ANC doesn’t understand economics

In my article Democracy fails to bring development because of the ANC’s disastrous policies I asked if democracy is a prerequisite for human development and economic freedom. In this article I take a retrospective look at South Africa’s economy since 1994.

It’s an article of faith for me, backed by economic evidence, that the ANC government and left don’t understand the western economic system. Yes, the National Democratic Revolution and patronage and populism have distracted them. But I’m convinced SA’s poor economic performance since 1994, while peer nations reaped the commodities and agriculture booms, is because they lack economic nous.

There has been a preponderance of communists and unionists in economic portfolios – Alec Erwin, Rob Davies, Pravin Gordhan, Ebrahim Patel. What do they understand about modern, industrialised economies? (Doctrinaire SACP members may dismiss China, which has a capitalist centre, as a sell-out.)

Except for Chris Liebenberg, not one professional economist or finance specialist occupied the primary economics portfolio – Treasury (see Nhlanhla Nene and Des van Rooyen below). Trevor Manuel and Pravin Gordhan were technicians at best, lacking insight for professional analysis only a specialist can bring to the job.

They’ve had medical doctors in the health minister job – even the late, oft-inebriated Manto Tshabalala-Msimang knew medicine – but no economists in inarguably the most important cabinet post bar the president. Doesn’t the ANC think it deserves it? Perhaps this is a good reason why the country has not performed well economically.

Manuel and Gordhan are not oracles

I don’t understand why business, media and others are so enamoured of SA’s post-1994 finance ministers. They hang onto their every word as if they were the Oracle of Delphi. They are “heroes”, and we should “go down on our knees and thank them” they say.

In fact, Manuel was an engineering technician diplomate from his alma mater, Peninsula Technikon (where I too studied engineering). I’m all for on-the-job training, but the finance minister job requires specialised, technical knowledge. Remember his “amorphous markets” comment that started a run on the rand? After a couple of years in trade and industry he should have known better.

But his comment revealed how naive and unprepared he was for the portfolio. After this I always thought he was a dilettante and poseur. His Xhosa bon mots during his budget speeches were twee and cringe-inducing. His fans in Parliament and media lapped it up, though.

But today he’s considered the Obi-Wan/Yoda of finance. His rare missives from his redoubt in his corporate HQ office are pored over by media cognoscenti like nuggets of gold in the shit that passes for SA’s political economy.

Gordhan is similar. Nhlanhla Nene was not in the job long enough for me to form an opinion, but he appeared to be headed in the right direction before he paid the price. The difference between Nene and the other two, though, is he served an apprenticeship as deputy finance minister, which they didn’t, and he has an economics degree.

Now, before someone says a minister is the political head of a department and has a team of specialists, then why the fuss after “unknown backbencher” Des van Rooyen was appointed in December 2015? He holds two master’s degrees including a master’s in finance specialising in economic policy from the University of London. Academically, he is the most qualified of the Zuma administration’s finance ministers.

Yes, yes, I know all about the Zupta contagion, but that’s not my point. Like Manuel and Gordhan, he too could have learned on the job. In fact, his academic background may have made him a quicker study than they, but we shall never know.

I know there are many things at play in the fields of macroeconomics that determine growth. But growth is a good indicator of the performance/success of a country’s economic policy and its chief financial officer, i.e. finance minister.

Post-1994 growth has averaged 3%, half that of SA’s peer nations’ 5-6%-plus (not including China) for the same period. If we assume 6% is the benchmark for growth, development and job creation – government’s “achievable” target SA should have obtained, at least before the 2008 crash – Manuel and Gordhan performed poorly, far less than 8 or 9 out of 10 the media and DA regularly gave them.

Manuel (and Maria Ramos, an economist, his director-general) gets credit for steering SA out of apartheid’s bankruptcy and through a necessary structural adjustment programme, GEAR. (Typical of government’s confusion, it conflicted with the RDP.)

But numerous points are deducted for approving and defending the arms deal that was the trigger for the subsequent toxic brew of greed and corruption that has doomed the ANC and almost the country with it. Today he is still unrepentant. And his lapdogs quote him as the voice of reason and probity?

Gordhan has muddled along, overseeing public debt that during his tenure from 2009 to 2014 rose from about 30% GDP to 50%. Points are deducted for failing to do what he promised – reduce public spending. Under his watch Nkandla occurred and SAA, SABC and other state enterprises continued their implosion.

He also allowed banks to get away with their cartel-like practice of near usurious charges, another promise he broke. His promised firm hand is all talk. And under his management South Africa is facing possible downgrades.

I wrote before that Gordhan is not our last hero at the bridge, defending us from economic ruin. In my book his score is a lower than Manuel’s, pushing him to mediocre. Somehow his urbaneness and newly acquired status of victimhood (“Leave Gordhan alone!”; “Let me do my job”) has overshadowed and made some forget his failures. It’s only in SA, where mediocrity is a virtue, that he’s considered “excellent”.

As a former accountant myself, albeit for a very small concern, and a lay economics analyst, I think Gordhan (and less so Manuel) has adequate skills for a bookkeeper, but not the tough and ruthless perseverance a chief financial officer must have.

I’m not underestimating the impact of party ideology – the ANC’s obeisance to the Party of the Broad Church and their bible’s commandments, the National Democratic Revolution – on SA’s growth path. The disastrous evidence is before us.

But if Treasury is hostage to ANC ideology, why has its fan club in media and business frequently and loudly proclaimed its “independence must be upheld”? Even I have done so. Independence from what, though?

The economy’s key failures

I don’t know about them, but my view is Treasury must guide the economy to growth, development and prosperity based on sound social democratic and economic principles and not in the manner they have done over the past 20 years. The path has not been pro-growth and development.

In Africa’s Third Liberation Greg Mills and Jeffrey Herbst summarise the SA economy’s key failures:

- Balance of payments problems due to shrinking exports and increasing imports, including industrial technology.

- Low labour productivity despite spending 20% of budget, or 7% GDP, on education. Due to protected industries, from 1990 to 2009 productivity rose only 2% while labour costs almost 6%. Between 2006 and 2009 public sector wages rose 23% compared to 10% in the private sector.

- Government spending is crowding out private investment at a higher rate than comparable developing nations. High public debt is associated with low growth, and acts as a disinvestment to work and savings.

- Investment promotion is constrained by political and economic interests. Included are unions resisting deregulating the labour market and lowering wages (and wanting a minimum wage), leading to the lack of job creation.

- During the commodities boom to 2008, when peer nations reaped the rewards and grew 5% pa and above, SA’s mining output fell 1% pa, and investment in mining shrank just under a third between 2003 and 2005. In 2009 mining output was at its lowest level since 2000.

The result of policy and political failures is a stagnant economy – a “stalled state” – and lack of jobs. Essentially the failures are laid equally at the doors of the president and economic minister of the day.

Economic policy blunders

Here’s a review of some of government’s industrial policy blunders.

I don’t know if it could have been prohibited, but government should have discouraged – we know SA’s corporations are very afraid of defying government – Old Mutual, mining and other companies moving headquarters to London, despite them having no significant operations abroad. This contributed to the loss of confidence in the country as an investment destination and devaluation of the rand. Why should foreign companies invest when South African are leaving? A rookie finance minister’s (Trevor Manuel) mistake many at the time (including me) thought a bad idea.

 Manuel also approved Barclays’ majority stake in Absa, Africa’s largest retail bank. This concentrated the banking sector rather than opening it to competition. (His wife, Maria Ramos, later became group chief executive of Absa.) Similarly, Walmart should not have been permitted to buy a majority stake in Massmart. Now both have regretted their investment, but are having difficulty divesting their shareholding.

On the basis of antitrust principles and encouraging competition, Barclays’ and Walmart’s investments should have been permitted on condition they added diversity, infrastructure and competition and new jobs to their sectors – the bricks and mortar of investment that’s harder to divest, not volatile, “hot” money.

Instead, from Walmart government extracted conditions and R100m for a “supply chain programme to improve competitiveness in the industry”. The programme reveals both government’s fatuousness and ignorance of economics. Both Barclays’ and Walmart’s investments concentrated their industries and diminished competition. But government believes increasing the number of oligarchies improves competition? Has the programme had any impact, or was it simply extortion as I thought it was?

Had Walmart wanted to enter SA it could have acquired – government could have insisted – Massmart’s successful Builder’s Warehouse chain or a similar, promising green field enterprise. Similarly for Barclays, play the long game of building the brand from scratch – like successful, fast growing Capitec – rather than opportunistic, hot money in Absa.

Other blunders include semi-privatising Telkom without another fixed-line operator in place, or Telkom should have been unbundled, and selling Iscor outright to Mittal Steel, which turned both into private monopolies overnight. Once they were privatised both engaged in unrelenting price-gouging causing huge damage to consumers and industry.

It set back access to reasonably priced telecommunications and steel for years and economic growth immeasurably. Fining Telkom and ArcelorMittal years later could not undo the damage. Ironically, ArcelorMittal has now sought government protection from cheap Chinese imports. Allegedly they and government have “learned their lesson”.

Recently director-general of trade and industry Lionel October admitted they were “naive” about Mittal.

I read an honours degree in economics. I could call myself an economist but I’m not. I know enough to read the signposts, though. For the advanced international economics course in 1993 I wrote an essay on competition in oligarchic and monopolistic economies.

Even with some of the technical material above my head, I understood the limitations and dangers to competition and growth in an economy that’s not free. This is standard economic theory, so why did October, whose résumé lists a master’s in economics from University of London, and his political masters, not understand it?

It’s not that they’re naive, which is used as a weak defence. Instead, they don’t appear to understand the functioning of the western economic system and importance of political risk, stable institutions and a free economy on investor confidence. An example is the ANC’s complaints the markets – Manuel’s amorphous markets – “overreacted” to Nene’s firing in 2015. This is unsurprising given they are socialist-trained and leaning apparatchiks who are determined to take SA along the low road of patronage and low growth.

Big business is complicit

I must make something very clear, though. While government deserves most of the responsibility for the state of the economy, it’s convenient in some quarters to blame them for everything that’s gone wrong. But big business and unions must share a portion of the blame.

South Africa’s economy is small and concentrated, and big business extracts as much revenue as they can squeeze from it. While there is nothing wrong with an acceptable rate of return, in SA they are like the commission-seeker or briber who demands a higher and higher percentage – in our case, from already embattled consumers – from transactions (e.g. banks, cell phone networks, etc).

In a speech at the University of Witwatersand on 19 July 2016, the IMF’s David Lipton noted some of the problems that are already known: high barriers to entry for new entrants, which favour existing companies; few retail banks and high bank charges; SA companies have high profit margins, often 50 percent higher than in other countries; barriers to entry, protected industries and labour and protective subsidies harm consumers and competition, and widespread anti-competitive behaviour in industries.

Collective bargaining serves big business’ and unions’ interest and is a big obstacle to small and medium enterprises – traditional job creators – that in turn suppresses competition. And apologists for SA’s big business and their model of almost unfettered capitalism choose to ignore, or excuse, the fact the questionable and rent-seeking black economic empowerment model is their creation.

For 20 years big business made huge profits from a protected, uncompetitive and inefficient economy that was their love-child from a political marriage of convenience with “naive” and complicit ANC. Now that the happy, boom years are over and economy is stagnating at near 0% growth, like a delinquent, estranged spouse, they sit on their cash or invest it abroad, trying to distance themselves from the gunshot wedding and its bastard.

Rather than be active, responsible citizens, as we all should be, and take a united stand against the “toxic combination of disastrous policy, incompetence and corruption that resulted in declining economic outcomes” they helped create, big business cowardly and dishonestly hides behind statements like Christo Wiese’s pretend-ignorance, “As a businessmen rather than a politician, [I] would like to stay out of politics”.

The failures of the past 22 years indicate the government’s, left’s and big business’ lack of understanding of a competitive, free economic system and the requirements essential for growth and development.

It’s a result of the ANC’s socialist-cum-nationalist black empowerment model married to apartheid-era’s over-protected, uncompetitive corporate/industrial model in which the elite benefit – a strange, two-headed beast that, yet, feeds off each other.

This symbiosis, and ANC-business-unions (pro-growth) policy stalemate, is why the IMF’s and others’ repeated warnings for complete structural economic reforms to improve growth and job creation have been ignored. And so, SA’s development decline will continue.