Which State Is Likely to Fail and Why – Economic Postman

Which State Is Likely to Fail and Why – Economic Postman

Businessmen have celebrated the arrival of Cyril Ramaphosa as President of South Africa in 2018, seeing him as a pragmatic tycoon capable of fixing the incompetent kleptocracy of his predecessor Jacob Zuma. Yet five years later, they themselves are outraged and sounding the alarm, warning clearly that South Africa could become a failed state.

Already in 2023, outages exceeded those of 2022, which was the worst year on record so far. The companies predict a total network collapse. “If this crisis continues, we will not be able to guarantee a stable supply of food, medicine and other essential goods,” the retailers wrote in a letter to the president in February. Morale plummeted further as the rand hit a record high after the US ambassador earlier in May accused South Africa of secret arms shipments to Russia.

No one expects Ramaphosa to solve the problem anymore. Those with means are finding private alternatives: private health insurance, private schools and security, or solar panels on homes.

The links between big business and government began before 1994, when Nelson Mandela and the African National Congress came to power. As international corporations and funds left South Africa in the 1980s, domestic conglomerates became increasingly important. By the end of the decade, three conglomerates controlled companies representing 75% of the market value of the Johannesburg Stock Exchange.

In 1985, the prospect of nationalization pushed large companies to defy the wishes of the apartheid regime, and the presidency of the Anglo-American group then met exiled leaders. Those talks culminated in an informal agreement with the African National Congress to abandon nationalizations while corporations embraced “positive discrimination” and enriched themselves with a black elite, including Mr Ramaphosa. Thus, the basic structure of the South African economy has changed little.

According to IMF research, the accrued liabilities of listed companies increased by 25% between 2000 and 2016, while the global average increase was 6%. Fixed margins, ie prices above the marginal cost of production, are a natural phenomenon in the absence of competition.

The problems were overcome by private initiative, according to an article in The Economist. In 2015, Mr Zuma dismantled the rand by replacing a respected finance minister, who had helped block a multi-billion dollar nuclear deal with Russia, with an obscure MP. Industrialists called a meeting with party bigwigs, including Mr Ramaphosa, who had by then amassed a fortune and returned to politics.

However, today’s crises cannot be solved so simply. Entrepreneurs typically cite three issues: power, logistics and crime. Last year’s blackouts may have reduced GDP by 7-8%. 2023 could be even darker. The mobile network is down. Expenditure on diesel for generators has drastically reduced supermarket profits.

Transnet, the state-owned freight rail operator, has been hit, like Eskom, by allegations of corruption and mismanagement. Last year, mining industries lost 300 billion rand ($16 billion) in runaway exports, or about a third, because they could not get their goods out of the country.

The Fraud Factor

Crime makes everything worse. In 2019, at least 183 infrastructure projects were disrupted by the “construction mafia” demanding jobs and bribes. Railway cable theft cost South Africa an estimated R50 billion in 2022. Former Eskom railway chief Andre de Ruyter, who tried to eradicate cancer, was poisoned in December but survived. Western officials fear that South Africa is now the capital of money laundering.

Mr. Ramaphosa repeatedly pledged to keep his promises, but failed miserably. Although some do not question his honesty, most consider him incompetent. When US Treasury Secretary Janet Yellen visited South Africa earlier this year, academics and economists asked her to make sense of the president.

For several years, companies sent staff to help run government services, paying their salaries. Corporate lawyers work in the prosecution service, bankers in the industry department. Several detachments are involved in Operation Vulindlela (“Setting Aside”), a joint initiative of the presidency and the finance department aimed at overcoming bureaucratic inertia.

In March, Ramaphosa said the private sector would fund the Resource Mobilization Fund (RMF), designed to hire external consultants.

Business groups emphasize that their efforts will be transparent. And the approach offers a better chance of success than relying on ministers who are instinctively skeptical of the free market.

But critics remain concerned about corporate behavior. Organized business has, at least until recently, had a case of Stockholm Syndrome covering a failing president. Perhaps it would be better for business leaders to explain to the public the true extent of the South African crisis, and perhaps they would be heard.

In a global poll by US consultancy Edelman, South Africans said they trust business more than government, media or NGOs, by a margin of 40 percentage points (62% vs. 20%).

But companies are still very timid when it comes to cleaning up corruption. After being poisoned, “disappointed” by the reaction of other businessmen, many of whom sent private messages but remained silent in public, André de Ruyter appears disappointed. “But that’s the culture,” he told The Economist.

But the African National Congress is not fixed, and therefore the country’s problems cannot be solved, because it is basically a state. The situation is so serious, claims a former deputy finance minister in The Economist, that society could “explode at any moment”.

The moment is reminiscent of 1985, Songezo Zibi, a former business editor and business executive who founded his own political party days ago, told The Economist. While he admits that no corporation has the power that conglomerates had in the 1980s, he says corporations need to show the same courage today. Instead of joining other government initiatives, the 40 or 50 senior executives should come together with unions and NGOs to craft a new “social contract”.

Power hostile to the market

Companies are unlikely to agree to such proposals, not only because they are vague, but also because today’s party will still be in power tomorrow. Companies are already going after Ramaphosa’s deputy and likely successor, Paul Masatile.

However, it seems that big business no longer feels isolated from South Africa’s problems. Potential competitors are relatively rare: the World Bank suggests that South Africa has a third of the small businesses it should have, given its GDP per capita. Much of the revenue generated by the 40 largest listed companies comes from countries other than South Africa.

But there are limits to what even the biggest companies can do to protect themselves. Some believe that big business may be able to overcome short-term problems, but in the long term their fate is inextricably linked to the success or failure of the South African economy.

But looking at it soberly, if 90% of the population is suffering, how can this country be sustainable?

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