I once asked a meeting of law students if they knew why we have the laws that protect our wealth and enforce the sanctity of contracts. They appeared to have little idea, other than that it is morally wrong to steal or perpetrate fraud, or not to be true to your word.
Nobody had told them that protecting rights to wealth is essential if wealth is to be created in the first instance. That if you saved and invested in a home, farm, mine or business enterprise and somebody who is stronger than you can simply take it away, there would be no reason to save and invest in productive, long-lasting assets. Protection of wealth to encourage wealth creation is essential if any community is to become more productive and escape deprivation.
The power of any government to take what might be yours, gained fairly in exchange, is one of the obvious dangers to be averted in the public interest of more saving and more capital expenditure. While there might be good cause for a compulsory purchase to advance a broad public interest, it should be facilitated by offering the market value of the asset as compensation. No compulsory expropriation without compensation is enshrined in our constitution and legal practice — for good income-enhancing reasons.
Having to offer full compensation to owners is a deterrent to exercising compulsory purchase orders. The taxpayer will have to pay up for the assets, and they have political influence resented by those whose ambitions to change the world for the better are frustrated by want of the means. Just pay for what you wish to take is a principle to be defended and honoured.
South Africans are not only reluctant taxpayers, we are reluctant savers and maintain an unsatisfactory rate of capital accumulation. We have to rely on foreign savings on a big scale. We are dependent on capital that can be freely invested anywhere. And that capital is easily frightened off by threats of being taken away, by expropriation or changes to regulations that will affect its market value.
The mere hint of expropriation of land and real estate, without compensation, makes foreign capital more expensive. Foreign investors demand high expected returns to compensate for the risk of our taking away or interfering with their capital. Hence our low rate of capital formation.
To justify any addition to its plant and equipment, an average-risk JSE-listed company would have to expect an annual return of more than 15%, or at least a real 9% after expected inflation of about 6%. That is a return few companies can confidently budget for. Hence they are investing less, and saving less, by paying out more of their earnings in dividends. The ratio of JSE earnings to dividends has halved since 2010. Companies are retaining less because they are investing less in capex, for understandable reasons.
It has taken Covid-19 to bring the low rate at which SA saves above the dismal rate at which we are adding to plant and equipment — only 12% of GDP in 2020. Accordingly, we have become a net lender to the world rather than a borrower, temporarily it is to be hoped.
Reducing the risks of investing in SA will encourage more capex and more savings in the form of earnings retained by business. We could then attract the necessary foreign capital at a lower cost than we are paying now. Reducing risks means sensibly reducing the threat of taking — not adding to it.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.