When a beleaguered president is a blessing (III): There isn’t going to be a better time for reforms 

President Jacob Zuma is the most powerful person in the country not because he is a visionary or a policy wonk. The pursuit of self interests through coalitions is integral to democracy and capitalism. Thus many people become powerful in business and politics through manipulating factions. 

Zuma focuses on behind-the-scenes machinations. Those outside his circle awaken to media reports which rarely reflect sight of the actual to-ing and fro-ing. It is not realistic to expect desperately needed policy reforms in the next two years without Zuma’s support. Conversely, his beleaguered status makes such support quite possible.

Zuma’s factional infighting skills have been honed over seven tumultuous decades. The scenario where Zuma and his patronage machine become vulnerable is if the ANC doesn’t achieve a majority in 2019. The risk of this spiked in August from being extraordinarily unlikely to being simply unlikely.

Such risks are now high enough that Zuma and his cronies are seriously motivated to avoid a downward economic and social spiral. Reducing patronage is necessary, yet it ensures nothing. As is obvious to the credit agencies and the IMF, to grow SA’s economy requires profound policy reforms. The interest of the Zuma clan and those of the taxpayers have suddenly become far more aligned.

Policy shifts could be managed in the absence of Zuma. For instance, the IMF could dictate changes amid an emergency debt restructuring. Such scenarios would be precipitated by a full-blown crisis.

Zuma’s legal pressures could mount to where he is hounded out of office before the 2019 elections. This unlikely outcome would resemble Brazil’s political dramas of the past three years which helped inspire the worst depression in that country’s history. 

Having just ousted its president, Brazil faces prolonged economic floundering amid political paralysis. Over half of Brazil’s lawmakers are under indictment or being investigated. What would follow from removing Zuma?

SA’s non-ANC constituencies must be pragmatic about the ruling party’s factional dynamics. Zuma’s cronies are dominant but they need populist support. Conversely, communist enthused policy making has suddenly become prohibitively expensive. 

Virtually all of the policies the IMF and credit agencies rally against trace to comrades obsessed with redistribution and opposed to competition. Having such people design economic policies distracted attention thus helping Zuma entrenched his patronage machine. 

Given the suddenly real prospect of the ANC being defeated in 2019, Zuma is now seen as being willing to purge policy-designing comrades and to, hesitatingly, rein in cronyism. This, alongside necessarily bold policy shifts, is SA’s best option. 

The extent to which SA’s economic policies preclude a healthy future is difficult to overstate. The comrades routinely disdain the fundamental realities required for economies to prosper in the 21st century. They fixate on redistribution. There are limits to this approach and they have plumbed them.

SA’s most fundamental economic policies are so intellectually convoluted, that they make it difficult for the nation’s business people to think clearly. Ill-conceived policies span: labour laws; property rights; investor protections; BEE; and financial regulations.

The comrades refuse to accept that redistribution without growth is failing everyone - and that this largely reflects their policy influence.

Excessive reliance on commodity demand should have given way to investing in skills and competitiveness. Instead, it was accompanied by over reliance on debt funded consumption by under skilled workers. Thus SA’s growth prospects are now harshly constrained.

If the private sector doesn’t engage Zuma in a pragmatic, solutions-focused dialogue, then a crisis - or long wait - will be necessary to provoke necessary changes. A moderate-sized financial crisis hit two years ago and that opportunity was blundered. Now a slow moving economic and political crisis is gathering momentum and the vague response is mostly to hope Zuma will depart and goodness will prevail.

SA and the world are awash with investment capital. The problem is lack of final demand - more specifically, lack of purchasing power. In SA, this traces to a broad swath of misguided policies.

Domestic consumption will stagnate in 2017, 2018 and beyond because the money that would have funded growth, must service debt. Follow-the-money-analyses show that various policies redirect taxpayer income to fund low-productivity civil servants and other ineffective redistribution initiatives - with much of such monthly flows then cycling to lenders. This is the opposite of creating a virtuous economic cycle.

That SA has developed much expertise at managing credit would be a positive if the country’s broad economic policies facilitated healthy growth; they don’t. When African Bank’s shocking disclosure in mid 2014 heralded insolvency, SA’s policy making comrades reverted to form and conflated market signals with market failures.

Then, as now, the country needed to reduce household debt. Market forces should have been allowed to exert themselves with regulators overseeing an orderly liquidation. This would have been a windfall to lenders active in the low-income lending space. Thus there was an exceptional opportunity to meaningfully ratchet down maximum permissible interest rates and household debt without damaging the banking sector. Rather, African bank was resuscitated.

Foreign investors which had lent to the bank couldn’t believe their luck. To avoid losses to taxpayers, the new African Bank must market loans which undermine household stability.

The comrades imagined systemic banking risks that weren’t there while ignoring, and then exacerbating, grave macroeconomic risks. It will now take many years to undo the widespread damage to transitioning households resulting from African Bank having been rescued. 

That the heads of SA’s banks agreed to such a misinformed set of decisions, at an emergency weekend meeting convened by the central bank’s chief comrade, is indicative of how SA’s executives are not inclined to refuse policy makers. 

The extent to which misguided policies damage the economy is astounding. For example, in the low-income lending space, banning payroll deductions for high cost credit was illogical. It drove costs higher without achieving its objective, constraining the excessive proliferation of such loans. 

As with many of SA’s economic policies, this one should have been rescinded long ago - or turned on its head with nearly all such loans being required to be repaid through payroll deduction, capped by a maximum debt deduction percentage. This would reduce loan losses, collection costs, admin costs, banking fees, and overindebtedness. 

SA’s economic policy making routinely disdains prudence. But more worrying still, African Bank’s rescue showed how SA’s policy makers even undermine the corrective potential of a dramatic crisis. Such public sector interventions give economists anxiety palpitations.

Excessive household debt aggressively erodes upliftment paths. Consider current protests against student loans. Will SA’s youth respond ever more forcefully to the lack of opportunities?

Many grim years could pass before SA has a president as politically well positioned to drive fundamental shifts. Zuma should reshuffle his cabinet to make way for pro-business, pro-growth reformers who will drive necessarily bold policy shifts while overseeing a steady tamping of patronage. 

Zuma should radically alter policies because it suits his interests. Taxpayers should encourage such a move because it suits their interests.

The final essay in this series will sketch paths which would be possible with broad policy reforms.

Shawn Hagedorn is an independent strategy adviser

@shawnhagedorn