31 MAY 2012-05-21

I have chosen “the importance of property rights for South Africa” as my topic today because I believe that property rights are under threat. Moreover, the next twelve months could be crucial in determining their future – and by extension the future of our economy and our society.

By property rights I mean our right to own any form of property: our land, our homes, our possessions; our investments; our savings; our pensions and our money.

Why are property rights so important?
According to Friedrich Hayek, the great Austrian economist and philosopher, modern civilisation – with its ability to meet the needs of billions of people – was made possible by private property – and that without private property it is doomed to disaster.

In Milton Friedman’s view property rights are “the most basic of human rights and an essential foundation for other human rights.”

It is not only free market economists who hold such views. In his book, The Audacity of Hope President Obama writes that “our Constitution places the ownership of private property at the very heart of our system of liberty. The result of this business culture has been prosperity that is unmatched in human history.”

If one stops to think about it, the amount of property we own – and that can be converted into money – determines our ability to do what we want to do in many facets of our lives.

• It enables us to buy the food and shelter that we need for our day to day survival;
• it helps us to pay for education and medical treatment above the levels provided by the state;
• it provides us with security and a pension when we are old;
• it gives us the ability to buy consumer goods – including cars, computers and clothes; and
• it enables us to enjoy life’s little luxuries – to dine out; to go to the movies and to go on holiday.

It is as simple as this:
Property empowers us as individuals to do pursue our lawful goals in our commercial interaction with others. Its possession gives us the freedom to choose what we want to do and what we want to acquire.
That is why most of us spend most of our productive lives working to obtain sufficient property – most generally in the form of money – to meet our needs.

The desire to acquire property is innate in our species. There is hardly a community anywhere in the world that does not trade; that does not have markets; and that does not strive to acquire or increase its store of property.

Remove private property from society and you kill much of the economic activity that we currently see in our streets and in our cities.

A friend of mine was one of the first members of the South African government to return to Maputo after the civil war in Mocambique. There was hardly any economic activity at all: the shops were deserted because their shelves were empty; the once thriving Indian market was chained and padlocked; there was hardly any traffic in the main avenues – except for the vehicles of senior government officials.

The economic desolation was partly caused by the aftermath of the war – but the main cause was the fact that the communist government had systematically removed the private property from the system.

In the old Soviet Union the tiny private garden patches that comrades were permitted to cultivate – and that comprised only 1% of the agricultural land – produced a massively disproportionate percentage of the available food. This is because it was one of the few sectors of the economy where private property was permitted.

On the other hand, the reintroduction of private property and private enterprise in China has contributed to the greatest enrichment of the largest number of people in the shortest period in human history. It has transformed China from an impoverished backwater of the global economy to its present status as the most dynamic economy in the world. More importantly, the legitimisation of private property has materially improved the lives of hundreds of millions of people from the drab, pyjama-clad uniformity of the Mao era to the colourful exuberance and creativity of the present.

The simple truth is that private property empowers its possessors – just as economic growth empowers countries.

And yet private property is under threat:
It is evident from the policy papers that the ANC released in March that property rights will be an important topic of discussion at next month’s policy conference:

Firstly, the ANC appears to be intent on proceeding with the implementation of its controversial Green Paper on Land Reform which could seriously undermine the property rights of farmers:
• The ‘Agrarian Transformation’ that is postulated by the Green Paper would require ‘a rapid and fundamental change in the systems and patterns of ownership and control of land, livestock, cropping and community.’
• privately owned land would be freehold but with ‘limited extent’. This means that a cap might be placed on the size of farms or the number of farms that a person may own;
• foreign owned land would be freehold with ‘precarious tenure’ and would be subject to conditions that might include some form of black economic empowerment partnership;
• implementation of the new policy would go hand in hand with implementation of the Land Tenure Security Bill, 2010 – which would further erode the property rights of farmers. According to AgriSA, the Bill would give farm dwellers and their dependents unlimited and comprehensive rights in respect of stock-farming and cropping, services, training housing and roads – and would create unlimited obligations for farmers.

Secondly, the ANC is thinking of targeting the pensions and life assurance savings of citizens.

• According to the policy papers, the State plans to regulate a substantial part of public and private retirement and life assurance funds so that these funds can be invested in the financial instruments of State Owned Enterprises and/or Development Finance Institutions.
• Any attempt to interfere with the ability of pension and life assurance funds to achieve the maximum secure benefits for their investors could seriously undermine the property rights of those involved.

All of this is part of a general policy to increase the government’s role in the economy through the establishment of a “developmental state”. The envisaged developmental state would include “a mix of private, state, co-operative and other forms of social ownership.” The “balance between social and private ownership of investment resources” would “be determined by the balance of evidence in relation to national developmental needs and the concrete tasks of the National Democratic Revolution at any time.” In other words, the future of private property would depend on its contribution to the government’s development programme and to its ideological agenda.

The concrete tasks of the National Democratic Revolution include “the de-racialisation of ownership and control of wealth, including land, equity and affirmative action in the provision of skills and access to positions of management.”

If the ANC is serious about this agenda, it would erode the property rights of South Africans on the basis of their race. This, in turn, would have very serious implications for the national consensus on which we have operated since 1994.

These views are motivated by the oft repeated claims that little or nothing has changed in economic relationships since 1994.

According to the ANC’s Strategy and tactics Documents “The ownership and control of wealth and income, the poverty trap, access to opportunity and so on – are all in the main defined, as under apartheid, on the basis of race and gender.”

But is this true?
• The claim is frequently made that less than 5% of agricultural land has been successfully transferred from white to black landowners since 1994 – and that the there is little or no possibility of achieving the 30% target by 2014. But what are the facts?
According to the South African Institute of Race Relations 25.4% of South Africa’s total surface area is owned by the State. 2.1% of the land has been transferred to black South Africans through land restitution. A further 2.5% has been redistributed. In addition, another 2.1% of agricultural land would have been transferred to claimants had they not chosen payouts amounting to R5 billion instead. Apart from this, an unknown amount of land – but calculated to comprise at least 5% of the total – has been transferred to black South Africans through normal land sales. This means that at least 35% of the country’s land is owned either by black South Africans or by the government. The remaining 65% is not all owned by whites since it also includes large tracts of land owned by South Africa’s 283 municipalities.

Be that as it may, nearly everyone accepts the need for ongoing and effective land reform. Agri SA is keen to engage with government to substantially increase the amount of land owned by black farmers – but in a manner that will be fair to existing farmers and that will not diminish the production of food.
• People also claim that there has been little or no change in economic relationships since 1994. This is also untrue. Between 1993 and 2008 the white share of income dropped from 54% to below 40%.

According to last year’s National Diagnostic Report there has also been significant deracialisation of the top 20% of income earners. Between 1995 and 2009 the white share of the top 20% of income earners dropped from 47% to 32%.

• The black share of the ownership of shares on the Johannesburg is also frequently underestimated. According to a survey by Trevor Chandler and Associates that was commissioned by the Johannesburg Stock Exchange last year, black South Africans own directly or indirectly 17% of the shares in the top 100 companies. This means that they own 28 % of the shares available to South Africans. 44% of shares are foreign owned or cross-held shares – and a further 2% are owned by the State.

• Black South Africans also own a substantial share of the residential property market.
According to research at the end of 2010 black, Coloured and Indian South Africans owned 56.2% of South Africa’s primary residential market compared with 43.8% that was owned by whites. This means that the total value of black, Coloured and Indian residential property is more than 2.3 trillion rand. According to economist Mike Schussler, these figures reflect the radical change in the composition of South Africa’s housing market since 1994. This is due in part to the fact that government has built more than 3 million homes since then.

However, less than 5% of black homes are bonded – which means that enormous wealth is still locked up in the black residential market.

• In addition to all this, the black controlled government accounts for some 28% of the annual gross domestic product. To this must be added 6% of GDP represented by state owned enterprises – and up to 10% of GDP that the informal sector is estimated to contribute. If one then considers that the government controls economic and fiscal policy, the claim that little has changed in economic relationships since 1994, is clearly wrong.
Nevertheless, the assault on private property continues. In the wake of the economic crisis of 2008, there are increasingly strident calls for the rejection of free market economic policies.

The central question for policy makers should, however, be which system can promote general prosperity and reduce poverty most effectively?

Just as the possession of property empowers its owners, the lack of property – what we call poverty – seriously diminishes the ability of the poor to achieve even their most basic goals. It leaves them with little or on freedom to make choices about their lives. Poverty is the starkest form of disempowerment. So how can it be best addressed? – by seizing and distributing the property of the haves – or by following the advice those who favour free markets and property rights?

The facts show clearly that property rights and free markets promote the general prosperity of everyone much more effectively than government intervention and control. According to the annual Economic Freedom in the World survey countries that have free economic systems based on free enterprise and property rights out-perform economies that are not free in almost every measure of societal success:
• Countries in the top quartile of free economies had per capita incomes of $ 31 500 in 2009 compared with only $ 4 545 in the least economically free quartile.
• They had an average growth in per capita GDP between 1990 and 2009 of 3.07% compared to 1.18% in the least free economies;
• Moreover the average per capita income of the poorest 10% of people in the freest economies was greater than the average income in the least free economies;
• Life expectancy was 79.4 years in free economies compared with only 40.7 years in the bottom quartile.
• In the freest economies only 2.7% of the people lived in poverty compared with 41.5% in the least free economies.
There is no doubt which system best promotes prosperity and well-being. The bad news is that South Africa’s position in the economic freedom ratings has been declining steadily. In 1980 we were the 28th freest economy in the world; by 1995 we had slumped to 46th position – and in 2009 we were in 84th place.
Clearly there is a great deal more that needs to be done to promote growth and to address poverty in South Africa. The solution, however, does not lie in attacking private property.
If Government adopts the kind of anti-private property policies that are spelled out in the policy discussion papers, there would be seriously negative consequences for all of our people:
• The most productive individuals from all our communities would no longer be able or willing to contribute to economic growth;
• The government would receive less tax – which would affect its ability to finance essential social programmes;
• Foreign and domestic investment would dry up.
• Our farms would no longer be able to produce the food upon which our people depend.
In short, the mechanism that produces national prosperity would be destroyed – and with it the hopes and dreams of all our people for a better life.
It is also untrue that our problems will be solved by greater government involvement in the economy. The simple realities are that
• The bigger the public sector becomes the smaller the private sector will be. This means that there will be slower growth and lower revenues for the state;
• Government has a poor record in terms of service delivery – and many State Owned Enterprises have very poor performance records. There is no reason to suppose that greater state involvement in the economy will be managed any better.
• Government enterprises are sheltered from competition and from the discipline of the market. They do not go out of business if they fail to satisfy their customers. Bureaucrats stay in their jobs and receive annual increases regardless of their performance;

The Government should instead address the challenges identified in its own National Diagnostic Report – and most notably the problems of unemployment and education:
• It must get South Africans – and particularly black South Africans – back into the labour market. One of the main problems in promoting equality and in eliminating poverty lies in the fact that only 36% of black South Africans between the ages of 15 and 64 have jobs – compared with 64% of whites;
• One of the main reasons for high unemployment rates is the virtual collapse of black education. Forget about the 70% matric pass rate claims: of the 1 050 000 children who entered the school system in 2000, less than 90 000 had university entrance qualifications – and a high proportion of these were white, coloured or Indian;

Government policy should be directed toward addressing these challenges – and not to hobbling private enterprise by undermining property rights.

South Africa remains a country with immense potential. We all need to work together to achieve that potential – but the private sector will not be able to lay its indispensible role if property rights are undermined and if the state continues to expand its role in the economy.