Category: SA Economy

South Africans would benefit greatly if the country’s state-owned enterprises were to be privatised. Full story as published in FinWeek here.

I have a very radical policy proposal, which is to repeal the National Credit Act. Repeal would allow lenders and borrowers complete freedom to contract with each other for credit on any terms they found agreeable. It would help transform the economic prospects of many South Africans who do not benefit from regular incomes and so do not qualify for credit under current regulations.

Freer access to credit would be particularly helpful to informal traders and aspirant farmers and entrepreneurs. By saving the significant costs of complying with current regulations, a repeal might well lead to less expensive borrowing terms for the many who currently receive credit. Strong competition for potential credit business would convert lower compliance costs of providing credit into lower charges for all borrowers. The reputation of the lenders for fair treatment of its customers would become even more critical in attracting new and repeat credit business. A lender would not have to proclaim it is an authorised financial service provider as if this were some kind of guarantee that absolves borrowers or lenders of the need to undertake proper diligence.

The importance of maintaining reputation – brand value – in which so much is invested, including training employees to deliver their services better than their rivals, is what keeps profit-seeking businesses honest and efficient. It attracts the most valuable type of business, repeat business.

Perhaps, given their knowledge and experience, the regulators and compliance officers that would be rendered unemployed should my proposal come to pass, could be converted into useful predictors of the ability of potential borrowers to deserve the credit on offer. Identifying much more accurately and easily the credit rating of any potential borrower would allow for well-targeted, attractive offers of credit – perhaps initiated at very low cost over the internet. Credit markets are particularly well-placed to apply the new science of big data management that is revolutionising all business.

There is a long history of limiting (defined as usurious) interest rates that may be charged to borrowers, which has disturbed and complicated the contracts borrowers and lenders agree to – and in turn has encouraged regulation of these complicated terms. If lenders were free to declare all revenues they expect to receive from a borrower as simply interest or capital repayment, at whatever rate agreed to, borrowers could easily make comparisons of the costs or benefits on offer. This is the case when a motor car is leased for a monthly payment. How much of this payment pays for the car and how much for the motor plan is irrelevant to the driver. It is simply a question of how much car the monthly payment buys. The benefits of the transaction to the motor dealer, the lessee and the lessor are bundled into one convenient monthly payment. We do not pay a hotel separately for towels, linen, or air conditioning – ‘free’ breakfast may even be included in the daily rate. And no regulator (yet) tells the hotel to itemise its menu or what services they are allowed to charge for and how much they can charge

The National Credit Regulator however allows the lender only clearly defined fees and payments that include the repayment of the principal debt; an initiation fee, a service fee, interest, the cost of any credit insurance, default administration charges and collection costs. It has argued that a fee charged to retail customers to join a club of customers cannot be levied. The jury or, rather, the judges are out on this one.

Club fees, delivery, insurance or other charges are all contributions to the lender’s revenue, in addition to interest payments that are controlled. Reducing the lender’s ability to raise revenues from explicit interest charges or to protect themselves with capital repayments leads inevitably to a complicated array of fees to supplement interest received. Restricting the flow of revenues therefore means less credit supplied to well- qualified borrowers. This is an unsatisfactory outcome that an unregulated credit market would overcome. 7 July 2017

Slides presented at the Denker Conference on Eradicating Poverty held Thursday 20th July available here

My book Get SA Growing (Jonathan Ball 2017) hopes to persuade South Africans that there is a clear and highly realistic way out of our poverty trap. And that is to let all our people exercise much more freedom to help themselves improve their economic circumstances. Or in other words for the economy to rely much more on highly competitive market forces, to determine output, incomes, jobs and wages. There is overwhelming support from economic history, especially from the recent immense poverty reduction achievements of many Asian economies, of how it is possible, using the power of the market place, to lift billions of people out of absolute poverty.

South Africa could be playing much more helpfully to its objective strengths – and that is the competence and competiveness of established businesses and new entrants to business to effectively deliver goods and services and employment and incomes. And are highly capable of doing much more for their stakeholders. Not only for their owners, but for their numerically much more important customers and employees.  And their owners, often pension and retirement funds who manage most of our savings, are rapidly becoming as racially representative of the work-force. Something ignored so opportunistically by the politics of empowerment.

The book tries to build trust in and respect for market forces by examining and explaining what goes on in our economy and how and why it could be better organized for the benefit of nearly all of us- and especially the many desperate poor. It is written by an economist for my fellow South Africans who share my frustration with our economic failure.

We should have more respect for the rights of individuals to make their own decisions and bear the consequences of them. And we should not allow adults who have the power to elect their government to be treated as if they were children in need of close supervision- an assumption often convenient for politicians and the officials who direct government spending on their behalf. Private providers of goods and services, now supplied by government agencies, would treat people much more as valued customers rather than as supplicants.

Privatization of the delivery of benefits – currently funded by the taxpayer – would produce much better results- especially in education – where the spending and tax burden is a heavy one and the outcomes so disappointing. The extra skills that would command employment and higher incomes are simply not emerging nearly well enough. Radical reforms are required that would make public schools and hospitals private ones. And convert public enterprises into more efficient private ones that would not convert losses and poor operating procedures into ever increasing public debts. Privatization could be used to pay off the expensive public debt.

A much greater reliance on and encouragement for the free play of market forces is called for in South Africa Much less should be expected from well-meaning national development plans or from even honestly governed state owned corporations to deliver the essential jobs and goods and services. Perhaps even more dangerous to the well- being of all South Africans would be to provide even greater opportunity for doing government business, funded by taxpayers, on highly favourable (non-competitive) terms with the politically well-connected few. The newly promulgated Mining Charter is an exercise in extreme crony-capitalism that will undermine the future of mining in SA and its ability to create incomes, jobs and tax revenues.

Faster economic growth would be truly transformational.  Building on the strengths we have- on our skilled human capital that is globally competitive – and so very vulnerable to emigration – and on the proven ability to raise financial capital from global markets when the prospects are favourable – faster growth would greatly stimulate the upward mobility of an increasingly skilled black South Africans. The upper reaches of the economy could soon become as racially transformed as have the ranks of the middle income classes. And the very poor and less skilled (now mostly not working) would benefit greatly from increased competition for their increasingly valuable and scarce services. Forcing transformation of the leaders of the SA economy would have the opposite effect. It would mean further economic stagnation and increased resentment of higher income South Africans.

The hope is that the book will make it more likely that the economic future of South Africa will be decided in a less racially charged way- with more reliance on meritocratic market forces. South Africa in fact undertakes an extraordinary degree of redistributing earned incomes, unequal because the valuable skills that command high incomes are so unequally distributed. That is unusual amounts of income is currently taken from the very well off to fund government expenditure – judged by the practices of other economies with comparable incomes per head. But economic stagnation has now severely limited the capacity to help the poor. More of the higher incomes that come with growth can then be redistributed to the least advantaged -hopefully with much more help from private suppliers of the benefits provided.  Growth and redistribution is very possible for South Africa- should we change our ways and grow faster – as the book hopes to persuade South Africans to do.

Cyberspace has revealed the modus operandi of a group of SA businesses that have excelled (if that is the right term) at doing business with the SA government. We now know just how profitable these favoured procurement exercises have been.

The large modern state, which includes state owned business enterprises with genuine monopoly powers, has significant economic powers to contract for goods and services from private suppliers. Such contracts, we would surely agree, should be determined in an objective way and be subject to genuine competition for such potentially valuable business opportunities.

If objectivity is not to be the guiding principle, the waste incurred is not only in the form of hard-earned tax revenues or borrowing powers supported by the tax base. It also means a sacrifice of the alternative benefits that might have been better provided for – including spending on the least advantaged of society. That officials of government, responsible for such negotiations, might directly benefit from such contracts, is always a possibility, to be guarded against by appropriately vigilant and transparent procedures.

Government practice, anywhere in the world, does not always conform to best practice. A case can therefore be made for not only better, and more honest government, but also for less government. This argues for a smaller, less intrusive role for government as a supplier of goods and services (as opposed to funder of benefits). This would leave space for private hospitals or private schools, for example, to compete for demanding patients or pupils, funded partly or fully by the taxpayer. It would also call for the privatisation of public enterprises, with the proceeds used to pay off government borrowing.

In some societies the degree of corruption can be such as to not only destroy the practice of good government itself, but to undermine the efficiency of the greater economy. Economic growth itself, of the inclusive kind, becomes much more difficult to realise and is replaced by exclusive growth that benefits mainly those in power and their politically-favoured hangers on.

One term that describes such a failing economic system is ‘state capture’. Another is crony capitalism. South Africa is in grave danger of more crony capitalism and of undermining the growth prospects for our economy and benefits for the poor that a competitive market led economy could deliver.

Cyberspace has also revealed that the notion of ‘white monopoly capitalism’ is a creation of a PR company employed by the same group of SA businesses that have benefited so greatly from state largesse. But the notion of white monopoly capital is a politically and racially charged canard. It is an attack on well-established enterprises that compete actively and effectively for customers and employees, and which effectively service their stakeholders – who are mostly black South Africans. If these enterprises are JSE-listed enterprises, their shareowners will be pension or retirement funds, the beneficiaries of which will increasingly be black South Africans. It is convenient for crony SA capitalists and their supporters to ignore such ownership claims in conventional measures of empowerment.

Any constraints on these established businesses to compete freely for customers, skills or capital will harm their many owners, customers and employees. It will also harm the employment and income prospects of many poor South Africans. And by reducing the growth of the economy, they limit the tax base that could be used to support them.

How Orwellian it is to find the enemy in established businesses that are the most capable and competitive element of our economic structure. Arguments are raised to increase the scope for crony capitalism, rather than diminish it. The newly released Mining Charter is unfortunately a charter for more crony capitalism. However its terms of engagement make it very unlikely that more capital will be allocated to risky exploration or mining developments. Giving up 50% or more of the upside in any venture, for no protection on the downside, is a severe impediment to risk taking. Not only will potential employment or income or taxes from mining in SA be sacrificed, the very few intended beneficiaries (the potential cronies) will find the takings hard to realise – if there is no investment. 23 June 2017

The views expressed in this column are those of the author and may not necessarily represent those of Investec Wealth & Investment.

The author makes the full case for genuine capitalism in South Africa in his recently published book, ‘Get South Africa Going’ – Jonathan Ball Publishers, Johannesburg and Cape Town, 2017.

My book has been published. ( See below for details ). It should be available in the book stores and on-line very soon. The chapter outline included in the Foreword is shown below.

Get South Africa Growing

Jonathan Ball Publishers
Johannesburg and Cape Town

Brian Kantor

Published in South Africa in 2017 by
JONATHAN BALL PUBLISHERS
A division of Media24 (Pty) Ltd
PO Box 33977
Jeppestown
2043
ISBN 978-1-86842-763-5
ebook ISBN 978-1-86842-764-2

Chapter outline

In the first chapter, I address the current very unsatisfactory state of the South African economy seen as a whole – the macro environment – and what might be done to improve it. I accept that the global economy has made it more difficult for our economy to grow faster in recent years and I consider what more favourable cyclical forces might spark faster growth. But, I would argue that our problems are not with our stars but with ourselves, and while the challenge to government is to live within the taxpayer’s means, it is a call for not just more competent government but also less government.

In Chapter 2, I make the argument for market forces properly understood – why they are fair to the participants in markets while delivering the goods, services and incomes that people want more of. I make the case for the market meritocracy and why much greater reliance on the free play of market forces is called for in South Africa. As support for this contention, I refer to the proven ability of these market forces, of individuals given essential freedom and encouragement to pursue their economic interests and protection of their gains, to lift billions of people out of absolute poverty in recent years. The global economy bears witness to an unprecedentedly successful poverty relief programme that deserves greater recognition appreciation than it has received and emulation for other economies playing catch-up. The chapter attempts to do this.

Chapter 3 attempts to answer a burning question: given its well-demonstrated achievements, why do these market forces, and the business enterprises that are their prime instrument, not receive more approval? Why are they so often regarded with hostility rather than respect? Why are they regarded as opposed to the economic interests of the many they serve, thought capable of dishonesty unless proved otherwise, rather than the other way around – recognised as beneficent forces for economic progress, unless in exceptional cases proved otherwise? In doing so I challenge those with these attitudes to perhaps reconsider their motives and to change them – so that markets in this country can more easily get on with their important task of delivering goods, services, incomes and jobs in abundance.

Chapter 4 provides further exhortation to South Africans and arguments to back up this essential view of the world and how it works. It attempts to explain how we as a society would do much better to focus on the growth in incomes and wealth rather than their redistribution. The danger to the growth opportunity is redistribution – redistribution not necessarily to the poor that are deserving of assistance, but to the better-off with a strong sense of opportunity. Opportunities that can advance the economic welfare of a privileged minority but are taken at the expense of a better functioning economy and are often to the disadvantage of the objectively poor and disadvantaged. More redistribution – taking from the more successful to give to the economically less successful – inevitably follows economic growth. It has always done so, as the history of other economies reveals. But it is vital to get the sequence right and not to let redistribution – of which we already do significant amounts – get too much in the way of faster growth by undermining the incentives of enterprising and efficient individuals to contribute their skills and assets to the economy. Discouraging rather than encouraging such individuals means that they could easily decide to supply their services to other economies rather than ours.

Chapter 5 and 6 look more closely at the labour market and at policies for regulating the South African economy and encouraging competition. Chapter 7 examines competition policy in more detail and looks at why activist policies are not good for business and so the economy. My scepticism about the beneficence of such policies will be apparent, as will hopefully the reasons for my critique. I hope that public opinion will share such views and help inhibit the ever-flowing tide of more onerous regulation and more active competition policy, which discourages rather than encourages economic efficiency in a world of continuous innovation that effectively threatens what are temporary powers to control markets.

Chapter 8 shares insights about the all-important role played by privately owned corporations and the stock exchanges that help them raise capital and monitor their use of capital. I analyse the sources and uses of savings in South Africa and why our corporations have succeeded, on both sides of the saving–investment nexus, for their owners, who are mostly members of pension and retirement funds and collective investment schemes. I celebrate the opportunities that South Africans, the pension funds that act as their agents for acquiring wealth, and the companies that they own on their behalf have been given in recent years to diversify their wealth across other jurisdictions. I explain why being able to reduce South Africa-specific risks to the wealth of South Africans has been very helpful to the economy. This has encouraged risk-taking in South Africa rather than elsewhere. This chapter also discusses the costs and benefits of black economic empowerment (BEE).

To conclude, Chapter 9 supports the thrust of my argument by turning to measures of South African economic performance. It considers how South Africa ranks relative to our competitors in the global economy. The measures of our standing in the world are mostly very discouraging – and encouraging of reforms that would add freedom and competitiveness and enhance both incomes and standing, as well as respect for our economy as a place to do business.

The text is supplemented by shorter essays, entitled ‘Point of View’, previously published on my www.zaeconomist blog and elsewhere, that substantiate and concentrate the argument without repeating too much. If you like, they offer a short reinforcement of the message.

Brian Kantor

February 2017

I recently asked a class of senior law students what they thought the purpose was of all the laws that protect property (wealth or assets or capital by other names) against theft, fraud or seizure, including by the state, and the purpose of the many laws that facilitate the exchange of assets.

The students did have a sense of the fairness of such laws protecting owners. They did not recognise the importance of the economic incentives at work: that unless rights to property were exercised, there would be little incentive to create wealth; to save, to build and to sacrifice immediate consumption for later benefits for society at large.

Who would wish to save up to build a house or a business or improve a tract of land, providing goods, services and incomes to others, if someone more powerful could move in and take over? But I also pointed out that the value of assets owned can be severely damaged by regulations of their use (perhaps of net benefit to society at large) for which compensation is seldom allowed by the courts. I spoke of the proverbial little old lady and her children whose only meaningful asset is a house, whose value is much diminished by declaring it of historical interest – for which compensation could be offered but in practice is never offered or awarded.

I made the point that property rights or their absence (or the dangers of regulation of the use of assets) would be reflected in the market value attached to such always vulnerable assets. Threaten for example a wealth tax or a mining tax and the value of assets and the incentive to create wealth will be undermined in ways that are very likely to harm the poor.

But the state not only has the power to take wealth, it also exercises the power to take from wealth or income from some and give it to others. South Africa has supplied very large numbers of houses to essentially lucky recipients – lucky because the waiting lists for gifts of this value are very long and will never be exhausted. The numbers of such interventions in the housing or accommodation space are not known with certainty, nor is it fully known what happens to the houses once handed over.

The important question is how should the value of these gifts of housing or land or low rentals be best protected by law? Protected surely best by full rights of ownership attached to them, as is the wealth protected when created through the sacrifice of consumption or the sweat of a brow. Living in a potentially valuable home without food on the table has little logic to it. Effectively exchanging the house for more food and cheaper informal shelter may be a sensible choice to make. Leasing out and combining small parcels of farming land can provide a better standard of living for its new owners than subsistence farming on it.

Our laws that most unfortunately restrict property rights – for example that only allow the transfer of RDP homes after eight years of occupancy or prevent formal rental contracts – accordingly leads to widespread losses and waste. To houses that exchange hands at far less than their cost or potential and that can never form part of any inheritance or tax base. To potentially valuable farms that become wastelands.

We should make all transfers of government assets to private ownership immediately come with full rights of ownership. And we should be making every effort to convert currently fallow government owned and tribally managed land to private ownership with full rights, whoever are the initial beneficiaries. This will then allow the market place take over to make the best use of these assets. The impact on the economy will be as favourable for the creation and preservation of wealth and the generation of extra incomes in SA, as secure property rights always prove to be. 28 April 2017

Click here for a shorter version of this article

There will be good economic reasons for rejoicing should he go. The rand would strengthen – it would move back into line with its emerging currency market peers. Today this would have meant a USD/ZAR of approximately R12.6. Yesterday, April 12^th a day of protest and a day when the probability of Zuma going sooner rather than later improved, saw a basket of EM currencies gain seven cents vs the weaker USD while the ZAR gained 34 cents, indicating less SA specific risk priced into the rand.

If the rand maintains these better values lower inflation will follow the lower costs of imports and the lower prices for exports and would bring lower short term interest rates in its wake. Cheaper than otherwise goods and services and credit would encourage households to spend more- as would the higher house prices and equity in homes that accompany lower mortgage rates and a more hopeful outlook for South Africa. And the firms that supplied them would be much more inclined to add, rather than contract capacity and hire more rather than fewer employees, as they are now doing. The SA business cycle would turn up rather than down.

The yield on longer dated RSA debt would also tend to go back to where it was, reducing the cost of servicing our national debt –easing the burden on SA taxpayers and opening up the possibility of more help for the poor and improve the prospects of growth friendly, lower tax rates. The first Zuma attempt to control the Treasury in December 2015 took the yield on RSA 10 year bonds from 8.5% p.a in early December that year to about 9.6% by early January 2016. This move also widened the spread between RSA and US debt by about the same 100bp ( see figure below) from about 5.7% p.a to 6.7%. The latest Zuma intervention in the Treasury has seen this risk premium rise further, but not dramatically, from a still unsatisfactory 6.46% level in early 2017 to the current 6.6% p.a level.

The ZUMA factor driving SA risk

Source; I-net Investec Wealth and Investment

This spread may be regarded as the SA risk premium, the extra returns in rands, all South African investments have to be able to offer to justify their viability – in addition to their covering the additional business risks associated with a particular enterprise.  This extra return is also the rate at which the rand is expected to depreciate over the next ten years. And the weaker the rand the more inflation expected. The Zuma interventions have understandably have resulted in the rand being expected to lose dollar value at a faster rate and so also, in a consistent way, to increase the expected inflation rate. The market place understandably expects a weakened Treasury to be less able to control government spending and less conservative in how such spending is funded. That is less able to raise taxes and less willing to pay ever higher rates of interest on its debts and so more inclined to print money, an approach that would be clearly inflationary.

Another way of measuring risks would be to convert the calculation of required returns and risk into to much less inflationary USD. The yield on US dollar denominated debt issued by the SA government provides an appropriate bench mark for measuring required risk adjusted returns on South African assets. As we show below these dollar yields rose significantly from around 3.6% in early 2015 to as much as 5.12% p.a. by year end. Since then this rate has receded but increased by a significant 36bp since mid- February.  The cost of insuring SA 5 year dollar denominated debt against default, an accurate measure of real sovereign risk has followed a similar pattern rising from 1.82% p.a at its lowest in 2017 to the current 2.15% p.a. That is when converted into USD an investment in a South African asset would be required to return over 2% p.a. more in USD than an equivalent US investment to justify its value.

Zuma risk measured in USD

Source; Bloomberg, Investec Wealth and Investment

More risks demand higher returns (sometimes described as the hurdle rate capital raisers have to leap over) and the higher the required returns the fewer investment projects will qualify – to the grave disadvantage of the economy and its growth prospects. The object of economic policy should be to reduce such risks rather than to raise them- something the Zuma presidency has clearly failed at.

These required returns that add business risk to sovereign risk may also be regarded as the discount rate used to present value any flow of income from businesses or government agencies. The higher the discount rate attached to SA assets the less they are worth. Adding risk makes SA immediately poorer as well as undermining their income prospects as less is invested in SA projects that could add to incomes and demands for labour.

Yet given the reactions of the credit rating agencies that have down rated SA credit indicating a higher probability of default on our debt these market reactions as we have identified them must be regarded as surprisingly subdued.

The rand, and the market in RSA bonds, clearly benefit to a degree from the prospect that Zuma might not survive the campaign to remove him.  Were Zuma certain to stay rather than possibly go, we would be facing even more risk aversion more inflation expected, higher interest rates and a very likely recession as confidence in the prospects for the SA economy ebbed away.

Were Zuma to go the benefits could extend well beyond the promise of a revival of fiscal rectitude and less inflation and lower interest rates. It would offer the prospect of a radical economic transformation. By which I mean the cleaning of the Aegean stables that the State Owned Companies (SOC’s) have become. It would not require any Hurculean effort to do. A few investment bankers could do the job of converting the SOC’s into ordinarily valuable and well managed business. So converting them into assets from their current state of very expensive and potentially ever larger liabilities, that SA tax payers and consumers have to cover. Converting these burdens into private businesses that will compete for their custom, that will be run efficiently and deliver their goods and services at lower competitive prices – as business have to do to survive the market test would be a large plus for South Africans. And they would become taxpayers rather than incur vast contingent liabilities that damage our credit rating and raise our costs of finance.

Can any SA seriously believe that these SOC’s are essential to the purpose of developing the SA economy?  Or fail to understand that their actions are driven by the narrow interests of their managers and employees and what their suppliers can extract from them. Their monopoly powers that make this behaviour possible need to be removed by breaking them up into smaller units by selling off their assets to a variety of owners and operators. And the capital to fund these purchases will be abundantly available from domestic and foreign capital providers at market determined values.

The proceeds from their privatization could be used to pay of much of SA’s debt and dramatically reduce the interest burden of serving it and open up the prospect for genuine poverty relief. This transformation – turning great weakness into strength – would help raise the growth potential of the SA economy – and truly transform the economic prospects of all South Africans

There will be good economic reasons for rejoicing should President Jacob Zuma relinquish his post in the near future.

The rand would in all likelihood strengthen and would probably move back into line with its emerging currency market peers. Today this would have meant a USD/ZAR exchange rate of approximately R12.60.

Lower inflation will follow a stronger rand and bring lower short term interest rates in its wake. Cheaper goods and services and credit would encourage households to spend more, as would the higher house prices and equity in homes that accompany lower mortgage rates and a more hopeful outlook for South Africa. And the firms that supplied them would be much more inclined to add capacity and hire more employees. The SA business cycle would turn up.

The first Zuma attempt to control the Treasury in December 2015 took the yield on RSA 10 year bonds from 8.5% p.a in early December that year to about 9.6% by early January 2016. This move also widened the spread between RSA and US debt by about 100bps from about 5.7% p.a to 6.7%. The latest Zuma intervention in the Treasury has seen this risk premium rise further, but not dramatically, from a still unsatisfactory 6.46% level in early 2017, to the current 6.6% p.a level.

This spread may be regarded as the extra returns in rands that South African investments have to be able to offer to justify their viability – in addition to their covering the additional business risks associated with a particular enterprise. This extra return is also the rate at which the rand is expected to depreciate over the next ten years. The weaker the rand, the more inflation expected.

The cost of insuring SA five year, US dollar-denominated debt against default, an accurate measure of real sovereign risk, has followed a similar pattern, rising from 1.82% p.a at its lowest in 2017 to the current 2.15% p.a. When calculated in US dollars, an investment in a South African asset would be required to return over 2% p.a. more in US dollars than an equivalent US investment, to justify its value.

Greater risks demand higher returns and the higher the required returns, the fewer investment projects will qualify – to the grave disadvantage of the economy and its growth prospects. The object of economic policy should be to reduce such risks rather than to raise them, something the Zuma presidency has clearly failed at. Yet, given the reactions of the credit rating agencies, which have downgraded SA credit (indicating a higher probability of default on our debt), these market reactions must be regarded as surprisingly subdued.

The rand, and the market in RSA bonds, clearly benefit to a degree from the prospect that Zuma might not survive the campaign to remove him. Were Zuma to go, the benefits could extend well beyond the promise of a revival of fiscal rectitude and less inflation and lower interest rates. It would offer the prospect of a radical economic transformation. By this, I mean the cleaning of the Aegean stables that the state-owned companies (SOCs) have become. It would not require any Herculean effort to do.

A few investment bankers could do the job of converting the SOCs into a number of ordinarily valuable and well-managed businesses that compete with each other. They would be run efficiently and deliver their goods and services at competitive prices – as business have to do to survive the market test.

Can anyone seriously believe, in light of the evidence, that these SOCs with monopoly powers are essential to develop the SA economy? Or fail to understand that their actions are inevitably driven by the narrow interests of their managers and employees and what their suppliers can extract from them?

The proceeds from their privatisation could be used to pay off much of SA’s debt and dramatically reduce the interest burden of serving it, thus opening up the prospect for genuine poverty relief. This transformation – turning great weakness into strength – would help raise the growth potential of the SA economy – and truly transform the economic prospects of all South Africans. 18 April 2017

Being President can be very good (and honest) business

Donald Trump likes to remind us what a great businessman he is (or rather was). He may be right and perhaps his best business decision was to run for US President. It has greatly enhanced the value of his brand. As they like to say in Hollywood, there is no such thing as bad publicity.

Moreover he did not apparently have to spend much of his own wealth on his triumphant publicity campaign. A generally hostile media provided him with all the exposure he needed and did not have to pay much for. They thought, as did Hillary Clinton, that exposing his exceptionalism would be enough to put off potential voters. As we now know, they were wrong. The daily Trump tweets became the news events of the campaign (and, alas, continue to make the news) and were to his advantage at the polling booths. A tweeting President Trump, like much else of what he will now do and say, breaks the mold and we may well just have to get accustomed to his style (or lack of it).

What he does in office, with the help of his cabinet colleagues and many appointments, will matter more than his Tweets or intentions. The promise of a very different and more encouraging approach than that provided by the Obama administration to doing business in the US has resonated strongly with business – especially small business whose confidence levels are at record highs. Confidence in future income prospects is the most important ingredient in the recipe for more spending by households and firms that will raise US growth rates if it materialises.

Separation of US powers, between the House, the Senate, the states and the courts, is designed to complicate and constrain the realisation of any Presidential agenda or campaign promise. Tax reforms, of which much is expected, are initiated in Congress where much work has been done over the years by the Republican leaders in the House. We, as well as Trump, await with some anxiety the essential details. The implementation of a border tax, or rather a system where costs of imports may be disallowed as a deduction from taxable income, will deserve particular notice. The implications are vast – and not just in the US – and may well threaten the system of corporate taxing practiced everywhere else.

Taxing imports

This border or import tax will be intended to compensate the IRS for a lower corporate tax rate – given the excess of US imports over exports. The lower the corporate tax rate however, the less will any expenditure deduction matter for after-tax incomes. This includes the deduction for interest incurred or capital expenditure, both of which will be subject to debate and possible reform. It will be deemed protectionist by the World Trade Organisation and the US will argue otherwise but irrespectively. Net-net it may mean higher prices in the US but only if net-net taxes have risen for business enterprises in general. That will not be the intention though different businesses will be affected differently in ways that will be worth anticipating. It is effective after tax profits that influence the required returns on capital that have to be recovered in the prices that consumers or customers must pay if the firm is to succeed. Even income taxes find their way into prices.

Managing conflict

President Trump is not bound by the conflict of interest regulations that apply to all others responsible for government business. Trump however has elected to recuse himself fully from the Trump enterprise while President. His sons will run the business and manage the Trump brand. The cry from the anti-Trump brigade is that such arrangements, even should Trump stay fully uninvolved in the decisions made by Trump Enterprises, still represent a conflict of interest. In other words, the Trumps should abandon the Trump business and eliminate the brand, including presumably removing the Trump insignia that currently adorns buildings and merchandise – not a practical possibility. Selling the brand would not have eliminated the connection with the Presidency.

The Trump brand therefore lives on and understandably so given its value, calculated as the present value of the difference a Trump branding can make to rentals or prices that a Trump enterprise or franchisee can realise and pay royalties on. But this does not mean any conflict of interest. The better Trump does in discharging his responsibilities as President, the better his contributions will be appreciated by the public at large and the more valuable his brand will become. The economic interests in his brand and that of the US are well aligned, just as they were well aligned with the Obama brand. The lecture and consulting fees he will now be able to charge depend on the regard in which he is held.

The success the governments of the Western Cape have had in competing for resources with the rest of South Africa is highly evident in the building activity under way in the more expensive parts of the region. Any number of ordinarily valuable buildings are clearly worth more dead than alive – they are worth demolishing so that they can be replaced by more valuable structures, valuable enough to more than recover the costs of demolishing what stood before.

The demand for these expensive new residential structures has come mostly from migrants from other parts of South Africa where local government has proved much less competent in delivering services so essential to the quality of life, such waste removal, water and electricity supplies, easy access to homes, work and recreation as well as protection against fire, noise and criminals.

The more valuable the stock of buildings, the larger the tax base upon which the local authority can draw to fund service delivery, including in the more deprived parts of town. Moreover current revenues can be used to justify the raising of debt to fund a large capital expenditure programme in order to sustain and enhance the infrastructure that supports effective service delivery. This includes funding the additional roads and bridges and sewage works that support and make viable green field housing developments.

The extra tax these developments will generate over time can more than fund and repay the additional debt incurred. Bridges and new roads that improve access to undeveloped (often wastefully used land owned by government authorities) can prove highly profitable investments. They can be funded with tolls that can then pay off debt incurred in the building – no more or less than a user charge – rather than used to tax users as has wrongly been the case with most toll roads in the country, giving them their well-deserved notoriety.

A criticism one can make of the management of City of Cape Town is its reluctance to raise more debt to fund capital expenditure, that is to put its financial strength supported by ever rising values in the buildings and especially the land it services, to better and more immediate use.

Clearly regional economic development can become a highly virtuous circle of increased revenues and financial strength that leads to useful additional expenditure on improved service delivery that helps attract migrants to the region, rich and poor, that reinforces the growth under way.

It should however be fully appreciated (as perhaps it is appreciated in Cape Town), that the resource critical for faster growth and for which the competition is most intense (not only nationally but also internationally) are the skills, enterprise and wealth embodied in the high income earners of any community. Their contribution to economic development is indispensable for the incomes and the prospects of their poor neighbours. Moreover, providing this mobile resource with a globally competitive quality of local government service at a reasonable charge is essential to the purpose of economic growth. It is also essential to the incomes of the poor who will wish to migrate to the regions that promise better income opportunities.

Hence the relationship between the expensive real estate in a city that is demanded by the affluent and economically successful and the less expensive real estate, that is consistent with much lower earnings and less affordability, is a mutually supportive one. Improved competitive local government service delivery is very encouraging to the high income earners who deliver so much to an economy – including tax revenues – and so symbiotically also very valuable to the poor, who can expect improved services as well as improved income prospects.
If South Africa or any region of it is to succeed in the global competition for the all-important scarce resources that high income earners provide an economy, it will need to continue to offer them competitively priced and efficient services that local governments deliver. South Africa will also need to provide them and their children with competitively priced educational services and also competitive and competitively priced medical services. The role played in education by private suppliers of education and medical service is an obviously important one in these regards. Such quality service delivery will need to be nurtured and encouraged if South Africa is to succeed in overcoming poverty.