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Have you state-proofed your business?

The nine most feared words in the English language, according to former US President Ronald Reagan, are “I’m from the government and I’m here to help.” This is precisely the case in South Africa, as we were reminded of on three unpleasant occasions in February 2020.

There is very little about these occasions themselves that you and I can do – they are outside of our control. But what we can change is how we react to them, and how we either decrease their impact on our lives or find ways to profit from them.

The President’s speech

The first unpleasant occasion was President Cyril Ramaphosa’s State of the Nation address. The terrible state of the South African fiscus and economy necessitated fundamental reforms in government policy. Instead he doubled down with a speech that demonstrated two fundamental misunderstandings.

First, he incorrectly diagnosed the cause of the dire state of the economy and the fiscus by laying the blame for it at the feat of corruption and state capture. However harmful, these were only contributing factors to the country’s problems – paling in comparison to the harm done by interventions such as high taxes, minimum wages, bureaucratic red tape, BEE, competition policy and expropriation without compensation.

Second, Mr Ramaphosa failed to acknowledge that wealth is not created by bureaucrats and politicians, but, instead, by businesses in market economies. This is demonstrated in his emphasis on “economic masterplans” and “social consensuses” at the centre of his strategy for economic growth. He even announced a sovereign wealth fund and a state bank.

Mr Ramaphosa closed his speech by saying “A new age has begun.” This is incorrect. He has assured business and the public that his government remains committed to its interventionist policies – he just wants it to be implemented in a corruption-free manner.

The Minister of Finance’s speech

The second unpleasant occasion was Minister of Finance Tito Mboweni’s Budget Speech. Here too there was talk of reform – so much so that it is tempting to echo the public praise the Minister received for suggestions such as cutting the public wage bill. Sadly, if you ignore the speech and look at the numbers, there is, in fact, no reform.

Remember finance Minister Malusi Gigaba? In his 2018 Budget Speech, he proposed expanding debt to what was then seen as unsustainable levels. He was well-criticised for it and everybody applauded when Mr Ramaphosa replaced Mr Gigaba with Mr Mboweni.

But what if I tell you that the budget deficit proposed by Mr Gigaba pales in comparison to the budget deficit of Mr Mboweni? On the consolidated budget this coming fiscal year, Mr Mboweni will make 80% more debt than what Mr Gigaba proposed two years ago, and 50% more debt than what Mr Mboweni himself proposed last year.

To his credit, Mr Mboweni did not increase taxes – and maybe he really wants to slow the growth of the public wage bill. But that all means nothing if he does not decrease total expenditure. Virtually all the alleged and expected “savings” on wages have stealthily been reallocated to other expense items. To top it all off, talk of savings is misleading – in most instances expenses are not decreased at all, but simply increasing at a more gradual rate than previously planned.

So, when you take the rhetoric with a pinch of salt and rather look at the numbers – which is the bottom-line – it is clear that the fiscal crisis in South Africa is ramping up at an accelerating pace and that there are no plans to contain it. Expect to see, in years ahead, increasing pressure on Mr Lesetja Kganyago of the Reserve Bank to solve fiscal problems with monetary policy – something he has been doing his best to resist so far.

The economy has the last word

The third unpleasant occasion was the announcement of a 1,4% GDP contraction in the fourth quarter of 2019. Not that we needed statisticians to tell us how tough it is out there, but still.

How did it happen? Why did the economy contract?

Not because of international financial crisis. Not because people in South Africa stopped working as hard, or because there was no opportunity for investment. The current economic situation is not a natural disaster – it is man-made.

People are unemployed, and goods and services are expensive because of government’s strategy to grow and “transform” the economy.

What this means for you and me

There are many commentators today who write on what government should do differently. Many of them pin their hopes on reform by Mr Ramaphosa or Mr Mboweni. And they implore you to put your weight too behind Mr Ramaphosa’s eventual success, because the alternative is almost too dire to contemplate.

I want to propose a different strategy: state-proofing.

State-proofing is a good idea most of the time, but in South Africa it is fast becoming essential. It entails three things:

First, that, instead of assuming access to benevolent government, you assume that government is going to be unresponsive at best (whether it is through lack of will or capability does not matter).

Second, that you design business plans that do not depend on government benevolence for success. In fact, you could even try and profit from government failure. Predict the failure, and then try and be there when it happens with value-for-money alternatives.

Third, that you act upon these plans in tangible ways, such as developing foreign currency income streams, down-scaling on government contracts, not playing the BEE-game, supporting community organisations, setting up private charities, and much more.

Of course, writing as CEO of Sakeliga I have business strategy in mind, but if you are reading this as an employee or retiree or student the principles would apply equally.

If the goal is to create prosperity and social flourishing, then you are going to have to do it both on a for-profit and a non-profit basis, without help from government. For yourself, for your community, and for all communities around you.

Article posted by Newshorn on 11 March 2020.

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