Cyril on a tight-rope: Paradox, not policy certainty the outcome of the ANC conference

Will the honeymoon breathing space of optimism that the worst corruption is over and that more business-friendly policies and better public spending behaviour be utilised or wasted? With new reports of the ANC’s national executive committee setting wheels in motion to recall Zuma as president, it is important to note that acting against Zuma would still not set enterprise friendly policies in place.

South Africa’s post-apartheid ANC policies and strategies dealing with enterprise development have been largely driven by an increasingly unfriendly framework for established businesses as well as an anti-growth premise. In the final gasps of December 2017, the ANC Conference even took unanimously policy positions that makes mockery of Ramaphosa’s utterances of making growth the priority.

The decisions to endorse Zuma’s announcement on free tertiary education and to change the Constitution to enable expropriation without compensation, provide ample proof the ANC doesn’t understand what is required to ensure growth and to step back from the fiscal cliff.

Three of the main causes for the growing anti-business sentiment within the ANC are:

  • The still strong revulsion in the restrictions of apartheid had placed on black entrepreneurship and the conviction that established businesses were beneficiaries of unjustified privileges and should be restrained as much as possible enabling black owned enterprises to step into the gaps. The unanimous decision by the 2017 ANC conference under leadership of Cyril Ramaphosa to pursue land expropriation without compensation, is the latest addition to burden/restrict/punish existing enterprises.
  • The combined genes of populism and Marxism in the DNA of the ANC.
  • Finding scapegoats to avert the attention from the failing policies and the deterioration of services by a bloated and largely ineffective administration.

The arsenal of strategies to achieve a reversal of the enterprise landscape of 1990 had placed transformation by pursuing racially defined targets in the economy at the centre: growth was a mere also-ran participant.  The ANC concentrated on the former, not the latter.  Policies and strategies included (not limited to) the following measures:

  • Equity transfers from existing companies to black share-holders. This resulted in numerous black billionaires (including Patrice Motsepe and his brother in law Cyril Ramaphosa). Most of the top 80 JSE-listed companies engaged in such schemes. In many instances, significant shareholding was given (through a range of instruments that did dilute existing share value) to black South Africans.
  • Most companies introduced black directors.
  • For promotion at middle and senior management levels white males are shackled by an attribute they can do nothing about, whilst at recruitment level they experience racial job reservation.
  • Preferential procurement (BEE points) by Government result in many contracts being awarded not by best value or track record of implementation, but by demographic driven criteria. • Prescriptive procurement favouring black owned enterprises.
  • Charters – like the Mining Charter – that had driven the old mining houses of scale (Anglo and General Mining) as well as industrial giants (SAB) to establish their primary listings in London, New York and Frankfurt and to concentrate on diversifying their business footprint globally as quickly as possible (that is effectively disinvestment).
  • A Labour legislation regime that rendered SA’s low productivity levels more inefficient on the global scale.
  • Discontinuing the public private partnership of the Small Business Development Corporation to establish Government only advisory and financial services (Ntsika and Khula that both performed dismally and were rolled into SEFA and SEDA).
  • Promoting the mass establishment of black-owned businesses.
  • Non-managing the spatial interface between rate-paying formal enterprises and the informal sector (resulting in the decay of property values in many city centres and towns).
  • Land reform and land restitution in the cadastre-defined areas resulting in the majority of commercial farms thus transferred losing their commercial base and leaving the non-cadastre traditional areas to remain commercially unproductive. Now the ANC wants to add the instrument of expropriation without compensation.

The mass establishment of black businesses is a central plank in Ramaphosa’s New Deal that he had announced as part of his leadership campaign. This approach has been tested and tried with minimal effect, also during his stint as Deputy President.

The ANC ignores the available evidence whether creating lots of enterprises have a significant effect on economic growth. The World Bank recently published the latest data on New Business Density (NBD). NBD is viewed as an important indicator of a positive entrepreneurial and enterprise environment. If more enterprises per 1 000 people of working age are formed (according to this logic) it is indicative of a positive enterprise climate and entrepreneurial activity. The Global Entrepreneurship Monitor (GEM) considers a high score on the Total Early-stage Entrepreneurial Activity as a positive indication of entrepreneurial activity. EOSA doesn’t share the view that high enterprise formation is per se an indicator of a positive business climate.

Blog Figure 1 NBD & GDP:Capita 2006-2016

EOSA compared the NBD data on 68 countries for a ten-year period with 2006 as basis. If a sustained annual high NBD would be meaningful for growth, it should result in a higher improvement in GDP per capita than in the case of countries with a lower NBD. Figure 1 indicates that there is no correlation between a higher NBD and an improvement in per capita GDP. (For purposes of graphics EOSA expressed NBD per 10 000 of working age population rather than the standard 1 000).

It is important to note that NBD figures are based on formal businesses incorporated on a limited liability basis. (It therefore excludes the more than 130 000 cooperatives that were also incorporated in this period by the SA Government’s drive to promote cooperatives: an initiative that could qualify as a world record in business incubation failure.

The position of the countries with the three highest peaks in Figure 1 of respectively 517, 251 and 227 new businesses per 10 000 of working age population per annum are ranked in positions 6, 31 and 67. The three countries with the lowest average new business formation per annum for every 10 000 of the population, namely 0.4, 1 and 1.8, are ranked in positions 37, 1 and 14 respectively. There is no correlation.

Where is South Africa in this picture?

South Africa had the third highest number of new limited liability company registrations of the 68 countries with 2.975 million registrations from 2006 to 2016. Only the UK and Russia had a higher total of new company registrations. On the NBD index (for this article expressed as number of new firms per 10 000 of the population of working age) the ten-year average for SA was 81.07 new firms per 10 000 of the working population (in position 15). Of the countries with a comparable NBD-rate, SA fared the worst in terms of the % increase of GDP/capita (Table 1)

Screen Shot 2018-01-04 at 10.17.07 PM.png

It is clear that of these countries with a highly comparable ranking on the NBD index, South Africa’s company formation was (in terms of improving per capita GDP growth) substantially less effective than countries with a similar NBD. This implies that either other factors (policy, governance, trade regimes) are of more importance, or that the companies established in South Africa were far less effective than those in other countries, or a combination thereof.

Looking at the data from another angle, brings an interesting perspective. Comparing the situation of South Africa with 8 African countries (Botswana, Mauritius, Morocco, Namibia, Nigeria, Rwanda, Senegal and Zambia), South Africa had for the decade 2006 to 2016 the lowest rate of improvement in GDP/capita (See Figure 2).

Blog Figure 2 NBD SA 3rd and last in Africa

Where South Africa’s per capita GDP had only increased by 6.37% in the ten years, Rwanda’s per capita GDP has improved by 60.78%: that despite the fact that South Africa’s rate of establishing limited liability companies per 10 000 of the working age population, was 9 times higher than in the case of Rwanda. This can be described to:

  • Either the small number of new firms incorporated in Rwanda were far more economically vibrant and substantially better jet engines for economic growth and poverty reduction, than the newly incorporated firms in South Africa (therefore better entrepreneurs), and/or
  • new firm establishment has far less to do with economic growth than factors like good governance (e.g. effective crime prevention and schools than enable Grades 4s to read) or policy certainty and stability, or ensuring a global competitive environment for businesses…

Another angle yields further perspectives. Three of the nine African countries had a NBD-rate in excess of 80 new firms per 10 000 of the working age population, namely Botswana, Mauritius and South Africa. (The remainder had less than 15 new firms per 10 000 of the working age population.) Of the three with a high NBD-score, South Africa recorded a substantially lower per capita growth rate (6.37%) over the 10-year period compared to 45.44% for Mauritius and 25.5% in the case of Botswana.

This can be ascribed to:

  • The new firms in Botswana and Mauritius are far more growth oriented and successful than the new firms of South Africa (therefore better entrepreneurs), AND/OR
  • Better policy certainty (less foot-chains slammed on firms), good governance (an effective police force, teachers and hospital staff and/or less corruption).

The irony is that the registers of the Mauritius Corporate and Business Registration Department and the Botswana Companies and Intellectual Property Authority confirm that South African citizens are quite active in registering companies there. Some of the surnames of directors in Mauritian companies younger than 10 years are Botha, Basson, Coetzee, De Bruyn, Meyer, Van der Walt: not names that would garner any BEE points in the South African context.

Blog Figure 3 Mauritius Botswana overtakes SA.png

In the services and (small component) manufacturing sectors, white South Africans established companies in Mauritius and Botswana. One can only deduce that they went there because of a more business friendly environment. It is no Van der Merwe joke that South Africa through demographic driven economics has been exporting entrepreneurship and talent that could have contributed locally to economic growth and job creation. Such talents contribute to Botswana and Mauritius outperforming South Africa in per capita GDP with Namibia narrowing the gap steadily.

Back to the policies. Mbeki tried to walk the ideological tightrope between the diverging ideological constituencies of the ANC by simultaneously pursuing transformation (which has drags on company focus and growth) and growth. GEAR and the Accelerated and Shared Growth initiative for SA (ASGISA) were examples of the latter. It appears as if Mbeki had realised that economic transformation with Charters, preferential procurement, racial targets with its implied foot chains slowing growth, had to be balanced with high growth initiatives since the latter, rather than the former, would lead to job creation and poverty alleviation.

That approach by Mbeki triggered the chant of the populist choir directed by Jacob Zuma and his protagonists Julius Malema (Youth League), Zwelinzima Vavi (Cosatu) and Blade Nzimande (SACP) to topple Mbeki at Polokwane. Mbeki (with his attempts to balance the negatives of transformation with GEAR and ASGISA) was criticised for elitism and portrayed as a lackey of white capitalists.

The ANC in Polokwane not only made a deliberate decision to back a deeply flawed candidate as president, it also pursued a policy change that was anti-growth. The much-celebrated milestone of Polokwane against big capital, large business and GEAR became the millstone around the neck of the poor.

Many in the ANC now refer to slow growth as an unintended outcome. That is self-delusionary: slow growth is a direct outcome of numerous policies pursued despite expert advice about the consequences. The advice by Ricardo Hausman as chairperson of the International Panel on the Accelerated and Shared Growth Initiative for South Africa that all should be done to retain the skills of white South Africans, was rejected. Hausman argued that such skills were essential for economic growth and job creation.

The anti-business choir sings the refrain about the market and growth not narrowing the wealth gap. The irony is that by rejecting Hausman’s advice, the ANC killed off (with a double barrel rifle) two approaches that would have resulted in a lower inequality: 

  • The scarcer the skill, the higher the remuneration package. The gap between the highly skilled and the semi-skilled or unskilled therefore increased.
  • Policy and strategy limitations on skilled experienced people within corporations drove them to job opportunities abroad, often establishing very successful businesses there (as demonstrated in Botswana and Mauritius). In similar vein, large corporates established headquarters abroad or secured listings on Australian, European or North American stock exchanges to “diversify” their businesses.

Blog Figure 4 SA cannot attract, retain or cultivate skills.png

South Africa experienced a push-back of poverty for several years during the Mbeki presidency due to his attempts to balance the negative implications of the demographic driven economics.

Ten years ago, the ANC elective conference in Polokwane cut off the ASGISA and GEAR end of the balancing pole and added weight to the demographic driven part of it. No-one in the ANC since 2009 has had the courage to focus on this fundamental flaw in economics. The criticism that did emerge focused on corruption and poor service delivery.

Whilst getting rid of corruption (and in this the recall of Jacob Zuma together with charging him for fraud and corruption will be important indicators) and improving service delivery would improve the economic climate, economic growth that will roll back poverty and unemployment requires a radical revision of prevalent economic policy and strategy.

Ramaphosa’s New Deal talks growth but details shackles. It is in itself a lopsided balancing staff and has all the potential to reinforce the skills flight.

The conference unanimous decisions on free tertiary education and land expropriation will not soothe the rating agencies or inspire investors either. Ramaphosa has to walk the tightrope knowing very well its anchoring is on one side secured by David Mabusa, a man that doesn’t tolerate someone standing in his way. Should something happen to Ramaphosa, Mabusa would automatically become the caretaker leader…

The outcome of the Nasrec-conference is not a commitment to economic growth and freedom that the country so desperately needs: it presents more obstacles. What makes it worse: it appears as if the conference delegates did not even care about the conundrum they had formulated…

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