Quarterly Review 2010.03

23 May 2018
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FMF

Quarterly review

January – March 2010

Land reform project

South Africa’s “land acts” are often regarded as the cornerstone of apartheid, the aspect of South Africa’s “crime against humanity” that made the biggest single contribution to psychological, political and material dispossession of black South Africans. The “land question” remains one of the most problematic and conflict-provoking aspects of post-apartheid South Africa. The “land debate” consists primarily of an acrimonious discourse about land redistribution from whites to blacks, which is so overpowering that scant attention is paid to other aspects that have greater potential for black economic empowerment.

The land situation in South Africa

Black South Africans constitute 80% of the population and live primarily on urban “plots” which they hold under a range of limited forms of tenure. The balance live on plots or farms in rural “tribal” areas (formerly “homelands”), also under a range of forms of tribal tenure. A small but growing number of blacks live in historically “white” areas.

Fifteen years after transition to predominantly black rule, most black South Africans still live under the legislative progeny of the Land Acts. In other words, most black South Africans still live under apartheid legislation and land tenure imposed now by a democratic government instead of a white racist regime. Additionally, the present regime inherited the massive loot of the apartheid government in the form of gigantic “parastatals” created primarily for white regime patronage, and extensive government-owned land. This land is unutilised or underutilised, and, therefore, is readily available for redistribution to landless blacks. Given the dire situation with property rights, why has the post-apartheid government not converted black-held land to full ownership indistinguishable from historically white land? Why has it not utilised superfluous land and parastatals to empower its constituency?

The FMF is the only organisation that has worked for conversion of all black held land to full ownership (“freehold”), and for the redistribution of superfluous government land to the victims of apartheid as a substantial once-off compensation for the crime of apartheid. Virtually everyone to whom these ideas are put endorses them regardless of ideology, yet, with few exceptions, neither has occurred. As Hernando de Soto has so eloquently explained, the poor are locked by tenacious land laws into a world of “dead capital”. The theory is straightforward: unleash dead capital into the hands of the poor and the economy by giving them full title that is freely tradable and mortgageable. The reality is that there are always powerful vested interests in preserving whatever the status quo happens to be – what Milton Friedman aptly called the “tyranny of the status quo” – compounded by prohibitively costly and complex laws governing fundamental change.

The matter can be understood in the context of three South African experiences.

Mathanjana tribal area

Mathanjana is a remote tribal area northeast of Pretoria. After protracted interaction with the chiefs and communities, the government and all stakeholders agreed that Mathanjana should become the first tribal area in South Africa where village plots would be converted to freehold. That was eight years ago. Despite the fact that most plots had existed for generations, laws governing town planning, land survey, property registration, tribalism, local government tax, and the like, meant that the cost to government of the process has exceeded the value of the raw land. Communities promised land title long ago have become frustrated and pessimistic. The conclusion to be drawn is that the introduction of full property rights in traditional communities in South Africa and probably throughout the developing world requires a fundamental and radical revision of law and procedure. Existing forms of tenure registration can be converted to full ownership without any expenses or formalities for all pre-existing plots. Newly established plots on superfluous government land can be the subject of streamlined town planning and related formalities.

“Perryville” urban area

“Perryville” is a municipal area covering various towns. It prides itself on the extent to which it has implemented land “transformation” for black South Africans. Virtually all black-occupied land has been properly surveyed, included in town planning schemes, proclaimed and registered in the deeds registry. Thousands of “title deeds” were issued. Curiously, most were not given to intended beneficiaries and some that were, were either not freely tradable or subject to endorsement, failing which they would lapse.

In consultation with the FMF, “Perryville” municipality has resolved to become the first urban area in South Africa where all land is held under full freehold on the basis of complete equality between whites and blacks. Because most formalities have already been complied with, conversion to ownership is relatively easy, at least conceptually. Even so, there are substantial obstacles of the kind that bedevil land ownership in the third world. Firstly, substantial sums in arrear rents, rates and taxes are owed to the municipality, sometimes far in excess of the value of the land. Although these sums are unlikely ever to be paid, they are reflected in the municipal accounts as assets. If they are written off to allow for tenure upgrade, the municipality will be technically insolvent and in breach of local government management legislation. Secondly, there are a host of professions wanting their slice of the cake: town planners, property lawyers, land surveyors, development consultants.

Armed with its Mathanjana experience, the FMF confronted these challenges with “Perryville” and said that normalisation could be achieved only if the council broke with convention in fundamental ways. It would have to be willing to grant full title without the prohibitively costly intervention of the professions. To solve its accounting problem it was suggested that land-related debts be severed from the land and converted in the council’s accounts to civil debts so that “clearance certificates” could be issued on all land regardless of debt to the council. The government is considering exempting conversion from apartheid title from deeds registry fees. Property lawyers in the area are being approached regarding a substantial reduction of their fees. One of South Africa’s leading companies is considering covering the costs of essential consultants as a marketing rather than philanthropic expense.

Langa urban area

The standard objection to giving the poor full, unambiguously tradable ownership of their land is that “they” cannot be trusted with it – they will sell the land and spend the money frivolously leaving them again landless. Apart from this being offensively patronising, it is contradicted by experience. The problem in South Africa and probably worldwide in comparable circumstances is the opposite, namely that the poor have been conditioned into not regarding land as tradable. They hold on to it tenaciously, passing it from one generation to another, fearful of losing it and mindful of their inability to acquire land in the free market. The predominantly black area of South Africa where most of the plots are held under relatively free title is Langa “township” falling under the Cape Town municipality. Although these titles are freely tradable and mortgageable, no property market to speak of has emerged. Local newspapers do not have “properties for sale” classified advertisements of the kind that characterise mature property markets and there are no estate agents (realtors). “For sale” signs are uncommon. A small but growing number of mortgages have been registered.

The problem turns out not to be purely technical. Difficult though it is to get full title, this further challenge is cultural and psychological. Dead capital does not become living capital as a matter of law. The solution proposed for “Perryville” is for tenure upgrade to be accompanied by public information on the implications by way of pamphlets and workshops, preferably run by banks marketing their services.

Conclusion

Hernando de Soto is certainly right about the tragedy of dead capital inflicted on the poor in most countries by virtue of them being denied unambiguous and fully tradable title to their most substantial physical asset, their land. South Africa’s experience, like that of many other countries, is that conversion of restricted tenure to full title is, in the real world, extremely difficult and costly. The Free Market Foundation’s experience in South Africa has exposed many of the practical challenges and resulted in creative solutions that could convert dead capital into living capital expeditiously and affordably.

What Hernando de Soto’s vision seems to need is a basic set of implementation strategies tailored to context-specific circumstances. It is hard to imagine anything more effective that the world’s “development” agencies such as the UN, World Bank and IMF could do in the pursuit of their mandates than a global programme along the lines of South Africa’s experience.

In addition… Alexandra Township

The Law Review Project is working with the Alexandra Property Owners Rights organisation (APOR) to try to resolve a long-standing injustice in the “township”.

Alex was proclaimed early in the century as a “normal” township. In those days property developers decided such things as land use, neighbourhood covenants, and restrictions on which races could occupy. In this case, the developer offered the land to “natives and coloureds” who acquired the land in full and unambiguous freehold title.

Under Verwoerdian apartheid, Alex became known as one of many “black spots” where blacks owned land in white group areas. All privately owned land in Alex was subsequently expropriated and landowners became city council tenants. By then most landowners had built middle-class brick houses, which exist to this day and are occupied by aged victims or their descendents. Most landowners had tenants living in shacks in their yards – an average of four per plot. There were about 3,000 freehold (expropriated) properties with 12,000 tenants.

In law, all former owners (and their descendents) and all former tenants are in the same legal position as tenants of the Jo’burg City Council. Despite this technical legal position, the two groups are still spoken of as “owners” and “tenants”. To try to acquire restitution, the “owners” formed two representative groups whose main activity was to apply to the Land Claims Commission for restitution. The outcome was an offer of R50,000 per claimant / property, supposedly in full settlement.

Most claimants signed the settlement contract. The position regarding the few who didn’t remains unresolved. Those who did, insist that they were briefed by government representatives to the effect that the R50,000 was compensation for lost rent and that their land claim was still to be resolved.

There have been additional complications along the way. For instance, the Jo’burg City Council started “selling” plots to tenants. When we became aware of this, it was pointed out to the city council that such sales had no legal status. Because the properties did not exist in law, the sales were illegal.

The current position is a maximal shambles in that no-one has yet produced anything approaching a realistic solution. Owners are intent on persisting with their restitution claim, politicians are intent on securing the votes of tenants, and tenants do not want to find themselves paying rent to or being evicted by landlords.

Our current thinking is that a precondition for progress is rectification of the contract. The problem is that, according to the official view, owners have no claim because government has settled with them in full and final settlement by way of a compensation (at least to most) of R50,000, and therefore is under no legal obligation to accommodate them further. Whilst the contract stands, it is impossible for owners to seek any other form of legal redress and they remain at the mercy of the bureaucratic inertia to which they have been subjected for the past fifteen years.

Freda Utley Prize for Advancing Liberty

The Atlas Economic Research Foundation, Washington DC, announced on Monday, 1 February 2010, that it had awarded the 2010 Freda Utley Prize for Advancing Liberty to the FMF. Named for the late Freda Utley, an outspoken writer and commentator against totalitarian regimes, the $10,000 prize rewards the efforts of think tanks that are most effective in disseminating the ideas of freedom.

Freda Utley married Russian economist Arcadi Berdichevsky and in 1930 they emigrated from the UK to the USSR. Soon after moving to Moscow, she became disillusioned with the Soviet regime. In 1936 Arcadi, accused of being a Trotskyist, was arrested and sentenced to five years in a gulag. Freda smuggled their young son out of the country as the couple had agreed they should do in the event of problems with the government. Decades after his arrest it was established that Arcadi had been executed in 1938.

Freda Utley’s book Odyssey of a Liberal: Memoirs contains the following poignant passage: “It was a passion for the emancipation of mankind, not the blueprint of a planned society nor any mystical yearning to merge myself in a fellowship absolving me of personal responsibility, which both led me into the Communist fold, and caused me to leave it as soon as I learned that it meant submission to the most total tyranny which mankind has ever experienced.”

More international recognition…

The Think Tanks and Civil Societies Program at the University of Pennsylvania ranks think tanks around the world based on a survey of hundreds of scholars and experts. According to them: “Think tanks are public policy research, analysis and engagement institutions that generate policy-oriented research, analysis and advice on domestic and international issues that in turn, enable both policymakers and the public at large to make informed decisions about public policy issues. The think tank index has been described as the insider’s guide to the global marketplace of ideas.”

There are over 6,300 think tanks operating in 169 countries. The Free Market Foundation has been nominated (for the second time) as one of 392 leading think tanks in the world and rated 4th in the list of top 25 think tanks in sub-Saharan Africa.

A lightbulb moment

In March, Business Day carried an article headlined: Eskom to open door to private producers – Hogan says state utility can no longer provide for all of SA’s needs. Could the Foundation’s Energy Policy Unit finally be having an impact? See the following articles on our website:

  1. Shed Eskom’s monopoly to solve the electricity crisis
  2. What the hospital pricing furore and electricity blackouts have in common
  3. Restructuring South Africa’s electric power system
  4. A real electricity market will rapidly end blackouts
  5. Should SA be totally dependent for electricity on a single government utility?

Betonberaad and projects

As usual, in lieu of the more appealing bosberaad, the FMF holds an annual strategy meeting in the city, hence the more mundane betonberaad. This year we prioritised the following projects – some of which are expanded on in this Review: Land, health, energy, intellectual property rights, labour, education, tax and the youth.

Setting a bad example: Statutory plunder in the UK

The Foundation last month, along with other African think tanks, released a pamphlet challenging proposed legislation in the UK (the Debt Relief (Developing Countries) Bill), which would severely curtail the ability of commercial creditors to recover debts owed by 40 Heavily Indebted Poor Countries (HIPCs). We urged UK Members of Parliament to oppose the legislation saying: “This legislation sends completely the wrong signal to leaders of poor countries, who need to focus their efforts on good governance, economic liberalisation, and advancing the rule of law.”

Essentially the Bill, as a corollary to inter-governmental agreements to write off HIPC debt, would compel private lenders in the UK to write off up to 90% of monies owed them by HIPCs.

We argued that the Debt Relief Bill would not only hand more financial power to deeply flawed regimes, but would also act as a major disincentive for British lenders and investors to operate in developing nations; that the proposed law, applied retroactively, represented a dangerous ex post facto interference in private contracts, making such contracts barely worth the paper they are printed on; that financial investors would view this legislation as simply the tip of the iceberg, and the fear of future similar bills calling for further debt forgiveness would have a chilling effect on long-term lending; and that it was in conflict with the rule of law.

We like to believe that our efforts influenced the lone objection to the Bill, which stopped it from being adopted (at least until after the 2010 general election) and prevented property rights law and the rule of law in the UK from being corrupted.

For more information, see the relevant documents on our home page under Events.

Property rights rule, OK

Our first in-house function for 2010, hosted at the Foundation on February 23, combined the launch of the 2010 edition of the International Property Rights Index with Leon Louw’s presentation, Nationalisation: Malan to Malema.

Leon assured us that the ghosts of DF Malan, Hendrik Verwoerd and other apartheid founding fathers are walking the corridors of power, grinning broadly at the prospect of their failed policies being implemented by the ultra-left faction of the ANC; and rooting for them to triumph over better-informed and more rational ANC leadership!

He addressed the paradoxical similarities between the NP and ANC in the context of the latest International Property Rights Index (IPRI), which shows incontestably that the interests of the masses can be served only by elevating property rights to a primary national goal and commitment, and that stagnation and destitution are the inevitable consequences of compromising property rights.

[Our next presentation will be by Rex van Schalkwyk on April 21 – invitations to follow soon.]

South Africa ranked 24th out of 125 countries

The International Property Rights Index is prepared annually from a study conducted by a Hernando de Soto Fellow at the Washington-based Property Rights Alliance. It is published by the Property Rights Alliance with the support of sixty-two partner organisations worldwide, including the Free Market Foundation.

The study asks the following questions: Do societies that respect property rights perform better than those that disregard property rights? Do countries that provide the legal framework for enforcement of property rights have better economic outcomes? Legal and political environment (LP), Physical Property Rights (PPR) and Intellectual Property Rights (IPR) are the three components that are measured in the compilation of the index. SA’s scores were (out of 10) LP 5.7 45th, PPR 7.4 22nd, IPR 7.4 20th and overall IPRI 6.8 24th. IPRI is yet another index on which SA is pulled down because of its high crime rate.

Leon said: “SA is in the top 20% of countries measured in this study and this bodes well for the future if the rating improves or even remains at this level, which it needs to do if SA is to fulfil its promise of being one of the world’s high growth countries. SA has shown that it has the potential to grow and prosper. All it needs is the continued application of policies, such as respect for property rights, which have been shown to play a crucial role in bringing about economic growth.”

Feature Articles – creating a stir

As you know, the Foundation’s website articles, sent to you weekly, are regularly republished by the local and international media. In addition, media articles sometimes quote or mention the FMF or originate from interviews or press releases or are written specifically for the press. The FMF’s directors and economist are also often interviewed on both radio and TV.

In 2008, the FMF appeared in the media over 210 times; in 2009 this increased to 240. Recently republished articles include:

  1. Racially shaped policies will always be a lose-lose game, Temba Nolutshungu, Business Day
  2. One man, one rate: Flat tax the way to go, Jasson Urbach, Pretoria News
  3.     Healthcare costs will increase and continue increasing, Eustace Davie, Moneyweb

Spreading the word…

To date, 2010 has seen Leon address the D-Group on Layman’s guide to the financial crisis; the Microfinance Conference on The impact of financial regulation on microfinance; and our networking lunch, generously hosted by Boehringer Ingelheim, on The financial crisis: Who’s really to blame?

In addition, the South African Chamber of Commerce and Industry (SACCI) invited Leon to join their delegation to a bilateral discussion with the South African Reserve Bank. On the agenda: Monetary policy (including inflation targeting); interest rate stability and investor confidence; exchange rate intervention (SACCI supports free markets); financial stability and emerging risks; economic cycle strategy; and promoting shared economic objectives.

US NHI a blow to South Africa

The FMF continues to express concern about the potential harm to health care delivery to the poor of the implementation of a National Health Insurance scheme based on political rather than economic considerations, a job made considerably harder by the US government’s intervention in US healthcare delivery. See www.healthpolicyunit.org for related articles.

Happy birthday: 1975-2010

The Free Market Foundation was established in 1975 as a counter to the national socialist ideas upon which apartheid was based. Now it faces the challenge of communist / socialist ideas that are fast gaining political ground. Throughout, the Foundation has promoted and continues to promote ideas that bring peace and prosperity wherever they are implemented: the rule of law and economic and civil liberties characterised by personal choice, personal responsibility, voluntary exchange and protection of persons and their property. The Foundation this year celebrates 35 years of promoting economic freedom.

 

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