Can economic policy escape “State Capture”?

An attack from the outside can leave a country in ruins but there is a good chance that the population will rise to defend itself with whatever means at their disposal. When an attack is launched from within by fellow citizens (and there is no civil war underway) the destruction can be much worse. That is because its people are unaware the country is being attacked, the attackers operate in secret and by stealth. This is how we could describe the Gupta and Busasa strategy for the capture of the state. In his book, Shadow State: The Politics of State Capture Mark Swilling lays bare their grand strategy and their links with the power elite and foreign interests. This article is an adapted version of one of the chapters in his book published for New Agenda issue 73. 

State capture by shadowy elites has profound implications for state institutions. It destroys public trust in the state and its organs, it weakens key economic agencies that are tasked with delivering development outcomes, and it erodes confidence in the economy.

When there is no trust in public institutions there is little incentive to pay tax, large companies sit on cash rather than reinvest profits towards productive use, criminality proliferates exploiting weaknesses in intelligence and crime enforce­ment authorities, and both capital and skills flee the country. The majority of South Africans are bearing the brunt of these corrosive developments.

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Various studies, including Shadow State: The Politics of State Capture by myself and colleagues, have documented the systematic repurposing of state institutions by the Zuma-centred power elite after 2009. These premeditated and coordi­nated activities were designed to enrich a core group of beneficiaries, to consolidate political power and to ensure the long-term survival of the rent-seeking system that was built by this power elite. To this end a symbiotic relationship between the constitutional state and the shadow state was built and consolidated, with large chunks of it still intact and persisting into the Ramaphosa era.

At the nexus of this symbiosis was a handful of companies and individuals con­nected in one way or another to the Gupta-Zuma family network. However, as evidence from the Zondo Commission emerges, it is clear that this was not the only network in place – Gavin Watson’s Bosasa network was also constructed. Both, however, depended on the repurposing of procurement procedures to benefit a particular network of unscrupulous business operators, politicians and officials. Decisions made within these corrupted nexus points were executed by well-placed individuals located in the most signif­icant centres of state power (in government, SOEs and the bureaucracy).

Former Deputy Minister of Finance Mcebisi Jonas told the public protector that he had been offered a place in this network with a R600 million bribe. This transac­tion reveals the clear modus operandi of those who operate within the shadow state, and how this has made it possible for them to gain control of the constitutional state. They were brazenly confident because they had nothing to fear – they operated in the totally secure knowledge they had protection from “Number 1”. More importantly, there was a deap-seated racism at play: an underlying assumption that ‘all blacks have their price’, and therefore there was no need to ‘soften up the target’ with compromising information.

Crucially, we have no idea how many others accepted these kinds of unimag­inably enormous bribes. Those who resist were systematically removed, redeployed to other lucrative positions to silence them, placed under tremendous pressure, or hounded out by trumped up internal and/or external charges and dubious intelli­gence reports.

We argued in the Shadow State that the attempts by the Zuma-centred power elite to centralise the control of rents in order to eliminate lower-order rent-seeking competitors began in about 2012. The ultimate prize was control of the National Treasury, because this would give them control of the Financial Intelligence Centre, the Chief Procurement Office (which regulates procurement and activates legal action against corrupt prac­tices), and the Public Investment Corporation (the second-largest shareholder on the Johannesburg Stock Exchange), and the power to issue guarantees (which was essential for making the nuclear deal work). The Cabinet reshuffle in April 2017 was the final step taken to make possible control of the National Treasury.

The capture of the National Treasury, however, followed four other processes that consolidated power and centralised control of rents: the ballooning of the Senior Management Service in the public service to create a compliant, politically dependent bureaucratic class; the routing of the good cops from the police and intelligence services and their replacement with loyalists prepared to cover up ille­gal rent seeking; redirection of the procurement spend of the SOEs to favour those who were prepared to deal with the networks of brokers associated with the Guptas and Gavin Watson; and the con­solidation of the ‘Premier League’ as a network of party bosses to ensure that the NEC of the ANC remains loyal, because it is implicated in the flow of large amounts of cash to keep this political Ponzi scheme going.

At the epicentre of the political project is a rhetorical commitment to radical economic transformation. Unsurprisingly, although the ANC’s official policy doc­uments on radical economic transformation encompass a broad range of interven­tions that take the NDP as a point of departure, the Zuma-centred power elite has emphasised the role of the SOEs and, in particular, the procurement spend of the SOEs. Eskom and Transnet are the centrepieces of this focus: Eskom because it is regarded as key to ensuring that the nuclear deal goes ahead, and Transnet because it is regarded as key to ensuring that the mining industry is captured and is, itself, a massive investor is large-scale infrastructure projects.

In short, instead of becoming a new economic policy consensus, radical eco­nomic transformation has been turned into an ideological football kicked around by factional political players within the ANC itself and the Tripartite Alliance in general, who use the term to mean very different things. Crucially, radical eco­nomic transformation is used to give ideological legitimacy to what is essentially a political project to repurpose state institutions for the benefit of a power elite.

Three things need to happen if the crisis is to be resolved. Firstly, the rent-seeking networks must be broken and dismantled. This will require political action within and outside the Tripartite Alliance. Zuma has been dislodged as the kingpin. However, this must be coupled with legal action to crim­inalise and bring the perpetrators of state capture to justice. To a large extent, the election of Ramaphosa as President marks a major political shift. A new Director of the NPA is in place, and a total of 28 major commissions, inquiries and investigations have taken place (with some ongoing, such as Zondo). 15 of these 28 investigations are related to the Gupta-Zuma network. This means 13 are related to other networks. We are flooded with information, but hardly any prosecutions. Instead, Ramaphosa’s focus is on maintaining the unity of the ANC, while condoning the taking out of ‘sore thumbs’. This will not go to the root of the rot in the ANC itself. To really regain the credibility of the ANC, Ramaphosa may well need to decide to act against many of its most important functionaries. Unity of the ANC plays into the hands of the ‘re-Zumafication’ campaign.

The public protector’s recommendation that a judicial commis­sion of inquiry be established has now been implemented – this is the Zondo Commision. This is a major step forward, even though many in the ANC would prefer that it gets closed down. It is, however, not enough. It will require bold action by the banking sector and the Reserve Bank to expose and shut down the financial mechanisms that the shadow state uses. The closing of the Oakbay company accounts was a brave step, but it does not go far enough.

Secondly, a new national economic consensus is required. This has never been given serious attention beyond setting out multiple policy frameworks and bureau­cratic processes. The short-lived post-1994 RDP developed by the Presidency was unilaterally replaced in 1996 by the Gear policy – a framework developed by the Ministry of Finance and adopted without the approval of the Alliance partners. At the same time the Department of Labour’s Presidential Labour Market Commission came up with a social plan. A few years later ASGISA was also adopted without full consensus. The adoption in 2002 of the ‘developmental state’ framework came closest to a consensus, but it lacked substance and focused primarily on a weakly defined industrial policy framework, one that has failed to induce confidence in the economy and public investment in infrastructure as a way of ‘crowding in’ private investment.

The subsequent adoption of the New Growth Path did not improve matters, especially when this was interpreted by Gigaba, after he was appointed minister of public enterprises in 2010, as a licence to transform the governance of the SOEs. The economic policies inscribed in ASGISA also never enjoyed the full support of the Alliance partners, not least because the NDP is pessimistic about the future of manufacturing, saying virtually nothing about de-financialisation, and is vague when it comes to achieving employment-centred development in an environment where trade unions have policy influence.

While the external environment in the wake of the global financial crisis has certainly had adverse effects on South Africa’s growth outlook, governance failures and policy uncertainty have inflicted the most damage. The promises made by the ANC to its Alliance partners after the final draft of the NDP was published that there would be further efforts to strengthen the economic policies of the NDP, were never carried out. The DTI industrial policy framework adopted in 2007 was resisted by National Treasury, which argued against ‘picking winners’, thus thwarting the implementation of industrial policy.

In short, there has never really been a broadly shared and fully supported eco­nomic policy framework. Radical economic transformation is already a factional political football. One can speculate that a positive outcome of this political crisis would be the adoption, for the first time ever, of a new economic consensus that can unite the different factions of the Alliance by giving real substance to radical economic transformation while enjoying broad stakeholder support in the busi­ness community, labour sector and civil society. Without this, the power elite that formed around Zuma will be able to continue co-opting radical economic trans­formation in order to mask ongoing rent-seeking practices by manipulating SOE procurement spend. This is unlikely to crowd in private investment.

 

The nuclear deal was justified in terms of radical economic trans­formation, masking how Eskom’s procurement system and the issuing of a sover­eign guarantee will be used to effectively hand over the South African economy to (Russian) foreign interests. The nuclear deal is the ultimate ‘big and shiny’ capital-intensive project that reinforces the mineral-energy-complex, crowds out investment in the cheapest energy available (which is renewable energy), increases indebtedness to foreign lenders and, of course, benefits the cohort of rent-seeking corrupt insiders.

A new economic consensus will have to address the core challenge of invest­ment. As argued in the Shadow State, after 1994 the combination of the shareholder value movement, BEE and financialisation may have stimulated consumption-driven growth, but they redirected surpluses away from productive employment-creating investments. Since they were adopted in 2007, industrial pol­icies have not had much success beyond defending the position of the automotive sector and limited successes in the clothing and textile sector. These two sectors remain vulnerable in the face of global competitive challenges from other develop­ing countries as well as risks relating to the longevity of the African Growth and Opportunity Act, which has been a boon for the auto sector. The introduction of the 100 Black Industrialists programme has diverted focus from implementing good industrial policy strategies. It would seem that the Black Industrialists scheme, as good as it looks on paper, has been poorly administered, with very little value created thus far.

Compared to its peers in the rest of the world, South Africa has, since 1994, been an anomaly. High returns on investment are usually associated with high investment levels, as is the case with China. In South Africa returns on investment have been similar to those of China, but investment levels – and therefore employ­ment-creation rates – are low. This is partly the result of market concentration that gives large conglomerates more market power to extract higher margins than would have been possible in a more competitive environment, and partly caused by the fact that the business class, which remains dominated by white decision-makers, has a low level of confidence in the post-1994 democratic project. Even international financial institutions such as the International Monetary Fund have underlined the concentration of product markets as problematic and in need of deep reforms.

The use of SOE procurement spend has tended to strengthen investment in large capital-intensive projects concentrated within the mineral-energy-complex. This reinforces a pattern of job-starved economic growth in an economy with one of the highest unemployment rates in the world (36% if non-job seeking economically active people are included). More people get welfare payments via SASSA (17 million) than the number of people employed (around 9 million). 14 million South Africans are hungry.

What is really needed, therefore, is employment- and livelihood-creating investments across a wide spectrum of small and medium enterprises capable of absorbing large numbers of unskilled and semi-skilled workers. Although large corporations shed rather than create jobs, it is their CEOs who seem most influential during the Ramaphosa era. This is not a good idea – it is like asking the armaments industry to work out a peace plan. The new minimum wage of R3500 pm is a good thing, but a Universal Basic Income Grant of R3500 pm could have a much more radical impact and benefit more people.

 

Enterprise development needs to be supported by a proliferation of innovations that emerge from what are often referred to as ‘triple helix’ innovation networks (partnerships among enterprises, knowledge institutions and state insti­tutions) that connect knowledge and market opportunities with investment flows and an enabling regulatory environment. The so-called ‘Web 3.0’ (or ‘4th Industrial Revolution’) is key to success here. However, because macro-economic theory has never incorporated a theory of entrepreneurship, macro-economic policy in South Africa has not favoured enterprise development below the large-scale.  Even if such a theory and policy did emerge, job-creating enterprise development cannot thrive if returns on financial assets remains the driving force of economic growth. State intervention will be required to de-financialise the economy and re-racialise venture capital.

Innovative policy, which ‘creatively destroys’ to engender new forms of eco­nomic development, lies at the heart of truly inclusive economic growth. This kind of strategy can, however, only be realised if the financialisation of the economy is complemented by, for example, channelling more public funds through South Africa’s well-developed development finance institutions, and redirecting the investments of these institutions away from blue-chip companies and- capital-in­tensive projects into higher-risk employment- and livelihood-creating enterprises located in both the private and non-profit sectors.

The third thing that is needed to enable resolution of the crisis is for all stake­holders, in particular the political actors who replace the Zuma-centred power elite in the future, to commit to realising the vision of a new economic consensus within the framework of the Constitution and relevant legislation. The recent trend towards regarding the Constitution and the rule of law (such as the Public Finance Management Act) as an obstacle to radical economic transformation is dangerous, and must be stopped. Transformation is perfectly compatible with the Constitution and consistent with respect for the judiciary. Indeed, without this, the trust required for ‘tri­ple helix’-type employment- and livelihood-centred economic development will not materialise. A new trust compact is required if stakeholders are to work together in meaningful ways.

That said, so-called ‘Re-Zumafication’ is a distinct threat. The Russian-backed nuclear deal was at the centre of the political project of state capture. Don’t ever underestimate the Russians. Just because the Ramaphosa Government has shunned the nuclear deal, this does not mean the Russians have given up on the idea. The global power stakes are far too high.  Putin signed a decree in 2007 that provided for the integration and consolidation of all nuclear capabilities built up during the Cold War into a new civilian nuclear industry with global ambitions. Since then, Russians have been building nuclear power plants that are a hybrid between an embassy and a military base, often financed off a state guarantee that effectively gives Russia massive leverage over the host country. The contract that Zuma and Putin signed in 2014 – ruled illegal by the High Court in 2017 – was about Russia building a South African nuclear fleet. This, of course, was to be funded from loans generated from a state guarantee that both Pravin Ghordan and Nhlanhla Nene refused to sign which is what cost them their jobs. If either had signed, South Africa would have become another Russian-controlled failed state held together with violence and fear.

Shortly before Zuma resigned I argued in the Daily Maverick that the ‘Zexit’ was being delayed so that the nuclear deal could be finalized. We also know for sure now that old apartheid intelligence officers (like Neil Barnard) were working for the Zuma Presidency, and that Russian intelligence officers were also involved. Don’t forget: Zuma appointed himself Chair of the Ministerial Committee on nuclear procurement. There is now more than enough evidence to suggest the Russians want Ramaphosa out of the way so that the nuclear deal can be implemented.

Furthermore, Zuma has returned to his KZN base where he knows how to use violence and fear as a weapon to secure national power positions – after all, this was why Mandela brought him into the NEC, and why Mbeki had to bring him in as Deputy President. When Zuma used that famous television interview before he resigned to subtly threaten increased violence if he was displaced, all he did then was to voice publicly what he’d always done within the secretive cloak-and-dagger world of ANC leadership struggles. The 16 KZN youngsters who were sent to Moscow to be trained as assassins continue to be very effective implementers of a low intensity reign of terror.

It is time to recognise the need for truly innovative and radical interventions that will cut to the very root of our structural contradictions. It is quite simply impossible to grow an economy if 36% of the population do not have enough money to stay above the poverty line. Returns on financial assets are declining, which means we must finally accept that financialisation has runs its course.

Entrepreneurship of various kinds is key to success, but not if DFIs cannot find ways of supporting them through the failures that are the key to success. Capital deepening via infrastructure spending without job-creating growth is fruitless. And the transition to renewable energy – the energy base for a truly 21st Century economy not dependent on the minerals-energy complex – holds the key to the next phase of South African industrialisation. None of this is rocket science. But it does mean removing the blinkers that have limited our economic vision over the past 25 years.

 

 

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