Worth infinitely more than you've paid for it.
30 September 2016 01:46 (South Africa)
Business

Op-Ed: A citizen’s guide to the economy (and why Pravin Gordhan will prevail)

  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos
  • Business
Photo: A photograph made available 15 October 2015 shows a sign in a vineyard in English, Afrikaans and Mandarin at Babylonstoren wine farm in Franschoek, South Africa 14 October 2015. EPA/NIC BOTHMA

Reading our independent media, you can’t avoid knowing there is an epic battle between our President, his assorted supporters within the governing party and a collection of institutions, notably those notionally involved in enforcing the law, and the rest of the ANC, National Treasury and broad swathes of civil society. Where is it all leading? By DIRK DE VOS.

Making any predictions is a mugs game. For the most part, journalists on the front line provide copy on what might be going on. Political analysists, aided by their own sources and official comment, then read the tea leaves to try to explain it and proffer some sort of prediction as to where it all might be heading. Watching from afar, interested yet disinterested, are investors and the credit rating agencies. All the while, anxiety levels are on the rise.

What is going to happen?we all ask ourselves.

Nicholas Taleb, the probabilist, coined the term the Black Swan problemwhich says one cant predict the occurrence of rare events except to be certain they will happen and prognostication should focus instead on how fragile existing systems are to harm.

South Africa is particularly fragile and any number of Black Swans, say an economic collapse in China, a further and sustained fall in commodity prices, the UK exiting the EU or a President Trump, will upend any predictions made today on just about anything.

Without any insights into the various intrigues and a huge amount of disinformation, what is one to do? We have to rely on journalists and analysts but we citizens need something more, a bullshit filter constructed from available information. One can then ask questions such as who has the most to lose?.

South African exceptionalismholds that South Africa is somehow different or special compared to the rest of Africa. Actually, compared to the rest of Africa, we are quite different but in the broader family of nations were just another struggling middle income country with some peculiar features.

How does South Africa stack up to other countries? Making comparisons with publicly available data is hard to do. Economies are dynamic systems and much of the available data is out of date, unreliable or inconsistently measured. There is a huge amount of data so one has to select what is relevant. Likewise, it helps to select just a few countries for comparison purposes. This also requires some judgement.

What follows is, at best, a rough estimate of things. The genius of Thomas Piketty’s Capital in the 21st century is not so much his r > g hypothesis, which is probably wrong but his meticulously gathered data in different countries for really long periods of time. This is nothing like that. I have selected just a handful of countries to compare us against. The UK might be representative of advanced countries, Australia, a rich, resource-based economy (they think they are exceptional too) is also useful. Our BRICS partners are another grouping; and two African countries, especially the significant large economies, Nigeria and Egypt, provide useful comparisons.

The table below kicks off the analysis:

The basic economic structure of the countries is described. Due to the different ways of compiling data, one should not rely on it too much for analysing any one country. Instead, since the data above is from one source, the World Bank, it is useful just for comparison purposes.

What sticks out is South Africas unusually high unemployment rate. Also, as one of the poorer countries, the contribution of South Africas tertiary sector looks more like that of developed countries, as does Brazils. Going back in time, one cant help noticing how slowly we have grown compared to most of the other emerging economies.

The table below sets out the size of government and the importance of the extractive industries in each:

In general terms, for South Africas level of development, government expenditure as a share of GDP is relatively high and this is funded by a relatively high tax burden. Once again, we share this characteristic with Brazil. While primary resources remain a cornerstone of our export earnings, we are nowhere near countries such as Russia and Nigeria, which with oil and gas have been able to fund a good proportion of government expenditure from sources other than tax and borrowings.

Of course, Russia and Nigeria are finding (again) that their arrangements only work when the oil price is high. Otherwise, oil is just a curse. Former world chess champion, turned activist, Gary Kasparov makes the point that governments that traditionally rely on oil revenues for their funding dont have an incentive to be accountable to their citizens or develop their potential. China, which does, must therefore be on its way to becoming a proper democracy in the near future.

South Africa is different. Our government is funded almost entirely by its taxpayers. Strangely, there is support for the idea that South Africa should nationalise the mines so that all available rents are collected by the government on behalf of all its citizens. This model, where it exists elsewhere, such as in Russia and Nigeria, is mostly in oil and gas and not in other resources. It works poorly, provided the price of oil is high enough, or not at all. Venezuela, a favourite of our peacetime revolutionaries, is rediscovering this .

A 2011 Citigroup study estimated that only 7% of the value generated by SA miners is distributed to shareholders. Leaving aside problems of huge amounts of risk capital, skills and experience needed to successfully undertake mining as well as issues around compensation, a nationalised mining sector wont do much for the fiscus. It is noteworthy that China, which has invested directly in resources all around the world, chose to make a bank, Standard Bank, its biggest single investment in South Africa.

We can know this: any political party which has the nationalisation of mines as policy is either ignorant or lying. It wont happen because it simply does not make any sense whatsoever.

Let’s then look a little deeper into government. Kevin Lings at Stanlib used to publish a great overview of each annual budget and these provide a useful guide as to how government spends its money. The table below looks a little deeper into some of the way governments spend:

The amount South Africa spends on the salaries of public servants is an extreme outlier. Our governments expenditure is a significant share of GDP for our level of development. Nigerias government has a budget less than half the size of South Africas.

Some time ago, Mike Schüssler of economists.co.za took a look at this and found that South Africas labour unit costs have spiralled. More than that, public servants are very well paid, even in global terms. The average South African public service wage sits between the average wage paid to public servants in Canada and France. After-tax wages are even better. On a purchasing power parity basis, these are similar on average to those paid to German and Australian public servants. State-Owned Enterprises pay even more. Public servants are paid 34% more than their private sector peers and employees at State-Owned Enterprises are paid on average 43% more than the private sector.

Since Schüsslers study, the number of public servants employed has increased dramatically. Africa Checks research showed that in 2012 there were just under 2.2-million government employees and that between 2005 and 2012 these numbers increased by more than a quarter.

This sets up a rather precarious dynamic. South Africa is one of the most unequal societies in the world as measured by the Gini Coefficient. One has to be very careful about this particular metric. How one measures it in the same economy can give very different results. Furthermore, pre-tax and after-tax distributions can give very different outcomes as it does in South Africa One could also fairly state that of all employers, the public service is the most demographically representative. This would reduce inherited inequality but, given pay levels, it does the opposite. Still, the public service employs a good portion of our black middle class. Big changes through forced retrenchments would reverberate in a very big and unpleasant way. The Treasury would know this. Others in government? Not so much.

Consider this: the average employee at a State-Owned Enterprise would have to take a 30% pay drop to work in the formal private sector. For the average public servant to do the same, that employee would suffer a 25% pay drop. If the public servant had marketable skills, and many dont, the private sector might still be an option. But in this economy, the private sector is not growing employment. The drop into the informal sector is pretty dire. A Stats SA presentation on nonVAT businesses shows that 64.9% of nonVAT businesses made net profits below R1,501 a month.

To keep the whole thing afloat, careful management of fiscal policy is vital. One part of this is our creditworthiness. There will be politicians who will tell their supporters we cannot be beholden to credit rating agencies, that they are merely used by those opposed to economic transformation, that it is only the rich who care about what credit rating agencies say. That is rubbish. A poor credit rating increases the cost of debt and can prevent even accessing debt. The table below shows the impact of poor credit ratings in different ways:

One should be cautious about taking the numbers in the table at face value, though. The public debt interest charge as a percentage of government revenues would automatically reduce if the governments share of GDP increases. Despite huge public debt in the UK, servicing it represents a relatively modest share of all government expenditure. South Africas public debt servicing costs also look under control.

But for what could happen, look to Brazil. Brazils poor credit rating meant that servicing its public debt, just over 50% more than South Africas on a per-GDP basis, costs double that of South Africas. The difference is our investment grade credit rating.

It does not help that South Africa also has persistent current account trade deficit (balance of payments deficit) with the rest of the world. Why? The short answer is that our trade deficit also has to be financed. To get foreigners interested enough to lend us the hard currency we need, the interest rate or yieldwe have to offer them has to be high enough on a risk adjusted basis. Higher yields push up the interest rates we all have to pay, whether for investment purposes or consumption.

The main source of governments revenue is, of course, taxes. As already shown, South Africas government takes a relatively large amount of tax in comparison to other countries and SARS has been largely responsible for beating its targets year on year. There is some consensus that there is some upper limit to how much tax revenue can be collected in any economy. One constraint is the tension between raising revenue and providing a competitive environment for businesses to grow. The other is the problem of tax evasion. These constraints are currently the work of the Davis Tax Commission. South Africa is widely considered to be near or at the upper limit of what can be collected.

To continue to perform as it has done, SARS will have to maintain and improve its standards and, yes, gather intelligence on evasion and other schemes that defraud the rest of the taxpayer base. Technical competence is one aspect. Maintaining tax morality is the other. Nothing undermines a tax base more than the idea that some connected individuals are getting away with not paying their fair share. Our tax base is fairly narrow, made up of four main categories:

  • Income taxes off salaries generate 35.9% of all taxes;
  • VAT generating 26.9% of all taxes,
  • Companies Income Tax including dividends tax making up 18.9%; and
  • Miscellaneous taxes such as fuel taxes, customs and others that collectively generate 18.7%.

While the top 566,000 income earners, those earning over R500,000 per annum, were responsible for more than 50% of all personal income tax, there are 5-million additional taxpayers who have to make up the balance. Similarly, just 360-odd companies with income of over R200-million paid nearly 60% of all companiesincome tax, but there are 170,000-odd that pay this tax out of 650,000 active companies. VAT, an increasingly important component of the tax system, is paid by all South Africans and is administered by as many as 420,940 active VAT vendors.

SARS is a huge undertaking and it fulfils a critical task. As such, it has to be in the hands of highly competent people working at meeting revenue targets all the time. It is not easy to determine who might be competent to lead SARS. It is far easier to take a view on who is likely to be incompetent. A political stooge with little background in SARSoperations, how it works (well) and what doesnt work, is very likely to be incompetent. That same person, if despite the aforesaid disqualifications is bold enough to undertake a major restructuring in defiance of the ministry to which he reports, is likely to be incompetent. If other senior and important positions resign or are forced out of SARS on the scale we have seen, one can be confident it will end badly.

Other incompetents, say at the National Prosecuting Authority, the Hawks or intelligence services, should deeply concern us. We have seen what happens when incompetent but connected people lead the police services. The rising levels of crime and lawlessness is one measure but the evidence led at the Marikana Commission of Inquiry more or less proves it.

Incompetence at the Treasury and SARS presents a different level of threat. These two institutions are the vital thread which if pulled will see the country unravel. South Africa has already suffered from widespread theft of the public purse but has been robust enough to keep going. The Treasury and SARS make our progress possible. If they cease to function as they have done, every South African will suffer, but it should be clear who will lose the most — the voting base of the ANC, from the middle classes through the working class, the huge numbers of salaried public sector employees, and the recipients of social grants and other public services.

It is no wonder then that Minister Pravin Gordhan has received the political support he has from the ANC. This is about survival. So, one can be confident in making one prediction: Finance Minister Pravin Gordhan will prevail and Tom Moyane will soon have to pack his bags, leave SARS and go somewhere else. There is no other option because it is carved into the structure of the kind of economy South Africa is.

There is another lesson: If you want to make a lot of money in this country, whether through fair means or foul, having the Treasury and SARS functioning as they have is in your interests. No one can derive lasting benefits, whether its a mining right or a juicy contract with a State-Owned Company, if the country itself unravels. There is some comfort in that. DM

Photo: A photograph made available 15 October 2015 shows a sign in a vineyard in English, Afrikaans and Mandarin at Babylonstoren wine farm in Franschoek, South Africa 14 October 2015. EPA/NIC BOTHMA

Data Sources:

  1. https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita
  2. https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita
  3. Derived from http://www.tradingeconomics.com/
  4. https://en.wikipedia.org/wiki/Government_spending
  5. http://data.worldbank.org/indicator/NY.GDP.TOTL.RT.ZS
  6. http://stat.wto.org/
  7. For Implied Share of resource rents to government expenditure, divide resource rents as share of GDP by government expenditure as share of GDP
  8. http://siteresources.worldbank.org/PUBLICSECTORANDGOVERNANCE/Resources/285741-1343934891414/wage_bill_data_final_july_22_2011.xlsx
  9. http://ourworldindata.org/data/growth-and-distribution-of-prosperity/income-inequality/
  10. http://brics.ibge.gov.br/downloads/BRICS_Joint_Statistical_Publication_2014.pdf
  11. https://freeman.blogactiv.eu/2013/12/19/did-hu-and-wen-set-china-on-the-road-to-a-harmonious-society/
  12. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/02/11/000158349_20150211093731/Rendered/PDF/WPS7194.pdf
  13. http://www.theatlantic.com/daily-dish/archive/2011/02/if-inequality-is-a-factor-for-egypt/176356/
  14. http://cprenet.com/uploads/archive/UJMSS_12-1254.pdf
  15. http://brics.ibge.gov.br/downloads/BRICS_Joint_Statistical_Publication_2014.pdf
  16. http://www.tradingeconomics.com/country-list/government-debt-to-gdp
  17. http://www.tradingeconomics.com/country-list/rating
  18. http://data.worldbank.org/indicator/GC.XPN.INTP.RV.ZS
  19. http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx
  • Dirk de Vos
    dirk-de-vos.jpg
    Dirk de Vos
  • Business

Get overnight news and latest Daily Maverick articles

Do Not Miss

Daily Maverick has temporarily suspended comments on the site. Until the interwebs figures out a better way to deal with the naughty kids in the class, the space for your comments is on our Facebook page and the Twitterverse.

Alternatively, you are welcome to send a letter to the editor.