South Africa 2018: What hope for reform? - PoliticsWeb, 10 January 2018

Frans Cronje says the country, and business, needs to get out of the current ideological rut.
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South Africa 2018: What hope for reform? - PoliticsWeb, 10 January 2018

Frans Cronje says the country, and business, needs to get out of the current ideological rut.

What are the prospects for policy reform in South Africa?

With the ANC policy conference done and dusted, Frans Cronje looks to the prospects for policy reform and finds that there is no ducking the data – a fundamental policy reform process that secures property rights, liberates the labour market, rewards risk-taking private enterprise, and recasts the country’s empowerment laws is essential if South Africa is to attract the investment on which higher rates of economic growth depend. Yet the obstacles to reform are very much broader and more serious than the internal power struggle of the ruling party.

We start our current scenario briefing with a graphic that tracks three trends in the South African economy since 1994. The first is the year-on-year change in levels of fixed investment, which peaked between 2003/04 and 2007/08, fell through a deep trough into the global financial crisis, rallied in 2010 and 2011, and subsequently fell flat.

The second is the year-on-year change in consumer expenditure, which also peaked in the 2003/04 to 2007/08 window and dived into the global financial crisis. Such expenditure is equivalent to around 60% of GDP and is therefore important in giving direction to the economic growth rate. Consumer expenditure rallied, briefly, off the low base effect and delayed purchasing decisions of the global financial crisis year, but has subsequently followed fixed-investment levels in falling flat. Expenditure levels are unlikely to recover to pre-crisis highs as household debt levels are roughly 50% higher than they were in the mid-1990s.

The third indicator is the economic growth rate. This averaged around 3% into 2003 and then, for four brief years between 2004 and 2007, averaged five percent – incredibly this was the first time it had sustained such an average for that number of years since 1970. The growth rate sank in the aftermath of the ANC conference at Polokwane in December of 2007, bottomed out in the financial crisis year, rallied into 2010 and 2011 (as fixed investment and consumer spending rallied) and then declined year after year to a very low 0.3% in 2016.

We also add a fourth indicator to that graphic – the rate of global economic growth. South Africa’s growth rate showed a high degree of coincidence with the global rate from 1994 to the high point of 2007, through the financial crisis, and back out of the crisis – but only to 2012. From 2013, as the fragile global recovery saw the global economic growth rate increase year after year, South Africa’s growth rate peeled away on a sharply downward trajectory.

That graphic says as much about the future of South Africa’s economy as about its past and present. Domestic consumers are too indebted to kick start the economy. Fixed investment is the only way back to higher levels of growth. But such investment requires private sector confidence and, by extension, doing away with all the policy obstacles that undermine it.

We spend a great deal of time every year briefing groups that invest in South Africa about the probable social, economic, policy, and political trajectory of the country. For us, those briefings are a very useful barometer of investor sentiment towards current government policy, and time and again it reveals three areas of policy that stand out as key investment disincentives.

The first of these is empowerment policy. There is never any doubt that effective ways of ensuring accelerated rates of economic inclusion are necessary and desirable. However, as it is practised, the policy is often seen as a tax on investment and an attempt to extract wealth on behalf of a small political elite. Very few, perhaps none, of the firms we brief will state this in public for fear of the political consequences.

Our experience is sufficient to suggest that unless fundamental changes are made to empowerment policy (Google our work on a policy of Economic Empowerment of the Disadvantaged for a how-to guide on achieving this) South Africa will not succeed in becoming a competitive investment destination again.

The second of these is threats to property rights. From the cancellation of investment treaties to the undermining of intellectual property rights and the ruling party’s recent resolution on expropriation without compensation, the conclusion is inescapable that South Africa is not a country in which your investment is as safe as it might be in other competing jurisdictions.

Do not be fooled by reassurances that amendments to clauses dealing with property rights in the Constitution will relate to agricultural land alone. Property is broadly defined in the Constitution as relating to all types of property, from businesses to homes and immovable property. These are now all under threat.

Even if a more narrow definition is initially drafted the precedent that is set means that it will be only a matter of time before that definition is again widened to include other (more productive) forms of property. Likewise, reassurances that the seizure of property of any description can be achieved without negative economic ramifications are meaningless.

In the case of agriculture, seizures will effectively remove the capital base of the agricultural economy (farmers borrow over R100 billion annually to run their businesses) and stunt production and investment.

The manner in which years of threats to mining rights put the brakes on investment in that industry is a good case study of what happens when investor certainty is eroded. At the heart of threats to property rights lies the crippling ideological belief that the state can redistribute wealth in order to create prosperity. In deterring investment, the opposite is being achieved.

The third is labour market policy that prices poor people out of work, thereby reducing South Africa’s domestic competitiveness and stunting the domestic consumer market – a frustration for many firms who have exhausted South Africa’s consumer base.

Arguments in favour of ideas such as ‘decent work’ and the public (and often social media based) ‘shaming’ of firms that are seen as ‘exploitative’ have the further effect of scaring firms off the idea of employing what may be seen as relatively low-wage and therefore often entry-level labour.

This fear, exacerbated by already low investment levels, in turn serves to underpin South Africa’s very low levels of labour market absorption. Far from protecting the most vulnerable South Africans from exploitation, the consequence of our labour regulatory regime is often to exclude poor people from the most important avenue to social and economic advancement.    

Reforms to all three areas of policy are necessary if South Africa is to draw the investment and entrepreneurship to make possible the growth which will, in turn, lead to higher levels of employment and rising living standards. Alternative approaches to policy are available – and we have conducted considerable work in these areas – and lent much advice to political leaders.

Yet all three areas of reform attract needless controversy through the efforts of very effective lobbies relying on the fallacious arguments that property rights, pricing poor people into jobs, recasting empowerment policy, and drawing higher levels of private sector investment would advantage only the elites in society and further disadvantage the poor.

However, South Africa’s own track record of the past 20 years illustrates that there is no conflict between the interests of the poor and the middle classes when it comes to investment led economic growth. It must be stated very clearly that the opposite is true as eras of higher levels of investment-driven economic growth brought about rapid mass increases in both living standards and economic inclusion, thereby prompting rising popular confidence in the future of the country – while eras of lower levels of investment stunted living standards and reduced popular confidence in the government.

When the investor groups we brief ask why reforms are then not adopted our answer is firstly that politicians are unlikely to move against the drift of popular opinion – even if the long-term benefits of reform are apparent. Put differently, the anti-reform lobby is very good at shaping a popular climate hostile to reform and populist politicians exploit that climate to deflect criticism of their policy failings through conjuring up fallacious obstacles to progress, such as those around ‘monopoly capital’, commercial farmers, mining investors, ‘neo-colonialism’ and the property clauses of the Constitution. It is not difficult, but ultimately of little use, to convince a politician of the need for change if he or she cannot at the same time be convinced that policy reform will be met with immediate public adulation.

We take that answer further to say that a necessary step towards policy reform is therefore to invest more time and money in tackling, in public, the fallacious arguments that underpin the current policy malaise in the country – for example, that empowerment policy as currently practised is the only effective strategy for ensuring meaningful black economic participation, that redistribution of wealth and property can free the poor from the bonds of poverty and inequality, and that a heavily regulated labour market is in the best interests of the working class.

While many of the firms we brief will agree with our arguments, they seldom appreciate the extent to which business is itself culpable in feeding the fallacies. In endorsing and committing to current empowerment policies and the pursuit of racial representivity, in publicly supporting the idea of higher minimum wages, and in agreeing to arguments that poverty and inequality are buttressed in large part by an unfair distribution of wealth, many firms come to nurture the ideological points of departure that grow into the fallacies and then policies that deliver crises such as the mining charter, South Africa’s low levels of labour market absorption, and our country’s very poor attractiveness to fixed investment.

Too often we find ourselves alone in plainly stating that access to work is, in and of itself, a good thing, and that the benefits of employment do not have to be qualified by terms such as ‘decent work’. Likewise, that markets are not racist entities that look to exclude prospective participants – which is to completely misunderstand the motive force of capitalism.

Similarly that property rights do not give rise to poverty and that the poverty that is the daily burden of so many South Africans is not caused or maintained by the relative prosperity of the middle classes, but rather by South Africa’s too low rates of investment-driven economic growth and poor education offerings.

Until more voices plainly state all these things, and finance those groups that have traditionally done so, South Africa (under Cyril Ramaphosa – or anyone else) is unlikely to follow any sufficiently ambitious strategy of policy reform – one that is necessary to achieve very much higher rates of economic inclusion.

IRR TV

What are the prospects for policy reform in South Africa?

With the ANC policy conference done and dusted, Frans Cronje looks to the prospects for policy reform and finds that there is no ducking the data – a fundamental policy reform process that secures property rights, liberates the labour market, rewards risk-taking private enterprise, and recasts the country’s empowerment laws is essential if South Africa is to attract the investment on which higher rates of economic growth depend. Yet the obstacles to reform are very much broader and more serious than the internal power struggle of the ruling party.

We start our current scenario briefing with a graphic that tracks three trends in the South African economy since 1994. The first is the year-on-year change in levels of fixed investment, which peaked between 2003/04 and 2007/08, fell through a deep trough into the global financial crisis, rallied in 2010 and 2011, and subsequently fell flat.

The second is the year-on-year change in consumer expenditure, which also peaked in the 2003/04 to 2007/08 window and dived into the global financial crisis. Such expenditure is equivalent to around 60% of GDP and is therefore important in giving direction to the economic growth rate. Consumer expenditure rallied, briefly, off the low base effect and delayed purchasing decisions of the global financial crisis year, but has subsequently followed fixed-investment levels in falling flat. Expenditure levels are unlikely to recover to pre-crisis highs as household debt levels are roughly 50% higher than they were in the mid-1990s.

The third indicator is the economic growth rate. This averaged around 3% into 2003 and then, for four brief years between 2004 and 2007, averaged five percent – incredibly this was the first time it had sustained such an average for that number of years since 1970. The growth rate sank in the aftermath of the ANC conference at Polokwane in December of 2007, bottomed out in the financial crisis year, rallied into 2010 and 2011 (as fixed investment and consumer spending rallied) and then declined year after year to a very low 0.3% in 2016.

We also add a fourth indicator to that graphic – the rate of global economic growth. South Africa’s growth rate showed a high degree of coincidence with the global rate from 1994 to the high point of 2007, through the financial crisis, and back out of the crisis – but only to 2012. From 2013, as the fragile global recovery saw the global economic growth rate increase year after year, South Africa’s growth rate peeled away on a sharply downward trajectory.

That graphic says as much about the future of South Africa’s economy as about its past and present. Domestic consumers are too indebted to kick start the economy. Fixed investment is the only way back to higher levels of growth. But such investment requires private sector confidence and, by extension, doing away with all the policy obstacles that undermine it.

We spend a great deal of time every year briefing groups that invest in South Africa about the probable social, economic, policy, and political trajectory of the country. For us, those briefings are a very useful barometer of investor sentiment towards current government policy, and time and again it reveals three areas of policy that stand out as key investment disincentives.

The first of these is empowerment policy. There is never any doubt that effective ways of ensuring accelerated rates of economic inclusion are necessary and desirable. However, as it is practised, the policy is often seen as a tax on investment and an attempt to extract wealth on behalf of a small political elite. Very few, perhaps none, of the firms we brief will state this in public for fear of the political consequences.

Our experience is sufficient to suggest that unless fundamental changes are made to empowerment policy (Google our work on a policy of Economic Empowerment of the Disadvantaged for a how-to guide on achieving this) South Africa will not succeed in becoming a competitive investment destination again.

The second of these is threats to property rights. From the cancellation of investment treaties to the undermining of intellectual property rights and the ruling party’s recent resolution on expropriation without compensation, the conclusion is inescapable that South Africa is not a country in which your investment is as safe as it might be in other competing jurisdictions.

Do not be fooled by reassurances that amendments to clauses dealing with property rights in the Constitution will relate to agricultural land alone. Property is broadly defined in the Constitution as relating to all types of property, from businesses to homes and immovable property. These are now all under threat.

Even if a more narrow definition is initially drafted the precedent that is set means that it will be only a matter of time before that definition is again widened to include other (more productive) forms of property. Likewise, reassurances that the seizure of property of any description can be achieved without negative economic ramifications are meaningless.

In the case of agriculture, seizures will effectively remove the capital base of the agricultural economy (farmers borrow over R100 billion annually to run their businesses) and stunt production and investment.

The manner in which years of threats to mining rights put the brakes on investment in that industry is a good case study of what happens when investor certainty is eroded. At the heart of threats to property rights lies the crippling ideological belief that the state can redistribute wealth in order to create prosperity. In deterring investment, the opposite is being achieved.

The third is labour market policy that prices poor people out of work, thereby reducing South Africa’s domestic competitiveness and stunting the domestic consumer market – a frustration for many firms who have exhausted South Africa’s consumer base.

Arguments in favour of ideas such as ‘decent work’ and the public (and often social media based) ‘shaming’ of firms that are seen as ‘exploitative’ have the further effect of scaring firms off the idea of employing what may be seen as relatively low-wage and therefore often entry-level labour.

This fear, exacerbated by already low investment levels, in turn serves to underpin South Africa’s very low levels of labour market absorption. Far from protecting the most vulnerable South Africans from exploitation, the consequence of our labour regulatory regime is often to exclude poor people from the most important avenue to social and economic advancement.    

Reforms to all three areas of policy are necessary if South Africa is to draw the investment and entrepreneurship to make possible the growth which will, in turn, lead to higher levels of employment and rising living standards. Alternative approaches to policy are available – and we have conducted considerable work in these areas – and lent much advice to political leaders.

Yet all three areas of reform attract needless controversy through the efforts of very effective lobbies relying on the fallacious arguments that property rights, pricing poor people into jobs, recasting empowerment policy, and drawing higher levels of private sector investment would advantage only the elites in society and further disadvantage the poor.

However, South Africa’s own track record of the past 20 years illustrates that there is no conflict between the interests of the poor and the middle classes when it comes to investment led economic growth. It must be stated very clearly that the opposite is true as eras of higher levels of investment-driven economic growth brought about rapid mass increases in both living standards and economic inclusion, thereby prompting rising popular confidence in the future of the country – while eras of lower levels of investment stunted living standards and reduced popular confidence in the government.

When the investor groups we brief ask why reforms are then not adopted our answer is firstly that politicians are unlikely to move against the drift of popular opinion – even if the long-term benefits of reform are apparent. Put differently, the anti-reform lobby is very good at shaping a popular climate hostile to reform and populist politicians exploit that climate to deflect criticism of their policy failings through conjuring up fallacious obstacles to progress, such as those around ‘monopoly capital’, commercial farmers, mining investors, ‘neo-colonialism’ and the property clauses of the Constitution. It is not difficult, but ultimately of little use, to convince a politician of the need for change if he or she cannot at the same time be convinced that policy reform will be met with immediate public adulation.

We take that answer further to say that a necessary step towards policy reform is therefore to invest more time and money in tackling, in public, the fallacious arguments that underpin the current policy malaise in the country – for example, that empowerment policy as currently practised is the only effective strategy for ensuring meaningful black economic participation, that redistribution of wealth and property can free the poor from the bonds of poverty and inequality, and that a heavily regulated labour market is in the best interests of the working class.

While many of the firms we brief will agree with our arguments, they seldom appreciate the extent to which business is itself culpable in feeding the fallacies. In endorsing and committing to current empowerment policies and the pursuit of racial representivity, in publicly supporting the idea of higher minimum wages, and in agreeing to arguments that poverty and inequality are buttressed in large part by an unfair distribution of wealth, many firms come to nurture the ideological points of departure that grow into the fallacies and then policies that deliver crises such as the mining charter, South Africa’s low levels of labour market absorption, and our country’s very poor attractiveness to fixed investment.

Too often we find ourselves alone in plainly stating that access to work is, in and of itself, a good thing, and that the benefits of employment do not have to be qualified by terms such as ‘decent work’. Likewise, that markets are not racist entities that look to exclude prospective participants – which is to completely misunderstand the motive force of capitalism.

Similarly that property rights do not give rise to poverty and that the poverty that is the daily burden of so many South Africans is not caused or maintained by the relative prosperity of the middle classes, but rather by South Africa’s too low rates of investment-driven economic growth and poor education offerings.

Until more voices plainly state all these things, and finance those groups that have traditionally done so, South Africa (under Cyril Ramaphosa – or anyone else) is unlikely to follow any sufficiently ambitious strategy of policy reform – one that is necessary to achieve very much higher rates of economic inclusion.

Free Society Project