Government sabotages growth through property rights uncertainties and ignoring Moody’s warning shots

The heated debate between proponents of property protection and those in favour of  confiscation (expropriation without compensation) has been characterised by a lack of data and waged mainly on ideological and emotional arguments.  The lack of an acceptable factual basis is evident in:

• Government, AgriSA and Afriforum operating with different figures for categorising land ownership according to race;
• The number of farms on the list for the first round of expropriation.  (If there was such a list).
• Uncertainty about the number of recipients of free subsidy houses (where transfer of title has not taken place) and how these properties should be counted.
• Arguments that expropriation would kill the economy simply being countered with promises that the economy would not be harmed.

At the public consultations the facts applied were almost always derived from (and limited to) local situations and narratives with no or little attention to systemic information. EOSA therefore analysed last year’s WEF’s Global Competitiveness Index (as part of our enterprise research on relevant data and statistics) to assess whether there are some global indicators to inform the debate.  Several significant correlations are evident from the WEF data:

• Highly competitive countries have strong protection of property rights.
• High per capita GDP goes hand-in-hand with property rights.
• Poor policing and high cost of crime for businesses are not characteristics of highly competitive countries.

It is important to note that Big Data approaches are less concerned with the question of causality when encountering significant correlations: a strong symbiosis between two factors enables forecasting, if one factor is in decline, the other’s stability will suffer, or vice versa.

Property rights and global competitiveness

For the 137 countries dealt with in the 2017-18 GCI, it is clear that strong protection of property rights fosters a high ranking in global competitiveness.

In 2007-08 31 of the 40 most competitive countries were amongst the 40 with the strongest protection of property rights.

This does not imply strong protection of property rights is directly propelling countries to become globally more  competitive.  It does imply that without strong property protection, a country is unlikely to be in the top league of economic competitive countries. Looking at the clustering of countries around the regression line, the densest fit occurs amongst countries ranked in the top 40 places on both indicators.  For the remainder, the clustering resembles an expanding Milky Way.

South Africa’s decline:

In 2007/8 ranked SA almost made it into the top 40: it was in position 23 on the protection of property rights and in position 42 on the GCI. Ten years later it had slipped to position 56 (dropping 33 places) for the protection of property rights and position 61 on the GCI (dropping 19 places). This was before the embrace by the ANC of Expropriation without Compensation.

Property rights protection and per capita GDP

Protection of property rights is also significantly correlated with per capita GDP.  In 2017-18 the 23 countries with a per capita GDP higher than US $38000 could be found under the 31 countries with the strongest regard for and protection of property rights.

 

The same held in 2007-8:   the 19 countries with a (then) per capita GDP above $30000 could be found under the 30 countries with the best protection for property rights.

South Africa’s decline:

In the 2007-8 GCI South Africa was in position 23 for protection of property rights with a 2005 per capita GDP of $6 126.  By 2017/18 SA has slipped to position 56 in protecting property rights and per capita GDP declined by 15% to $5261.

Strong protection of property rights is essential for attaining a high per capita GDP, just as for being internationally amongst the most competitive.

Crime against business

Protection of property rights deals with fixed and movable assets, patents, copyright and other intellectual property.  Factors playing a role in protection of such property rights involve, in addition to policy and legislation, effective crime prevention, protection of rights and the heeding of court verdicts. The embrace of expropriation without compensation by die ANC with a commitment to change the Constitution, has loosened most wheel nuts.

WEF-data indicate a very strong correlation (r = 0,8571) between efficient policing and a low cost of crime to business.  Unfortunately, South Africa is firmly entrenched as one of the five countries with the highest cost of crime for business and one of the 20 worst police services.

To promote private sector investment and stimulate economic growth in such conditions is a tall order:  it is akin to striving to win the 100m sprint at the Olympic Games in leg-irons. (Read here how high criminality and dismal policing undermine South Africa’s economy)

Warning shots across the bow

Government is tampering with property rights in a so-called pursuit of economic growth and an equitable society.  There is no systemic evidence that that route will foster growth.  The WEF data shows that growth is intricately interwoven with effective policing and the protection of property rights.

One can only wonder why Government is pursuing populist policies during a time the country is hanging on by its fingernails from tumbling into the black hole of a consensus junk status by rating agencies.

In March, Moody’s kept SA’s investment grading a notch above junk, raising prospects from negative to stable. This was based on “the recent change in political leadership appear(ing) to have halted the gradual erosion of the strength of SA’s institutions.” However, Moody’s warned:

• “Significant uncertainties remain… Risks are tilted to the upside. The departmental cuts required to support the increased spending on education announced under the previous Presidency will test policymakers and administrators alike”.
• “the authority and capacity of the incoming administration remains to be tested. The divisions within the ANC present policymakers with conflicting priorities which create policy uncertainty.”
• “It remains uncertain how the government will pursue its objectives regarding land appropriation… or what impact that will have on production and security. How government acts will provide insights into how it plans to balance nearer-term economic objectives (to sustain confidence and promote investment) against longer-term social and economic objectives.”

Moody’s expected quick moves: “South Africa’s ratings would be placed on negative outlook or for downgrade, and eventually downgraded if it were to become clear that government’s commitment or capacity to engineer revived growth and debt stabilisation were to falter… Moody’s would consider government’s success in delivering planned structural reforms in the period between now and the 2019 elections.”

Apart from these three warnings shots by Moody’s across the bow, the IMF in their July 30 statement also warned about the debt of State owned enterprises, a too large public sector wage bill and government “spending more resources but getting weaker outcomes in education and health than other countries that spend less“.

With elections expected in April/May 2019, at least 50% of the window of opportunity granted by Moody’s has closed…   Little of substance has materialised to counter these warnings. In fact:

• Growth is declining, policy uncertainty is growing, and the flames of the devouring furnace of public sector commitments have been fanned with the unquestioning adoption of an off-the-cuff announcement of free tertiary education by a compromised president,  as well as offering the public sector salary increases higher than inflation.
• SOE’s have new boards of directors, are uncovering more and more corruption and unauthorised expenditure and continue to run up losses.
• The State capture saga acts as blinkers preventing a focus on the bottomless pit of ineffective procurement and wastage on services that in many cases add very very little value.

Government undermines economic growth

Is the lack of  focus (remember Ramaphosa’s promise in his New Deal of an unrelented focus on growth?) driven by an attempt to hide its failure in effective policing as well as failures in effective service delivery in education, health, water and sanitation (to name a few) or camouflaging its incapacity to implement effective turnaround strategies? ( Is its track record of one failed initiative after another to improve municipal management (Batho Pele, The Local Government Turnaround Strategy, Project Consolidate, Back to Basics) indicative of an incapacity to implement meaningful reform programs?)

Or is the lack of economic understanding a major constraint? Charles Simkins (Helen Suzman Foundation) recently lamented “there seems to be a lack of clarity about the limits of government relationships with markets” and that “parliament has insufficient economic expertise among its members“.  That holds true for most national departments (apart from Treasury) and a lack of understanding basic economics is even more common in provincial and municipal  bureaucracies.

There is certainly a lack of grasping the tapestry nature of the economy.  EOSA could not find a single comment by Government about the WEF’s finding that SA’s police is one of the most inefficient and that the cost of crime is the fifth worst in the world and how these hamper investment, growth and job creation.  Any serious focus on growth would have involved remedial action to put an end to this abomination.

Had Government channelled the energy that went into creating policy uncertainty around property rights to radically reform the police service by increasing its efficiency, the conditions for growth and investment would have improved.

Government is failing its constitutional obligation right to protect its citizens and their property by running one of the worst police services in the world. It thereby burdens growth, development and job creation and thus makes South Africans poorer with per capita GDP declining by 15% from 2007 to US $5261 in 2017.

When (already in 2016) a Deputy Minister of Finance expected that the country’s top investigative unit was compromised, one can expect with certainty that SA will struggle to maintain its existing rankings on the WEF’s Global Competitiveness Index and the Fraser Institute’s Economic Freedom Index.  Both these are due for release in the next month  –  watch this space.

A data-informed message from Business to Government

There is (as the WEF data shows) sufficient data to demonstrate the importance of strong protection of property rights (including effective policing):

• in order to be internationally competitive,
• for becoming a high-income country, and
• for furthering FDI.

The challenge for the private sector is to engage Government securing a commitment to improve policing at crime prevention levels as well as effective investigative levels. This has to be done through the introduction of a publicly available data-based monitoring system. At police station level the crime chain should be recorded:  from incidents reported/charges laid, effective investigative work, arrests, prosecution, court verdict.

It is time that government becomes accountable to provide services of standard for the taxes that is being paid.

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