Capturing Treasury could have dire consequences

State capture, which has raised new fears in South Africa now that President Jacob Zuma has sacked Pravin Gordhan as minister of finance, is not something new to this world. There are many countries that are in some way or another governed and exploited by some or other mafia regime after certain interest groups had acquired control over specific instruments of power such as the defence force, police – and especially the secret police – Treasury and the legal system. 

In fact, we are surrounded by countries that have been and are still being subjected to state capture. Zimbabwe, which had a flourishing economy with surplus food production, has been so impoverished through state capture that many of its citizens go hungry. When the moment of truth arrived for a bankrupt Treasury, it was unacceptable for President Robert Mugabe’s government to cut expenses, and crazy financial decisions were made to create money, which led to rampant inflation, and this not only wiped out the buying power of the savings of the middle class, but eventually led to the demise of the Zimbabwean dollar. Today, Zimbabwe does not even have its own currency and uses the American dollar as legal tender. And there is an acute shortage of US dollars. 

Years ago, Zambia was put on the path to impoverishment by none other than President Kenneth Kaunda, after he transferred his able minister of finance, Arthur Wina, to another portfolio, partly because he did not like Wina’s attempts at applying some degree of financial discipline. The Kaunda government simply began spending money as if it was coming out of a bottomless pit. And then the government went ahead and nationalised the copper industry, the country’s biggest source of income. Incompetent supporters and officials were put in charge of the mines and it was not long before the industry was in trouble – similar to SA’s state-owned enterprises. 

Whereas about 700 000 tonnes of copper were produced in the 1970s, it dropped to an all-time low of 255 000 tonnes by 1998. 

Sound familiar?

Just like SA, Zambia missed the last wave of prosperity for commodities, which would have given it an enormous rise in income. The rulers eventually realised that the only solution was privatisation, which did in fact lead to a dramatic improvement, with production now once again more than 700 000 tonnes. 

However, the copper industry is complaining that the government – just like in SA – acts irrationally, which causes too much uncertainty. The international miner Barrick Gold Corporation eventually decided that it would have to close down after the government increased royalties from 6% to 20%. The government then did an about-turn and reduced the royalties to 9%, which is still a problem in an industry hampered by high production costs and poor infrastructure.  

Then we have Angola, which Portugal handed on a plate to the communist-minded MPLA. The MPLA started ruling the country with the aid of East German and Cuban “advisers” as if it was the party’s personal property. The long-serving head of state, President José Eduardo dos Santos, took the shocking decision to milk the rich oil industry by paying himself a fee for every barrel produced. It made him one of the richest people, if not the richest, in Africa.

Dos Santos has announced that he wanted to retire, but typical of dictators, he is looking at a family member to succeed him so that his family could retain its hold. His oldest daughter, Isabel, is making her presence felt, and she is already regarded as the richest woman in Africa. Her fortune is estimated to be between R40bn and R50bn. Her father appointed her in June last year as the head of Sonangol, the rich state-controlled oil company. She has large shareholdings in major businesses, such as 42% in Banco BIC. In Portugal she also owns major assets, including a majority shareholding in the cable television company Nos SGPS.

It is possible that she, like her father, will eventually have the last say over the country’s Treasury. 

But definitely the worst case of state capture happened in Mozambique after the Portuguese left the country under extremely messy circumstances. Portugal was so eager to get rid of Mozambique that it literally handed the country over on a platter to Frelimo, a political and guerrilla movement, which had power only in the north. SA spent millions combatting Frelimo by aiding Renamo, the strongest opposition group. 

Frelimo immediately descended upon all state assets and anyone with political   power simply started filling their pockets. This, and poor management, led to the country’s economy imploding in less than a year. Mozambique earned the dubious title of being the poorest country in the world. Its Treasury was one of the last targets after all the instruments of power were hijacked. Frelimo’s hold was consolidated through the establishment of a powerful secret police unit, known as the SNASP. This was achieved with technical help from East German and Cuban secret police advisers with Russia’s infamous KGB as model. The SNASP virtually had unlimited powers. For example, anyone – and especially opposition leaders – arrested by the secret police was prohibited by law from taking opposing legal action. 

Nationalisation without compensation

The biggest intervention after state capture was completed, was the nationalisation – without compensation – of all privately owned buildings and land, as well as institutions such as schools, colleges and hospitals. Even legal practices and funeral services landed in the net as well as most private businesses. The state levied rent on these assets, which was collected by Frelimo, who naturally had no shortage of money. 

To ensure that pressure could not come from the business community, Frelimo passed laws empowering the state to kick out any manager in a private company and to replace such person with a public servant or someone appointed by Frelimo. Thousands of unqualified political cadres were appointed with dire consequences for the businesses concerned, and the national economy. 

About 200 000 white Portuguese – some of them descendants of generations of Mozambican citizens – fled with just the clothes on their backs to escape robbery and death. Thousands crossed the border into SA. This was a tremendous setback for Mozambique, because they largely represented the expertise. The government’s reaction was to berate them as being racists and accuse them of ruining the country’s economy. 

The government even tried to control the movement of all citizens. You required a pass, which was issued by Frelimo, to move from one area to another. Visits lasting more than two days required Frelimo’s approval and these visits had to be ratified by the minister of internal affairs. 

A characteristic of countries subjected to state capture is that the ruling mafia is always short of cash, owing to a weakened economy, and they then try to scrounge it in all possible places. The Mozambican government is a case in point as it’s currently in trouble internationally because it borrowed money using false information and then deliberately refrained from making the loans public. 

The lesson here for SA is that a full capture of state entities – especially Treasury – by the Zuma mafia should be fought tooth and nail. The pattern in countries after state capture is that once a mafia regime becomes entrenched, it takes on a life of its own and it becomes very difficult to get rid of. In one word, the consequences that this could hold for this country and especially the economy, are frightening. 

Lucas de Lange  is a former editor of finweek and an author of two books on investment. 

This article originally appeared in the 20 April edition of finweek. Buy and download the magazine here

ZAR/USD
17.42
(+0.10)
ZAR/GBP
22.77
(+0.02)
ZAR/EUR
20.59
(-0.00)
ZAR/AUD
12.46
(+0.38)
ZAR/JPY
0.16
(+0.28)
Gold
1952.30
(+1.67)
Silver
27.44
(+7.13)
Platinum
960.00
(+3.27)
Brent Crude
45.32
(+2.09)
Palladium
2175.50
(+1.97)
All Share
57419.46
(+0.00)
Top 40
53082.08
(-0.08)
Financial 15
10227.06
(+0.86)
Industrial 25
75743.15
(-0.61)
Resource 10
59161.88
(+0.29)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 989 votes
It depends on how the funds are used.
74% - 6590 votes
No. We should have gotten the loan elsewhere.
15% - 1382 votes
Vote