Policy void fuels poverty

Government interference in business, and government as an employer or a net creator of jobs, are both unsustainable in reducing income inequality and wealth.

16 September 2020 | Economics

Over the past decade there has been a notable shift in policy and a clear ideological drift towards a more overtly government-controlled economy. - EPRA

JM Kretschmer - The Namibian government has of late come under increased pressure from all sectors of society, and in a key turn of events also from its own voter base, to reduce inequality and poverty.

There are substantial socio-economic challenges in the country including housing, equal access to quality education, joblessness and more, all exacerbated by the Covid-19 pandemic.

The political arena in the country has seen sweeping changes with members of the ruling party, generally a united front, establishing their own movements or parties and speaking out, very critical of the current regime. The Fishrot scandal also landed a heavy blow against the ruling party Swapo, and its senior officials and its policies.

This pressure has seen the government respond, in the view of some, quite erratically.

According to the Economic Policy Research Association (EPRA), “Namibia has enjoyed a relatively free market which attracted investment, spurred growth, and played an important role in much of the progress made since 1990 – whether directly, such as through upliftment thanks to employment or corporate social responsibility; or indirectly, by providing the finances for government to do so (through tax revenue)”.

‘Interventionist’

“However, over the past decade there has been a notable shift in policy and a clear ideological drift towards a more overtly government-controlled economy. This has seen the introduction of more interventionist policy from government, as exemplified by the controversial NIPA [Namibia Investment Promotion Act] and different versions of NEEEB [New Equitable Economic Empowerment Bill], as well as several other detrimental policies such as the sheep marketing scheme (which decimated the local industry), the additional conditions imposed on mineral exploration licences introduced in 2015 (which dramatically decreased exploration activity), and Regulation 13 (previously 28) of the Pension Fund Act that allowed GIPF [Government Institutions Pension Fund] to allocate pensioners money to be invested by a small number of preferred funds in unlisted investments (greenfields) and high-risk projects,” EPRA says.

But knee-jerk reactions will, according to economic experts, worsen the already shrinking economy. There has been a clear shift towards a quasi-socialist approach in Swapo’s economic policies.

This has seen a decline in growth, particularly over the last five years.

‘Short-sighted’

An analysis by Cirrus Capital shows that to return to the level of economic growth seen in 2015, Namibia will have to grow at 4% per year, for the next 10 years. Thus, by 2030, Namibia would have demonstrated zero economic growth for 15 years. The growth seen in 2015 was driven by government spending while ideally it should have been through investment and private-sector spending.

Earlier this year, Cirrus in its 2020 Economic Outlook wrote: “From a small business and investment perspective, no respite can be expected in the near-term. Indeed, it appears as if government remains determined to introduce additional taxes (dividend, taxes on trusts etc.), and while the worst-possible iteration of NEEEF and NIPA are unlikely to be introduced, less draconian versions (but still less desirable than the already challenging status quo) can be expected.

“That this will keep pressure on small businesses – the core employers in the country – is undeniable. These short-sighted measures will push economic, fiscal and household recovery further from reach, as well as provide additional space for misappropriation of funds by individuals, not to mention failure to achieve their broad-based intended outcomes,” Cirrus said.

Income inequality

Addressing income inequality and alleviating poverty will be all but impossible.

Germinal G. Van - an author, political essayist, and libertarian scholar who was born in the Ivory Coast and now lives and works in the United States - says that economic inequality is a risk to any government and could potentially lead to social upheaval and criminality.

However, in his view: “The truth is that there are two kinds of income inequality. There is income inequality that is created by the private sector and which is a characteristic of developed economies. This kind of income inequality is a positive and healthy inequality, because it is based on the two fundamental elements that create economic growth, the rule of law and private property. But income inequality also results from corrupt regimes that extract wealth from the population and hoard it within the government class. The difference is that the first kind of inequality goes hand in hand with wealthy countries. The second kind does nothing to lessen poverty.”

Inequality in Namibia is at an all-time high.

Destitution

With an estimated 900 000 Namibians living in shacks in informal settlements with some 200 000 in Windhoek alone, few with access to any services, along with more than 30% of the economy driven by the informal market living hand to mouth, the challenges cannot be overemphasised.

The deputy minister of urban development, Derek Klazen, last week announced that N$76 billion is needed to address housing in the country. He added that there is a backlog of 300 000 houses. Government has delivered just under 35 000 units.

In 2019, the World Bank reported that the unemployment rate of Namibians between the ages of 15 and 34 has increased from 43.4% in 2016 to 46.1% by the end of 2019. The unemployment rate of those aged between 19 and 34 stands at 44%. In addition, of the more than 850 000 Namibians under the age of 34, 34.5% have no formal education. It is important to note that Namibia has been independent for 30 years.

Is it any wonder then that 400 people sat for a written test for a single cleaning job at the Waapandula Combined School at Omuthiya in the Oshikoto Region in July 2019?

Van reports that Namibia’s high level of inequality, with a Gini-coefficient of 0.62 is surprising.

“If income inequality is such a predicament, then how come are these countries (South Africa, Namibia and Botswana) the wealthiest? These three countries also have in common a higher index of property rights and a higher index of the rule of law.”

He continues by saying that currently, South Africa, Botswana, and Namibia reflect the positive income inequality that a society creates as it innovates and develops.

This trend, in the view of experts, must be maintained at all costs.

Unsustainable

Government interference in business, and government as an employer or a net creator of jobs, are both unsustainable in reducing income inequality and wealth.

In 2019, president Hage Geingob appointed a panel of economic experts to prepare a report for him on the Namibian economy. The goal was to provide concrete advice and information to turn the ailing economy around.

The panel recommended that policy certainty is of utmost importance for an improved economic and investment climate “which is paramount to job creation” and “changes in productive capacity and supporting policy regimes are needed”. Bottlenecks in the procurement process in the panel’s view, also reduced public spending on important sectors such as health.

They also made mention of the bloated public sector, accounting for 46% of government expenditure, making reference to the levels being unsustainable and requiring urgent reform.

In their view, key institutional arrangements could contribute to a more competitive economy which is needed for the promotion of investment which in turn, should focus on export markets.

‘Dramatic decline’

Experts agree that two of the most essential elements for markets to function are the protection of private property rights and adherence to the rule of law.

Economies must be left alone to function, produce and trade on their own, on the basis of supply and demand. Healthy competition drives prices down and is in the best interest of all. But without business confidence there can be no investment.

In October 2018, Dr Roelof Botha and Professor Ilse Botha performed research on the impact of the term ‘expropriation without compensation’ in South Africa, following the establishment of the parliamentary committee to review such a process on farmland in the county.

They write that “unfortunately, these words/concepts have been accompanied by a fairly dramatic decline in confidence levels amongst businesses and consumers alike, with capital formation having declined by more than 7% over the past 11 quarters. The importance of capital formation to the well-being of the economy cannot be over-emphasised.”

Murmurs of expropriation of land in Namibia, with ‘fair compensation’ have also reduced investment into the critical agricultural sector and Namibia imports the bulk of what it eats.

Policies by the Namibian government have eroded business confidence in the country. There is uncertainty over property rights, in particular with the equitable economic empowerment legislation, as well as in agriculture and even tax legislation.

Drain on investment

Predictions by the Bank of Namibia (BoN) indicate that the country’s economy can shrink by almost 8% while some economists predict a bigger contraction of up to 12%. The country was in recession prior to the pandemic and Covid has been costly. Not just to government, but also the private sector.

EPRA says, Namibia has already begun to feel the withdrawal of investment. The most recent data shows this both in terms of gross fixed capital formation and net direct investment. This, it says, coincides notably with a dramatic shift in policy.

Nordea’s trade portal agrees. It is the largest financial group in Northern Europe.

It reports on Namibia saying that the country’s “business climate suffered from a significant deterioration over the last decade. From ranking 54th in the World Bank 2008 Doing Business report, the country dropped to the 104th position (out of 190 countries) in the Doing Business 2020 report. President Hage Geingob has introduced new measures aiming at strengthening the national economy, some of which restrict investment opportunities for foreign groups and strengthen state control in certain areas, especially in the exploitation of natural resources.

“Property rights are constitutionally guaranteed, but the parliament can legally expropriate property and regulate the property rights of foreign nationals. In a context of high inequalities, debates over land redistribution and economic empowerment are increasingly popular. Labour regulations are relatively flexible, but the labour market lacks dynamism and the workforce is small and not highly skilled,” Nordea says.

According to the 2020 World Investment Report by the United Nations Conference on Trade and Development (UNCTAD) the inward flow of foreign direct investment into Namibia has seen a dramatic decline of US$374 million in 2017 to USS$157 million in 2018 and -US$17 million in 2019.

Economic freedom

In its analysis of Namibia, the Heritage Foundation ranks Namibia’s economic freedom score at 60.9, making its economy the 96th freest in the 2020 index. Its overall score has increased by 2.2 points due to an increase in the score for fiscal health. Namibia is ranked 7th among 47 countries in the Sub-Saharan Africa region, and its overall score is well above the regional average and slightly below the world average.

On property rights, Namibia scores 58.9 while government integrity has a much lower score, that of 46. It makes mention of low labour productivity and a lack of skills as hampering the growth of the economy and says that “although foreign investment is encouraged, necessary regulatory infrastructure for spurring growth in new investment is not in place. The financial sector remains underdeveloped, and access to credit is limited”. It scores investment freedom at 65, a figure, experts say, needs to improve further.

Across Africa and everywhere in the world where development lags and economies struggle, a distinct link to unsure property rights and government intervention in the free-market economy is seen.

There can be no more important aspect to economies developing and creating jobs than ensuring that property rights are in place, supported by liberal economic policies and ease of doing business. It is, in the view of economic experts, historically too, the only way to alleviate poverty and reduce income inequality. The Austrian-born economist and philosopher Friedrich Hayek says the “system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not.”

* JM Kretschmer is a Namibian freelance journalist.

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