What must be done? - Saturday Star

9 May 2020 - South Africa is heading for deep trouble. Even the ANC knows it, and is consumed by fear, but for many reasons Cyril Ramaphosa has been unable to pull the ripcord and deploy the parachute safely. Here we are, then, hurtling towards the ground at terminal velocity. Can South Africa still be saved?

Book Extract

South Africa is heading for deep trouble. Even the ANC knows it, and is consumed by fear, but for many reasons Cyril Ramaphosa has been unable to pull the ripcord and deploy the parachute safely. Here we are, then, hurtling towards the ground at terminal velocity. Can South Africa still be saved? What awaits us in the 2020s and 2030s? Will the country continue down the path of state capture, corrupt leadership and economic downturn? Or can South Africa rise from Jacob Zuma's lost decade and the devastating impact of Covid 19 to become a global economic powerhouse? And which scenarios lie in between?

In this incisive book, Frans Cronje pulls no punches. He analyses where we are, boldly predicts where we are headed, and warns that there is not much time left to prepare for our future. A gripping and eye-opening read by a bestselling author and the country's foremost scenario planner. 

Chapter 9

What must be done?

OVER the past 25 years, the South African government has drafted, considered and partially implemented an incredible 15 industrial policy and economic turnaround plans or a new one every 20 months. These ranged from the Reconstruction and Development Programme RDP, to the Accelerated and Shared Growth Initiative for South Africa AsgiSA in 2005, to the National Development Plan NDP in 2013.

Some were behemoths running to hundreds of pages, but in terms of content the bulk of them were are all pretty much the same and dictated that the state should plan and direct economic activity, that race should be the basis of policy, and that wealth redistribution should be the purpose of policy.

Predictably, they mainly failed, only for their central ideas to be redrafted into new plans, perhaps in the hope that if the same thing was done often enough, it might, one day, work. An exception of sorts was the Growth, Employment and Redistribution strategy Gear published in 1996, which, despite its internal contradictions, contained sufficient pragmatism to support rising growth and job creation rates and reduce debt and deficit levels although these successes also related to the fortuitous circumstances cheap surplus electricity, low consumer debt levels, still excellent infrastructure, interest rates that would halve, a booming global economy, and sky high resource prices inherited by the ANC on coming to power in 1994.

Now, each of these circumstances has changed, meaning that weaknesses in government policy will be exposed ever more clearly. Trying to turn the economy around this time will require a bold new approach to policy, including the slaying of the holy cows of state direction, race-based policy and wealth redistribution, and firm decisions on the structural reforms necessary for positioning South Africa as an attractive investment destination.

However, since coming to power in 2018, the administration led by Cyril Ramaphosa has achieved little of this. The administration's positions on property rights contrive to allow the state near complete power to direct economic and investment activity. It has sought, in the face of the evidence, to enforce race based policy ever more harshly and punitively. Tightening the labour regulatory environment continues to price vast numbers of people out of jobs.

Economic growth remains a back-seat issue relative to the enthusiasm with which new means for wealth redistribution are pursued. The results speak for themselves. If none of this will ever work, then what would work? What should be done to lead an actual economic recovery, one sufficient to see South Africa rise to become a middle income society?

The answers are unlike anything the country has seen, a virtual massacre of the holy cows. Building on many years of research, analysis and consultation, my colleagues have developed such a turnaround strategy, which was first published in 2016 as the National Growth Strategy. Unlike the bulk of other such plans published over the past two decades, it is straightforward, logical and workable, based on the building blocks common to every free and prosperous society. It has four components, each of which builds on and reinforces the others and all of which can be initiated within months.

At its simplest, the plan seeks to:

Improve capital inflows and foreign direct investment FDI into South Africa, to start raising the country's capital-to-income ratio in order to allow much higher rates of economic growth;

Build and maintain essential economic and social infrastructure as a solid foundation for further economic expansion;

Translate increased growth into increased employment; and

Empower the disadvantaged to climb the economic ladder to increased prosperity. Its objective is to halt the current economic descent, to lift the rate of economic growth to above 5 per cent of GDP by 2030 and to sustain growth in excess of such levels for the subsequent twenty years.

By the early 2030s, the plan could have the South African economy growing at a rate of between 5 and 7 per cent, the unemployment rate falling to below 15 per cent, debt levels falling, and a budget deficit that is lower than the economic growth rate. The social welfare system will be both expanded and sustainable, the middle class will grow quickly, doubling in size every decade, levels of poverty and dependency will be cut in half every decade, and South Africa will be well on track to becoming a majority middle class society in the 2040s.

Consider that, if the growth rate could be raised to 7 per cent of GDP a year, the economy would double in size every ten years, average GDP per head would soar, and between 500 000 and 750 000 net new jobs would be created annually. To increase the growth rate, South Africa needs to push up the ratio of fixed investment to GDP from under 20 percent to 30 per cent, and the capital to income ratio from 2:1 to much nearer to 5 7:1.

To achieve this, the country will have to attract significant amounts of both foreign and domestic capital. To draw capital into the country, the government must ensure that property rights are properly protected – consider that getting the capital to income ratio right will require more than doubling the amount of capital in the country, a prospect that has absolutely no chance of success if there is any prospect of the government expropriating any property without compensation.

But, lamentably, threats to property rights now extend far beyond land and are evident in laws and policies affecting healthcare, pension funds, agriculture, mining, oil and gas, the private security industry, and the country's intellectual property regime.

The combined effect of these threats, as we know from our daily advisory experience, is to deter fixed capital investment by both foreign and domestic investors and explains why, even in the post Zuma era, the government has struggled to attract sufficient capital investment. Investors' preference is to put their capital into other markets ranging from Ethiopia and Zambia to Nigeria, the United Arab Emirates, the UK and the USA.

Nine firm actions to secure property rights will reverse this trend, each of which could be actioned within months:

Rework the Protection of Investment Act of 2015 to increase the protection on offer to foreign investors, in particular;

Enter into new bilateral investment treaties with major trading and investment partners, based on the SADC Protocol on Finance and Investment of 2006, which was ratified by South Africa in 2008;

Bring the Expropriation Bill into line with the Constitution under a revised Bill similar to that put forward by the IRR;

Abandon the idea of expropriation without compensation completely and shut down the related parliamentary processes and committees;

Abandon the proposed de facto nationalisation of medical aid schemes and the businesses of private doctors;

Abandon a draft scheme to nationalise private pensions and related savings through a single state-run national pension scheme;

Abandon plans to raise BEE ownership levels of businesses to 51 percent, which would result in the effective expropriation of those businesses;

Abandon proposed ceilings on farm sizes and proposed legislation seeking to vest all non-urban land in the custodianship of the state;

Secure intellectual property rights, including copyright and patent rights, by scrapping the proposed intellectual property rights tribunal and related policy proposals.

Taking these steps will send a clear signal that the government is serious about policy reform and attracting the fixed investment needed to drive growth and jobs. From Ramaphosa down, the government has said so much about its enthusiasm for expropriation and, in the process, done such damage to foreign and domestic investor confidence that anything less than a complete turnaround will result in investors continuing to doubt South Africa's trustworthiness as a capital investment destination, and they will commit their funds elsewhere. 

The Rise or Fall of South Africa by Frans Cronje, published by Tafelberg and retailing for R232.00. eBook Platforms: Amazon; Snapplify; Kobo 

ABOUT THE AUTHOR  Frans Cronje is the chief executive of the South African Institute of Race Relations (SAIRR). He has presented scenarios concerning South Africa's long-term economic and political prospects to more than a hundred corporations, government departments, foreign governments and political parties. He holds a PhD in scenario planning.

 

AUTHOR'S NOTE 

IN LATE December last year, a doctor by the name of Li Wenliang identified a handful of cases of a virus similar to the Severe Acute Respiratory Syndrome, or SARS virus, that had caused a global scare in 2003. In January 2020, after making his fears known to fellow doctors on social media, he was investigated by the local public security bureau in China's central Hubei province, and called into a Wuhan police station where he was sanctioned for spreading false news on the internet.

Less than a month later he would be dead, becoming one of the early global victims of the Covid 19 pandemic he had tried to forestall. Much of the narrative of this book had been drafted before these events, and I had submitted the manuscript to Tafelberg in November 2019 – although some gaps remained, where my colleagues would enter up-to-the-minute facts and data, which is why you will sometimes see 2020 data in the book.

Months later, as South Africa entered its Covid 19 lockdown, Tafelberg and I discussed whether, given events sweeping the world, we needed to redraft parts of the narrative, as well as the conclusions reached in the book. After much deliberation, we came to the conclusion that it was not necessary. We have not changed the content or conclusions reached in this book because, while I did not know that a viral pandemic would sweep the word in the first half of 2020, my colleagues and I did know that South Africa was very exposed to any external global shock.

On pages 60 and 61 we make a point, for example, reiterated at various junctions in the book, that ‘a good way of determining the extent of your exposure to global political and economic risk is to ask how many independent factors are now brewing any combination of two or three of which could tip you into deep trouble... For South Africa, today, the answer is about ten; the country's prospects for economic recovery are very vulnerable, therefore, to events outside of its control’ and that ‘the longer South Africa wallows in the relegation zone of nations, the greater the odds become that external market shocks ... will ... weigh on its recovery prospects'.

In other words, we knew that South Africa was teetering on the brink of a  socioeconomic crisis and that an external tipping point would likely trigger that crisis, although we did not know what that external tipping point would be.

However, the consequences of the Covid 19 crisis, which range from a market crash, the rand lurching towards R20 US$, mass job losses to rising levels of social instability are all foretold in detail in this book and so are their long-term implications.

As for the pandemic itself, countries that match sensible isolation protocols with mass tracking and testing and vast economic stimulus should pull out of the worst of the crisis, particularly if they are headed into summer, having suffered medium-term contractions and case-fatality rates on the lower end of present estimates.

But South Africa has few of these advantages. Beyond a youthful population and the yet untested impact of BCG vaccinations, a vaccination used for TB, the country's isolation efforts are unlikely to be airtight; mass tracking and testing infrastructure were delayed; its public healthcare infrastructure is weak; and the populist policies of its government mean that it entered the pandemic in a most fragile economic state and cannot do much to rescue businesses that go under or people who lose jobs.

 Add to that the imminence of winter and there is little to mitigate the local socioeconomic consequences of the virus, consequences that are likely to greatly accelerate, rather than alter or contradict, the ultimate conclusions reached in this book.

FRANS CRONJE, April 2020 

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