We need to act now, says economists
Despite the hysterical warning for people to get the money out of South Africa, economist Dawie Roodt insists that he is doing the right thing by warning citizens about the dark path South Africa is on.
Roodt said that South Africa is on the same route that many countries have already experienced before like Somalia or Zimbabwe which ended up in a failed state.
The problem lies in government spending, where the state is under pressure to spend more on more people every year, but does not have the means to do so. This leads to huge debt problems that cannot be solved easily – and the obvious solutions are not politically effective. Economists have previously warned that South Africa is on a dangerous path.
According to Roodt, a country’s rise and fall follows the following pattern:
- Government starts small by providing basic services
- Service demand grows, generating more tax
- Interest groups become noisy while state spending/taxes become unclear
- Debts and interest increase rapdily
- Lenders stop lending to the state
- State starts forcing citizens to pay more tax
- Savers immigrate/re locate
- Country introduces foreign exchange policy
“At this point, various trajectories are possible. The state can get its house in order, sometimes under the watchful eye of a big brother such as the EU over Greece. Or the state can simply refuse to repay its debt and call debtors all sorts of bad names, like vulture funds in Argentina recently,” Roodt said.
The most popular to get rid of its debt is to pretend to repay it, he said. In this way, the government takes full control of the reserve bank, and starts printing more money – effectively lowering state debt in real terms. However, the consequence of this is hyperinflation, which has been seen in other failed states like Zimbabwe.
“The economic consequences of all these approaches fluctuates between bad and horrible,” Roodt said.
South Africa’s path
In SA’s case, we have already reached the point where the government is running low ob cash, and the rope is tightening around the taxpayers’ necks. Debts are at all time highs with the mid-term budget making it clear that there will be no reduction in state spending. A third of South Africa’s GDP is in state spending – excluding municipalities and SOEs.
The obvious solution is to cut state spending – however, this won’t happen as many of South Africans depend on this through pensions, social grants, education etc. With an election coming up, this is simply not an option right now.
And even if these cuts were made there will still be a severe impact to the economy in the short-term. The only real solution is to either raise taxes or hike VAT. “From here, prescribed assets, exchange-control regulations, the capture of the SARB, and other horrible things can happen,” Roodt said.
“In short, once the state’s finances reach a certain level of unsustainability, a typical pattern is for a state to first steal from its taxpayers until it runs out of taxpayers, then to steal from its savers until it runs out of savers and then, depending on other things, the country repents and gets its house in order at an initial and very dear political and economic price,” Roodt said.
“But if it persists in its sinful ways, it enters a weak growth trajectory with continuous tax evasion, road blocks, political uncertainty and protest marches”. “In a bad scenario, we have dictatorships, states of emergencies and so on. In a very bad scenario, a total collapse of the state — à la Somalia and, probably soon, Zimbabwe.”