SA economy in a cul de sac

2016-06-13 15:09

Statistics South Africa last week announced a sharp decline of 1,2% in the economic growth of the country, as measured by the change in the gross domestic product (GDP), for the first quarter of this year. This is a clear indication that South Africa's economy reached a cul de sac. The general economic commentary deals at the moment mainly on the need for economic growth, a reduction of government debt and job creation. The grading process of the country's investment status is in full swing and a downgrade had already become inevitable. At the same time the ANC became very naive about the poor state of the economy and has no idea what's happening around them. They remain very convinced that their socialist and communist ideology will still be able to maintain their self-enrichment status.

Socialism is not a sustainable political and economic system. This fact has been demonstrates clearly over the years and it is no wonder that the former Prime Minister of Britain, Margaret Thatcher, has said that "The problem with socialism is that it eventually runs out of other people's money." This system cannot create economic growth and prosperity and ultimately become a bottomless pit where by governments believe it will keep them forever in power. The application of the system clearly has no limits, with the result that a still much larger part of the population becomes dependent on social and child support grants, as proved by the ANC government since 1994. Today about 18 million people or 30% of the population has become totally dependent on these grants in South Africa, which is not sustainable, especially if the country cannot generate economic growth and job opportunities.

Communism systematically seized and infiltrated the country since 1994 with the aim to destroy capitalism, which in fact is the only economic system that can create sustainable economic growth and greater prosperity. Communism has in the past been rejected all around the world as an unsustainable political and economic system. The South African society's tolerance levels to further allow the development of totally unaffordable socialism and destructive communism has become too large and its resistance levels is a huge cause for concern.

How is it possible that the ANC government don’t understand the basic economic principle how economic growth and wealth can be created? A simple age-old principle that economic growth and prosperity can only by created by producers, manufacturers and service providers who are able to generate profits in the economy. There is no any other way. "Capitalism" or "capitalists" is for most people swear words today because they don’t understand where the economic growth and prosperity came from before 1994. It was definitely not created by socialism or communism. How impossible is it to understand that most of government’s revenue is dependent on the income tax payable on profits which can only be created in a capitalist system? Why don’t they understand that the four basic production factors necessary to start a business and to generate profits in a sustainable way, namely, land and raw materials, capital, labor and management, should be allowed to move around freely in the economy to where their alternative earnings and efficiency is the highest? Where prices are determined by the market forces of demand and supply which are not disturbed by government intervention.

In South Africa, land is apparently the government's final trump card that it will play to try to remain in power without any concerns what will happen to its productive value which is necessary for sustainable food security. And to create jobs by trying to settle people on small pieces of farmland, according to the National Development Plan which is supported by many experts, to be plunged into poverty which is even for black farmers no longer acceptable. And to threaten white commercial farmers with legislation to expropriate land that will not be applicable or sustainable as the government will never have the funds to compensate them in a fair and just manner. Despite also the fact that its land reform policies create unnecessary uncertainty and will plunge the country into famine and bigger poverty.

The price and availability of capital are also distorted by legislation as the Reserve Bank, which is actually a capital control board, is of the opinion that it can manage the supply and demand of capital better than market forces. The origin of the importance that is given to interest rates has its roots in the mandate of the Reserve Bank to stabilise prices in the economy, which is in fact the single biggest delusion in economic science. Prices should increase when the demand in the economy is greater than the supply. Good entrepreneurs will recognise these opportunities and it will stimulate production, manufacturing and services which will ultimately lead to a higher supply than demand and prices will decrease again.

The importance that most economists are giving to the role that interest rates play in the economy has long since exceeded all limits. The relationship between inflation and economic growth is not as strong as they want it to be, because there are a range of other important factors that determines economic growth.

There is anyway no evidence that the Reserve Bank's interest rate policy can control inflation because it has no effect on the main reasons why inflation is created, such as the international increases in food and crude oil prices, a weakening exchange rate, the effects of a severe drought, political statements, administered prices, corruption and socialism. Economic growth is driven and created by profit and by profit alone and it is not only determined by interest costs. It is in fact much more determined by the prices of the other important production inputs such as land and raw materials, labor and management in relation to the prices of outputs and the efficiency with which inputs are transformed into outputs. Therefore, stimulating the production side of the economy due to a greater demand for specific products during certain periods is the only way to create economic growth while reducing inflation at the same time. As long as the consumer demand in the economy is not constantly be smothered by the interest rate policy of the Bank.

Minimum labor wages as prescribed by law is in fact pure communism and is not accompanied by increased productivity. Wages are in a capitalist system determined by the free operation of market forces without a negative effect on the profitability of businesses by legislation.

The quality of the general management level in the economy is weakened by legislation in the form of black economic empowerment and employment equity because no merits and performance are considered in management and staff appointments. Just look at all the state-owned enterprises that are subject to unprecedented corruption and bad governance.

The destruction of economic growth and future prosperity by a socio/communistic system of government, hugely contributed to the fact that the economy landed in a cul de sac which will also bleed any further economic growth and jobs creation to death. The restoration of capitalism will have to be the main discussion point in the talks between the government, labor and business, which also includes agriculture, to turn the devastating economic transformation process of the government around. If no real success could be achieved by the business sector in this regard then the end of the cul de sac for the economy will be very clear and finally in sight.

Fanie Brink - Independent Agricultural Economist

13 June 2016      

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