BUSINESS LIVE / 12 November 2018 - 1:03 / LINDA ENSOR
Two academics have conducted a macroeconomic impact assessment of the proposed land policy — and their results are not pretty
If implemented, land expropriation without compensation will have a drastic effect on the economy, with lower capital formation, a deep recession and rising budget deficits and debt levels, two academics have predicted.
The macroeconomic impact assessment of the policy of land expropriation without compensation — undertaken by University of Pretoria Gordon Institute of Business Science (Gibs) academic Roelof Botha and University of Johannesburg Professor Ilse Botha — was submitted to parliament’s joint constitutional review committee.
The two say that their study is “a robust, factual and objective” economic impact assessment of expropriation without compensation, but do not clarify their assumptions on what the policy will actually mean in SA nor how it will be implemented except to refer to “an institutionalised system where private property ownership is not guaranteed and protected by law”.
The authors implicitly acknowledge the need for a pragmatic and “sensible” land reform process but say this should be the result of an inclusive process of negotiation — preferably on similar lines to Codesa, the body that negotiated SA’s democratic transition.
“The results of the economic impact assessment point to extreme economic hardship for SA, should expropriation without compensation be adopted, including a downgrade of the country’s sovereign bonds to junk status, higher interest rates, a fairly sharp decline in taxation revenues and a deep recession,” the academics argue.
“It makes no sense to attempt the implementation of land reform policies that have proven over and over again to exercise a destructive influence on the economy and threaten the livelihoods of the most vulnerable members of society — those that cannot sell their skills in other jurisdictions.
“This study confirms imminent socio-economic disaster for SA in the event of expropriation without compensation being pursued. It is clear from international evidence that a strategy aimed at land reform should be based on market principles and pragmatism, with a detailed and comprehensive land audit as starting point.”
Parliament’s joint constitutional review committee is deliberating the question of a possible amendment to the constitution to make explicit the policy of land expropriation without compensation. The committee is due to make a decision on the issue this week.
President Cyril Ramaphosa has been at pains to allay fears about the implementation of the policy which he has insisted will not impact on property rights and will not involve nationalisation of land.
Contrary to the authors of the study, the president believes that the process of expropriating land without compensation will enhance growth and increase agricultural production and food security.
He has stressed the need to alter the racially skewed pattern of land ownership in an orderly process of land reform which will enhance stability in the country.
‘‘If we don’t have transformation, we won’t have stability,’’ he said in parliament several months ago. He added that the current willing-buyer‚ willing-seller approach to land reform was too slow.
The calamitous predictions in the study are based on the predicted decline in capital formation as percentage of GDP should the policy be implemented.
The authors point to countries that have pursued policies similar to expropriation without compensation to support their view that the ratio of capital formation to GDP will decline in the aftermath of such policy interventions.
The countries studied were Portugal, Spain, Romania, Vietnam, Venezuela, Ethiopia and Zimbabwe.
They found that the ratio of capital formation/GDP in these countries declined annually by an average 13.9% after the implementation of such policies and noted that the public debate about land expropriation without compensation in SA had already precipitated a decline in real terms of capital formation by more than 7% over the past eleven quarters.
The authors describe two scenarios based on conservatively estimated declines in capital formation of 5% and 10% a year respectively.
In the first, annualised nominal GDP in quarter three of 2020 will be R270.4bn less in the event of a 5% decline in capital formation induced by expropriation without compensation compared to an absence of the policy.
With the second, in the case of a 10% decline in capital formation, the decline in GDP amounts to R454.8bn.
According to the study the GDP impact means that SA will enter a recession in 2018 (year-on-year basis) and remain in recession throughout the forecasting period (up to quarter three 2020). This holds for real GDP growth trends for both scenarios one and two. Total fiscal revenues will decline over the forecasting period by R157.5bn for scenario one and by R261.5bn for scenario two.
Government’s budget deficit/GDP ratio will increase from a 2018/19 budget estimate of 3.8% to 5.3% for scenario one and to 6.5% for scenario two by the third quarter of 2020. On the back of a recession and fiscal instability, SA’s sovereign bonds will in all likelihood be downgraded to junk status by Moody’s Investor Services.
Over the 10-quarter forecasting period, government’s financing requirement will escalate by a cumulative R157.4bn under scenario one and by R261.5bn under scenario two. The authors say that this will inevitably lead to higher money market and capital market interest rates and a higher cost of servicing public debt.
This will “crowd-out” the government’s ability to spend funds on poverty alleviation and basic services such as education, health and the maintenance of infrastructure.
The academics predict that the decline in GDP between scenario two and a policy-neutral scenario could lead to a loss of more than 2.28-million jobs.
“Against the background of the current high level of socio-political unrest in SA, the combination of a prolonged recession, higher interest rates and significantly higher unemployment will tend to aggravate the security situation in the country in general. An escalation of criminal activity can also be expected, which will encourage the emigration of highly skilled people, further eroding the country’s international competitiveness.”
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER