A scary path, but no outcome is inevitable
The junking of SA’s debt has forced even those disinclined to think sacrilegious thoughts to ponder whether this country could go the same way as Zimbabwe and Venezuela.
I don’t think so, but there is no doubt that the danger of starting down a path towards economic disaster is more likely now than at any point since democracy.
There are superficial comparison points. The land grab ideas that President Jacob Zuma now extols are similar to those early in Zimbabwe’s calamitous decline and they are being proposed for essentially the same reason. Like Robert Mugabe, Zuma sensed his political support ebbing to a dangerously low point so he pulled out the bazooka of political promises.
In Venezuela, President Nicolas Maduro says he is engaged in an “economic war” stoked by Yankee imperialists. This idea is loosely related to the notion of a “radical economic transformation” so beloved of Zuma’s cronies, whose grasp of the simplest economic notions are seemingly a bridge too far.
Venezuela is the place where sensible economics go to die. Maduro blames capitalism for inflation running at 1,660% and for the fact that there are precious few goods on the shelves of now state-owned supermarkets. In fact, in a desperate attempt at increasing his political popularity, Maduro “froze” prices of supermarket goods.
The results were, of course, perverse. Instead of goods becoming available at cheaper prices, they disappeared. “Freezing” prices instantly eliminated the incentive to sell them. Anything on sale was instantly bought so it could be smuggled out of the country and resold for much more.
Venezuela’s attempt at freezing prices shows how fast and how brutally economic populism rebounds on its advocates.
One odd little factoid is that Venezuela has one of the highest proportional rates of bitcoin mining in the world. Bitcoin mining requires high computing power, which requires lots of electricity. Electricity is almost free in Venezuela because the government fancies itself as a grand dispenser of economic “justice”. Essentially, the bitcoin miners are cashing the economic subsidy provided by the government. It’s short-sighted, because, inevitably, electricity has to be rationed. Turns out, whatever your political inclinations, simple economic logic dictates that price mechanisms are crucial for balancing supply and demand, and if they are removed … catastrophe.
Venezuela provides a range of other lessons, too. First, it’s a classic tale of economic hubris. Venezuela reputedly has the world’s largest untapped oil reserves, and oil constitutes 90% of its exports. During the mid-2000s, the economy grew steadily as the oil price increased. But as soon as it began declining, government subsidies quickly became unsustainable, leading to higher inflation, leading to more populist economic messaging, leading to more government “interventions”, leading to more misery, emigration and unemployment.
It’s a picture with which we are not entirely unfamiliar. In SA the commodity boom tended to obscure fundamental problems with the economy. As soon as commodity prices declined, those problems moved quickly from being conceptual to becoming very real.
The second lesson of Venezuela is how fast the decline can happen. In 2013, at the start of Maduro’s rule, Venezuela’s debt was rated investment grade. Shortly after he was elected, Venezuela was junked. S&P Global Ratings downgraded Venezuela’s credit rating three times in the following year, from B+ to B to B- to CCC+. It is now CCC, one notch above “default imminent with little prospect for recovery”.
So, please, can there be some good news? In fact, there is. There are two main differences between SA and Venezuela. The first is that SA is a more diversified economy. Venezuela’s problems derive in part from the “Dutch disease”, or commodity curse. The phrase refers to the puzzling correlation between countries that are notionally rich in commodities but are unable to translate that wealth into economic prowess. The reason is typically that highly profitable commodity exports tend to boost the currency, making it progressively less competitive, increasing dependence on the very commodity that’s causing the problem. This affects SA, too, but overall the mining sector is now barely 8% of the economy, although its proportion of exports remains high.
The second difference is political. In Venezuela’s case, even before the Hugo Chavez period, left-wing groups had long held power and were fairly united in their weirdo economic policies. In SA, the dissent in the ANC is not overwhelming but it is large and significant. SA’s dominant political ethic in the democratic era has been about compromise and balance — and the institutions of state reflect that.
The ANC is now in a tough spot politically, partly because of the unusual emergence of a left-wing force in the EFF. The existence of the EFF means outlandish economic promises typically made by socialist radicals have competition. It’s hard, or harder, for the ANC to claim it is the party of “radical economic transformation” when someone else is making the same claim rather more credibly. The ANC is now fighting on two flanks, and that’s always tough.
More fundamentally, SA’s population is now urban, diverse, and a large chunk has take the first steps in the inexorable process of gaining entry into the middle class.
Nobody knows precisely how things will turn out in SA, and I fear they may get worse before they get better. But all is not lost.
VENEZUELA’S ATTEMPT AT FREEZING PRICES SHOWS HOW FAST AND HOW BRUTALLY ECONOMIC POPULISM REBOUNDS ON ITS ADVOCATES