The Financial Action Task Force, an international organization tasked with assessing money laundering and terrorist financing, warned South Africa earlier this year of the need for tougher controls; and although some measures have been taken, not enough has been done. The implication is that international banks will have to be much more cautious in doing business with South Africa, as it will be on a list that includes rogue states like Syria, Haiti and Yemen. Economists define rent-seeking as the acquisition of wealth without any contribution to mutual wealth creation, a practice common in South Africa ranging from bribing and lobbying the government for special favors to outright extortion – pay us or we will harm you or your business to gain an advantage . Reversing decades of rising crime is key to growth. And as much as major reform is needed to address red tape, unemployment and the collapse of state-owned enterprises, better security and law enforcement are vital to ensuring growth. Article republished courtesy of the Daily Friend. – Sandra Lawrence
The Tomb Economy of South Africa
The share of the economy, which is often criminal, sometimes open, is growing. It is nothing but a burden and not conducive to productivity and growth. It is a predatory economy of rent, crime and extortion.
Most consumers, taxpayers, and many small businesses live in this stealth economy. Bidders, civil servants, overpaid politicians, many large companies, and vast numbers of consultants and supporters are all part of a predatory rent-seeking system. Then there are syndicates that steal hatches and cables, and gangs that threaten legitimate businesses.
This is not new, but we are paying an increasing price for this burden as we struggle to grow. Political leadership in solving these problems would give a big boost to the fight against waste and crime, as would faster economic growth. But we seem to be trapped by an apparently indifferent government and the broad interests at stake that maintain the status quo.
Over the years, we have paid the price for poor security in lost investments, but now the country is facing the threat of being blacklisted by the Financial Action Task Force (FATF). It is an international body that assesses countries’ money laundering and terrorist financing controls. South Africa was warned earlier this year that tighter controls were needed, and while some measures have been taken, not enough has been done. The implications are that international banks will have to be much more cautious about doing business with South Africa as we end up on the rogue list like Syria, Haiti and Yemen.
Economists define rent-seeking as the extraction of wealth without any contribution to the creation of mutual wealth. This includes bribing and lobbying the government for special favors. There are a lot of rent-seeking activities. Bain’s consultation with the SA Revenue Service destroyed value, weakening the institution. Extortion is pretty simple: pay us or we will harm you or your business to gain an advantage, but it can also be rent seeking. Trucks and buses are attacked to get routes or get paid – an easy form of economic rent. Next comes bribery, which continues even without the Guptas in the country.
All this leads to a gross misallocation of resources, waste and an unfair advantage for some.
If there was an index of rent seeking, crime and extortion, it would be high and rising in the case of South Africa. It is not only low investment that hinders productivity and growth, but also poor governance that fails to deal with crime and leads to waste. Because the police service cannot be relied upon, South African companies must invest heavily in their own security, which increases costs and reduces productivity.
Reversing decades of rising crime will be key to our growth. As much as major reform is needed to address red tape, unemployment and the collapse of state-owned enterprises, we also need much better security and law enforcement to ensure growth. And growth itself, by creating more opportunities and competition, can help reduce the damage caused by the element of theft.
In almost all areas of the economy, we suffer from rent extraction. We get little for what we pay for in education, health and safety. Truck and bus companies face attacks on their vehicles by organized gangs. The construction industry is regularly faced with demands for payment to get offenders to go away. The ANC builds support and loyalty based on its ability to deliver sweeteners such as contracts and social grants to its supporters. Cadres can earn rent through public service placement.
Black empowerment may also be another form of rent-seeking behavior. Early beneficiaries were able to pay for their mega stakes in corporate South African companies with cash flows from the business. Beyond the broadening of the racial basis of ownership, the broader economic benefits are debatable. A change of ownership rarely increases value by itself. It would be much better to invest heavily in education, training, mentoring and loans for start-ups as a primary route to ownership empowerment.
One of the forms of rent for personnel and black business is benefits for them from state purchases. There is now pressure to further increase public procurement “set aside” for previously disadvantaged groups from 30%. According to fin24, the ANC in KwaZulu-Natal wants to increase the proportion of government procurement earmarked for previously disadvantaged groups to 96%. The economic rent from reserve purchases often arises from the additional margin these suppliers tend to charge because they are often not the original supplier of the product.
Most key industries have been run by oligopolies – a few dominant players – for years. This applies to banking, cement, steel and milling. The more concentrated the industry, the more likely players are to receive rents from consumers and benefit from tariff protection. Steel producer ArcelorMittal is protected by tariffs that allow it to sell at import parity – the price of imported steel.
No public infrastructure with moving parts seems safe. Recent photos of train stations in parts of Gauteng show torn railway tracks and destroyed buildings, all due to looting.
Police have said they intend to set up a specialist economic infrastructure unit to investigate the theft of cables and hatches. Whether this signals a renewed high-level political commitment to fighting crime remains an open question. The scale of the theft of public infrastructure is now so serious that it must worsen the prospects for economic growth.
For years, mafias demanding up to 30% of the contract price of projects have plagued the construction industry. Due to the inability of law enforcement agencies to deal with the problem, mafias have taken root and often turn into “business forums” with the appearance of legitimacy. Intimidation and violence by these groups have cost lives, increased the cost of projects and delayed construction.
Violent intimidation has spread to other industries. For some time along the N3, trucks were periodically attacked and burned. Last year, an Intercape driver was shot dead in one of 60 attacks on the company’s buses. U Sunday Times Over the weekend, Intercape CEO Johann Ferreira blamed the taxi industry. Violence between rival taxi gangs competing for routes peaked in the 1990s and has never fully subsided. Effective enforcement is the solution, but there is none.
Intercape’s Ferreira should have the final word on our descent into a stealth economy.
“When it comes to taxi violence, we seem to be in a failed state of lawlessness and anarchy,” he said. Sunday Times. “This is anarchy, plain and simple, and unless it is stopped and dealt with decisively, our country is on a path to self-destruction.”
The opinion of the writer does not necessarily reflect that of the Daily Friend or the IRR.
- Jonathan Katzenelenbogen is a freelance financial journalist based in Johannesburg. His articles have appeared on DefenceWeb, Politicsweb, and a number of foreign publications. Jonathan also worked for Business Day as a TV and radio reporter and newsreader.
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