OPINION: Forget FDI, local investment is a more reasonable option to boost the economy
Opinion / 17 September 2018, 4:30pm / Siyabonga Hadebe
PRETORIA – The notion of a ‘democracy deficit’ has never been really explored in the South African context. A deficit occurs when democratic institutions “fail to function properly (eg lack of transparency and accountability, technocratic decision making, inadequate participation of citizens in policy making).”
In our environment this statement proves to be much truer as far as decisions on the economy and finance are concerned. It is for the reason that some important changes affecting the economic policy may require more engagement than others due to their potential long-term damage and devastation.
For example, while we are expecting concrete proposals on how to turn around the economy, there is a push for the Government Employees Pension Fund (GEPF) to invest offshore. But also, we have heard that South Africa needs to attract more inward investment to grow the economy and also to create jobs. These appear to be two trains moving in opposite directions.
The decision to permit the GEPF is not only confusing but also anomalous – it goes against the very idea of stimulating the economy. One would imagine that for genuine capital formation to happen, the country would consider using locally available funds from the public and private sectors.
How exactly does exporting capital contribute to the goal of growing the economy? This means that a state institution could be showing what may be regarded as lack of faith in South African economy in preference for overseas market. Therefore, the GEPF move may be contradictory and troublesome for those who are currently being asked to bring their money to the country.
In addition, as a country we have walked this path before with disastrous outcomes for the economy. Capital outflows in whatever form, legal or not, undermine the health of the economy over a long run.
Those who are familiar with the economic treachery that began just before the end of apartheid will know and remember how much this country has been defrauded billions of rands. Besides privatisation and outright stealing, the promise for better returns in overseas markets was used to encourage massive outflows of capital by South African companies.
After the democratic elections in 1994, the finance portfolio continued to be under ex-apartheid minister Derek Keys and the South African Reserve Bank (SARB) under another ‘verkrampte’ Chris Stals. The two men worked tirelessly in taking the country’s macroeconomic policy to an undesired direction.
Among many of their actions, they decided to scrap the Currency and Exchanges Act of 1933 and the adoption by the SARB of what is called “flexible exchange controls” – to facilitate capital flights out of South Africa.
It was in this period that South Africa witnessed a mass exodus of large corporations to list and later relocated their headquarters to either London or New York. The likes of Anglo-American, South African Breweries, Dimension Data and Old Mutual left the place they had exploited for over century to settle abroad.
With them, they took along trillions of dollars. This was in addition to much of the money that had already departed our shores during the dark days of apartheid with the help of international banks such as Deutschebank, Citigroup and HSBC. This collaboration between local and international actors undermined South Africa’s transition from repressive rule to a democracy.
The relocation of capital in the post-apartheid period plus rampant practices of cash hoarding, also called the ‘investment strike’, have ensured that economic growth will never breach the 3% mark. The sudden haste to try and look for solutions to solve recession problems steer away from dealing with the root causes.
Business Day reports that the GEPF that looks after R2-trillion on behalf of government workers “may shift hundreds of billions of rand offshore as it seeks to reduce its dependence on the local market.”
In the name of “diversification” and attracting capital, the GEPF follows in the footsteps of the South African corporates that left the country and never returned. South African Breweries is now a Belgian company. Dimension Data is Japanese, and Anglo-American is British.
At some point, the then secretary general of the African National Congress (ANC) and now minister of mineral resources Gwede Mantashe once questioned the pride of South African firms following Anglo-American’s decision to separate local assets from the global assets that they had capitalised.
Mantashe added that Nestle remains a proud Swiss company even though it barely generates 2% of its revenue from Switzerland.
Perhaps there is a need to tighten exchange controls once and compel the SARB to play a much prominent role in upholding the integrity of the South African economy.
In this regard, the SARB’s monetary policy could facilitate economic transformation and also accelerate state participation in the different areas of the economy, mining included. Discouraging capital flights for whatever reason should be prioritised to prevent the GEPF and other state-led development finance institutions from building other countries at South Africa’s expense.
Other people will argue that China uses the massive strength of its state-owned enterprises to invest abroad. However, China does not run a massive debt from loans and borrowings. South Africa needs to focus on growing the economy and also fast track participation by its black majority in the economy.
Monies currently controlled by state corporations including the Public Investment Corporation (PIC) and the the Development Bank of Southern Africa (DBSA) as well the GEPF can be a superb catalyst to solving the present economic problems.
The University of Johannesburg’s Centre for Competition, Regulation and Economic Development estimates that South African corporations hold more than R1 trillion in cash reserves. This is not acceptable in an economy that is forever contracting while focus is mainly on regressive investment decisions like shopping malls and other non-value added economic activities.
The Mail & Guardian of 14 May 2018 reported that South Africa was going to receive its share of the UU$D60bn recently pledged by China (or approximately R370bn). It intends to use it as a stimulus package to boost the economy. Debt-driven growth? Such stimulus package will go to existing companies and not create any new opportunities.
Instead, South Africa should in the mid-term follow examples of other countries like the United States, Japan and South Korea to discourage cash hoarding by big companies. In 2014, Seoul “promised new tax measures aimed at unlocking billions of dollars in corporate cash reserves, in an effort to address the country’s exceptionally low dividend yields and rising wealth inequality.”
The Financial Times said this move was aimed at boosting the Korean economy, including changes to the tax code intended to discourage companies from hoarding cash. Finally in 2015, South Korea succeeded to enact “a three-year binding law aimed at slapping 10% punitive taxes on cash reserves if a company does not spend more than 80% of its annual profits on investment, dividends and wage increases.”
If taxes are seen as a punitive measure in efforts to revitalise the economy, then large monopolies should be forced to integrate new start-ups in their value chains. The entire economy must restructured to emphasise on manufacturing and tertiary sectors of the economy. Market development to encourage consumption of local products is equally important.
Solutions to present and future economic problems require pragmatism. Local investment is a more reasonable option to stimulating the economy using both privately and publicly held capital.
Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.
The views expressed here are not necessarily those of Independent Media.