Health of SA’s big five institutions

Saving our big five

Apart from the rhino, South Africa’s big five are doing well; the animals that is. The economic big five may not be that healthy…

In terms of per capita GDP and life expectancy, the Zimbabwean economy today is more or less where it was in 1946. Since around 1987, the Zim economy has been in a downward spiral and within a decade has lost 60 years of progress in terms of economic performance and life expectancy. Average life expectancy fell from 62 years in 1987 to approximate 40 years today, while income has fallen by approximately 30 % on a per capital basis. Something went wrong in the late 80s and 90s.

The Holy Grail of economics must be that one critical thing that makes an economy succeed. But economists disagree on what that critical thing could be. Some argue, for instance, that a free market is the only answer while others reckon that investment in education, access to other markets or financial regulations could be the key. Economists disagree on a great deal and they all consider their own point of view as the only truth. But, disagree as they may, few disagree on the importance of healthy institutions.

In the economic sense of the word an institution can be defined as "the rules of the game". As societies grow bigger and increase in complexity, as they become more dependent on technology and more specialised, and as the rights of individuals are increasingly recognised, new rules are required to support the functioning of the modern society. Individual property rights in a hunter gatherer society have little value but they are of the utmost importance in a successful modern economy; individual property rights evolved from a state of non-existence to social property rights and finally to individual property rights – Marx was clearly wrong!

Nevertheless, over time we experimented with numerous permutations of "the rules of the game". This process is likely to continue indefinitely but by now we have learned important lessons and Zimbabwe is a clear example of how not to treat your institutions.

In 1981 his Excellency President Robert Gabriel Mugabe was elected through the institution of democracy as the first fully democratically elected leader of the new Zimbabwe. One of the widely accepted functions of the modern state is to redistribute; to take from the rich and give to the poor. In Zim pretty much the same happened but over time the nature of this redistribution started to change from "take from the rich and give to the poor" to "take from the adversaries and give to the supporters".

Private property was either stolen by the state or it was stolen with the implicit support of the state. Inevitably this led to the undermining of arguably the most important institution in a modern economy – private property rights. Without doubt the undermining of private property rights affected sentiment, savings and investments, and consequently economic performance.

But institutions are there to support other institutions. Press freedom was initially used effectively to report on the misdeeds of the state; that is exactly what it is supposed to do. But soon journalists had accidents and explosions rocked the offices of the "hostile press" and soon another institution was gone.

But all is not lost if an independent judiciary continues to exist; in Zim the independent judiciary ruled successfully against the state in many instances … initially. Over time, however, court orders were simply ignored, "uncooperative" judges were pushed out and the bench was stuffed with "friendly" judges; the end of another institution.

Even after most property assets had been stolen many supporters were still demanding their share of the spoils; they wanted their money. No problem, said the tyrant, "if they want money we print more"; and another institution, the independence of the central bank was gone, and with it the country’s currency.

The last of the big five, democracy, was all that survived to prevent Zimbabwe from squandering the efforts of more than three generations. And the last election? One man one vote one candidate, and there was another institution – gone.

But how are our big five doing?

Private property rights: safe but under scrutiny.

Our constitution does protect private property rights but probably to a lesser extent than most people think! In the past decade South Africa experienced the nationalisation of mineral rights without too much of fuss. Perhaps the fact that mineral rights vests in the state in many other countries as well as the fact that the existing mining houses kept on mining pretty much as before meant that the nationalisation of mineral rights were mostly a non-event. However, continuous comments and calls for the nationalisation not only of the mines but other businesses also, clearly create uncertainty. Furthermore, land ownership is currently being "debated" and may lead to silly proposals to curb private land ownership. Here we should be worried!

Press Freedom: under attack.

The South African press can be considered as one of the freest in the world. And a free press often steps on sensitive toes. No wonder that politicians are currently introducing all sorts of measures, – The Protection of Public Information Bill, for instance – to curb this "menace". This institution is healthy, it is fighting back – but it is under attack.

Judicial independence: weakened.

Despite slurs and slander towards the judiciary, court orders are being adhered to by all. Our constitutional protection of the bench is probably sufficient. However, the system is cumbersome, costly and inefficient – typical of a bureaucratic institution. What is of concern, however, is the recent development in terms of which judges appear to have been appointed on the basis of their political loyalties and not on merit. This will clearly weaken the judiciary although the institution as such remains unthreatened.

Reserve Bank: Healthy.

Clearly the SARB has gone softer on inflation. Interest rates are technically too low and are likely to remain so for an extended period of time. The SARB is failing in its mandate to keep inflation below 6%. But what is clear is that the SARB will not be influenced by political pressure and will not blatantly turn on the printing presses (too much). This institution is healthy and independent.

Democracy: slowly growing up.

The last of the big five, democracy, is slowly growing up. The electorate still mostly votes on racial, historical and loyalty lines but recent elections do suggest that bread and butter issues are becoming more important. The real test of the health of our democracy will of course be when the ruling party is voted out, which will happen one day.

Clearly some of South Africa’s big five institutions are better off than others. As usual politicians will continue to try to weaken those institutions that were put in place exactly to protect us from their misuse of power. But in the end it will be up to us – through the institution of democracy – to ensure that all of our institutions remain healthy.

Dawie Roodt is Chief Economist of The Efficient Group


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