Fighting corruption is crucial to growth in South Africa

Back in March 2019, Marianne Merten wrote in Daily Maverick that the “Gordian knot” of State Capture and grand corruption during and following the Zuma-Gupta presidency “has wiped out a third of South Africa’s R4.9-trillion gross domestic product”.

Merten then took an important stab at quantifying the growth-sapping adverse impacts of this development-destroying era. Apparently, inter alia, from 2010 to 2017 between 500,000 and 2.5 million jobs were not created; R500-billion to R1-trillion in tax revenue was foregone; and essential social programmes, services and assistance went undelivered.

“State Capture has extracted an enormous price directly and indirectly on South Africans, most harshly on the poorest and most vulnerable,” she wrote.

However, some influential people in the South African business commentary and investment world are asserting that an anti-corruption strategy is not a growth strategy for South Africa (they have included such players as FirstRand chairman Roger Jardine and Business Day writer Hilary Joffe.)

Actually, without a powerful and effective national anti-corruption strategy, any South African economic development, growth, investment, education, political stability and open society effort is likely to be still-born and ineffectual.

The international development literature on the direct and deleterious impact of corruption on socioeconomic development and growth seems rather clear — in a broad range of political and economic models from socialist to free market.

It appears that some of the lowest hanging fruit of any developmental or growth strategy with a reasonable chance of success are the minimisation, and preferably the elimination, of state and societal corruption. To put this another way, not putting in place anti-corruption measures that vanquish systemic and state theft makes overall development policy and practice likely to fail.

The developmental implications of corruption appear to be enormous as multipliers of national socioeconomic deadweight and drag. I offer the following excerpt from one leading review study from 2012: “Quantifying the Costs of Corruption: Assessing Current Methods and Recommendations for the Future” by the international governance entity, Transparency International. (Warning: super-dense text ahead, but it’s a worthwhile meal — as is the large report from which it is lifted.)

“[T]he authors found that the relative contribution of the direct impact of corruption to be 19%, the relative contribution of the investment channel to the total effect is 32%, the relative contribution of the schooling channel to the total effect is 5%, the relative contribution of the openness channel to the total effect is 28%, and the relative contribution of the political instability channel to the total effect is 16%.

“Thus, the main effect of corruption on economic growth is found to be transmitted through investments. Finally, studying the long-term effects of corruption on growth finds that a one-standard deviation decrease in corruption levels increases the long-term level of investment by 4.86 percent points, consistent with Mauro’s finding. It further increases schooling by 2.21 years while increasing the openness coefficient by 0.30 and increases the political instability index by 0.06, thus revealing the long-term effect of corruption on those variables that are seen as drivers of economic growth.”

Take a moment to reflect on the above mostly double-digit impacts-of-corruption-on-economic-development numbers from one of the Transparency International research works:

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  The direct impact of corruption is almost 20%;

  
  


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  The contribution of the economic “investment channel” to the total anti-development effect is 32%;

  
  


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  The contribution of the “schooling (education) channel” to the total anti-development effect is 5%;

  
  


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  The contribution of the societal “openness channel” to the total anti-development effect is 28%;

  
  


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  The relative contribution of the political instability channel to the total anti-development effect is 16%; and

  
  


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  A one-standard deviation decrease in corruption levels increases the long-term level of investment by 4.86 percent points.

  
  

It appears that an anti-corruption strategy is at the very least something without which national growth and development are unlikely to occur. At the most, it is itself a powerful growth and development strategy.

What might the criteria for a South African anti-corruption strategy — and thus also a growth and development strategy — be? The apex South African Constitutional Court has already provided most or all of the answer for South Africa, in its March 2011 Glenister ruling: the applicable criteria are “STIRS”, or specialised, trained, independent, resourced and secure. Given the supreme law status of Constitutional Court decisions, one might usefully add the concepts of immediate and robust. When you add them up, this all suggests STIR, SIR!

And surely for President Cyril Ramaphosa, this all translates into “Chapter 9 constitutionally-entrenched”.

The Latin phrase sine qua non, oft-used by Roman-Dutch and common law lawyers alike, comes to mind. Contrary to the puzzling assertion of Jardine and Joffe that an anti-corruption strategy is not a growth strategy, the prompt significant reduction and eventual elimination of State Capture and grand corruption in South Africa would appear to be a (or even the) sine qua non of meaningful social and economic development in the country.

Merten’s extraordinary State Capture and grand corruption grand totals — one-third of SA GDP, up to R1-trillion of uncollected tax revenue, and up to 2.5 million jobs not created — make the “sine qua non” empirically clear: without ending grand corruption, no growth and development.

What growth and development strategy could the Presidency or the SA business community possibly devise and implement — including to attract investment, restore confidence and reputation, and plug all the holes in the SA political and economic bucket — that could conceivably succeed without first meaningfully taming and then eliminating corruption?

Or what growth and development strategy could come up with up to 2.5 million new jobs, R1-trillion in new tax revenues and increase GDP by an amount up to 33%, all in four, seven or 10 years? Grand corruption at the scale quantified by Merten and Daily Maverick is an undertow current against which a national economy lifesaving team cannot possibly swim out, rescue a struggling polity and fiscus, and return to safe shores.

It would also appear that South Africa’s continuing status as a democracy may even be at stake in the context of state corruption. A recent massive review study reviewed the many determinants of “democratic survival” and identified “income and a law-abiding bureaucracy” as the only robust factors for democratic survival — among other democratisation factors such as long-tenured leaders, majoritarianism, and natural resources (adverse), education, political protests and a democratic regional neighbourhood (positive):

“Numerous studies... suggest different economic, social, cultural, demographic, institutional and international determinants of democracy. We distinguish between democratisation and democratic survival and test the sensitivities of 67 proposed determinants... For democratic survival, the only robust factors are income and a law-abiding bureaucracy. In addition, our results highlight the uncertainty surrounding the relationship between income and democratisation, but show that broader development processes enhance the chances of democratisation... [Emphasis added.]

“[C]hances of democratisation are lower in countries with large Muslim populations, but that relationship is sensitive to controlling for natural resources, education and neighbourhood characteristics. Other results of the sensitivity analysis show that political protests, a democratic neighborhood, and the global proportion of democracies positively influence democratisation, while natural resources, majoritarian systems, and long-tenured leaders make countries less likely to democratise.” (Rød, EG, Knutsen, CH & Hegre, H. Public Choice (2019).)

It would appear that if a third (or even just one quarter or one-tenth) of national Gross Domestic Product is being stolen and spirited to Dubai or wherever by an over-entrenched and law-defying ANC governing class with continuing impunity, any meaningful improvement in income, economic growth and development for the foreseeable future is sadly unlikely, and even threatens the survival of democracy in South Africa.

It’s helpful perhaps to be mindful of the situation that pertains in Russia, a conspicuous example of continuing State Capture and corruption. A legal colleague (off whom I bounced a draft of this piece) sent me the following apposite quote from Edward Lucas’s 2008 book The New Cold War: Putin’s Russia and the Threat of the West:

“The most telling indicator of corruption is not Russia’s low standing in the corruption rankings published by outfits like Transparency International, but the lack of public fuss about official crookedness. No senior official ends up in court unless he has first fallen foul of his political masters.”

I have a few start-of-the-decade wishes for SA. May the “public fuss” or “political protests” (referred to by Rød, Knutsen et al above) concerning official crookedness and robbery in SA continue, including as identified by the Glenister Constitutional Court litigation of 2008 to 2014 and the ongoing efforts of investigative journalists and civil society organisations in South Africa.

May such anti-corruption and anti-lawlessness fuss, protest and litigation not be abated by the problematic and dismissive reasoning of Jardine as adopted by Joffe, that an anti-corruption strategy is not a growth strategy.

And may the Ramaphosa administration take seriously its legal obligations to implement the Constitution and the clarion Glenister litigation rulings properly, fully and promptly. Any continuing delay or failure to do so will likely have lasting, debilitating and corrosive impacts on the lives and futures of millions of South African children, women and men. DM