Lawlessness in South Africa threatens economic growth
The Financial Action Task Force, an international body that assesses money laundering and terrorist financing, warned South Africa earlier this year of the need to introduce stricter controls; and while some action has been taken, not enough has been done. The consequence is that international banks will have to be much more careful in doing business with South Africa, as it will be on a list that includes pariahs like Syria, Haiti and Yemen. Economists define rent-seeking as the gaining of wealth without any contribution to reciprocal wealth creation, a widespread practice in South Africa, ranging from bribery and lobbying the government for special favors to outright extortion – pay us or we will damage you or your business to gain an advantage. Reversing decades of rising crime rates is the key to growth. And while big reform is needed to tackle bureaucracy, unemployment, and failing state-owned enterprises, much better security and law enforcement are essential to ensure growth. Article republished with kind permission from The Daily Friend. –Sandra Laurence
South Africa’s Scam Economy
By Jonathan Katzenellenbogen*
There is a growing part of the economy that is often criminal, sometimes out in the open. It is nothing but a burden and does not contribute to productivity and growth. It is a fraudulent economy of rent seeking, crime and extortion.
Most consumers, taxpayers and many small businesses live in this fraudulent economy. Bidders, sections of the civil service, overpaid politicians, many large corporations, and a large number of consultants and parasites are all part of the fraudulent rent-seeking system. Then there are the syndicates stealing manhole covers and cables, and the gangs threatening legitimate businesses.
It’s nothing new, but we are paying an increasing price for this burden as we struggle to grow. Political leadership on these issues would give a big boost to the fight against waste and crime, as would faster economic growth. But we seem to be trapped, due to a seemingly indifferent government, and the broad interests at stake that perpetuate the status quo.
For many years we have paid the price for poor security for sacrificed investments, but now the country is being threatened with a “grey listing” by the Financial Action Task Force (FATF). It is an international organization that assesses the controls exercised by countries on money laundering and the financing of terrorism. Earlier this year, South Africa was warned of the need to introduce stricter controls, and although some measures have been taken, they have not been taken enough. The consequences are that international banks will have to be much more careful when doing business with South Africa, as we will be on a list that includes pariahs like Syria, Haiti and Yemen.
Economists define rent-seeking as enrichment without any contribution to the reciprocal creation of wealth. This includes bribery and lobbying the government for special favors. There are a lot of rent-seeking activities. Bain’s advice to the SA Revenue Service destroyed value by weakening the institution. Extortion is quite simple – pay us or we will harm you or your business so that we can gain an advantage – but it can also be rent seeking. Trucks and buses are attacked to gain roads or to secure gains – an easy form of economic rent. Then there is the corruption, which continues even without the Guptas in the country.
All of this leads to gross misallocation of resources, waste and unfair advantage for some.
If there were an index of rent seeking, criminality and extortion, it would be high and growing in the case of South Africa. It is not just low investment that is holding back productivity and growth, it is also poor governance that fails to tackle crime and leads to waste. Because the police cannot be relied upon, South African companies must invest heavily in their own security, which has the effect of increasing costs and reducing productivity.
Reversing decades of rising crime rates will be key to our growth. As much as big reform is needed to tackle red tape, unemployment and failing state-owned enterprises, we also need much better security and law enforcement to ensure growth. And growth itself, by creating more opportunity and competition, could help reduce the damage caused by the scam element.
In virtually every area of the economy, we experience rent extraction. We get little for what we pay for in education, health and safety. Trucking and bus companies face attacks on their vehicles by organized gangs. The construction industry regularly faces demands for payments to evict troublemakers. The ANC builds its support and loyalty based on its ability to provide sweeteners such as contracts and social grants to its supporters. Executives are able to seek rent through deployment in the civil service.
Black empowerment can also be another form of rent-seeking behavior. Early recipients were able to pay for their mega stakes in South African companies with corporate cash flow. Besides broadening the racial base of ownership, the broader economic benefits are questionable. Changing ownership by itself rarely leads to greater value. It would have been much better to invest heavily in education, training, mentorship and credit for start-ups as the main route to empowerment ownership.
One form of rent for black executives and businesses is the benefits they derive from government contracts. There are now pressures to increase public procurement “reserved” for previously disadvantaged groups by another 30%. According to fin24, the KwaZulu-Natal ANC wants to increase to 96% the share of public contracts reserved for previously disadvantaged groups. The economic rent from reserved supply often arises from the additional markup these suppliers tend to charge, since they are often not the original suppliers of an item.
Most key industries have been run for years by oligopolies – a few dominant players. This is the case of banking, cement, steel and grinding. The more concentrated an industry, the more likely players are to extract consumer rents and gain price protection. Steel producer ArcelorMittal is protected by tariffs that allow it to have an import parity selling price – the landed cost of imported steel.
No public infrastructure with moving parts seems safe. Recent photographs of train stations in parts of Gauteng show torn train tracks and gutted buildings, all from looting.
The police have announced their intention to create a specialized economic infrastructure unit to investigate the theft of cables and manhole covers. Whether this signals a new high-level political commitment to tackling crime is an open question. The scale of public infrastructure theft is now so severe that it must jeopardize prospects for economic growth.
For years, mafias demanding up to 30% of the contract price for projects have plagued the construction industry. Due to the inability of law enforcement to deal with the problem, mafias have taken root and often turn into “business forums” with an air of legitimacy. The intimidation and violence of these groups has cost lives, driven up the cost of projects and delayed construction.
Violent bullying has spread to other industries. For some time, trucks have been attacked and set on fire intermittently along the N3. Last year, an Intercape driver was shot dead in one of 60 attacks on the company’s buses. In a Sunday time report over the weekend, Intercape CEO Johann Ferreira blamed the taxi industry. Violence between rival taxi groups competing for routes peaked in the 1990s, and it has never fully diminished. Effective law enforcement is the solution, but it is missing.
The final word on our descent into the scam economy should go to Ferreira of Intercape.
“As far as taxi violence is concerned, we seem to be in a broken state where anarchy and lawlessness reign,” he told the Sunday Times. “This is outright anarchy, and unless it is stopped and dealt with decisively, our country is on the path to self-destruction.”
The writer’s opinion is not necessarily that of the Daily Friend or the IRR.
- Jonathan Katzenellenbogen is a freelance financial journalist based in Johannesburg. His articles have been published on DefenseWeb, Politicsweb, as well as in a number of foreign publications. Jonathan has also worked on Business Day and as a reporter and newsreader on television and radio.
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