How close are we to economic collapse? - Agri News Net

17 August 2020 - A friend of mine is preparing for South Africa’s economic collapse. He is growing his own vegetables and is promoting off-the-grid living to anyone who will listen.

Jonathan Katzenellenbogen

A friend of mine is preparing for South Africa’s economic collapse. He is growing his own vegetables and is promoting off-the-grid living to anyone who will listen.

On a trip through Africa some years ago, he saw people who had fallen back on their own resources thriving in the midst of chaos. His conclusion: ‘practise self-sufficiency wherever possible and stop having any expectations of the government’.

Other friends have moved to small towns where they can partially live off the grid and be away from big cities should hell break loose. But, ultimately, other than emigration, there is no escape from collapse. Hyperinflation, a breakdown of law and order, and shortages of pharmaceuticals, petrol and spare parts will leave no corner of the country untouched.

Deteriorating government finances, nearly fifteen years of load-shedding, corruption, overall bad governance, deteriorating law and order, downgrades by the credit rating agencies, and the Covid-19 crisis have raised the risks of a very severe and long downturn, if not collapse.  

What defines collapse rather than a severe downturn includes a dysfunctional banking and payments system combined with disruptions in the supply of crucial goods. There is no strict delineation between the two and those in the midst of trouble might well see a collapse only in hindsight, as there is no big event and the apocalypse has often been on a long and slow road in coming.

The disaster scenario of economic collapse and mass public violence has for long been mentioned, but given a low probability, in the extensive genre of books on the future of South Africa. But with the absence of structural reform to kick-start investment and growth, combined with the Covid-19 shock, the risks of a severely damaged economy have been raised.

Chances of collapse

Chances to reform have been missed a number of times. Reforming on the back of Ramaphoria in 2018 and early 2019 was a definite option, and seizing the moment at the start of the Covid-19 crisis was another opportune moment. Should there not be deep budget cuts and other key changes at the time of the Medium-Term Budget Policy Statement, the chances of collapse will have to rise.

The causes of economic collapse vary, but the results are to an extent similar. Historically, war, blockades and sanctions, and policy own goals have all been factors. In Zimbabwe and Venezuela, and in the case of South Africa’s unfolding crisis, it is policy own goals that are dominant.

In Zimbabwe, the war veterans were given large payoffs, pushing up the government budget deficit. Soon afterwards farms were seized as part of the government’s fast-track land reform programme. Business confidence collapsed and investors fled, hyperinflation was soon ignited as the central bank monetised the deficit, and, after a time, the currency and payments system collapsed. 

Today, 50 percent of Zimbabwe’s population is reliant on food aid, bank deposits are largely frozen, there are shortages of medicines, corruption abounds, there is massive unemployment, civil servants’ salaries go unpaid, a large percentage of Zimbabweans live outside the country, there are electricity and fuel shortages, empty shelves in supermarkets, drug shortages, and often many-kilometre-long queues to fill up at petrol stations. There is also civil unrest and repression. Many Zimbabweans working in South Africa send home monthly parcels of essentials like mealie meal, cooking oil, toothpaste, tinned food and sugar.

In Venezuela, as part of his ‘Bolivarian Revolution’, Hugo Chavez’s government pushed through a constitutional amendment to take over ‘large’ and ‘idle’ farms to allow peasants ownership. Other farms were grabbed and, as food production dropped, industries that supplied the agricultural sector were seized. The government doubled down to defend socialism with price controls and a range of repressive measures. As the economy plummeted, there was a mass exodus.

Investors fled

To try and disguise their own goals, both countries have resorted to the clichés of blaming imperialism and sanctions for their ills. Local and foreign investors fled Zimbabwe and Venezuela after they saw property seized. In Zimbabwe, it is individuals with high-level links to Zanu-PF that are sanctioned by the United States and European Union. Venezuela was well into its trajectory of collapse prior to sanctions. Moreover, sanctions were imposed because of crackdowns on the opposition and elections that were found to be neither free nor fair, rather than because of economic policies.

In a collapse, there is often a small politically connected elite who benefit from the situation. Collapse, controls, and shortages allow officials to misuse their positions to gain access to goods in short supply. Reform would threaten their positions.

Is South Africa even close to this dystopia?

The deficit and debt burden, the absence of reform, and the populist clamour from within the African National Congress (ANC) – including calls for nationalisation, expropriation without compensation and grand government schemes – could combine to make a perfect storm. There is also plenty of another ingredient – mass anger, which the politicians could seek to exploit, by making promises. A study by the Institute of Security Studies released last week points to the rise in protests over the past few months.

The strength of the South African Constitution, the sophistication and the size of the economy, the ability of the government to borrow, and the independence of the central bank are sometimes cited in defence of the ‘why it could not happen here’ argument. Size and sophistication might give a cushion, but not immunity to the laws of economics. The independence of the central bank as a bulwark against the government using it as a printing press or raiding its foreign exchange reserves is vital, but threatening noises have been made against the Reserve Bank from within the ANC.

Drawn-out process

Collapse is very often a drawn-out process without end. Zimbabwe has been in a dire predicament for close to 25 years, and Venezuela has been on the skids for over 25 years. In his recently published book ‘The Rise and Fall of South Africa, Latest Scenarios’, Frans Cronje, CEO of the Institute of Race Relations, writes that that the country’s fall will have ‘no end point or rock-bottom moment’ and, should it occur, it will be ‘a painfully slow and drawn-out process of economic decline and civil rights erosion’.

In the face of decline, there is inevitably considerable human ingenuity used in an attempt to get by. As much as ingenuity helps, collapse results in economic damage, lost lives, and lost human potential.

But the lessons of economic collapse have not been really learned by populists. The Governor of the Reserve Bank, Lesetja Kganyago, has warned of the dangers of populism and the likely push to economic disaster.

In a speech almost three years ago, he said: ‘When a country blows up its own macroeconomy, its policy options narrow to the point where all the choices are bad ones. If you can get anyone to lend to you, it will be the IMF. One way or another, you will end up doing real and brutal austerity.’

Jonathan Katzenellenbogen is a Johannesburg-based freelance financial journalist, and regular contributor to the Daily Friend.

This article was first published on the IRR's online publication, Daily Friend.