WHY ECONOMIC POLICY MATTERS
The weakening of the Rand and the decline in the stock market as the 2024 General Election results started filtering through, shows just how aware the market is of the future direction of the economic policies within South Africa. The two far left political parties of the EFF and the MK party both received a significant number of votes to be placed as the third and fourth biggest political parties in South Africa. Ascension to power by either of these parties could be determinantal to the long-term future of the country and by extension to you and me, the citizens of the country. In this month’s Financial View, we look at why economic policies do indeed matter and why the investors and workers will flee from countries where the policies are destructive and anti-capitalist.
South Africa has a history of inequality and in 2024 there is still a large disparity between the rich and the poor. We don’t score well on the Gini coefficient and this is often cited in negative news articles. To address this imbalance there has to be change but unfortunately many parties advocate the only way to achieve change is to apply government funds to the poor. South Africa currently finds itself in a situation of dwindling taxpayers and an increasing number of citizens reliant on the state for income through the form of government grants. The problem, however, is that one can only spend what one earns as income i.e. tax revenue. If the Finance Minister does not receive sufficient taxable income, he has to borrow money to fund his spending. In which case he will find himself in a debt spiral where the interest burden consumes a large and larger part of his revenue.
Margaret Thatcher, one-time Prime Minister of the United Kingdom, summed it up best when she stated, “The problem with Socialism is that you eventually run out of other people’s money”. We have long stated that a country needs to be run like a business. A business needs earnings that exceed expenditure to survive. Any failing business that has too much debt, eventually shuts its doors because it cannot afford to keep going. Our politicians do not seem to understand that there is limited income and feel differently as they make promises of ever-increasing expenditure in the election manifestos especially from the two parties on the far left, being the EFF and the MK party.
Let’s start with social grants. To many politicians this is the quickest form of redress. We state that jobs should be the focus to improve the standard of living of the poor, but socialists prefer to deploy state funds. The EFF wants to double the monthly amount of a state grant to just over R4k a month whilst the MK party want a range of increases, especially for those older than 75. Both of these will help these people but will have an effect of doubling the National Budget allocation to grants. The poor benefit but is it sustainable? Where is the extra money going to come from?
Both parties want to nationalise the central bank. The central bank is critical to the stability of the economy and the country as they have the ability to influence the amount of currency in circulation. Our central bank to date has been one of the best in the world as they have avoided the temptation to open the printing presses and have had a tight control on inflation. Take that fiscal discipline away and we will soon be an inflationary environment that is out of control. There is an example of this very close to our home as our neighbours to the north have long dealt with a hyperinflationary environment. On a recent Uber trip in Cape Town, the driver who hailed from Zimbabwe, was complaining about the fact that he was a trillionaire at one stage in his life. What is the point of having any assets if they have no value.
Whilst Zimbabwe is an example that we can refer to there is an even better example of failed economic policies where a socialist government spent more than they were earning. Julius Malema, leader of the EFF, often cites Venezuela as an example of what can be achieved with socialism. The problem is that he only focuses on chapter 1 and not the rest of the story. So, a quick history recap – In 1998 Hugo Chávez was elected president on a socialist platform, pledging to use Venezuela’s large oil wealth to reduce poverty and inequality. Venezuela is a petrostate and their economy is not diversified at all, and totally reliant on the oil price. The late 90’s was a period of a high oil prices, so Venezuela was awash with money and through the introduction of state petrol producers and increased tax revenues. Chávez took the opportunity of increased revenue to drastically increase government expenditure. All of this money was spent on housing, education, healthcare and food security. According to History.com:
“Though Chávez wanted to diversify the Venezuelan economy, his expensive strategy only increased the dependence upon exported oil. Chávez also strives to build Venezuelan influence, providing subsidized oil to Cuba in exchange for the services of Cuban doctors and teachers. He sells oil to other South American countries and China at below-market rates. At the same time, though, Chávez neglects to spend money maintaining oil facilities, and production declines”. (Sound Familiar?)
Over the course of Chávez’s presidency, which lasted until 2013, strategic petroleum reserves dwindled and government debt more than doubled. In 2014 global oil prices plummeted and Venezuela – which relies almost entirely on oil revenue for its income – went into a seven-year recession. Inflation skyrocketed and shortages of basic goods became widespread. Waves of anti-government protests in 2014 and 2017 fizzled out after a police crackdown. Millions of Venezuelans left the country to escape economic hardship and political repression. Amid growing discontent, their current president Nicolás Maduro was re-elected in 2018 in a presidential election widely dismissed as neither free nor fair.
Contrast this against Singapore. In 1965, Singapore became a sovereign country and adopted a host of policies to generate economic growth and raise living standards. It opened the door to international trade, foreign investment and immigration. Government spending as a share of the economy was kept small. In 2022, for instance, total government spending in Singapore was 15.4% of the economy (GDP) compared to 32% for South Africa. The tight fiscal control in Singapore has meant that taxes can be low, which in turn encourages even more foreign investment. Investors are typically risk adverse, so uncertainty drives them away, but if you do everything in your power to be attractive to investors, they provide ample capital for growth. This growth has seen Singapore rise to 2nd place in the world when measured by GDP per capita, or how rich the average citizen is.
The question we have to ask is whether we want to go down the route of Venezuelan socialism as promoted by the policies of the EFF and MK party or would we prefer the Singaporean economic miracle. We know which one we prefer. Encourage foreign investment by opening our arms to capitalists. Increased investment increases jobs meaning more South Africans are removed from unemployment and poverty, and ultimately more jobs leads to more tax revenue which puts the country’s income statement in a far healthier position.
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