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The Financial Action Task Force, an international body which assesses money laundering and terrorist financing, warned South Africa earlier this year about the need to introduce stricter controls; and while some measures were taken, not enough was done. The consequence is that international banks will have to be a lot more careful in doing business with South Africa, as it will be on a list that includes outcasts like Syria, Haiti and Yemen. Economists define rent seeking as gaining wealth without any contribution to reciprocal wealth creation, a practice rife in SA, from bribing and lobbying the government for special favours to straightforward extortion – pay us or we will damage you or your business to gain an advantage. Reversing decades of rising crime rates is key to growth. And as much as grand reform is needed to address red tape, unemployment, and the failing public enterprises, far better security and law enforcement is vital to ensure growth. Article republished courtesy of the Daily Friend. – Sandra Laurence
South Africa’s rip-off economy
By Jonathan Katzenellenbogen*
There is a growing share of the economy that is often criminal, sometimes out in the open. It is nothing but a burden, and does not contribute to productivity and growth. It is a rip-off economy of rent-seeking, crime, and extortion.
Most consumers, taxpayers, and many smaller businesses live in this rip-off economy. Tenderpreneurs, sections of the civil service, overpaid politicians, many big companies, as well as vast numbers of consultants and hangers-on are all part of the rip-off system of rent seeking. Then there are the syndicates stealing manhole covers and cables, and the gangs that threaten legitimate businesses.
This is not new, but we are paying a rising price for this burden as we struggle to grow. Political leadership in dealing with these problems would give a big impetus to the fight against waste and crime, as would faster economic growth. But we seem to be caught in a trap, due to an apparently indifferent government, and the vast interests at stake which perpetuate the status quo.
We have for many years paid the price for poor security in forgone investment, but now the country is threatened with a “greylisting” by the Financial Action Task Force (FATF). This is an international body which assesses the controls countries have on money laundering and terrorist financing. Earlier this year South Africa was given a warning about the need to introduce stricter controls, and while some measures were taken, not enough has been done. The consequences are that international banks will have to be a lot more careful in doing business with South Africa, as we will be on a list that includes outcasts like Syria, Haiti, and Yemen.
Economists define rent seeking as gaining wealth without any contribution to reciprocal wealth creation. This includes bribing and lobbying the government for special favours. There are a whole lot of rent-seeking activities. Bain’s consulting to the SA Revenue Service destroyed value in weakening the institution. Extortion is quite straightforward – pay us or we will damage you or your business so that we can gain an advantage – but it can also be rent seeking. Trucks and buses are attacked to gain routes or to ensure payoffs – an easy form of economic rent. Then there is bribery, which continues even without the Guptas in the country.
It all leads to a gross misallocation of resources, waste, and unfair advantage for some.
If there were an index for rent seeking, crime, and extortion, it would be high and growing in South Africa’s case. It is not low investment alone that is a drag on productivity and growth, it is also poor governance that fails to deal with crime and leads to waste. Because the police service cannot be relied upon, South African companies have to invest heavily in their own security – which serves to push up costs and also lower productivity.
Reversing decades of rising crime rates will be key to our growth. As much as grand reform is needed to address red tape, unemployment, and the failing public enterprises, we also need far better security and law enforcement to ensure growth. And growth itself, by creating greater opportunity and competition, could help reduce the damage caused by the rip-off element.
In virtually every area of the economy we suffer the extraction of rents. We get little for what we pay for in the areas of education, health, and security. Trucking and bus companies face attacks on their vehicles from organised gangs. The construction industry regularly faces demands for payments to make trouble-makers go away. The ANC builds support and loyalty on the basis of its ability to deliver sweeteners such as contracts and social grants to its supporters. Cadres are able to seek rents through deployment in government service.
Black empowerment can also be another form of rent-seeking behaviour. The early beneficiaries were able to pay for their mega stakes in corporate South Africa with the cash flows from the business. Apart from broadening the racial basis of ownership, the wider economic benefits are debatable. Changing ownership on its own rarely leads to greater value. It would have been far better to invest massively in education, training, mentoring, and credit for start-ups as the main path to empowerment ownership.
One form of rent for cadres and black businesses is the benefits to them from public procurement. There are now pressures to further increase the public procurement “set aside” for previously disadvantaged groups from 30%. According to fin24, the ANC in KwaZulu-Natal wishes to raise the share of state procurement set aside for previously disadvantaged groups to 96%. The economic rent from reserved procurement often arises from the extra margin that these suppliers tend to charge, because they are often not the original suppliers of an item.
Most key industries have for years been run by oligopolies – a few dominant players. This is true of banking, cement, steel, and milling. The more concentrated an industry, the better chance the players have to extract rents from consumers and enjoy tariff protection. Steel producer ArcelorMittal is protected by tariffs which allow it a selling price at import parity – the landed cost of imported steel.
No public infrastructure with movable parts seems to be safe. Recent photographs of railway stations in parts of Gauteng show ripped up railway tracks and gutted buildings, all due to pillage.
The police have said they intend to establish a specialised Economic Infrastructure Unit to investigate the theft of cables and manhole covers. Whether this signals a new high-level political commitment to the fight against crime is an open question. The scale of theft of public infrastructure is now so serious that it has to impair economic growth prospects.
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 to deal with the problem, the mafias have become entrenched and often turn themselves into “business forums” with an air of legitimacy. The intimidation and violence from these groups has cost lives, driven up the cost of projects, and delayed construction.
Violent intimidation has spread to other industries. For some time trucks have been intermittently attacked and burnt along the N3. In the past year an Intercape driver was shot dead in one of the 60 attacks on the company’s buses. In a Sunday Times report over the weekend, the CEO of Intercape, Johann Ferreira, blamed the taxi industry. Violence between rival taxi groups competing for routes peaked in the 1990s, and it has never entirely abated. Effective law enforcement is the solution, but it is absent.
The last word on our descent into the rip-off economy should go to Intercape’s Ferreira.
“As far as taxi violence is concerned, we appear to find ourselves in a failed state where lawlessness and anarchy rule,” he told the Sunday Times. “This is anarchy plain and simple, and unless this is stopped and dealt with decisively, our country is on a path to self-destruction.”
The opinion of the writer is not necessarily that of the Daily Friend or the IRR.
- Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist. His articles have appeared on DefenceWeb, Politicsweb, as well as in a number of overseas publications. Jonathan has also worked on Business Day and as a TV and radio reporter and newsreader.
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