South Africa at the tipping point?

Institute for Futures Research Annual Workshop and Conference October 2017


South Africa at the tipping point?

“The market is the creator of social wealth and the wellspring of self-sustaining economic development” Li Keqiang, Premier, People’s Republic of China

Anyone who does not believe that South Africa is at the tipping point is living in a fool’s paradise. Consider these few facts that are just the tip of the iceberg in terms of the prevailing socioeconomic state of the country: a shrinking economy evidenced by a 0.3% decline in the fourth quarter of 2016, a 0.7% decline in the first quarter of 2017; and a 2.5% growth in the second quarter of 2017 that is virtually nullified by a population growth rate of 1.2%. The single biggest problem facing the country is the chronic unemployment crisis that has relegated over 9.3 million people (36.6% of the working-age population) to a life of poverty and destitution. Related to this, the World Bank projects a 0.6% from 1.1% overall economic growth for 2017. At this rate of economic growth, incomes will double roughly every 120 years. If the economy were rather to grow at a rate of say 5%, incomes would double roughly every 14 years. Clearly, then, the key to overcome SA’s unacceptably high levels of poverty and unemployment is to get the economy growing!

The government, however, is intent on pushing ahead with increasingly populist policies such as the introduction of a national health insurance (NHI) system that has the potential to cripple South Africa’s already weak economy. This is a particularly bad use of scarce taxpayer resources. One must remember that government has a relatively fixed budget and spending in one area necessarily comes at the expense of other areas. For example, if the government decides to dedicate more of the budget toward healthcare, that necessarily means that there is less money available for education, policing, housing etc. Moreover, in attempts to introduce a nationalised healthcare system the government is increasingly restricting individuals’ liberty and freedoms. Consider, for example, the banning of primary health insurance products and the imminent removal of medical scheme tax credits. These policies will adversely affect the poor and middle-class the most.

Pondering the question as to where all this is coming from, the words of the arch-communist leader who ushered in and headed a one-party communist government in Russia, Vladimir Lenin (1870 – 1924) seem germane. He said, “Socialized medicine is the keystone to the arch of the socialist state.”

According to Gauteng health MEC, Gwen Ramokgopa, there are 11,736 patients waiting for operations at the Chris Hani Baragwanath Hospital. Ramokgopa also said that, for various reasons, in 2016, 1,824 operations there have had to be cancelled. The official reasons cited for this crisis make for sombre reading: machinery breakdowns and staff shortages. That is little consolation for patients requiring hip replacements who are forced to wait for unacceptably long periods of time – sometimes up to 5 years.

What about the R5.2bn so far this year of hard-earned taxpayers’ monies that is being used to bail out a perennially loss making (state owned) abyss called SAA! Add to this toxic cocktail the fact that, in recent years, South Africa has been experiencing frightening unprecedented levels of corruption in government and its acolytes.

Dramatically exacerbating this state of affairs is that the financial services industry is being inhibited by onerous regulations that expose it to the mercy of rabid regulators.  The financial services industry, universally, is the crucial lifeblood of the economy, and, in this country has always demonstrated global competitiveness by churning out innovative financial products. Thanks to enabling legislation, parliament’s legislative powers have been hijacked. Regulators, with their extensive draconian powers, have the capacity to pass laws and, especially in the financial services industry, are now usurping extra-judicial powers over the Ombudsman. All this is at the peril of undermining established contract and commercial laws that are vital to the smooth operation of the economy. 

Not surprisingly, Rand Merchant Bank’s latest “Where to Invest in Africa” report for 2018 reveals that Egypt has knocked South Africa from its long-standing top spot regarding investment in Africa. Egypt displaced South Africa largely because of its superior economic activity score and South Africa’s sluggish growth rates that have deteriorated markedly over the past seven years. According to the report, South Africa also faces mounting concerns over issues of institutional strength and governance.

The words of Li Keqiang, Premier of the People’s Republic of China (World Economic Forum, Davos, 2015) resound poignantly and should be heeded by policymakers if the economic rot is to be effectively arrested, “Excessive regulation discourages innovation, and healthy competition is the way to prosperity…this will incentivise market players, and help reduce the possibility of rent-seeking and corruption”.

So, what is to be done? First of all, it should be accepted that all the mess is a consequence of government policy. Given this, the rational point of departure in considering policy should be to study empirical evidence that accounts for high growth economies. A precondition for this should be the discard of any ideological influence.

Fortunately, this evidence is in the form of empirical studies such as The Economic Freedom of the World (EFW) index that is spearheaded by the Fraser Institute and co-published with over 100 think tanks; The Index of Economic Freedom (published by the Heritage Foundation); International Property Rights Index (Property Rights Alliance). These are the most prominent of empirical studies, but there are others that substantiate the correlation between economic freedom and economic growth as consonant with downstream indicators of human wellbeing such as higher economic growth, lower inflation, lower unemployment, higher average incomes, less poverty and that their citizens live, on average, 20 years longer than those living in the least free countries

In short, these studies demonstrate that the higher the levels of economic freedom, the higher the levels of economic growth and the better the indicators of human wellbeing. With countries ranked according to measurement of the level of economic freedom, South Africa’s rating has been on the decline in recent years. Currently, it features at position 95 out of 119 countries (EFW, 2017 Annual Report). It is insightful to contrast this with South Africa’s previous rankings as indicated in brackets. In 2000 (46); 2005 (70); 2010 (82).

With the prescience of these studies, it is very clear what ought to be done by all involved in policymaking to bring about a policy regime that will reflect the highest levels of economic freedom.

However, there are some self-inflicted impediments to freeing up the economy that need to be done away with. To name a few of the most salient:

1)    The measures advocated to address income inequality as proposed by Thomas Piketty in his book Capital in the Twenty-First Century. Essentially, Piketty advocates punitive redistributive tax measures that target the richest individuals and business entities. The consequences of this will be to negate capital formation and drive the capital in the hands of the wealthy to other entrepreneurial-friendly markets. 

Piketty’s thesis echoes the words of the founder of communism, Karl Marx, who said “There is only one way to kill capitalism - by taxes, taxes and more taxes”.

The Piketty solution also complies with the statement made by the late communist leader of Russia, Vladimir Lenin: “The way to crush the bourgeoisie is to grind them between the millstone of taxation and inflation”.

In stark contrast to these ideas is the reality of human nature. People are endowed differently, have different tastes, preferences and priorities. They embark on a whole diversity of socioeconomic endeavours in order to lead relatively contented lives and enjoy happiness. When people are free to exploit their internal resources, the outcomes naturally manifest in various ways and degrees.  Some embark on business ventures, even when at great risk as there are no guarantees of success.  The element of risk, and the degree thereof, explains why entrepreneurs are few and far between in any community or country. Most people seek a less risky means of earning an income by choosing to work in established business enterprises. Other individuals prefer to pursue initiatives in other spheres of human endeavour such as sporting activities, music, and fine arts. Not surprisingly and inevitably, the income outcomes will manifest a whole range of income differentials.

Piketty negates this aspect of the real nature of humans. In essence, the Piketty proposal contradicts economic freedom.

“The worst form of inequality is to make unequal things equal” was the amazing verdict of Aristotle, Greek philosopher (384 – 322 BC) on such an issue.

Empirical evidence abounds to the effect that in any country where affirmative action policies have been implemented, the results have been totally counterproductive.  A case in point is the United States. After more than fifty years of affirmative action policies implemented to boost the social fortunes of the targeted beneficiary group, the blacks/African-Americans, this group occupies the lowest rung of the socioeconomic ladder.  At the top are the US-Asiatic ethnics, then the whites, and then the US-Latino ethnics with the blacks lagging behind.  Affirmative action policies the world over have only, ever, demonstrably benefited politically connected elites, as is the case in South Africa.

There is a whole plethora of policies that should be abrogated because they negate the economic freedoms of individuals thus detrimentally impact the socioeconomic welfare of the country.

Economic freedom is defined in terms of the fundamental principles of protection of private property, voluntary exchange and freedom to compete.  Policies collectively defined within these parameters would launch this country on a trajectory of high economic growth and overall happiness.

“Freedom means diversity but also mobility.  It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables almost everyone from top to bottom, to enjoy a fuller and richer life,” noted Milton and Rose Friedman (Free to Choose: A Personal Statement, The Cato Journal, Cato Institute).

This is exactly what happened in the People’s Republic of China. Starting in Shenzen in Guangdong province with the liberation of the agricultural sector from the clutches of the state, from 1972 onwards, Deng Xiaoping, at the helm of the Communist state, implemented the most radical free market experiment (unprecedented historically) in areas designated as special economic zones/Freed Trade Zones.  The result, according to the World Bank, has been, within decades, the upliftment from poverty of over 500 million Chinese.

Yes, it is possible to reverse the damage and set the country on a high growth economic trajectory. For our lack of economic growth, the buck stops with the government, solely and exclusively. That cannot be emphasised enough.  Scapegoating by blaming this country’s shortcomings on apartheid, colonialism, imperialism and the discredited nonsensical concept of white monopoly capital or some particular individual white industrialists is calculated to deflect attention from those responsible for the mess and their acolytes.

Government must heed the following advice: “To pursue the ideal of an equal distribution of the goods of this world is to build on envy and covetousness which jeopardise social harmony and economic peace.  It is highly immoral because it proposes to steal by political vote,” Hans Sennholz, President, Foundation for Economic Education (The Freeman, August, 1992).

The following policy measures will bring about a situation that can be analogically described as a rising tide that floats all ships.

a)    Stop the current introduction of all foreign-based financial services laws and regulations until proper independent empirical research has been done to confirm precisely what problems South Africa faces, then prioritise these and draft new laws particular to the country’s needs.  Existing and proposed/new laws should be subjected to a rigorous Regulatory Impact Assessment by an independent body that will involve industry representatives.

b)    Give poor people (identified on a rigorous means-tested basis) shares in failing state-owned enterprises such as SAA and Eskom.  The Czech Republic is an example of where this was implemented successfully.

c)    Free up the labour market to make it easy for people to be employed.  The contemplated national minimum wage should not be implemented as it will render unemployable those who are unskilled and have no experience, the most of whom will be young people.

d)    The government should ensure that, in the economic arena, a policy environment that is informed by freedom for all is in place, thus ensuring the removal of barriers to entry and participation in the economy.

e)    The cost of going into business should be lowered, which will translate into a proliferation of businesses being established as the spirit of enterprise is unleashed, and, consequently, more people employed making them participants of a wealth-creation/ job-creation movement rather than contenders to swell the ranks of welfare grant recipients.

f)     The National Health Insurance should be dumped and the interventionist tentacles of big government withdrawn from the provision of health care.  The government should instead purchase health services for the poor from privately competing providers, which will ensure that the best service is obtained for the best price.

In conclusion, the words of late president Nelson Rolihlahla Mandela (12 November 2003, Johns Hopkins Symposium) encapsulate the overall policy paradigm that should be embraced if this country is to be a high growth economy:

“It is not a question any longer about whether the world embraces a free market economy. The globalised world in which we live has made it imperative that we open our markets both internally and to the outside world. The free market is not merely an American export; it is the acknowledged route for economies all over the world. Closed markets and command economies are self-evidently inappropriate for our times.”

Temba A Nolutshungu (Director, Free Market Foundation)

This article was a presentation by Temba to the Institute for Futures Research, University of Stellenbosch on 19 & 20 October 2017 

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