Nationalisation will be catastrophic

All the talk of nationalisation the last few weeks has got South Africans discussing it openly on news sites.

I've got a feeling that the ANC Youth League and COSATU as well as a whole host of other unions that are calling for nationalisation won't listen to any reason anyway, but for those of you who realise that if the ANC took over mines and banks, it would be just as corrupt and useless as any other department that they mismanage, I've decided to shed some light on the economic effects of nationalisation.

Please note that this article assumes that the mines will still operate, but if other ANC-run companies and mines are anything to go by, just how long do they think the mines will actually be producing anything?

I've always known that nationalisation is bad. I learnt about it in history in High School. But to be honest, I didn't remember exactly why it was bad until I read the following article on Sake24, which I've tried to translate to the best of my abilities here:

Nationalisation will be catastrophic

Christo Luus, 18 July 2011

The ANC Youth League and COSATU are proposing Nationalisation and expropriation. This is a euphemism for large-scale, state-controlled theft.

There is overwhelming historical evidence from countries worldwide that state controlled companies are never run as effectively as private companies. State-run companies usually can’t allocate and apply scarce resources optimally.

In the event that a state-run company acquires a monopoly, the situation gets worse.

 State-run entities are mostly unprofitable and usually remain dependant on subsidies which need to be financed by tax payers. There are numerous examples of such companies in South Africa.

What the advocates of Nationalisation don’t realise is that the companies they want to nationalise are owned by other companies, pension funds, investment funds or individuals. A large proportion of share holders in these companies are foreigners. Large percentages of pension fund shares are already owned by blacks.

If banks and mines are nationalised, the value of their shares will be wiped out completely, especially if the biggest or sole share holder – the state – refuses to pay for their shares.

nationalisation south africa banks mines disasterAt the end of last year, the investment of official pension funds in ordinary shares came to about R583 billion, which was 56% of their assets. The investment of private pension funds in shares came to R365 billion (55% of their assets). Insurance companies had a further R746 billion in shares – most of which was invested in pension funds on behalf of clients.

The nationalisation of banks and mines may cause a direct loss for pension funds of about R729 billion.

Many more billions may be lost due to the decreased value of other shares of non-nationalised industries and state equities. If a loss of 30% on these assets is assumed, pension fund assets of more than R1000 billion could be wiped out. These funds could provide an inflation-related pension of R15 000 per month to roughly 2.5 million people.

The large-scale confiscation of private assets could have the following results on the economy:

  • Large scale sales of JSE shares. At the end of last year, banks and mines represented 43% of the JSE market capital. The remainder of the shares will be negatively affected if the state confiscates bank and mine shares. It will have dire effects on the value of workers’ pension funds and will make pensioners dependent on state pensions.
  • Capital flight will be inevitable. No foreign company will invest in an economy which may or may not confiscate their shares. The country will not attract any notable foreign investment.
  • The value of the rand will plummet to unprecedented levels, with skyrocketing inflation following. Interest rates will have to rise dramatically, unless the government manages to take control of the Reserve Bank in order to limit interest rates, as it has frequently advocated. This can lead to hyper inflation very quickly as it did in Zimbabwe.
  • The value of state equities could plummet and contribute to the drop in value of pension funds. This will raise the interest of state debt drastically.
  • Due to the fact that domestic savings (which will decrease drastically) will be the sole financial source for fixed asset creation, very little funds will be available for the construction of buildings, the acquisition or replacement of machinery and equipment or the development and maintenance of existing infrastructure.
  • Without foreign capital in-flow, the country will be forced to restrict imports in order to balance the books, which will nullify existing trade agreements and further increase inflation.
  • More food will have to be imported if productive, commercial farmers are removed from their land, which will put more strain on the balance of import/export.
  • South Africa’s reserves currently only covers about 6 months worth of imports and these reserves will be bled dry very quickly in a crisis. This could impact payments for oil and food and lead to massive shortages (as in Zimbabwe). The consequences of such shortages will be the loss of production, which will lead to job losses.
  • Per capita income in South Africa will drastically decrease and unemployment and poverty will increase. Government deficits will increase significantly and state debt will skyrocket. (like in Zimbabwe)

The proposed policies of Cosatu and the ANC Youth League will have dire effects on the South African economy and everybody – except the powerful few in the ANC elite - will be poorer than ever before.
If the government wants to provide “economic freedom for the masses”, they should adopt a policy directly opposite to the policies proposed by Cosatu and the ANC Youth League.

The private sector should be allowed to grow at a higher pace, create more jobs and pay more taxes. In order to achieve this, business-friendly policies are needed which limit corruption and which eliminate unnecessary bureaucracy. The state should focus on the maintenance and development of the country’s infrastructure, better basic service delivery, higher quality of education and training and decreasing its deficit and debt.

The government has a duty towards the citizens of South Africa to remove the elements in our society who advocate the break-down of order and who promote violence and lawlessness from their platforms.

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