Comments by Frans Cronje at the Willard Hotel, Washington DC,– hosted by the Transatlantic Dialogue Program of the Friedrich Naumann Foundation for Freedom, May 7 2015

What South Africa’s rejection of the West means for United States’ interests in Africa

South Africa’s socio-economic problems are well known. Our economic growth rate is well below that of comparable emerging markets – particularly those in Africa. Electricity supply shortages are a crippling constraint on future growth and make it impossible, in the short term, for the country to notch up growth rates above 3% of GDP. But economic growth at twice that rate is necessary to make major inroads into our unemployment crisis.

Half of the country’s young people do not have jobs. Only half of South Africa’s children are likely to complete their schooling, while only 5% will pass mathematics with 50% in their last year of high school. Weak economic performance is putting pressure on government revenues, which means that policies based on state-driven socio-economic advancement are ever less likely to succeed as the fiscal deficit becomes one of the most powerful forces acting on the Government.

Debt levels (that have doubled in a decade) exclude the possibility of aggressive borrowing. Rising and unmet expectations are now driving violent protest levels that have grown by more than 100% over the past decade.

What is not well understood is how and why these very failures are being exploited by a clique of powerful politicians. These individuals have effectively hijacked the policy formulation process in the country so as to derail our democratic transition and place South Africa firmly on the route, first to socialism, and then, to quote from the communist party, which now holds 4/10 Cabinet seats, in time, to “a fully-fledged communist society”.

In 1991 Nelson Mandela returned from Davos convinced that the world had changed and that the Afro-Socialism then espoused by his party needed to be rejected in favor of a new and better economic policy direction. That thinking led first to the toning down of the Reconstruction and Development Programme policy blueprint of 1994 (with its initial calls for nationalization), and thereafter to the Growth, Employment, and Redistribution or GEAR policy in 1996, which then became the mainstay of much of South Africa’s economic policy thinking for the next decade.

Both policies, and GEAR especially, were conservative policies that emphasized the importance of economic growth and fiscal consolidation. The policies saw interest rates more than halve between 1994 and 2007, the debt-to-GDP ratio brought down from 48% to around 25%, and the economic growth rate steadily escalate to average more than 5% of GDP between 2004 and 2007. In 2007 and 2008, the South African government was even able to run small budget surpluses despite vastly increased spending on social welfare. In many macro-economic respects the new African National Congress (ANC) (still South Africa’s ruling party and the party Mandela led) government was doing very well in rebuilding the South African economy.

However, this conservative thrust came under growing pressure from the leftist and communist factions within the party and the broader alliance of which it forms part. Since 1994, the ANC has governed the country in a coalition with the communist party –which has never won a single vote in its own right – and the largest trade union movement, the Congress of South African Trade Unions (Cosatu). Though the Left had been extremely influential in the fight against apartheid rule, Mandela had also become resolute on the importance of South Africa adopting a pragmatic economic policy framework.

He personally drove considerable efforts to reduce the communist influence within his party – a role later also played by his successor, Thabo Mbeki. At the same time, higher growth rates, an expanding tax base, and declining debt levels allowed the State to implement one of the most expansive social welfare systems of any developing economy.

While the IRR has always criticized the dependency that this has bred (many more people now receive welfare than those who work and/or pay tax), we have none the less acknowledged how the broader welfare system, funded through massive wealth redistribution from corporate and individual taxpayers, has improved the living standards of poor people. This is a reality that many on South Africa’s political Left continue to deny.

As a result of declining interest rates, rising consumer spending (which accounts for over 60% of GDP), and the mid-2000s commodities boom, South Africa was by 2007 showing many positive signs. The odds seemed good that its political transition of the 1990s would, despite a range of stumbling blocks, see the country emerge as a middle income society in the model of Western democracy.

This in turn had the potential to set a powerful precedent for the political evolution of scores of African economies. Many of these countries, after years of disastrous performance, were/are now beginning to average growth rates in excess of 6% of GDP. For South Africans, for Africa, and for Western nations alike, the implications of South Africa’s unfolding political and economic evolution were considerable – and generally very positive.

Over the past seven years, however, things have gone very badly wrong. This can be traced back to an ANC national conference at Polokwane in 2007, where communist and leftist factions within the ruling alliance staged a fight back and deposed President Thabo Mbeki – who had been weakened by his serious policy missteps on Aids, Zimbabwe, and a corrupt arms purchase. That policy conference marked the beginning of a purge, and in time the effective isolation, of the ANC’s more pragmatic leaders. Their places have been filled by hardline communists who now wield great influence over economic thinking.

This new leadership has wasted no time in seeking to change South Africa’s policy trajectory. It has sought to undermine and hobble the private sector, isolate the country from Western interests, and erode its democratic institutions. Indeed earlier this year a senior communist leader suggested that South Africa should uncouple itself from the global economy. This new line of leftist policy thinking is what explains the reckless manner in which South Africa has handled the AGOA negotiations here in Washington and why it has seen fit to end bilateral investment treaties with several European countries.

To give you a sense of the current policy environment, here are some of the new policies introduced over the past two to three years:

The Employment Equity Amendment Act of 2013 – an affirmative action law - was brought into effect in August 2014. It threatens employers with massive fines – of up to 10% of annual turnover – for repeatedly failing to meet racial targets at management levels, which the age and skills profiles of black South Africans make it extremely difficult to fulfil.

The Broad-Based Black Economic Empowerment Amendment Act of 2013 makes further changes to an existing statute which seeks to force firms to cede equity and other stakes in their businesses to ‘empowerment partners’ often closely related to the ruling party. The new rules introduce fines of up to 10% of annual turnover, and/or jail terms of up to ten years, for ‘fronting’ or misrepresenting the empowerment status of firms. Fronting is extraordinarily widely defined to include the unintentional undermining of BEE objectives.

New generic codes of good BEE conduct were gazetted by the Department of Trade and Industry (DTI) in October 2013 and make empowerment requirements very much more onerous and difficult to fulfil. This is especially the case for some 30 000 small and medium enterprises with annual turnover of between US$1m and US$5m. These firms are crucial to growth and jobs, and are already finding it difficult to expand in a negative business environment.

A new Mineral and Petroleum Resources Development Amendment Bill, which seeks to impose price and export controls on coal and other minerals was introduced. In echoes of Venezuela it entitled the State to a 20% free carried interest in all new oil exploration and production ventures, as well as a further possible 80% stake at a price the Government is willing to agree. (This Bill is currently being revised, but could come out worse rather than better.)

On the labour front, laws have been amended to restrict the use of casual or atypical jobs, even though these are the only private-sector jobs that have been growing in the past decade.

Property rights are under threat in a host of spheres.

A land claims process has been re-opened under the Restitution of Land Rights Amendment Act of 2014, which came into effect in July 2014. The Government expects close on 400 000 claims to be lodged for privately-held properties within the new five-year window period. These claims could cost R179bn to settle, but the land restitution budget over the next five years is likely to be less than R15bn. The disparity suggests that mass expropriations at much less than market value may be on the cards. 

A new Expropriation Bill has been tabled in Parliament, which allows the State to take ownership and possession of property by notice to the owner – and without first requiring the State to obtain a court order confirming the constitutionality of the proposed expropriation.

Related to these bills is another new law, the Property Valuation Act of 2014, which seeks to give a state official, the new valuer general, the sole power to value all land and accompanying movables that are targeted for land reform. Such land will not be limited to farming land but could include land used for mining, industrial, residential, and other purposes.

The Private Security Industry Regulation Amendment Bill of 2013 will require all foreign-owned security companies – defined widely enough to include companies that merely manufacture or transport security equipment (such as Fedex) – to have 51% South African ownership. This may herald the beginning of broader indigenisation requirements, as in Zimbabwe.

If it is enacted in its initial form, a proposed law, ironically named the Promotion and Protection of Investment Bill of 2013, will allow the State to take virtually any commercial property without having to pay any compensation for it at all. However, in the face of an outcry spearheaded by the IRR, this particularly damaging provision has reportedly been omitted from the most recent version of the Bill, which has yet to be publicly released;

New immigration regulations are on the cards, which will make it much tougher for foreign companies to send executives to SA. However, there is talk that the rules may be relaxed for Chinese investors. 

In 2013 the Government put forward proposals to restrict or terminate patent rights. 

Another government proposal has been put forward to transfer 50% of all commercial farms to long-serving farm workers.

This has been followed by a further proposal: that the Government should set limits on the size of farms and then expropriate any land in excess of these ceilings.

President Jacob Zuma used this year’s State of the Nation address to announce proposed new rules prohibiting foreigners (and foreign-owned companies) from owning agricultural land.

It is a long list but its length and scope makes the point on where current policy thinking is leading.

Though such interventions are clearly proving harmful in practice – just look at our key economic indicators - they still enjoy considerable support among key opinion makers. In our engagements with civil society organisations and journalists, we regularly confront influential people who spend a lot of their time advocating for ways in which the State can exercise even greater control over the lives and futures of individuals, businesses, and other organisations. Perversely, such policy thinking seems likely to become even more entrenched as the economy weakens, because the Left is busy portraying low growth and high unemployment as the inevitable products of the profit-seeking market economy.

The danger is not just in the economic sphere. On the contrary, the adverse consequences of policies that limit economic freedom are already being exploited by populist politicians to drive a resurgent racial and anti-Western nationalism. Increasingly, the demand is that the rights and freedoms set down in the Constitution (dismissed by the Economic Freedom Fighters - a new Leftist party - as an illegitimate ‘elite pact’) must be eroded in order to liberate the poor from oppression. The upshot is that many of our democratic institutions are also under siege.

We have warned at length about the growing political manipulation of institutions ranging from the national prosecuting authority to the police, the revenue service, the national broadcaster, the public protector, and the human rights commission. Even the judiciary is not immune from these pressures. In fact, virtually every democratic institution is being eroded – and especially so where it demands political accountability or investigates corruption and malfeasance.

Privately-owned newspapers, which should be beyond the reach of the State, are now also under threat. A prominent example is that of a leading South African newspaper group, which changed hands in 2014 via one of our ubiquitous “empowerment deals”. This deal, however, involved a significant degree of state financing and was driven by a businessman with strong links to South Africa’s political power brokers. Newspapers within the group have since adopted a less than robust editorial line, while two of its (newly appointed) senior editors recently attended a ruling party event decked out in the party’s colours.

In addition, many other newspapers are heavily dependent on state advertising, which could now be withdrawn from those identified by the Government as too critical and “negative” in their reporting. The risk here is of steadily expanding control by a state hostile to adverse press coverage.

Also worrying is the growing brutality of the State. We have warned against the high number of torture cases being brought against the police. In time, we caution, such methods might be used not only against criminals but also against the Government’s political opponents. Already, there is “chatter” among grassroots activists about the partisan use of the police to suppress demonstrations and other protest actions.

This analysis might seem too strong to some people – and surprise others who remember the promise of the Mandela era. However, not even the sanctity of Parliament was respected when riot police entered the legislature to eject an opposition member who had described President Zuma as “a thief”.

Weeks later, a number of policemen, all of them dressed up as parliamentary stewards rather than wearing their police uniforms, were used to evict an entire opposition party from Parliament, after that party’s members had engaged in aggressive heckling that forced President Zuma to interrupt his State-of-the-Nation address.

Don’t be misled by the South African government’s protestations about its purported commitment to the National Development Plan (NDP) – its latest policy blueprint. For the communists in the Cabinet the plan is little more than a smokescreen concealing their true agenda.

Based on our 85 years of experience in South Africa, we doubt that there will be a comprehensive and overt move to drive the country into socialism overnight. The big-bang approach will not be used. Instead, we will see a cumulative and persistent white-anting of constitutional protections for property and other rights, while state ownership and control of land and other assets will steadily expand.

As in the past, this white-anting will often be undertaken under the guise of ‘racial transformation’ or ‘empowerment’. The Left in the ANC will continue to pursue this path, secure in the knowledge that very few analysts, business leaders, or even opposition politicians will have the courage to question the Government’s motives when to do so would expose themselves to the charge of ‘resisting racial transformation’.

Such is the power of political correctness over South Africa that most commentators either fail to see - or are unwilling to acknowledge - how the politics of race is used to silence dissent and therefore the search for the policy alternatives that could arrest South Africa’s decline. The Left then draws further strength from the continued decline placing South Africa in a dangerous downward spiral.

The Economist newspaper was well ahead of its South African peers last year when it demonstrated its understanding of the growing threat in an article headed, “Why Invest?” This article quoted extensively from IRR research in warning that the ANC was “moving quickly to adopt laws and policies that weakened property rights, reduced private sector autonomy, threatened business with draconian penalties, and undermined investor confidence”.

If we are to turn the tide in South Africa, it is first and foremost important to shift public opinion away from dirigisme and towards the economic freedom vital to investment, growth, and jobs. Calls for investment-friendly migration, energy, education, and other policies are unlikely to have much impact as long as public opinion endorses the view that a State-directed economy will deliver better results than one driven by market principles and the private sector. We must also keep showing that economic and political freedoms are two sides of the same coin. Given the essential link between the two, the diminution of economic freedom, now well in train, will in time also reduce the political freedom secured in 1994.

Should this matter in Washington? I have no doubt that it will – and that China’s and Russia’s fingerprints are all over the change of policy direction in South Africa since 2007. Africa is also on the ascendency. Its arable land, oil reserves, minerals, consumer markets, and new importance in the war on terror mean that its geostrategic importance has never been greater. Yet it is precisely at this critical juncture that Western interests are being frozen out of South Africa.

This is fundamentally changing the precedent that would otherwise have been set – and which would have been so influential in shaping the political and economic evolution of an increasing number of high-growth economies in Africa. The economic, strategic, and security costs will be immense if Western geo-political influence wanes just as Africa rises and in time this will be judged as a serious failure of diplomacy and of United States’ policy on Africa. Fortunately, while it is now late in the day, it is not too late for determined strategic efforts to halt and reverse the decline.

Any policy to ensure such a reversal must rest on two sources of support:

First, many in the Government and the ANC are themselves becoming uncomfortable with the expanding power of the communists in their midst. Have no doubt that there are reformers in the Government, the ANC, and the civil service - not to mention the opposition - who are horrified at South Africa’s current trajectory and the harm that has been done to relations with the United States.

The reformers must be supported through a fresh policy of constructive engagement aimed at building a climate of ideas sympathetic to policy reform. They are friends and allies but diplomatic efforts have done little to reach out to them or strengthen ties with them – this is of course a long term play. In the short term extend AGOA in order not to allow South Africa’s communists to turn you against our country - which would, at this stage, be to play into their hands.

Second, South Africa’s people want to be free. They want both the political and economic freedoms that the 1994 transition brought within their grasp. When they realize the extent to which their hopes have been betrayed, they will enormously regret the future they are now – mostly naively and unwittingly – hurtling towards.

Frans Cronje heads the IRR, a South African think-tank