Private investment dropped sharply in the past two years, in the most prolonged fall since 1994. In the year to June, it fell more than R55bn, or 10%, in constant rand from 2015 to 2017, after climbing 21% over the previous five years.
This wasn’t the sharpest fall since 1994. Investment dropped 13% from 2009 to 2010 (again using the year to June) in the global financial crisis. But it’s by far the most durable drop in private investment since the transition to democracy. Private investment reflects business’s economic expectations and political risk. When the economy is booming, it often does fine even where corruption is rampant and the rule of law is sketchy. But a slowing economy — and the economy has inevitably been affected by the fall in metal and coal prices from 2011 — makes business much pickier.
In SA, more than in most countries, business perceptions of the economy and politics have been fraught. For investors, the core of the 1994 compromise was that democracy would be accepted if property rights were respected and rich people could maintain their lifestyle. Most businesspeople realised that the democratic government would have to shift spending from the rich to the majority and work to expand economic opportunities for historically marginalised people.
Investors in effect set two key indicators for good governance. They kept a sharp watch on government spending. Improving services for the poor majority to the level enjoyed in the rich suburbs would multiply spending by the state. The result would be higher taxes, inevitably affecting the rich, or much higher debt, which could destabilise the economy.
Investors also saw the Constitution and the legal system as a bulwark against populist politicians who might be tempted to overturn the 1994 compromise by directly expropriating property, pre-empting business decisions to achieve social aims or using the state corruptly to loot the economy.
The importance of the rule of law has appeared in the host of legal challenges to government interventions, for instance suing against laws on intellectual property, the export of scrap metal, environmental rules and the extension of collective agreements. Moreover, policy discussion about a step-change towards a more inclusive economy inevitably leads to questions about constitutionality. This approach risks a backlash. As the rule of law is increasingly portrayed as a block to economic development, it becomes a target for populists.
If business wants a better investment environment, it should add some success indicators that support more inclusive growth
The economic downturn in Zimbabwe is usually portrayed as the result of capital flight after a populist government expropriated property without compensation, legal consistency or a managed transition. It is equally true to say that in the first 20 years after Zimbabwe’s democratic transition most voters saw growth but very little improvement in living conditions, employment or — in an overwhelmingly rural society — access to land. In a democracy, inequality on the level entrenched in Zimbabwe and SA is ultimately unsustainable. At some point, in the absence of a visible move towards more inclusive growth, populist (and often corrupt) solutions start to win over voters. From this standpoint, in the long run good governance depends on improving equality and inclusion in the economy.
When most people feel they have virtually no chance of economic success playing by the rules, they will be tempted by populism and corruption. By extension, if business wants a better investment environment, it should add some success indicators that support more inclusive growth.
It could give job creation, support for small business and equitable access to education and promotions the same weight as fiscal rectitude and property rights. That approach would help counter populist rhetoric and, by shaping a more dynamic and inclusive society, enable increased investment and growth.
• Makgetla is a senior researcher with Trade and Industrial Policy Strategies.
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