South Africa is at an inflection point: will it resist, or succumb to state capture?

The 2016 South African local government elections showed the country moving away from single party dominance Rogan Ward/Retuers

South Africa is sailing through tempestuous seas. It has no captain and is manned by a dysfunctional crew. Depending on the outcome of this rudderless journey, the country’s future could include being commandeered by crony capitalists and a credit rating downgrade to sub-investment grade.

This in turn would tip it into a recession. It would also entrench policy dysfunction, heighten socio-political and macroeconomic strife and undermine democratic fundamentals.

Alternatively, the country could resist state capture and weak governance; democracy could deepen, and centralised corruption could weaken.

There’s a fierce battle underway between two opposing camps. The outcome will determine whether the country is finally captured by crony capitalists, and shape its democratic trajectory. The one camp is represented by the patronage politics of President Jacob Zuma and the Gupta network. The other includes the National Treasury, African National Congress stalwarts, the media, nongovernmental organisations and business leaders.

The intensity of the battle was evident again when Finance Minister Pravin Gordhan was issued with a summons to appear in court on an alleged fraud charge. The charge has been brought by the country’s National Prosecuting Authority which is viewed as being closely aligned to Zuma. It opens the door for a cabinet reshuffle to install a more Zuma-aligned Finance Minister.

South Africa’s future prosperity, stability and cohesion is at stake. Corruption not only affects economic performance, including foreign direct investment. It also undermines a society’s democratic fundamentals.

Corruption and the economy

Literature shows that corruption negatively affects economic growth in the long-term by weakening three areas:

  • Domestic investment is deterred by uncertainty, weakened property rights, lower profits, and increased contract-related risks.

  • Public infrastructure. State expenditure becomes biased in favour of security. It shifts away from critical basic services like health care and education. This lowers public infrastructure’s quality and efficiency.

  • Institutional quality is weakened as trust and the effectiveness of political institutions and court systems is eroded.

There are two opposing arguments when considering corruption and foreign investment. One is that corruption acts as a “helping hand” for investment. This is because paying bribes may speed up bureaucratic processes and facilitate access to publicly funded projects.

The other view is that corruption acts as a “grabbing hand”. This is because bribes are an indirect tax that reduce investment profits, waste resources and heighten contract-related risks.

Both of these views have been advanced in debates about the Gupta family’s involvement in South Africa’s state-owned enterprises. One side claims that Zuma has allowed the Gupta family to influence his appointment of ministers, heads of state-owned entities and to facilitate multi-billion rand business deals with the state. The other side argues that the family has created employment and diversified the economy and that it is being targeted by South Africa’s banks and the “white establishment” in retaliation.

In tandem with this power-play, the country has experienced significant capital outflows and increasing hesitancy from the private sector to fund state-owned entities. A case in point was the decision by FutureGrowth Asset Management to stop lending money to six of South Africa’s largest state-owned companies.

A portion of this negative sentiment stems from global risk-aversion and the ongoing search for yields. But there have also been accelerating outflows in response to South Africa’s increasing political risks. This was made more visible after Zuma fired Finance Minister Nhlanhla Nene late in 2015.

These dynamics suggest that investors are increasingly, and openly, judging the costs associated with corruption scandals to be a “grabbing” rather than a “helping” hand.

Corruption and democracy

This changing perception has implications for democratisation. Recent research shows that the relationship between corruption and democracy is U-shaped rather than linear. The “helping hand” is more prevalent in the early stages of democracy. The “grabbing hand” becomes more dominant as democracy matures.

The association between corruption and democratisation in the long run is less clear. In theory, corruption levels should decline as democracy deepens. But corruption creates economic distortions. These then suppress development and hamper democratisation.

It has also been argued that the accumulation of “democratic capital” is more important than democracy per se. It takes time for citizens to learn to cherish and respect democracy as a valuable form of government.

The recent local government elections results indicate that over the past two decades South Africa has accumulated sufficient democratic capital to challenge the conventions of race-based voter patterns. This even raises the possibility that the ANC may no longer rule the country after national elections in 2019.

There are indications that patronage networks are coming under pressure after the elections. This includes the Gupta family’s decision to disinvest, and the court judgments against President Zuma and his appointees.

But there are also signs of efforts to use state-owned enterprises as funding channels to replace opportunities lost in metropolitan municipalities. This is evidenced by attempts to frustrate efforts to install greater financial controls at dysfunctional companies such as South African Airways, Eskom, Denel and the South African Broadcasting Corporation, and the renewed battle to gain control of Treasury. This in turn has exacerbated factional conflicts between leaders of the ruling party who sense that President Zuma’s influence is diminishing.

Inflection point

The post-election backlash indicates that society’s historic patience is wearing thin as the country urbanises, democratises and becomes more informationally complex.

Recent developments suggest that South Africa is at an inflection point where:

  • single-party dominance gives way to multi-party plurality,

  • centralised corruption will either become entrenched or dissolve into decentralised corruption, and

  • investors consider bribes and crony capitalism as more of a “grabbing hand” than a “helping hand”.

South Africa’s history of transition indicates that depending on the outcome of the latest salvo, the country will likely recover from the Zuma years. Whether the ANC as a political party will do so is, however, less certain.

The Conversation

Sean Gossel receives funding from the University of Cape Town Graduate School of Business.