Exchange controls have long been a costly discouragement to entrepreneurs and investors who try to operate global businesses. Now Mark Shuttleworth, South Africa’s famous technology billionaire, space tourist, philanthropist and venture capitalist, wants his money back. And he wants to bring the system down with it.
“He quite deliberately decided to attack the heart of the scheme and seeks to bring down the pillars of the temple,” complained the South African Reserve Bank’s lawyer, Jeremy Gauntlett, in an interview with TechCentral recently.
“If the applicant succeeds in striking down section nine of the Currency Act and declaring all orders and rules unconstitutional, there would be no inhibition on removing capital from this country at all. Section nine is the heart of the exchange control system and he wants to knock [it] down.”
Very perceptive, is our senior counsel. That is exactly what Samson Shuttleworth wants to do. He may have cut off his hair, but more strength to him, if you’ll excuse my embroidering on Gauntlett’s analogy. The central bank’s legal eagle would do well to remember that the temple he references was a pagan temple and Samson’s god granted him the strength to destroy it as a matter of righteous vengeance.
Shuttleworth, whose coffers the bank raided on the way out of the country, is going to court. He obviously wants his money back, as one would when bureaucrats skim 10% off the assets one worked hard (or, for those who sneer at the efforts of capitalist entrepreneurs, was lucky enough) to create. But he also wants key parts of the exchange control law to be declared unconstitutional.
His capital has its roots in the sale of Shuttleworth’s computer security business, Thawte, to Verisign, at the height of the dot com bubble in 1999, for $575 million – worth R3.5-billion at the time.
He has since founded Canonical Limited, which produces one of the world’s most popular open-source operating systems, known as Ubuntu. He started a venture capital outfit named Here Be Dragons, which has invested in such companies as Fundamo, Clicks2Customers, SA Cab and Moyo.
He launched the Shuttleworth Foundation, a non-profit that funds the use of free, open-source and educational software. He started an educational charity known as Hip2B2 (“hip to be square”), which promotes maths and science education, innovation and entrepreneurship among the youth.
Shuttleworth claims exchange control regulations forced him to conduct his investment operations from abroad, because they make it impossible to build global businesses of significant scale from inside South Africa. In fact, because investment decisions have to be reviewed by a civil service functionary before approval, they make it hard even to invest in the rest of Africa, which the government notionally encourages. To get around these obstacles, he moved his capital in tranches to the UK, paying a massive R250-million penalty to the SARB under protest.
It is ironic that his success derives from misguided US legislation restricting the export of encryption technology. Verisign needed a partner that could provide it to non-US customers and dangled a big carrot offshore to find one. Instead of thanking US lawmakers for their stupidity, and learning a lesson from them, the South African government appears to want to repeat the folly and punish the entrepreneur who had the foresight and skill to stand ready to collect. It is as if they believe that the money Shuttleworth earned somehow belongs to all South Africans.
Shuttleworth explains his thinking very well in an in-depth Q&A with Duncan McLeod, long-time Financial Mail technology editor and now the brain behind TechCentral, an independent news site.
Let’s leave aside the character and wealth of Shuttleworth. Whether he’s a nice guy or how he got rich has nothing whatsoever to do with anyone else, unless he stole from widows and orphans, which he clearly did not do, and which in any case attracts a far lesser penalty than R250-million.
The case raises questions of two kinds. The first kind is moral: if we accept, for the sake of argument, that confiscating people’s property benefits the country as a whole, does that grant government the right to do so?
The second is pragmatic: is it true that confiscating property benefits the country?
The first is simple to answer. Just because a policy that harms one individual benefits others, does not make that policy morally legitimate. Just because the class of beneficiaries of a policy is larger than the class of injured parties, does not justify the action. Mark Shuttleworth’s money is not ours and the government has no right, beyond the taxes we all pay, to lay claim to all or part of it on our behalf.
The reason for the caveat about tax is that constitutional limits on private property rights are defined by law of general application in the case of tax. However, in the case of exchange control, they are arbitrary and subject to the discretion of the finance ministry and civil service bureaucrats.
According to Shuttleworth’s lawyer, the SARB explicitly claims that the 10% penalty is not a tax, because it does not apply to many people and, therefore, it does not have to be enacted by parliament. It would seem that clause 25.1 of the Bill of Rights has a lot to say about this: “No one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.”
Ferial Haffajee, the editor of City Press, appears to confuse the issue in her public comment on the matter: “Don’t you think Mark Shuttleworth’s behind the curve on tax morality? Tax havens are under pressure, multinationals being made to pay up.”
Leaving aside the somewhat oxymoronic concept of “tax morality” and whether or not tax havens deserve to attract the capital they do, this issue is not about tax at all, or about where exactly Shuttleworth took his capital. Nobody has claimed that he evaded tax, or moved his capital offshore in order to avoid tax.
This is about whether money can be invested outside of South Africa without the government claiming a big chunk of it on the way out, just because it can. It is about whether capital can flow into South Africa without being captured and immobilised by regulatory penalties. It is about whether South African residents are legally permitted to deploy their capital efficiently.
It’s about whether the government is being hypocritical when it says South Africa’s entrepreneurs are world-class, or when it says it welcomes foreign direct investment, while in reality it penalises South Africans who wish to invest elsewhere, or try to run global businesses from South Africa. It is about whether it is fair to impose restrictions on South African residents that do not apply for foreign traders in our currency.
The second question is, for non-economists, harder to answer. Does exchange control actually work, or is it just a relic of the autarky (self-sufficiency) that Apartheid-era sanctions enforced on South Africa?
The reason this is a hard question to answer is that these policies clearly do have effects, but they are complex and unpredictable. They go well beyond simply slowing down capital flows and thus, in theory, stabilising the value of a free-floating currency. The immediate effects on currency values are hard to attribute to policy, even with hindsight, and the wider effects to the vitality of the productive economy are impossible to assess because so many other factors also influence economic performance.
The fact that South Africa’s exchange control policy has since 1994 been one of progressive liberalisation – so much so that few ordinary South Africans are still troubled by capital controls as they were in the mid-1990s – suggests that free capital flows are widely seen as desirable.
Globalisation and the increasingly rapid flow of large amounts of capital worldwide have, in recent years, given rise to conflicting views on capital controls, even within the world’s global financial institutions. For example, the IMF has recognised what some advocates of capital controls have been arguing, namely that it may be desirable to prevent a currency from rising too quickly because of so-called “hot money” inflows.
Writing in the IMF Economic Review, however, Ila Patnaik and Ajay Shah are critical of India, one of the few large emerging markets with extensive capital controls: “We find that the capital controls were associated with poor governance, were unable to sustain the erstwhile exchange rate regime and did not support financial stability. India’s experience is thus inconsistent with the revisionist view of capital controls.”
It seems reasonable, considering both South Africa’s long-term policy position and the historic volatility of the rand, to accept Shuttleworth’s claims about the limits of exchange control policy. He says they only affect South African residents and not the foreign traders who consider the rand a highly liquid proxy for making emerging market bets. He says history shows they do not protect the currency and, therefore, are not justifiable from a policy point of view. His argument that South Africa was protected from the fallout of the 2008 banking crisis less by exchange controls than by higher interest rates and more prudent banking oversight, is also more than a little plausible.
Most importantly, he has a point about the capricious nature of exchange control decisions. Central bank officials with no sound basis for making investment decisions get to second-guess the risks taken by investors. The finance ministry applies penalties in what appears to be an entirely discretionary manner. This unpredictable treatment of investors cannot be good for South Africa’s economic progress.
Ironically, Gauntlett concedes this point when he argues not that Shuttleworth is wrong, but that he is suing the wrong party. The SARB is just following orders, he says, and the case ought to be answered by the finance ministry.
In considering Shuttleworth’s claims, it is easy to be swayed by emotional responses. Sympathy for a billionaire is hard to muster. Suspicion about motives for leaving South Africa is to be expected. However, the question isn’t whether he can afford it, or whether his claim that leaving the country was a hard decision is heartfelt or pure spin. It isn’t even about him, in particular. The question is whether the rest of South Africa can afford to be deprived of investors and entrepreneurs like him.
If that is what our capital control regime achieves, we can forget about grand ideas such as SiliconCape or InnovationHub. They will never produce great South African companies, because exchange controls will (trigger warning!) kill them in the crib. If exchange controls deny growing companies access to global capital, the temple pillars cannot crumble soon enough.
The downside of the analogy? Samson did pull down the pagan temple, but he sacrificed his own life for it. Let’s hope Shuttleworth’s heroic battle goes better. For his sake and ours. DM
Star Wars was the first major film to be dubbed in Navajo.