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Steven Friedman: Investors will stomach ‘captured Treasury’ if Gigaba plays cards right

President Jacob Zuma’s recent radical cabinet overhaul that included a move to ensure that his allies maintain control of the all-important ministry of finance is not good news for international investors. This was clearly signalled when international credit ratings agencies downgraded South Africa to junk status, seeing only economic deterioration and political uncertainty in the foreseeable future. Political analyst Steven Friedman reckons the situation might not be as bad as some investors think – provided ‘captured’ finance minister Malusi Gigaba plays his cards right. Expect Gigaba and new deputy finance minister Sfiso Buthelezi to make moves to please their masters, as this is inevitably why they have been promoted. However, although business and government dislike each other, they need each other and may find ways to cooperate to keep the market economy afloat. The poor will lose, but economic insiders and others could still be winners as things continue to tick over pretty much as they do now. Think Friedman sounds like an ‘optimist? He says this is the pessimistic view, highlighting examples where markets co-exist with high levels of patronage. – Jackie Cameron 

By Steven Friedman*

The formal economy might find it a lot easier to live with a (partly) captured national treasury than many might imagine. This is bad news for people living in poverty who would then lack friends in high places to resist the capturers.

In trying to restore calm, after the firing of Finance minister Pravin Gordhan and his deputy Mcebisi Jonas, the spin doctors of the governing party, the African National Congress, say the markets will adjust. They point out that the appointment of previous finance ministers also spooked the markets, only to attract something close to hero worship once they settled in. Thus the new minister of finance, Malusi Gigaba, would also come to be loved by the markets.

Pravin Gordhan, former South African finance minister, right, speaks as Mcebisi Jonas, former South African deputy finance minister, left, looks on during a news conference in Pretoria on Friday, March 31, 2017. Photographer: Waldo Swiegers/Bloomberg

Just about no-one believes them. Their reassurances do not gel with the understanding of everyone opposed to the change and even some who welcome it. The change in minister is widely seen not as the replacement of one politician by another but as the capture of the Treasury by a faction which is interested not in the health of the economy but in using public money to feed the patronage networks of a connected few.

At issue is far less the policies the new Treasury leadership will proclaim than the likelihood that they will relax controls which hamper patronage politicians and connected businesses. And so it’s widely assumed that the economy is now to be laid waste by looting which will place the market economy in great danger.

It’s hard to argue against much of this account. The only plausible reason for Gordhan and Jonas’s removal is their campaign to prevent public resources and state-owned enterprises serving particular private interests. There would be little point in courting a ratings downgrade and other upheaval unless the purpose was to ensure that Treasury didn’t stand in the way of those interests who Gordhan and Jonas were frustrating.

But the rest of the story is not self-evident. In principle, the view that the ‘captured’ Treasury leadership is certain to lay waste the marketplace and make war on the owners of capital may be far less obvious than it seems. The marketplace and a Treasury which gives a helping hand to special interests may tolerate each other far more readily than we are being led to assume.

The economy will be hurt

Before the argument is drowned in a wave of indignation, it’s important to stress exactly what this may mean. The new Treasury leadership is not the victim of prejudice. It’s likely to remove barriers to particular businesses and politicians which have prevented them profiting from the public purse. This will weaken the economy and delay movement towards much-needed changes. Even if a captured Treasury really wanted to discuss vitally necessary economic reforms, it’s unlikely that either business or labour would trust it enough to join the dance.

Sfiso Buthelezi, South Africa’s deputy finance minister, speaks during a news conference in Pretoria, South Africa, on Saturday, April 1, 2017. Gigaba said he will use the National Treasury to push for inclusive economic growth while sticking within spending frameworks already put in place. Photographer: Waldo Swiegers/Bloomberg

But, while the new leadership will not take the economy forward, it could serve its special interests while keeping in place enough of the current framework to enable markets to continue operating much as they do now.

Gigaba and his deputy Sfiso Buthelezi won’t stay there long unless they remove some of the obstacles which have frustrated the patronage faction. But they could choose to do this in a way which keeps the market economy ticking over much as it does now. Whether they can pull this off is unclear. But it’s far from impossible.

Market and patronage can coexist

There is a myth behind the expectation that a captured Treasury is certain to devastate the formal economy. The myth is that market economies function effectively only when everyone plays by the rules. In reality, market economies can co-exist with all manner of favouritism, patronage and even dodgy dealing.

Flag of South Korea

Consider the South Korea experience which shows how markets can tolerate patronage politics. Every head of state who presided over the Korean economic miracle was jailed for corruption. The apartheid economy is another example of how markets can co-exist with a limited, but fairly high level, of patronage.

One of the great ironies of the last years of apartheid is that left critics consistently denounced its ‘monetarist’ adherence to fiscal discipline when it was really awash with spending, much of it linked to connected insiders, which aimed to buy apartheid out of trouble. Formal business may have opposed this, but also lived with it far more easily than it might care to admit.

Therefore, the new political leadership can choose to be captured in a strategic way. They can give connected interests some of what they want while making sure that the basic financial architecture is kept in place. They may well ensure that business learns to live with them and adjusts to what they are doing.

A captured Treasury which operates in this way wouldn’t be trusted by business. But they might well put up with each other – and make deals with each other – to ensure that the economy keeps running. Decades ago, David Yudelman, then a Wits academic, published an important book on this subject. It showed that, even when business and government dislike each other, they need each other and find ways to cooperate to keep the market economy afloat. If the new Treasury leadership plays its cards competently, it could prove him right yet again.

To many, this argument will seem too optimistic. It is, in reality, deeply pessimistic.

The poor are on their own

Whatever the capture of Treasury does or doesn’t do to the formal marketplace, it’s sure to make life even more difficult for the poor. The social grants scandal shows clearly how easily patronage politics produces arrangements in which the poor are sacrificed so that the insiders can enrich themselves.

Since the poor are also politically weak, the new Treasury is unlikely to worry much about them when it gives the green light to patronage deals.

More of Zapiro’s magic available at his website www.zapiro.com.

Last time there was an attempt to capture the South African Treasury, poor people were saved because the organised interests in the market economy united to stop this.

But, if the new Treasury leadership do manage to respect the core market rules while turning a blind eye to insider deals which its political masters need, the poor are likely to find themselves once again on their own, as they so often are – left to their own devices while the economic insiders continue to look after their own interests.

The markets may just find a captured Treasury less of a threat than they imagined. The poor are unlikely to have any such luck.

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