Protecting Property Rights Key to Economic Recovery

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South Africa’s intention to expropriate private property without compensation will have damaging effects on the already ailing economy.

Economic growth and property rights are intimately interrelated, and protecting property rights in any economy is paramount. This enables property owners to use their resources when and how they see fit, especially in planning investments and taking the risks that are necessary for business growth.

The simplest argument in favour of protected property rights is that economic growth depends on investment, and no investor will risk their capital if there is a possibility of losing it expropriation without compensation. Secure property rights are crucial for an investment-friendly environment.

First, it guarantees security of investment. Busi Mavuso, CEO of Business Leadership South Africa, has pointed out that “despite the debate over land reform being much needed, we have undermined confidence in property rights. Nobody makes investments in assets they can’t trust will still be theirs in future”.

Unprotected property rights mean that any investor who comes to South Africa may fail to obtain returns on their investment and hard work because, at any point, their business could be expropriated with nil compensation being paid. Thus, securing property rights reassures investors that their formal claim to their property is protected by law. Regrettably, South Africa is now classified as “a mostly unfree economy” on the Heritage Foundation’s Index of Economic Freedom, ranking number 106 out of 180.

Another consideration is that property rights play a role in facilitating transactions, not least in raising credit. Formally well-defined and secure property rights enable people to use their property as collateral to obtain loans from banks, thereby supporting other transactions. With property as collateral, capital can be raised at reasonable rates.

Cas Coovadia, former managing director of the Banking Association of South Africa said that “the uncertainty and fear around land expropriation has already created pressure within the banking and property industry”.

Once property rights are eroded through expropriation without compensation, land can no longer serve as collateral. This puts under threat the public and private loans to the agricultural sector worth roughly R162 billion, and makes financiers more likely to exit the sector.

Protecting property rights can enable the reduction of protection costs.

In 2018, South Africa’s Parliament passed a motion to review the property ownership clause of the Constitution, in order to allow for the expropriation of landwithout compensation.

Since then, South African farmers have been reluctant to invest in their farms. We have also been told that foreign investors are very concerned; at best, many have adopted a “wait and see” attitude. The likelihood of expropriation without compensation remains, and is thus discouraging essential investment by farmers and others in their properties. Farmers with secure land tenure are most likely to invest more in their land through “sweat equity” and to develop their farms in every possible way. But all this is in vain if the future is uncertain.

On the other hand, the international community is increasingly recognising the importance of formalising property rights. In February 2020, US Secretary of State Mike Pompeo warned that South Africa’s proposed use of expropriation to advance land reform would be “disastrous” for the economy. His comment cannot be ignored.

Lessons from neighbouring Zimbabwe cannot be overemphasised. On 22 July 2020, Zimbabwe signed an agreement worth US$3.5bn to compensate farmers who were evicted from their land during the controversial land reform programme of the early 2000s, dubbed “hondo yeminda” meaning “the struggle for land”. This is being done after almost two decades of land conflict that has damaged the economy. The effects of Zimbabwe’s violent land grab risk being replicated in South Africa’s proposed land expropriation without compensation: both undermine the importance of property rights. If South Africa is not careful, it could end up like Zimbabwe.

Peruvian economist Hernando de Soto classifies the world into two groups – countries that have defined property rights and those that do not. Without defined property rights, the implications are severe. People are unable to leverage their properties to generate wealth, and their assets become “dead capital” which cannot be used to generate income. Thus, the poor remain trapped by the “tragedy of the commons” where their unregistered properties can be stolen by powerful interests, hurting individuals and slowing economic development. Legally protected property rights are a significant source of the developed world’s prosperity, and their absence is the reason why poor countries remain trapped in poverty.

It is important to bear in mind that capital goes where it is welcome and stays where it is well-treated. The government needs to drop its current plans and rather implement reforms to protect property rights. This will attract investment into South Africa that is needed to generate much-needed jobs. The Covid-19 pandemic has already negatively impacted various sectors of the economy. A post-Covid economic recovery plan needs to be accompanied by secure property rights if it is to be successful, otherwise the economy could remain in intensive care long after the pandemic has passed.

Tawanda Makombo is an analyst at the Centre for Risk Analysis (CRA). Go to https://cra-sa.com/