Land seizures are complex, costly and unwise — just ask Zimbabwe

Someone, somewhere, pays the price for expropriation without compensation — often it is the entire country

The ANC made a landmark decision in the December 2017 conference, where it indicated that it would start the process towards a constitutional amendment of Section 25 to make possible land redistribution without compensation. This is a marked shift in policy, and comes at a time when land reform (through the state and the market) has made more progress than experts and policy makers care to admit.

Ironically, the ANC decision also comes at a time when the Zimbabwean government has established a compensation committee under its Land Acquisition Act to allow for dispossessed white former commercial farmers to be compensated for land seized 18 years ago. It raises the question why the ANC is taking a position that its revolutionary counterparts across the Limpopo are departing from. Nonetheless, if the Zimbabwean experience is not sufficient to proffer fundamental lessons for SA, then it would be prudent to point out a number of facts that should prompt policy makers to reconsider the ANC’s December decision.

With the benefit of hindsight, the Zimbabwean experience tells us that the notion of expropriation without compensation is a bad idea. The Zimbabweans might have seized the land without compensation 18 years ago, but they collectively paid for it through eight consecutive years of economic decline that led to job losses, deindustrialisation and a loss of agricultural export revenues. In 2009, economist Eddie Cross estimated the cost of Zimbabwe’s expropriation campaign at $20bn, which included lost export revenues, food aid imports and economic growth foregone, which could have sustained Zimbabwe’s once promising economy.

With an unemployment rate of more than 90% and tepid growth in the recent past, the Zimbabwean government is going back to correct the fundamental mistake it made by compensating farmers, whose losses are estimated to amount to $11bn.

The moral of the story is, if the government declines to compensate its commercial sector for land improvements – at the very least – someone else will have to pay for it, indirectly. The compensation effect, as we call it, will result in the entire economy and its citizenry paying for land seizures through lost agriculture export revenues and job opportunities.

Let us unpack the compensation effect within the South African context. There are two immediate points worth noting, which speak to the difficulty in implementing expropriation without compensation, and the implications thereof. First, if the Constitution is amended to allow expropriation without compensation, how would the law cater for the assets on the farm and improvements made on the land?

The land on its own is roughly 10% of the total value of a typical farm operation if fixed (immovable) and moveable assets are taken into account. Would sunk investments (such as general farm infrastructure and assets such as farm machinery) – which are 90% of the value of the farm – be subject to expropriation without compensation too? If compensation is due for farm assets, and not the land itself, then the technical argument that arises is: would it be prudent for the government to pay 90% in compensating farmers for improvements to the land to obtain the 10% that represents the actual land value?

Second, a complication would emerge from the fact that South African agricultural land is heavily indebted. Farm debt that is linked to the actual land through title deeds that have already been used to secure farm loans now stands at more than R160bn. In this case, two questions are worth considering if expropriation without compensation becomes reality. One is how the government handles heavily indebted land – if compensation is not due to farmers, would there be compensation to banks, which are de facto partial owners of that land through debt? If the government exonerates itself from compensating the banks, this would translate to R160bn wiped off the books of the banks.

Another scenario is if the government commits to cover debt associated with land, which by definition becomes expropriation with compensation. The only difference is that the compensation goes to the bank that is owed money, rather than the farmer. Let us assume that the government is sensible enough to compensate the commercial farmer for improvements made to the land on one hand, and the bank for debt owed by the farmers. If the government determines the value of infrastructure and investments on the farms and then uses that same value to cover the debt owed to the banks, situations could arise where farmers receive “zero compensation”. There might be situations where seized farms are insolvent, in which case the government would have to pay the banks the balance of what is owed by the farmers whose land they are seizing. This scenario is already permissible under the current Constitution and does not require an amendment of any law.

Third, the government will awaken to the realisation of the extremely complex technical headaches of expropriating land without compensation, by which time land reform will have stalled altogether.

This will lead to another wave of impatience that will seek to implement further draconian reforms to allow the government to seize land with impunity. We saw this in Zimbabwe when commercial farmers took the Zimbabwean government to court over land seizures. The courts were inundated with litigation that would have taken the government an entire generation to resolve, so in a moment of madness in 2003 the constitution was amended to nullify all those cases. In that instance, the Zimbabwean government wanted to get rid of the headaches that emerged from land seizures and wiped out $10bn in land value.

With the benefit of the Zimbabwean experience, most of which all too many South Africans are quick to ignore and dismiss, we learn an important lesson that needs to be the hallmark of land reform thinking in SA. This lesson is that there is no such thing as expropriation without compensation in a quasicapitalist economy. The history of land expropriation under apartheid has left a sore wound in our society, which certainly needs to be healed. However, the enduring principle of compensation in contemporary economics serves as an important reference point.

If the government seizes private property for free, someone somewhere within the economy will have to pay, whether directly through the loss of current and future on-farm job opportunities, or export revenues, or through protracted economic decline that will erode the purchasing power of money, or losses in pensions and savings, or deindustrialisation that will destroy future economic growth and off-farm job opportunities for the current generation.