Why expropriation without compensation will fail in South Africa

Expropriation without compensation will not succeed in the government’s primary aim of attempting to reduce inequality and boost the standard of living for the majority of South Africans. 

This is because the policy fails to recognise the fundamentally changed nature of the local economy in the 21st century compared to the past. 

The majority of economic activity is services-based, with primary industries such as agriculture and mining only making up 20% of South Africa’s economic output. 

Land, simply put, is not as valuable an economic resource as it used to be when primary industries dominated economic activity. 

This is feedback from Efficient Group chief economist Dawie Roodt, who outlined the changing nature of the local economy and what the government gets wrong in its desire for land redistribution. 

Speaking at the second annual BizNews Investment Conference, Roodt explained that the economy has fundamentally shifted towards the services industries. 

This includes sectors such as finance, healthcare, education, law, transportation, and consulting. These sectors make up the vast majority of economic activity in South Africa. 

“A hundred years ago, around 80% of what we produced in South Africa came from the primary industries of agriculture, mining, and things like that,” Roodt said. 

“Today, these industries are less than 20% of the economy, while the biggest chunk of South African economic activity happens in the services industry.” 

This means calls for land redistribution get the economic equation wrong, with things produced using land becoming relatively cheaper and less lucrative than other industries. 

“But services, particularly certain kinds, are getting increasingly expensive and that tells us a lot about the economy and about the way in which we should manage it,” Roodt said. 

“Today, if you look at economic activity, it is mostly service-oriented. It is driven by people providing services to other people, not products produced from the land.” 

“This is why our politicians are so extremely wrong. It is not about the land, but about what is done with the land that matters.” 

Roodt pointed to President Cyril Ramaphosa’s recent statements calling for the creation of thousands of small farmers through land redistribution as an example of this misguided thing. 

“Our President just told us it is a good idea to create small farmers and to redistribute the land. They are so extremely wrong because that is not where the economy is today,” Roodt said. 

“The ‘economy’ is happening in the cloud and the economies of today are service-oriented.” 

Expropriation without compensation can break the economy

Apart from the misdirected nature of expropriation without compensation in tackling South Africa’s economic challenges, it also threatens to make everyone in the country worse off. 

This is because the expropriation of land without compensation will make the piece of land free, but the country will pay the price in declining investment and economic growth. 

Sakeliga CEO Piet le Roux said that, in this sense, market-based compensation is in everyone’s best interest and that it is the cheapest way to expropriate property. 

“The cheapest way to expropriate land is at market value. If you go below market value, that is the most expensive way, as everybody pays a cost,” Le Roux said.

“It means that everyone will be poorer, there will be less development, and there will be social and political crises waiting for us.” 

As a result, it is important to ensure market-based compensation for expropriation by the state, regardless of the reason or purpose.

“Anything below market value is very expensive, because all property will then decrease in value and the owners of that property will share in that decrease,” Le Roux said. 

He explained that this would also have ramifications for future investment, with companies and individuals unwilling to invest if their private property could be taken without the state paying market value.

Economist and partner at Frans Cronje Private Clients, Bheki Mahlobo, said the issue of expropriation without compensation is central to why South Africa’s economy has stagnated. 

Policies such as this one make the country unattractive to investors who have the capital it needs to grow. 

“Currently, the most topical theme has been the relationship between South Africa and America, which is deteriorating,” Mahlobo said. 

“Fundamentally underpinning that decline in bilateral relations with the United States has been the issue of BEE and expropriation without compensation.”

“Certain individuals have benefitted from this regime and, at a broader scale, South Africa’s investment levels from other countries have declined.”

“These countries, including the US, which has made the point most explicitly, have said that BEE is a form of taxation on the commitment of capital investment into the country. It is not only the Americans that are saying that.”