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Rent-seeking is gobbling up our economy

CORRUPTION

South Africa is increasingly becoming a “rent-seeking” society in which the politically connected make easy money without having to work for it: they get government and private sector contracts, mining rights and favourable policies just because of their closeness to the ANC leadership.

Although rent-seeking may, for many, appear not to be corruption, it is a pervasive form of it. The entrenchment of a rent-seeking culture undermines the productive capacity of the economy, as well as innovation and new investment. It discourages job creation and efforts to reduce poverty and inequality. It ultimately stymies economic growth.

An obvious form of rent-seeking is narrow black economic empowerment (BEE), whereby shares in established white companies are allocated to a few politically connected blacks, their families and their associates. They become fabulously rich overnight just because of their political connections.

Such rent-seeking does not add value, but rather diminishes it. It is no wonder that many first-generation BEE deals have unravelled.

Rent-seeking includes appointing politically connected cadres in both the public and private sectors, or giving them government or private contracts, when they do not have the competence. Rent-seeking also involves lobbying for policies that enrich one group, company or political faction rather than the whole society.

Such activities generate more of the same, until there is a widespread culture of rent-seeking. If no action is taken against this, more people are attracted to such actions. Rent-seeking can generate a network of institutions that profit handsomely, such as lawyers advising on narrow BEE. It drives pork-barrel policies.

In the rent-seeking economy, there is no long-term investment. The rent-seekers try to “eat” as much as quickly as possible to amass wealth, before being pushed from the trough by the next dominant group.

Because it is so easy for the politically connected to live off “rents”, they are unlikely to have the incentive to build brick-and-mortar companies. Yet if South Africa is to industrialise, we need new, competitive productive sectors. Rent-seeking induces deindustrialisation.

The economy does not expand its productive capacity when rent-seekers milk existing capacity, choking less connected innovators and entrepreneurs who fail to get start-up finance, mining rights or trading licences. Narrow BEE means that black South Africans who are real entrepreneurs and innovators, people who could establish genuinely productive enterprises, creating new businesses and jobs, are elbowed out.

Worryingly, BEE deals increasingly use intermediary contractors who form superficially black shell companies, with little productive capacity, to secure public sector contracts. In many cases, established white companies will only appoint such politically connected black “businesses”.

Giving government contracts to the politically connected often means that services get more expensive: they have to hire white businesses with the capacity to deliver on their behalf. The same politically connected businesspeople get “empowered” by repeatedly being part of BEE contracts and government deals, to the detriment of building other companies.

A new phenomenon increasingly reported is that politically connected BEE businesspeople, in cahoots with corrupt government tender officials, steal the business plans submitted by entrepreneurs who are not politically connected, rework them slightly and then resubmit them to the same corrupt officials with successful outcomes.

Well-connected political deployees to government who lack the necessary competence push out talented potential incumbents. We often see the same people being appointed to senior positions, such as director general, in different departments, or as executives and board members at state-owned enterprises, even when they fail. They hop from one post to another, even if there are many talented black professionals out there.

Incompetent public sector deployees often cause waste, mismanagement and inefficiencies. Service delivery gets stunted and a negative cycle of corruption, nepotism and mismanagement ensues. They demoralise those working under them, decrease their productivity and undermine the whole system.

Rent-seeking is increasingly causing black resentment – from young black people, who cannot find a job without political connections, from business and from black professionals who get frozen out.

Black workers are also rebelling because they have not been empowered by skills development, shareholding and company social development, such as the provision of housing. Residents are angry because they are excluded.

Rent-seeking stunts the productivity of the whole economy: why does one have to work hard when all one needs is to be politically connected?

This rent-seeking phenomenon has broken the economies of most African countries in the postcolonial period. The cycle of rent-seeking, it seems, can only be broken if the sitting government is unseated.

So far, no African government that has lapsed into a rent-seeking culture has been able to reform from within. If South Africa is to buck this trend, there has to be a grass-roots campaign against corruption: the masses must understand its damaging impact on service delivery, poverty alleviation and job creation.

William Gumede chairs the Democracy Works Foundation and is the author of Restless Nation: Making Sense of Troubled Times. Unite against Corruption, a consortium of civil society groups and individuals, is organising marches against corruption in Cape Town and Pretoria on September 30. For details, visit uniteagainstcorruption.co.za.

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