Trouble may be brewing in South Africa.
Although the African National Congress (ANC) backed off its recent land confiscation push, the threat of economic redistributionism still looms in the African nation.
The threat started when the ANC and the (ironically named) Economic Freedom Fighters (EFF) voted for a Constitutional Amendment allowing land confiscation without compensation. This motion was approved by a 241-83 margin and was set to go through a constitutional ratification process. The socialist coalition that spearheaded the land confiscation initiative justified its passage arguing that it would tackle racial disparities.
But this bill was not without its fair share of international backlash. After considerable international outrage and U.S. President Donald Trump’s concerns over the nature of these expropriations, the South African government has put the brakes on land expropriation for the time being. Nevertheless, there are still talks to reintroduce this bill with more politically palatable language and provisions.
The underlying problem is government meddling
Although the cries of the racist overtones behind these expropriation attempts are warranted, the real problem lies in the socialist nature of these measures. What is at stake in these debates is the integrity of private property, the bedrock of any stable economy.
Attacks on South African property rights are the first steps in destabilizing one of Africa’s most prosperous economies. Not only will land confiscation affect economic output in the short-term, but it will have negative spillover effects into other sectors of the South African economy.
Land confiscation will very likely create regime uncertainty throughout the South African political economy. This concept, which economist Robert Higgs coined, refers to the uncertainty that arises after a government intervenes strongly in an economy. In the South African case, the uncertainty surrounding the legal and political status of property could produce substantial declines in investment and production. Due to this uncertainty, property owners are reluctant to invest in their property holdings or maintain them for fear of confiscation.
In the same vein, foreign investors will become leery about investing their resources in South Africa. But unlike the capital-rich residents of South Africa, they can take their capital out of the country with ease. Many historical cases of out of control government interventionism have shown that governments are willing to put the clamps on citizens who dare take their talents abroad. In sum, when private investment drops off, economic malaise follows. This is a very realistic scenario should South Africa follow through with its confiscation gambit.
And scaling back economic irrationality is no easy undertaking. Once economic interventions are initiated, they become very difficult to reverse. Given the capricious nature of politics, more interventions could follow, thus exacerbating economic downturns.
How South Africa arrived here
South Africa has been playing a dangerous game of economic interventionism over the past few decades. After ridding itself of the unjust Apartheid system, South Africa established itself as one of Africa’s most prosperous and economically free countries. But as time progressed, it has fallen for the false allure of statism.
Since 2000, South Africa has expanded its public sector and increased overall public spending, with no meaningful attempts to liberalize other sectors of the economy. Additionally, South Africa has witnessed its tax hiking strategy to be ineffective in raising revenues. The result has been slower economic growth and a considerable drop in South Africa’s economic freedom rankings. Once ranked at 36th place, South Africa found itself at 88th place in economic freedom as of 2014.
Despite troubling indicators, South Africa continues to go down the path of big government. But now it might be entering a new phase of government growth; one that threatens the country’s institutional underpinnings.
Is South Africa following in Zimbabwe’s footsteps?
With the recent call to expropriate white land-holdings, South Africa is taking a page from its northern neighbor’s ‒ Zimbabwe ‒ playbook. Since Robert Mugabe came into power in 1980, Zimbabwe went from one of Africa’s most prosperous countries to a complete basket case.
In 2000, Mugabe started out by targeting the landholdings of affluent white farmers. This made for good politics given Zimbabwe’s colonial past. Channeling anti-imperialist rhetoric and scapegoating the affluent is the hallmark of Third World demagogues.
Under Mugabe’s regime, easy money, land expropriations, and big spending were policy fixtures. Logically, these policies produced disastrous results ‒ inflation and the destruction of Zimbabwe’s productive capacities. Reports from the Commercial Farmers’ Union revealed that agricultural production fell by $12 billion from 2000 to 2009 thanks to Mugabe’s confiscation measures.
But confiscation was only one part of the all-inclusive package of economic statism.
Throughout his regime, Mugabe made sure to turn the Zimbabwean Central Bank into his personal printing press. Monetary policy was based on satisfying political whims and financing government largesse, instead of focusing on sustainable growth. The result was a world famous hyperinflation that forced Zimbabwe to dollarize after the government destroyed its local currency.
With its economy in dire straits, Zimbabwe saw millions of citizens leave the country in search of better prospects. Although a recent military coup deposed the Mugabe regime, its remains to be seen if Zimbabwe will opt for more market-oriented policies and get its institutions in line.
One thing from the Zimbabwean experience is clear: The genesis of its economic tragedy was land confiscation.
South Africa should look toward Botswana
In stark contrast to Zimbabwe, Botswana offers a pragmatic alternative for South Africa to follow. Since gaining its independence in the 1960s, Botswana started out as one of Africa’s poorest countries. However, that did not stop it from embracing audacious economic reforms.
Unlike many of its Third World counterparts, Botswana discarded victim politics and looked toward the market as its vehicle for progress. By establishing the rule of law, defending property rights, and avoiding foreign aid dependency, Botswana established itself as a regional exemplar.
Botswana, exploited its comparative advantage, diamond production, to become one of the world’s fastest-growing economies and arguably the most institutionally sound country in the African continent. Botswana’s dedication to pursuing rational economic policies has landed it in 35th place according to the Heritage Foundation’s 2018 Index of Economic Freedom.
So not all hope is lost in South Africa. It at least has a positive neighborly influence to look at for policy inspiration. Third World countries are not poor because they are culturally backwards. They are poor because they do not possess political institutions that are conducive to economic growth.
South Africa cannot rest
Despite the positive example set by its northern neighbor in Botswana, South Africa is preparing to emulate the same land confiscation prescription that destroyed Zimbabwe. Zimbabwe serves as a stern warning to South Africa should it embrace the tempting mistress of socialism.
Since the 20th century, it has been fashionable for the political class to pursue interventionist policies such as easy money, price controls, and fiscal irresponsibility. Should South Africa proceed with land confiscation, it will likely go down this interventionist death spiral. Left unchecked, the state’s natural tendency is to grow. And economic crises give demagogic politicians the perfect opportunity to justify their interventions.
On the investment front, there is a lot at stake for South Africa. Foreign investment is key for many developing countries to advance economically. But when property rights are on the chopping block, investors will give South Africa the cold shoulder.
In fact, jurisdictional competition is already very strong worldwide. Nations are constantly competing for investment and human capital across the globe. When one country tries to brazenly destroy wealth, foreign investors can find more lucrative options. South Africa is no longer alone as an attractive option for foreign investment in Africa. Its northern rival Botswana offers a more institutionally sound and economically free alternative to the increasingly statist South African system. All things being equal, investors will likely shift their operations to Botswana should the situation in South Africa continue to deteriorate.
The political class never learns
Sadly, many in the South African political class like the ANC and EFF parties believe that doubling down on economic interventionism will somehow put South Africa on the path to economic prosperity. The allure of trying to correct supposed injustices through state force is politically tempting. When dealing with state intervention, however, the devil is always in the details.
Channeling redistributionist politics is a great strategy for myopic politicians whose only concern is to rack up vote counts. Sprinkle in some race politics, and you have an attractive political platform.
Sadly, modern-day politicians do not look beyond stage 1. They pay no attention to the potential long-term effects of their economic policies. There is no telling what kind of demagogues will succeed them once they’re long out of office. More often than not, political successors in statist environments ratchet up previous interventions.
And it makes sense. Government growth is already hard to scale back. Disgruntled voters will clamor for more government, despite evidence showing that the economic crisis they face was caused by government meddling in the economy in the first place. Alas, contemporary politics based on feel-good intentions does not allow for such farsighted thinking.
Expropriating private property could take South Africa to a point of no return. It is easy to boil economic policy down to figures and graphs, but the implications of interventionism go beyond fancy numbers. South Africa’s social fabric could be in jeopardy.
South Africa’s path to prosperity is simple: It should discard any idea of property confiscation and look to deregulate its economy as much as possible. The primitive form of statism South Africa is flirting with will condemn it to the soup kitchen of national poverty.
Socialist state confiscation has failed repeatedly, but political demagogues insist on defying the basic laws of economics. The facts show that socialism is an economically and morally bankrupt system.
But old political habits die hard.