesburg Stock Exchange are predominantly “owned” by foreign institutional investors. Another 12.5% of the market is “owned” by the Public Investment Corporation of South Africa, which manages the Government Employees Pension Fund. From this perspective, the fact that individual black investors, according to Zuma, already own 10% of the stock market is impressive, given the predominance of institutional, not individual, investors. But the obsession with “black” equity ownership, besides making a few plutocrats super-rich, does not seem to be delivering “emancipation”.
The problem is that production requires not just capital and labour, but also knowhow—a factor of production ignored by Marx and his acolytes. Knowhow is the capacity to perform tasks. It exists only in brains. It comes in incredible diversity, including cooks, auditors, plumbers, chiropractors, and Web designers.
Knowhow is transmitted and accumulated slowly, mostly on the job, through a protracted process of imitation and repetition: learning by doing. A positive aspect of South Africa’s BEE policy is that it requires companies to recruit a racially more diverse team of managers and workers, so as to allow once excluded groups into the knowhow accumulation process.
But a manager with 20 years of experience cannot be created overnight. However radical a transformation you want to achieve, knowhow cannot be expropriated or nationalized. It cannot be extracted, like teeth, from the brains that possess it now.
Knowhow can, however, be fired, the way Chávez fired 300,000 years of experience from the oil industry in 2003. It can be scared away, too, as has happened with over 500,000 whites in South Africa. And it can be impeded from moving in, through, for example, South Africa’s tight immigration and labour policies.
When knowhow is shunned, production collapses, as it did in Venezuela and Zimbabwe. The problem, however, is not only the firms that exist; equally important are those that do not, because they were never founded or did not expand.
South Africa risks following in the steps of Zimbabwe, Venezuela and Algeria, where post-independence or revolutionary governments inherited a stock of knowhow located in the brains of people the new leaders may not have liked. Use it or lose it, and the attempt at “radical transformation” implied losing it, through emigration and exclusion. In the process, the leaders made knowhow scarcer, causing its price to rise and society to become both poorer and more unequal.
The alternative is to overcome past divisions by forging a new, more inclusive definition of “us”, one that acknowledges the potential contribution of the knowhow that exists, in the heads where it exists, and ensures that it can flow to a broader segment of society over time. Ultimately, the question is whether South Africa, 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 knowhow and celebrates its diversity.
Ricardo Hausmann is professor of economics at the Harvard Kennedy School.
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