Ramaphosa’s num­ber one chal­lenge: get­ting rid of pa­tron­age pol­i­tics

There is suf­fi­cient ev­i­dence that pa­tron­age is a ter­ri­ble sys­tem. If not ad­dressed at all lev­els of South African gov­ern­ment, chances of grow­ing the econ­omy to where it needs to be, will re­main slim.

Finweek English Edition - - Contents - By Jo­han Fourie ■ ed­i­to­rial@fin­week.co.za Jo­han Fourie is as­so­ciate pro­fes­sor in eco­nom­ics at Stel­len­bosch Univer­sity.

pres­i­dent Cyril Ramaphosa is on the in­vest­ment of­fen­sive. Be­cause the South African econ­omy is stalling, he is des­per­ate to at­tract in­vestors who will cre­ate jobs and boost in­comes. One way to do that, he be­lieves, is by host­ing sum­mits; a Jobs Sum­mit and an In­vest­ment Sum­mit could be just the thing to in­vig­o­rate in­vestor ap­petite for South Africa.

But it’s a hard sell. Not only is global eco­nomic growth on the wane, South African in­ter­nal poli­cies and pol­i­tics are not cre­at­ing the sta­ble, low-risk en­vi­ron­ment that in­vestors crave when the re­turns are un­likely to be dou­ble dig­its.

What­ever the mer­its of land re­dis­tri­bu­tion, calls for what seems to be an un­nec­es­sary con­sti­tu­tional change to al­low ex­pro­pri­a­tion cre­ate un­cer­tainty. An in­abil­ity to re­duce crime – the one is­sue that af­fects all South Africans – makes our coun­try less at­trac­tive as an in­vest­ment desti­na­tion. The Econ­o­mist’ re­cent ar­ti­cle on Cape Town’s high mur­der rate, for ex­am­ple, will un­doubt­edly hurt tourism. And al­though Tito Mboweni’s ap­point­ment seems to have sat­is­fied mar­kets, it is never a good sign to have a re­volv­ing door for the sec­ond-most im­por­tant of­fice in gov­ern­ment.

All of these ills are rooted in our pub­lic sec­tor in­com­pe­tence – the re­sult of a bu­reau­cracy built on pa­tron­age rather than the ef­fi­cient pro­vi­sion of pub­lic ser­vices – that makes do­ing busi­ness an ex­pen­sive and frus­trat­ing ex­er­cise.

This is the one thing Ramaphosa’s gov­ern­ment must be­gin to ad­dress if we are to cre­ate the right con­di­tions for growth.

As Guo Xu of the Haas School of Busi­ness at the Univer­sity of Cal­i­for­nia, Berke­ley notes in an up­com­ing Amer­i­can Eco­nomic Re­view pa­per: “State ca­pac­ity is fun­da­men­tal to devel­op­ment and growth. Bu­reau­crats are a key el­e­ment of state ca­pac­ity: they em­body the hu­man cap­i­tal of the state and are re­spon­si­ble for the de­liv­ery of pub­lic ser­vices and the im­ple­men­ta­tion of poli­cies. Un­der­stand­ing how to pro­mote and in­cen­tivise bu­reau­crats is cen­tral to im­prov­ing or­gan­i­sa­tional per­for­mance.”

For much of hu­man his­tory, bu­reau­crats were ap­pointed through pa­tron­age. The way you moved up in so­ci­ety was mostly the re­sult of who you knew rather than what you knew. Even in the US to­day, more than 8 000 fed­eral po­si­tions are still al­lo­cated “at the plea­sure of the pres­i­dent” (if, of course, he is com­pe­tent enough to do so).

It is not only in gov­ern­ment that you find pa­tron­age, we of­ten see fam­ily ties and per­sonal con­nec­tions play an im­por­tant role in new board ap­point­ments.

The­o­ret­i­cally at least, pa­tron­age can be a good thing. Loy­alty to the su­pe­rior may in­cen­tivise sub­or­di­nates to not shirk their work. But pa­tron­age can also be bad for or­gan­i­sa­tional per­for­mance, as favouritism may dis­in­cen­tivise sub­or­di­nates to work at all be­cause they have the pro­tec­tion of their su­pe­rior.

For long, though, it was dif­fi­cult to prove which of these two out­comes are most likely to oc­cur. Xu, how­ever, has found a novel ap­proach to do just that. He tran­scribed thou­sands of per­son­nel and pub­lic fi­nance records of the British Colo­nial Of­fice dur­ing the late 19th and early 20th cen­turies. He then mea­sured how closely gov­er­nors in the colonies are con­nected to the Sec­re­tary of State, the of­fi­cial in Eng­land who ap­pointed them.

He shows that gov­er­nors con­nected to the Sec­re­tary – as fam­ily mem­bers, mem­bers of the same party, or even as school bud­dies – en­joyed higher salaries through the pro­mo­tion to higher paid and larger colonies. How­ever, this is only true for the pe­riod be­fore the War­ren Fisher Re­form, a pol­icy that changed the ap­point­ment process from pa­tron­age to mer­i­toc­racy.

It is not only that these ap­pointees (be­fore the Re­form) earned higher salaries. They also per­formed worse. Xu finds that a colony’s pub­lic rev­enue per­for­mance de­clined in years when a gov­er­nor with close ties to the Sec­re­tary of State rules.

“This is con­sis­tent,” says Xu, “with the in­ter­pre­ta­tion that pa­tron­age ex­erts a neg­a­tive ef­fect on the per­for­mance of so­cially con­nected gov­er­nors. Con­sis­tent with the pre­vi­ous re­sult, the fis­cal per­for­mance gap dis­ap­pears af­ter the re­moval of pa­tron­age.”

The les­son? Pa­tron­age is bad for per­for­mance.

A new Na­tional Bureau of Eco­nomic Re­search (NBER) study sheds some light on why this might be. Three econ­o­mists use very de­tailed in­for­ma­tion, in­clud­ing firm-level bal­ance sheet data, so­cial se­cu­rity data, patent data and de­tailed data on lo­cal elec­tions in Italy (be­tween 1993 and 2014) to show that firms that are more con­nected to politi­cians are likely to be less pro­duc­tive.

They iden­tify a lead­er­ship para­dox: “When com­pared to their com­peti­tors, mar­ket lead­ers who are more likely to be po­lit­i­cally con­nected, are much less likely to in­no­vate. In ad­di­tion, po­lit­i­cal con­nec­tions re­late to a higher rate of sur­vival, as well as growth in em­ploy­ment and rev­enue, but not in pro­duc­tiv­ity.”

It seems to work like this: when a firm has strong po­lit­i­cal con­nec­tions, they use these con­nec­tions, legally or il­le­gally, to get pref­er­en­tial con­tracts, tar­iffs or other reg­u­la­tions that al­low them to beat the com­pe­ti­tion. When a firm has few or no po­lit­i­cal con­nec­tions, they are forced to in­no­vate to be bet­ter than the com­pe­ti­tion. Ul­ti­mately, more in­no­va­tive firms are more pro­duc­tive and dy­namic.

Pa­tron­age, the ev­i­dence shows, is a ter­ri­ble sys­tem. But it’s be­come en­demic in the South African state. With­out at­tempts at ad­dress­ing a pa­tron­age sys­tem that per­vades all lev­els of gov­ern­ment, no in­vest­ment sum­mit will push SA’s eco­nomic growth to where it needs to be.

Guo Xu As­sis­tant pro­fes­sor in busi­ness and pub­lic pol­icy at the Haas School of Busi­ness at the Univer­sity of Cal­i­for­nia, Berke­ley

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