The Vanishing Base and Government’s Ideology

The more a government interferes in and controls an economy, the bigger proportion it takes to cover its own costs.

Written by: Chris Hattingh

In a recent report, Eunomix Business & Economics Ltd, a Johannesburg-based political and economic risk consultancy said, “Bar a meaningful change of trajectory, South Africa will be a failed state by 2030.” Given that the governing African National Congress (ANC) appears committed to its ideology of a National Democratic Revolution – just socialism in different clothing – for as long as it remains in power, it will continue suppressing South Africans’ abilities to develop. To avoid the fate predicted by Eunomix, South Africa needs to break with all-controlling government policies and a redistributionist mindset.

After the country’s first democratic election in 1994, the Mandela government adopted policies that opened the economy, making South Africa more competitive and making it easier for South Africans – most especially black South Africans – to try their hand at creating wealth for themselves. The Mbeki administration continued that trend. Under Jacob Zuma, and now under Cyril Ramaphosa, the ANC has reverted to what its main ideology always demanded – that it needs to ‘take charge’ of the economy, and guide and control it in the ‘right’ direction.

However, the direction in which it is currently headed means that economic gains of previous years are being steadily wiped out. Instead of slashing taxes, and allowing people to work and build, the government of the day seeks to somehow redistribute people into prosperity – a path that only entrenches competition between interest groups to control the state, and that steadily diminishes the country’s economic prospects.

The more a government interferes in and controls an economy, the bigger proportion it takes to cover its own costs. Ballooning state costs, especially wages for public servants, are no guarantees for efficiency and cost-effectiveness (see here Eskom, and the country’s massive debt-to-GDP ratio). A government cannot create its own wealth or revenue – it can only take tax revenue, to fund its own functions and plans. The wider the scope of functions a government adopts, the more it will tax citizens. Aside from the fact that governments struggle to spend tax revenue efficiently, higher tax rates also discourage citizens from accumulating wealth – the more you succeed, in effect, the more you are punished.

Eunomix pushes for a “meaningful change of trajectory.” What would be truly meaningful – indeed, transformative – in the South African context?

The biggest initial move would be to shift from the view that the country has a single wealth pie that politicians are somehow best placed to divide between 60 million unique individuals. This view is flawed in that it presumes wealth is collectively owned, and secondly that wealth is fixed. The obsession with redistributionism as a means to ‘help’ those less well-off limits the broader discussion – and most importantly, does not address the artificial barriers to employment and growth that have been imposed by the state. This view does not have as its foundation the possibility that individuals are capable of creating wealth for themselves – if the environment in which they live as free from government interference and restriction as possible.

During the week of 7 September, it emerged that South Africa’s GDP had declined by a record 16.4% in the second quarter of 2020 (this figure was annualised to 51%). The repeated calls for an ‘inclusive’ and ‘transformed’ economy (from top government officials and many in the commentariat) are very quickly going to run into the brutal reality that the country is simply running out of fiscal runway.

If we don’t move to economic freedom-enhancing policies, there won’t be an economy that can be inclusive in the first place. There will be no support mechanism for South Africans who desperately need some form of assistance.

The only way to attain actual transformative growth, is to abandon the idea that has hobbled South Africa’s potential for centuries: That the state should be at the centre of our lives, and decide for us how we are to live.

Given the extensive damage that has been caused by the government’s COVID-19 lockdown (more than 3 million people added to the over 10 million unemployed before the pandemic), South Africa will need to do away with the ideas and policies that came before. A return to mere ‘normal’ will entail continued societal decline, lack of progress, and ever-growing unemployment – everything we endured before COVID-19. The kind of radical economic growth this country needs can only come from adopting the ideas and policies of individual rights and limited government.

Chris Hattingh is Executive Director at the Centre For Risk Analysis (CRA). With a special focus on trade, investment, and economic matters.