Opinionista Trudi Makhaya 23 March 2014

The path to riches is paved with crony capitalism

In the wake of the Public Protector’s report on Nkandla, many of us are reflecting on the type of society we have become. What the report reveals, in line with many other scandals, are the dysfunctions that may emerge in the relationships formed between private service providers, and public sector officials and politicians. The Economist just last week ran with a cover story on ‘The new age of crony capitalism’ based on an index it had created of countries that are friendly to that form of wealth accumulation.

At the heart of crony capitalism lies ‘rent-seeking’, that is activity aimed at achieving remuneration over and above what is due to labour, capital or land committed to its current use. These are gains that would not accrue to that factor of production in a functioning and transparent market. We see crony capitalism in our headlines as they tell tales of licenses, tenders and leases landing in the hands of politically connected businesspeople.

Of the 23 countries for which results are presented, South Africa comes in at number 12, a middling outcome. The top three countries where politically connected businessmen are likely to prosper, to use The Economist’s formulation, are Hong Kong, Russia and Malaysia. This is calculated based on the value of billionaire wealth derived from a list of sectors that are plagued by rent-seeking, as a percentage of GDP. The index is built on idea that some sectors are more susceptible to rent-seeking than others. Those are sectors with a tendency towards monopoly, licensing or heavy state involvement such as casinos, construction, mining and energy. This index comes with numerous qualifications and disclaimers. Businesspeople involved in these sectors may be clean; nonetheless it is argued that data from bodies such as Transparency International indicate that certain sectors are more susceptible to cronyism than others. It is interesting to note that of the top ten countries with a tendency towards crony capitalism, seven are in Asia.

Despite its weaknesses, acknowledged and unacknowledged, this effort at cataloguing and quantifying crony capitalism raises very important questions for economic development. Often in such discussions, the focus is on the lives of poor people; who they are, what they lack, what should be done to change their lot. How people become rich in a society is as worthy a subject though it’s often left to financial analysts and rarely forms part of the general discourse. It has become popular to chastise the top 1%. The index provides some nuance to the debate in attempting to differentiate between different paths of getting into that bracket.

From my understanding of the data, South Africa’s position on the list is due to the mining sector, which is classified as a rent-heavy sector because it is characterised by licensing and other forms of regulation; and which has produced a fair amount of local billionaire wealth.

Our billionaires, only seven according to the Forbes data that The Economist uses, coined it in the luxury, media, mining, pharmaceuticals and retail sectors. Mining magnates’ wealth accounts for an estimated 43% of the collective wealth of South African billionaires. But this is a lot of analysis to rest on the fortunes of seven families.

Carlos Slim and Bill Gates, who have been engaged in a battle for the top spot for some time, demonstrate, superficially, that distinction between crony wealth and merit-based wealth. The Economist makes it very clear how it feels about the cost of telecommunications in Mexico. The efforts of the competition authorities in that country to curb abuses of dominance in telecommunications services receive some well-deserved praise. But let us not forget that Bill Gates, who made his fortunes in the ‘rent-free’ technology sector through Microsoft, has also been dogged by competition law cases.

The crony capitalism index may do more to demonise than to enlighten. The lead article is the kind I should have liked. It is a paean to competition policy and law. It constantly advocates for governments’ role in promoting competition. The 19th century American battle against robber barons is cited at an episode worth emulating. Hong Kong’s high position on the index is attributed to its lack of competition laws, which were only enacted over the past two years. Yet we should be careful about perpetuating unhelpful stereotypes about wealth accumulation in developing countries. Despite the qualifications that clean billionaires do exist in rent-heavy industries, the authors of the article accompanying the index soon slip into talking about ‘crony wealth’.

South Africans should be concerned about crony capitalism. It is growth-inhibiting. It is the stuff that can keep a country in a middle income trap where the elite prosper at the expense of the rest. Gaining wealth should not be about handicapping others or exploiting bad governance. The culture of accumulation in the country is distorted and dysfunctional. The apartheid economy was built on corruption, cronyism and exclusion. And we have yet to transcend this unsavoury aspect of our economy as tenderpreneurship runs rampant. Though the crony capitalism index lets us off lightly, partly because it focuses on billionaire wealth and not on the more modest prosperity that arises from cronyism, many South Africans would argue that the return on political positioning is as higher if not higher than the return on creativity and hard work.

There are important questions to be raised in South Africa about the opportunities that entrepreneurs have to enter and to attain success in the economy. Given that the economy is dominated by monopolies and oligopolies, is it surprising that those with access to the government will use that position as a path to initial capital accumulation? Many studies, including those from the World Bank, have argued that South Africa has an opportunity deficit. The path to modest success, let alone significant wealth, is filled with many barriers. This is a challenge to government and business leaders to work together to remove the structural barriers to advancement, be they in access to education, wealth, affordable inputs and raw materials or the lack of a level playing field. DM