South Africa’s Expropriation Policy is a Catastrophe Awaiting a Trigger

The constitutional controversies surrounding the debates about the expropriation of farmlands from white farmers without compensation is already tearing South Africa apart and extreme care must be taken not to escalate it into a region-wide catastrophe. In pursuing this policy, South Africa is not only attaching a suicide vest to its own economy, but also its neighbors who rely heavily on the “Rainbow Nation” for trade and currency stability.

The Constitutional Contentions

Last week, South Africa’s Joint Constitutional Review Committee declared that the country will continue to pursue the policy of land expropriation without compensation. The proposition to change Section 25 of the constitution, which makes provision for the expropriation of property “only in terms of the law of general application,” will now be voted on in the South African Parliament in early 2019.

This section of the constitution as it stands mandates that there must be “just and equitable” compensation if a piece of land is seized from an immediate owner. The proposed amendment would change the “just and equitable” clause to mean “no compensation” is necessary – if the property is taken from a white landowner for instance. Currently, this policy is supported by the ruling party, the African National Congress, which currently holds 62 percent of the seats, and the Marxist, pro-land expropriation, Economic Freedom Fighters who holds another 6 percent of seats.

As I noted in my previous piece on this issue, pursuing expropriation without compensation will only further harm the already weakened South African economy. Worse still, it is likely that the country will face similar economic challenges like those that plagued Zimbabwe about a decade ago following Robert Mugabe’s chaotic land expropriation policy. It is equally necessary to consider the likely impacts on the southern Africa region, which of course, is highly powered by South Africa’s economy.

A likey Dire Regional Implication

This is important given that South Africa is the largest economy in the Southern African Customs Union (SACU). SACU is the world’s oldest customs union, and the other four members are Botswana, Lesotho, Namibia, and Eswatini (formerly Swaziland). The SACU arrangement allows these five nations to freely trade amongst each other, but a common external tariff applies to trade with outside nations. The significant thing here is that the other four SACU nations rely heavily on trade with South Africa.

This is hardly surprising considering South Africa’s economy is about twenty times larger than the second largest economy in SACU – $349 billion, compared to Botswana’s $17 billion. When analyzing the breakdown of exports, 88.9 percent of Lesotho exports go to South Africa. For tiny Eswatini, the figure is 81.3 percent, Botswana at 64 percent, and Namibia with 57.1 percent. But this gets interesting.

A recent economic impact assessment published by two of South Africa’s leading academics forecast that if the country adopts a policy of land expropriation, a nightmare combination of “a downgrade of the country’s sovereign bonds to junk status, higher interest rates, a fairly sharp decline in tax revenues and a deep recession” will occur.

The pair also concluded that there will be an “imminent socio-economic disaster for South Africa in the event of expropriation without compensation being pursued.” If forecasts such as these came to fruition, the result would be devastating for the SACU nations who rely so heavily on trade with South Africa.

To make matters worse, three SACU nations, Lesotho, Namibia, and Eswatini, have their exchange rate pegged to the South African Rand (ZAR). This means that the value and strength of these countries’ currencies, and in extension, their economies, are directly reliant on the strength of the ZAR.

It is often suggested that weakened property rights will lead to businesses and individuals being unwilling to invest in South Africa due to the fear that their capital and property would not be protected. This could be a potential reality if care is not taken.

Things are Already Getting Bad

The South African Banking Association (SABA) recently pointed out that since President Ramaphosa’s announcement of the expropriation plan back in July of this year, the number of agriculture-related transactions and the amount of capital invested into the sector has plummeted. SABA also fear this trend will rapidly accelerate if the constitution is amended.

Less investment coupled with a poor economy will inevitably result in the ZAR depreciating in value. If this happens, the value of the pegged currencies of Lesotho, Namibia, and Eswatini would depreciate along with the ZAR. This also means it would become more expensive for businesses in these countries to purchase goods from other countries.

More so, a depreciated currency will likely increase the rate of inflation that will create further economic uncertainties. And most concerning for Lesotho, Namibia, and Eswatini, will be the currency volatility caused by these uncertainties.  A volatile currency will deter foreign direct investment due to the fear of potential exchange losses caused by currency depreciation.

Unfortunately, however, it seems South Africa is hell-bent on pursuing this policy and the amendment to the constitution will likely pass when voted on in the National Assembly. This issue has truly reached a boiling point in South Africa and everyone involved needs to be wary of what happens next. May we hope the South African politicians acknowledge the senselessness of this policy for what it is and reject the ghastly amendment.

Alexander C. R. Hammond is a Senior Fellow at African Liberty. He is also a researcher at a Washington D.C. think tank and contributor to Young Voices.