Land expropriation without compensation is the perfect recipe for economic disaster. Without properly defined and delineated property rights, it is near impossible for economic entities to confidently engage in economic activity, more specifically in fixed/direct investment, which is a requisite for economic growth and prosperity.
Investment in fixed assets is essential for laying a solid foundation for increasing wealth and jobs. South Africans should be concerned since an ad hoc committee has recently published a draft amendment to the Constitution to allow for land expropriation.
Roelof Botha, adjunct faculty member of the University of Pretoria’s Gordon Institute of Business Science and Professor Ilse Botha of the University of Johannesburg, undertook research on the economic effects of expropriation without compensation. The study concluded that it will lead to a decline in capital formation.
If we look at time series data for growth in gross fixed capital formation (investment), the decline is already underway even though the Constitution has yet to be amended:
Figure 1: Gross fixed capital formation quarterly growth rate with trend line in red
Graph compiled using raw data from the Reserve Bank
It is clear that growth in gross fixed capital formation has been on an overall downward trend after good growth during Thabo Mbeki’s first term as president (1999-2004). Considering the projected negative effect of land expropriation on fixed capital formation coupled with the already dire situation regarding fixed capital formation, the future does not bode well.
Economist Mike Schussler, of Economist.co.za, says that among other things, clarity is need regarding expropriation without compensation in particular and property rights in general. Schussler says fixed investment as a percentage of GDP is at a lower level now than it was five years ago. He describes this as South Africa’s biggest challenge because it means fewer jobs are created.
We can also see how important gross fixed capital formation is for economic growth, without which any prospect of lowering unemployment and poverty levels is reduced to ashes.
Figure 2: Relationship between fixed investment and economic growth
Source: Graph compiled using raw data from the Reserve Bank
Note: Natural logarithms calculated using data measured at constant 2010 prices and seasonally adjusted at an annual rate
President Cyril Ramaphosa is engaging in confusing behaviour, going to investment rallies to convince foreign investors why South Africa is a safe haven for their investments, while simultaneously leading the charge against security of property rights. This contradictory public policy is contributing to uncertainty.
Ramaphosa bragged about bagging R363 billion in investment pledges on his latest investment drive, but it is crucial to remember that these pledges can be rescinded. According to Schussler, the country needs about R3 trillion in fixed investment if it is to become a normal emerging market (government aims to raise R1.2 trillion over the next four years), which also makes Ramaphosa’s (possible) gains in investment seem minuscule, not only relative to what government aims to achieve, but also relative to what is actually required.
Considering the dire situation already facing South Africa with respect to direct investment, the threat of land expropriation without compensation poses a grave risk not only to the economy but also to the fundamental freedom of private property rights which, historically, was denied the majority of citizens based on the arbitrary ground of race.
It is crucial that not only should property rights remain protected, but that the narrative is changed to one of legitimate restitution under the rule of law which falls well within the ambit of private property rights, rather than one where redistribution is spoken of as some sort of “Ayatollah” for retributive justice.
Jonker is an intern at the Free Market Foundation. He has a BCom in Law and a BCom (Hons) in Economics from NWU Pukke. The views expressed in this article are the author’s and not necessarily those of the Free Market Foundation.
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