South Africa a failed state? Economist Dawie Roodt issues stern warning

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South Africa a failed state? Economist Dawie Roodt issues stern warning
South Africa a failed state? Economist Dawie Roodt issues stern warning

Despite being called ‘hysterical‘ for warning people to get the money out of South Africa, economist Dawie Roodt insists that he is being completely responsible in warning citizens about the dark path the country is on.

In a column published on Tuesday, Roodt said that South Africa is on the same route that many countries have tread before where they end up in a failed state like Somalia or Zimbabwe. The problem is with government spending, he said, where the state is under pressure to spend more money on more people each year, but does not have the means to fund this. This leads to a massive debt problem that cannot be wished away and the obvious solutions are not politically expedient.

Analysts and economists, including Roodt, have already warned that South Africa is on a dangerous path though where exactly we are on the route down, and where we may go, remains to be seen.

According to Roodt, a country’s rise and fall follows the following broad pattern:

Government starts off small, providing basic services.
Demand for services grows, generating more tax.
Special interest groups become noisy, and state spending and taxes become distorted.
Debt balloons and interest payments go up sharply.
Lenders no longer want to lend to the state (downgrades).
State starts forcing savers and taxpayers to give it more money.
Savers flee the country.
The state introduces foreign exchange regulations.

“At this point, various trajectories are possible. The state can get its house in order, sometimes under the watchful eye of a big brother such as the EU over Greece. Or the state can simply refuse to repay its debt and call debtors all sorts of bad names, like vulture funds in Argentina recently,” Roodt said.

However, the most popular way by far for the state to get rid of its debt is to pretend to repay it, he said.
In this scenario, the government takes full control of the reserve bank, and starts printing a lot more money effectively reducing state debt in real terms. However, the consequence of this is hyperinflation, which has been seen in other failed states like Zimbabwe.

“The economic consequences of all these approaches fluctuates between bad and horrible,” Roodt said.

South Africa’s path:

In South Africa’s case, we’ve already hit the point where the government is running out of money, and the noose is tightening around taxpayers’ necks. Debt levels are at record highs, and the mid term budget has made it clear that there will be no reduction in state spending.

About a third of the country’s GDP is in state spending excluding municipalities and SOEs. Thus any big change in that spending profile, will have a major impact on the economy. The obvious solution to South Africa’s funding problem is to cut this spending however, this won’t happen as many of South Africa’s funding programmes are for people (pensions, social grants, education etc). With an election coming up, this is simply not an option for government, Roodt said.

And even if major cuts were made, the short-term impact on the economy would still be severe, he said. The only real option would be to raise taxes – or more likely, hike VAT, as taxpayers have already been stretched thin.
“From here, prescribed assets, exchange control regulations, the capture of the SARB, and other horrible things can happen,” Roodt said.

“In short, once the state’s finances reach a certain level of unsustainability, a typical pattern is for a state to first steal from its taxpayers until it runs out of taxpayers, then to steal from its savers until it runs out of savers and then, depending on other things, the country repents and gets its house in order at an initial and very dear political and economic price,” Roodt said.

“But if it persists in its sinful ways, it enters a weak growth trajectory with continuous tax evasion, road blocks, political uncertainty and protest marches.
“In a bad scenario, we have dictatorships, states of emergencies and so on. In a very bad scenario, a total collapse of the state — à la Somalia and, probably soon, Zimbabwe.”

Read the original article on Front Nasionaal SA

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