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Home  »  Banker SA   »   A Realistic View Of South African Democracy EDITION 09 2014

A Realistic View Of South African Democracy

By Chris Hart, commentator on economic issues & Chief Strategist at Investment Solutions

Twenty years following the first fully democratic election in South Africa, the country finds itself at an inflection point.
Chris Hart. Picture: Robert Tshabalala for Financial Mail Chris Hart. Picture: Robert Tshabalala for Financial Mail
EDITION 09 2014
Issue / Number
EDITION 09 2014

While substantial progress has been made to.reduce poverty and improve standards, it is quite clear that more progress is required. However, getting to this point has .been an achievement for South Africa.

The birth of the South African democracy was the result of a successful transition. The position of the Apartheid government had become increasingly untenable as the decade of the 1980s progressed. Earlier, the National Party had attempted a half-baked reform by introducing a tricameral parliament, which included the coloured and Indian population groups but excluded the black majority. This was unacceptable both within South Africa and also with the international community. The isolation intensified after the Rubicon speech by President PW Botha; reforms ground to a halt, South Africa was forced into a default and a number of states of emergency were declared as unrest escalated. The economy was also sapped through the border war being fought in South West Africa (now Namibia) at the time. President PW Botha suffered a stroke and was eventually replaced by the more reform-minded FW de Klerk. He unbanned the ANC and had Nelson Mandela released. Negotiations for a transition were initiated but this proved to be a difficult period. The CODESA (Convention for a Democratic South Africa) negotiations broke down initially and had to be restarted. CODESA2 also broke down, but an interim constitution was eventually agreed upon, paving the way for the 1994 elections. A landslide by the ANC won this election and a democracy was born under a government of national unity. Twenty years down the line, South Africa finds itself largely at peace. This was not an obvious outcome, given that the country was already experiencing a low-level civil war in the late 1980s and early 1990s. Even the legitimacy of the 1994 elections was at risk, with some key parties (mainly the Inkatha Freedom Party) planning to boycott the elections. Last-minute negotiations secured their participation.

The new order quickly became widely accepted. The full spectrum of both extreme left and right wings were operating within the system, using the courts and also participating in elections. This was an important early development in the transition from the oppression of Apartheid to the freedom of the new democracy. The constitutional framework negotiated in the run-up to the 1994 election was a key success factor. The establishment of strong and credible institutions meant that a constitutional democracy was established in South Africa. Some of the key institutions that were established included the offices of the Public Protector, the National Prosecuting Authority, the Independent Electoral Commission, the Constitutional Court and other so-called Chapter 9 institutions such as the Human Rights Commission. In addition, the bill of rights was embedded in the constitution. The independence of the judiciary was affirmed, as was the independence of the South African Reserve Bank. Sufficient checks and balances have been put in place to assure minorities of their protection against the might of the majority. South Africa is correctly described as a constitutional democracy.

Property rights were also given protection in the constitution and that helped to generate confidence in South Africa as a place to invest and do business. The government implemented macroeconomic management measures that aimed for the economy to progress along a sustainable path. Inflation was brought under better control and the budget was managed to the point of surplus in 2008. In this way, the economy was able to recover from the debilitating effects of sanctions and the cost of sustaining the war in what is now Namibia.

In many ways, South Africa has been fortunate. Strong leadership steered the country away from an intractable civil war and wise, levelheaded pragmatic negotiations formulated a good constitution.

However, Apartheid remains a national scar with a deep- level legacy that still weighs on the broader society. The triple problems of poverty, inequality and unemployment are identified by the government as the priority challenges left by the Apartheid legacy.

To deal with poverty, the government has implemented an extensive poverty alleviation programme, which includes both child and old age grants. This has provided a basic social safety net. Government budget expenditure is aggressively redistributive to try and deal with poverty.

The tax take is also highly ‘progressive’, which means that the ‘rich’ carry the highest tax burden. The combination of reducing incomes of top and middle earners and providing grants to the bottom earners has helped to reduce inequality. Other policies, such as Black Economic Empowerment and Affirmative Action, have also been implemented in order to redress the Apartheid legacy.

However, 20 years after the establishment of South Africa’s democracy, the outcomes so far have been unsatisfactory. The principal reason has been the persistence of exceptionally high unemployment of around 24%. This has been where the economy has battled. In addition, the economy has not recovered well in the wake of the global financial crisis of 2008, which had its epicenter in the developed markets. Social unrest has also become evident with the escalation of service delivery protests across South Africa.

The economy has distinctly underperformed since 2008. While the 2008 global financial crisis was one factor, the underperformance of the South African economy stands out when compared with other emerging market economies and also that of many countries in Africa. A number of measures have also deteriorated such as the debt levels, the deficits and unemployment. The highly regarded macroeconomic management of South Africa has slipped; the sovereign credit ratings have been downgraded and remain at risk for further downgrades. South Africa is also considered part of the ‘Fragile Five’, a grouping of emerging market economies that have developed the twin-deficit problem in their current accounts and national budgets. A third household deficit has also developed in South Africa, which adds to its vulnerability.

Essentially, South Africa has reached an inflection point. Poverty alleviation strategies have reached their maximum efficacy. The time has come to shift to poverty reduction strategies, which essentially means job creation. Reducing inequality through income-reducing taxes has also reached its limit and a shift towards lifting low-income earnings is also needed. This comes with employment creation for the unemployed but also an improvement in job quality for those who are in employment.

The inflection point is mainly about job creation. Through job creation, both poverty and inequality can be reduced as issues. The economic distinction between poverty reduction and poverty alleviation is that poverty reduction is about shifting resources to investment as opposed to allocating resources to consumption in the case of poverty alleviation.

Economic growth at levels high enough to absorb the unemployed into the labour force can only come about through investment. And investment is ultimately funded through savings. The current investment rate of 19% needs to be boosted to 30%. But even the current investment rate has generated a macro-economic mismatch, with a savings rate hovering around the 14% mark. Essentially, the savings rate needs to be doubled in order to sustainably support a higher investment rate and consequent higher growth. Essentially, at the core of the unemployment problem lies a capital deficiency that has arisen from a low savings rate.

This is where reform is needed. The triple challenge of poverty, inequality and unemployment has been perpetuated through the triple mistakes of regulation, labour unrest and taxes on saving and saving viability. The regulatory construction requires economies of scale for compliance, which is particularly detrimental to SMMEs – the job-creating engine of any economy.

Labour unrest has the consequence of investor avoidance of exposure to South African labour. Taxes on capital formation and investment viability have inhibited savings. These taxes include taxes on interest earned, dividend taxes, capital gains tax, property transfer duty, death duties and taxes on pension lump-sum payments at retirement. These are inappropriate taxes when the country is capital- deficient and facing a massive unemployment problem.

The inflection point for South Africa is key to establishing a virtuous cycle or entrenching a vicious cycle. Continued success for South Africa’s democracy may well depend on whether job creation can be achieved on the scale needed. Poverty alleviation and grants are no longer sufficient.

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