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The chokehold of politics on the economy

A ‘wall of money’ is heading to emerging markets, but investors are selling off their SA stock.

I have written many times about the economic implications of corruption in politics, resulting in what are now ingrained and endemic corrupt practices in government. This is not unique to ANC-led politics or government. The private sector is as capable, if not more, of corrupt practices that have equally negative and long-lasting effects on society.

It is important to state the obvious, for there are some who will be tempted to say that corruption is a post-1994 phenomenon.

I have always been wary of the dominant hand of politics over the economy. I become even more concerned when the direction of policies on economic matters is subjugated to political ideology – especially at a time when pragmatism to the veracities of a changing world economy is needed and must be accompanied by flexible implementable plans.

To cure the former, South Africa must take in quite large doses of a bitter medicine known as ‘economic realities’ if it is to release the choking hand of politics from economic pragmatism. As things stand, the chances of curing the economy towards positive growth don’t look good.

I will use two recent developments to illustrate the impact politics has on the economy, directly or indirectly.

Impact insight No 1: Corruption deters investment hugely

GDP data for the fourth quarter of 2018 released by Statistics SA last week indicates a country in its fifth successive year of diminishing growth, with an annual growth rate of more than 2% not achieved since 2013.

Source: Statistics SA

This affirms the economic predicament South Africa is in – sluggish growth typified by a decline in some primary and secondary sectors. According to Stats SA, the mining and construction sectors are in recession, with both recording negative growth in third and fourth quarters of 2018.

Mining alone fell by 3.8% and this is not helped by the ongoing dispute at the Sibanye-Stillwater gold mine, possible retrenchments across the sector, and the upcoming platinum wage negotiations.

Furthermore, as I wrote in my column just last week, joblessness is increasing. Nearly half of country’s working age population is unemployed and the demographics are leaning towards a young future South Africa.

Considering all of the above, it is difficult not to sound gloomy. However, one would have to be naive or blissfully ignorant not to see the situation as grim.

I acknowledge that there are multifaceted reasons for five years of static growth that are outside the range of this article.

For one, corruption that enables theft will trump investment. When state-owned enterprises, municipalities and government departments are used as a way to siphon money to family and associates then shamelessly mark it as fruitless and wasteful expenditure, it discourages those who would otherwise be investing in the country – especially when the country’s own auditor-general’s disapproving report finds such siphoning to amount to billions of rands of irregular expenditure. 

I’m clear when I say corrupt practices that enable the theft of billions in state money will always discourage any potential investor. Although they may be optimistic about the potential return on their investment, or the positive impact it may bring to the country, they will be cautious of being sucked in to the endemic corruption and be subjected to demands for bribes. Instead, they cautiously observe – or go elsewhere.

It is corruption, theft, misuse and misallocation of resources, as well as poor performance by municipalities and government departments, that has repelled investment. The underperforming economy, persistent unemployment and the continuing factional battles within the ruling alliance have not helped the country’s case.

Impact insight No 2: Investors are returning to emerging markets, and we’re about to miss out

It is a sad irony that South Africa, potentially so promising, has in the past 14 days seen its stocks being dumped in high volumes. This despite the country “being the cheapest on record relative to their emerging market peers” according to a Bloomberg article, Foreign Investors Are Fleeing South African Stocks for the reasons outlined above and others. For instance the supply of electricity is a big factor because of the risks it poses to business operations and productivity.

The decline of the country’s economic growth is as steep as its rise post-1994.

Apart from growth during the Thabo Mbeki years (1999 to 2008), although also plagued by unemployment, there hasn’t been any significant economic intervention that has spurred growth.

And unfortunately, the world economy doesn’t wait for any country to sort itself. It moves forward, and countries that are struggling are left behind.

The Institute of International Finance theorises that investors who withdrew funds from emerging markets last year are returning due to the lessening worry about the world economy. Is South Africa about to miss out on this investment? The potentially dynamic economy has been reduced to a state of sickness and is unable to get going. The ideas from the politicians have so far failed to lift it.

Once a country is off the pace, the global economic machine that it is marching on, it will be difficult to catch up. Even if bold action is taken, it takes years for economic growth to return. China, India and Brazil all eventually did something to get where they are.

If a country’s economic-political condition is captured by these variables: ideas, policy and growth, and assuming that the former can lead to suitable and relevant policies that may spur growth, we may have a chance.

If not, then South Africa is waist deep in a steaming pile of elephant dung.

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Good article.
We missed out on the commodity boom of 2008 and now comes missing out on emerging market investment boom – everyone, investors, ratings agencies and governments, seems to be waiting for the election outcome before deciding on a direction to take.

Yes, good article. Here is a nice quote to sum up the problem: ‘It is very clear that, over many years and due to a variety of reasons, the level of compliance with good corporate governance principles at many, if not most of our parastatals/State enterprises, has fallen to levels well below what might be regarded as even “minimally acceptable”. The extravagance of the remuneration packages and associated benefits which boards and management have blithely awarded themselves, borders on the obscene reflecting avarice and greed, instead of the commitment to serve which we expect, indeed demand, of those appointed to such strategic positions.’ – the Honorable Robert Mugabe. The problem is well know. The will to do something about it, is lacking.

Great article and too true. It’s high time SARS allowed taxpayers to deduct their own fruitless and wasteful expenditure against their declared income

SARA should adjust the taxable salary brackets with inflation.

No businsss investor foreign or local can compete with Bond return of 9%, it means that the risk you need to take for profit has to be 18% or higher.

As the stock market has proven, businesses are struggling to squeeze out even 12%.

High Risk low Reward.

Thank you for this good article.
I would like to add however that, as long as the PIC are the largest investor in our exchange you will never seperate politics from the economy. The nationalization of the Reserve Bank – the one economically independent entity we have – would be the ultimate chokehold.

With ANC corruption and BEE feeding that there is absolutely no growth in the economy and there can be no growth off a failing entity.

There has to be growth of at least 3% per annum in order for any meaningful transformation to take place, but the ANC migrated from shared growth to take and intercept wherever possible in order to corrupt as much money away and sadly this is at the expense of the poor the most.

Everyone in South Africa is quite aware of our corruption and economic malaise.

The sad part is that society doesn’t stand up to the corrupt regime it voted for and put an end to it.

Democracy is a joke when the people don’t weaponize it to root out leadership that has consistently failed them.

It may require the whole house to burn down before we spring into gear.

Will the last one to leave the country please switch off the generator.

Not to worry it will be off before you leave 🙂

I think you mean “stolen before you leave”.

Here’s an idea. Max out your access bond and invest the proceeds in emerging markets. Excluding SA of course!

Imagine the following situation for a moment. Every morning you drive past that group of unemployed men down at the traffic light. Your sense of morality drives you to motivate your body corporate to employ all of them. The residents contribute old clothes, food, blankets etc. to help these unemployed workers. The old women offer them tea and scones while they are working in the garden. This is a successful charity project.

The next moment the workers hold a meeting and come up with a list of demands. Firstly, they want the right to vote and appoint members on the body corporate because it is their constitutional right. Then they demand that the residents should reflect the demographics of the country. They also demand free housing and education from the body corporate because they are previously disadvantaged. Do you catch my drift?

This is the situation we find ourselves in as South Africans. The beneficiaries of our tax contributions, the recipients of social grants and those who were lucky enough to find employment, took control of the “body corporate”. What started out as a charity project is turning into a catastrophic disaster. It is not that the charity project is to blame. The disaster started when the beneficiaries took control of the body corporate.
The moral of the story? Charity is only viable if it happens voluntarily. When the beneficiaries receive the right to enforce and extort charitable contributions, the whole community is lost.

This is the exact same scenario that forced UCT to employ contracted, out-sourced staff as permanent.

We have many articles by prominent analysts who try to explain why the economy and job creation are imploding. All of them fail to address the really large elephant in the room – the total disregard for property rights.

Wealthy people who live in an upmarket security complex think it is ludicrous for me to suggest that the casual labourer from the nearest township is acting as chairman of the body corporate of their luxury development. This casual gardener has no rights to demand a place on the board. He does not own any property within the complex. He has no voting rights and no way to influence the rules of the complex.

Not within the property may be, but the very same gardener who owns no property and pays no taxes has the right to appoint the members of the organization that governs the body corporate. He elects the government, he appoints the cabinet who writes the rules that govern your security complex.

We have people from collectivist communities, with nothing to lose, who do not own any property, in positions of power where they make decisions over other people’s property.

If you want to predict the future of our economy you can run a small experiment. Sack the entire body corporate of your housing development and appoint the casual labourers and domestic workers in their place, and see what happens to the value of your property.

I’m not sure UCT was “forced”; Max Price just agreed to it as he had not guts for fighting them.

@ Sensei

As usual, great summaries and 100% on the button !!

I’ve just thought of a solution to ALL our problems: just privatize our SOEs!

The evidence is overwhelming that both common sense and the principles of democracy doesn’t work in Africa at all. Everything is determined by the village chief and his most beloved favourite goat.

Lesufi is the embodiment of this approach to governing. He can’t wait to get out of the office in order to micromanage issues that should be handled by his subordinates. Never looking once at his job description.

I’m nitpicking but the Lesufi types could not manage a spaza shop. It is more like interfere, generate publicity, show off his racism etc. Nothing remotely productive.

And then our large asset management companies keep on urging investors not to sell out and wait for the upturn. It’s like the Thomas Beckett play Waiting for Godot–it just ain’t gonna happen. Get into offshore funds, either via asset swaps or directly offshore, before CR flip flops and changes his tune on offshore investing. These funds managers, who keep on demonizing offshore investing, are directly responsible for millions of South Africans not having enough money for retirement.

Not a new idea but it’s still fun to see our foreign affairs minister reprimanding our biggest investor countries ambassadors for saying corruption is a big problem and should be dealt with. Or them supporting countries like Venezuela and Zimbabwe with socialist regimes etc.

The ANC must be one of the worst performing govs of all time. They are trying to balance stealing (destroys public entities, see SoE balance sheet/cash flow) with short term power grab focused socialist policies (destroys private sector, see mining/ICT/manufacturing etc).

Not a huge surprise, a lot of people said this would happen when we allowed a uneducated but cunning president and his friends in to government 10 years ago. The majority of those people still have more influence on gov than the biggest job providers in the country and hence we find ourselves in the spiral. Cyril is not the answer and it’s hard to feel sympathy for that 50% unemployed when they celebrated the same gov who put them there staying in power.

Well written.

Maybe its time to follow the sage advice of ask Why five times. We may not like the answers. Unfortunately, as a country we are better at dealing with ideology than with reality.

Great article! Selective in the sharing of information maybe? It is election year, how would that impact/motivate foreign investment? Is emerging markets not a punch bag for speculators? Is the JSE expensive and if so, why? Bench marking the equity prices against the long term nond interest rate, and when latter performs better, it could be indicative of equity over pricing? Is the foreign investment of a long term nature, invested in the productive economy? Financialisation is a recognised international phenomenon, profoundly defined by Rana Foroohar in her book Makers and Takers. SA is no exclusion?

The chokehold of politics on South Africa is such that she is dying in front of us.

the problem is and always be the ANC…..not even they can ran from this truth.

“It is important to state the obvious, for there are some who will be tempted to say that corruption is a post-1994 phenomenon”

I would be tempted to say corruption has exponentially increased thousands of percent against pre-1994. ESKOM, SAA SOE’s etc are good examples.

It’s a little too late for your homilies, unfortunately, Mr Molopyane. perhaps you could have written this column in1995?

I don’t know where you’ve been over the last 25 years but anyone with half a brain could have seen this outcome at least two decades ago – a “revolutionary movement” gets control of a vibrant complex, internationally competitive economy without a single experienced internationally savvy financially competent manager, but controlled by outdated communistic and unionist rhetoric.

It was and is a recipe for disaster. And you’re surprised?

BEE is also choking our economy, it’s an unjust racist law preventing huge growth! How many white entrepreneurs are struggling to get the big contracts because of skin colour, or start up entrepreneurs struggling to grow because they are restricted, so they leave our shores in search of thriving economies that do not discriminate because of race! You can not deny that BEE is a tit-for-tat childish law that also has a negative effect on our pitiful economy!

With a population growth rate of 1.55% (cf. StatsSA), any GDP figure of less than this is moving backwards. Unemployment increases, valus add is negative and creation of wealth collapses. Result: the above, self-accelerating.

Wanted to build a carport. Shopped around and made up my mind who got the job.
Talking to the builder installer he informed me I may need council approval.
Needing a host of people all needed to get plans put forward.
Running in a close 10000 Rand on top of the carport total.
Coming close to 50000 Rand.
Did cancel the whole thing.
When stupidity rules doing nothing is the best solution.

Wanted to build an outside storehouse.
Didn’t tell anybody.
Built it myself.
Have been using it for four years now.

😉

From Cape Town to the lowry pass. Watch left and right scenery. All are housing voters resulting in local council and government authority. Inspecting people like you doing the illegal thing.

How can we expect ANY growth in this country when our governance at both the political and corporate levels is so rotten. What the ANC did I under Jacob Zuma is bad enough but when you have Accounting fraud at a Corporate Level ( think Steinhoff, Tongaat and others) then you are really in trouble. I fully understand why there is no growth or investment in this country – our moral credibility has gone. And you can’t just blame the government.

@Mactheknife – You will not be popular for saying such things!
Don’t state that the private/corporate corruptors steal orders of magnitude more than what politicians and their ilk do – that’s counter the narrative. Don’t state that the frictional losses we have experienced in the economy to date are heavily outweighed by the corruption-related losses in the stock market. It goes against common knowledge – you know, what everybody knows about who is corrupt in this country.

@MActheKnife

You obviously dont understand even basic economics

In the case of the few business entities you mentioned, bear in mind they CREATED their own wealth/destiny

The reality is, govt creates NOTHING

They are parasitic by nature, and can only exist by sucking the economic blood out of us

Please dont EVER compare the private sector to government in terms of wealth creation

good point!

Good article, but the writer is missing the point.
It is not due to corruption that SA is struggling.
Obviously corruption is a problem, but that is a symptom of a larger issue..
The ANC is driving the NDR – National democratic revolution.
If you don’t know what this is, go and read about it on their website.
They are not ashamed of it.
In summary – the end game is full blown socialism.
BEE, a ridiculous labour law, trade unions, inefficient and ineffective SOE’s, ambitions to nationalise healthcare and the reserve bank, cadre deployment, corruption – these are all part of it.
They are all key ingredients to make it happen.
These things won’t go away if you get rid of only the corrupt individuals.
Just like things are not much better under Cyril, now that Zuma is gone.

I do not want to beat the drum on the emotive land issue but the simple reality is if you cannot guarantee property rights people will not invest. Global investors will politely hear out the convoluted explanations from government representatives at conferences “yes we are going to expropriate property without compensation, but nobody will lose their property”, but they will they will quickly move on do other EM countries with much more favourable growth prospects and lower risks. It is a no brainer unfortunately.

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