Category Archives: Politics

Why Julius Malema’s EFF doesn’t offer South Africans a way out of poverty

In “Why Nations Fail: The Origins of Power, Prosperity, and Poverty”, economist Daron Acemoglu and political scientist James A Robinson argue compellingly that the key to economic growth and prosperity lies in strong and inclusive institutions.

Inclusive economic institutions, such as those in South Korea and the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and enable individuals to make the choices they wish. To be inclusive economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it must also permit the entry of new businesses and allow people to choose their careers.

The authors go on to say: “Secure property rights are central, since only those with such rights will be willing to invest and increase productivity.”

In the same way that inclusive institutions spur economic growth and prosperity, extractive institutions that “are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity” doom a country to perpetual poverty.

Understandable anger about the excessive inequality in South Africa lies at the heart of the rise of Economic Freedom Fighters (EFF). The party is the most successful of the three splinters from the governing African National Congress (ANC) since 1994. The others are the United Democratic Movement and the Congress of the People. The EFF made headway by engaging in aggressive rhetoric and proclaiming an African socialist revolution.

The problem is not that the EFF’s analysis of South Africa’s problems is completely inaccurate – the party has a valid point about the necessity of free education, for example. The problem is how the EFF wants to address these issues and where it gets its economic policies from.

The manifesto

In its founding manifesto the party outlines seven “nonnegotiable cardinal pillars”, which include building state capacity, the nationalisation of strategic sectors of the economy and the expropriation of land without compensation.

The EFF’s local government election manifesto spells out this vision in more detail. Its manifesto is a combination of lavish promises and magical thinking with regard to basic economic concepts.

But first and foremost, the party’s manifesto is a continued attack on South Africa’s economic institutions. Among other things, the EFF wants to abolish the tender system that is used, for example, to determine who can build a road at the lowest cost.

Doing so would diminish competition among businesses. Rather, the EFF wants to directly employ residents to do the same job, thus creating the same patronage network it criticises in the ANC. How this should lead to less corruption remains a mystery.

Another aspect of the election manifesto is even more worrying. The EFF writes that

A minimum of 50% of basic food items and goods would have to be produced within a municipality. A minimum of 40% of all investments in its jurisdictions should be owned and controlled by community trusts or invest a minimum of 40% of their profits in the municipality.

The party envisions nothing less than a society where municipalities are organised in chiefdoms rather than being part of a modern nation state.

The Venezuela option

In a eulogy after the death of former Venezuelan president and fellow commander-in-chief, Hugo Chavez in 2013, Malema praises the comrade following his visit to Venezuela in 2010 where he studied the country’s nationalisation programme:

Chavez was able to lead Venezuela into an era where the wealth of Venezuela, particularly oil was returned to the ownership of the people as a whole.

Venezuela has some of the world’s largest proven oil reserves that, in conjunction with a tenfold increase in crude oil prices between 1998 and 2008, enabled Chavez to enact a series of populist socialist policies.

But when the oil price started to fall in 2014, the party in Venezuela was, quite literally, over.

On April 29 Empresas Polar, the country’s largest producer of beer, stopped producing because it ran out of barley. This is only the latest in a long list of shortages that includes basic necessities, such as baby food and toilet paper. Things have turned so badly that three meals a day have become a luxury many people can no longer afford.

The reason for this shortage is that many international firms suffered billion-dollar losses and abandoned their operations.

Russ Dallen, head of investment bank Latinvest, summarised the situation in Venezuela in grim words:

The worst shortage is of medicine and medical equipment. To be sick in Venezuela right now is a death sentence.

The EFF is trying to follow the Venezuelan model by heavily promotingthe nationalisation of “minerals, metals, banks, energy production and telecommunications” as its core economic agenda.

Even if nationalisation along the lines of the EFF document were legally possible – and it is not – the numbers simply do not add up. Primary mineral exports contribute about 30% of South Africa’s total merchandise exports. This is well below the 95% oil contributes to Venezuela’s exports. And it is less than clear that any state-owned entity will turn profits. Take power utility Eskom, for example, which would be insolvent without government bailouts, or national carrier SAA, which is currently in need of yet another guarantee from the National Treasury. Nationalisation will not be enough to finance the EFF’s lavish promises.

Reservoir of resentment

What the EFF is trying to do is tap into a reservoir of accumulated apartheid injustice. Freelance journalist Louise Ferreira summarisedaptly:

White prosperity was built on the oppression and dehumanisation of black bodies.

The scars of the apartheid regime’s crimes, in particular of the forced resettlement of millions of people, are still visible today. In 1994 the ANC set out to redistribute 30% of farmland to black farmers by the end of 2014, but only 5% of land has actually been transferred.

This lack of transformation is what makes the EFF attractive to so many. Early on, Malema picked up on the discontent South Africans had begun to feel towards democracy.

He was recently quoted saying that “white monopoly capital has stolen our land,” and one of the EFF’s key promises is that, similar to Zimbabwe, it will expropriate land without compensation.

Malema has never made a secret of his man-crush on Zimbabwe’s ruthless dictator Robert Mugabe:

There’s no system that has worked successfully for Africans, except the Zimbabwean system. The Zimbabweans today can be hungry and poor, but at least they own property.

What he fails to understand, however, is that without capital, and in particular foreign capital, the only thing people can do with their land is subsistence farming that will offer neither them, nor their children, a way out of poverty.

The EFF’s entire economic policy, it seems, consists of weakening the very institutions that economists have identified as key drivers of economic growth.

But without inclusive institutions, South Africa will be turned into a kleptocracy akin to countries like Venezuela and Zimbabwe.

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Zuma Shows Himself the Door

Mayhem is the only word that can describe Sunday’s shock reversal of the appointment of almost-minister of finance Desmond van Rooyen. Markets will undoubtedly welcome the move to a well-known and trusted minister of finance and the Rand already jumped for joy in the minutes following President Zuma’s announcement. As much as the nomination of Pravin Gordhan is to be welcomed, it poses a number of serious questions about President Zuma’s fitness for office.

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In his statement the President writes that he has “received many representations to reconsider my decision. As a democratic government, we emphasise the importance of listening to the people and to respond to their views”, and without doubt the President will have had many representations to reconsider his decision. All he had to do was open any given South African newspaper, or read a random story on South Africa in any international newspaper. The voices were loud, clear, and unison: the dismissal of finance minister Nene was a colossal mistake. But if the President indeed cared about public opinion, as he declares in his statement, he would reverse a number of other positions as well, starting with the luxury upgrades to his private home in Nkandla or his fancy VIP jet.

The next couple of days might unveil the deeper reasons and power shifts within the ANC that lead to this shocking plot twist. But even at this early stage four points can safely be concluded.

First, and foremost, the President has lost control of his administration. Either he was ill advised before his announcement, assuming he asked anyone for advise at all. In this case he chose his advisers miserably. Or he simply ignored the advise of those around him, in which case he holds them in so low esteem that he would go against their advise on a key issue like the Treasury. Or he is easily swayed by public opinion and rectified his mistake as soon as the public outcry reached the Union Buildings. Any of the three cases is bad and shows a lack of leadership.

Second, the President has lost control of his party and will be a lame duck from now on. Usually the term “lame duck” refers to a President in the last year of his presidency. Some commentators said US President Barack Obama was a lame duck, at least until he managed to engineer a path-breaking nuclear deal with Iran and helped put together the historic Paris Agreement on climate change last week. And while President Obama shows that not all outgoing presidents need to be lame ducks, President Zuma shows that you can become a lame duck even with plenty of time on your presidential watch. The back and forth on the key Cabinet position leaves Zuma a toothless tiger. His second-sharpest weapon as President, the nomination and redeployment of Cabinet members was taken away, leaving him with only his sharpest weapon: helping his cronies to gain positions of power within government and at parastatals such as SAA and Eskom. But if his sharpest weapon were enough to keep his party in check, Desmond van Rooyen would still be the minister of finance on Monday.

Third, the Government put the South African economy in a most vulnerable position. With our glaring current account deficit, we strongly depend on the goodwill of international investors. Without their capital flows our currency plummets, the price of imports, including oil, goes up, the risk of inflation increases, and the Reserve Bank is forced to raise interest rates, curtailing lackluster economic growth even further. We have seen all this in the past couple of months already. The other side of the coin is the fiscal side. With the increase in government debt, South Africa depends on favorable ratings and benevolent investors. Neither the current account deficit nor the increasing public debt levels are necessarily bad. But if debt levels are growing because of wasteful government spending, including subsidizing incompetent management of state-owned entities and using social grants as an easy way to buy votes in rural areas, investors start getting very cautious. And this, sadly, is the path our economy is currently on.

Fourth, the removal of finance minister Nhlanhla Nene was an attack on one of South Africa’s foremost institutions. It is unlikely that Sunday’s reversal means the attack has been stopped. The ludicrous ‘project spiderweb’ documents circulating the Internet, the farce that was Hlaudi Motsoeneng’s disciplinary hearing, and the many small and large attacks on the public protector, Thuli Madonsela, speak a very clear and nasty language.

The #ZumaMustFall movement is now gathering momentum and the first marches are already organized. An online petition quickly gathered more than 100,000 votes and it is very unlikely that the re-installment of Pravin Gordhan will put the minds of South Africans at ease.

Neither should it, because it is nothing but a red herring. What this week has shown is that President Jacob Zuma is no longer fit for office. He has shown that he lacks a number of important ingredients a President needs to have in order lead a country: Good judgment, foresight, and economic finesse. Many of these shortcomings were known for years. What this week has added, however, is another key ingredient a President needs: Power.

President Zuma has shown himself to the door. Now he is standing there, unsure what to do next. It is time for South Africans to come together and give an old man a helping hand to safely make it across.

Zuma’s Haphazard Move Sign of Deeper Malaise

(Appeared on BDLive on 10 December 2015) The sacking of finance minister Nhlanhla Nene less than a week after the Treasury’s refusal to rubber-stamp the controversial restructuring of a deal between SAA and European aircraft manufacturer Airbus not only sent the Rand plummeting. It shows how little the President regards formerly sacrosanct South African institutions like the Treasury, and how little he understands of the economy. If there is one thing that international investors dislike, it is policy uncertainty. The Treasury has a reputation for being amongst South Africa’s finest institutions. It needs this reputation in order to manage market expectations credibly and to steer the South African economy successfully.

With his decision to oust finance minister Nene, President Zuma put the Treasury’s hard-earned reputation at risk.

Not because the new finance minister David VanRooyen has by no means the same experience that his predecessor had. But because it is apparent that Nene’s removal was driven by petty politics and nothing else.

Under normal circumstances a power struggle between the minister of finance and the chairperson of a government owned parastatal would be a fairly dull affair resulting in a new chairperson for the parastatal. Not so in South Africa. Here, an incompetent but politically well connected chairperson can welcome a new minister of finance into office.

Unfortunately, the haphazard move to replace the minister is no isolated incident, but part of a pattern. It is the pattern of a President who puts himself and a select group of cronies over his people and his country. It is the pattern of a President who builds himself a 247 million Rand home when so many have to live in shacks and who wants to buy a 2 billion Rand VIP jet when the countries’ students take to the streets because government has been starving the universities and students cannot pick the bill up any longer. When President Zuma says “ANC first” what he really means is “My ANC first”.

The Airbus deal SAA chairperson Dudu Myeni proposes would put SAA at an acute risk of default. And, thanks to the generous government guarantees, put taxpayers at an acute risk of having to bail them out. Such a risk might be worth taking and in an open and transparent process taxpayers could form an opinion about whether they really want to shoulder this risk. But the Airbus deal is by no means open and transparent. Much of the details that are known are only known because of the tireless efforts of investigative journalists. The whole deal smells. And smells really bad. It smells as if someone would privately benefit from an agreement that puts taxpayers at risk.

But SAA is not the only thing that stinks up the presidential rose bushes. Of even greater concern is South Africa’s nuclear bid. The President pushes South Africa silently and in secret towards a massive nuclear program with unforeseeable consequences for our environment and our economy. The details about whether or not nuclear is the cheapest options are rather gory, but there are excellent reasons to believe that a country drenched in sunshine but with an outdated power grid will be much better off with decentralized energy from solar power. However, the real worry about the nuclear program is the secrecy it is shrouded in. Where is the public consultation process? Where is the debate within our society whether we really want to produce toxic waste that will pollute the earth for Millennia? Where are the scientific studies that would inform such a debate? Minister Nene reportedly “dragged his feet” with regards to the nuclear program which might well have exacerbated President Zuma’s decision to replace him.

South Africa is in a precarious situation. Political capture of key state institutions including Treasury, the Reserve Bank, and the judical system, are arguably amongst the biggest risks looming on the horizon. The good thing about this situation is that there are remedies. Governments need checks and balances, and the most powerful of these is the risk of losing power, either to the opposition as part of a coalition. Markets would certainly be grateful if South Africans remember this lesson during the next elections.