South Africa’s Debt Spiral is Fueled by Endless Corruption

The links between corruption and the increasing public debt of South Africa and other African countries must be contextualised historically and take account of flaws in the international financial architecture. The role of the elites of large private corporations and aspiring local, mainly black elites in the private sector points to important drivers of corruption in the South African state. Corruption within the state causes accelerating debt but domestic institutions and the global financial architecture have repeatedly exacerbated the debt problems of African and developing countries. Economic structural change within developing countries and addressing flaws in the global financial architecture regarding developing country sovereign debt have to be prioritised to tackle the impact of corruption and substantial sovereign debt on developing countries, including South Africa. 

Many developing countries have been assigned lower credit ratings than countries with higher debt and more defaults. Lenders’ biases cause them to demand short-term, higher interest rate loans. There is no framework for negotiating sovereign debt restructuring. Even though lenders categorise developing countries as high risk, they are reluctant to accept losses and want to pass on debt restructuring costs to developing countries. They drag out negotiations and sell debt to vulture funds which buy defaulted debt at a discount and demand full repayment from debtors. 

Domestic and Foreign Companies Exacerbate Problems of Corruption and National Debt

The Jubilee Report (commissioned by Pope Francis) acknowledges the “the underlying flaws in a global financial architecture that repeatedly gives rise to such development and debt crises”. The international community has not addressed these flaws in the global financial architecture nor supported the international financial institutions with measures to prevent repeated debt crises. An important solution the Jubilee Report calls for is greater responsibility, accountability and transparency of governments in taking on debt and managing public finances. 

Domestic and foreign corporations often exacerbate corruption and public debt problems through influence peddling for regulations, incentives and infrastructure that support their businesses at the expense of broader public interest projects. Public debt should be transparently allocated towards sustainable development that would address deeper socio-economic issues within countries. Daron Acemoglu, Simon Johnson, and James A. Robinson argue in their seminal article, "The Colonial Origins of Comparative Development: An Empirical Investigation," published in the American Economic Review in 2001, that institutions set up during colonialism, particularly in extractive economies, created a "blueprint" for governance that was against the provision of public goods but favoured the extraction of wealth for the elites. Large foreign and domestic corporations often oppose governments’ efforts to shift an economy from an existing growth path that these large corporations have built since colonialism and apartheid. They protect oligopolies and other economic rents that they extract from economies and work to entrench the power of the politicians and senior government officials who back them. 

Government Opts for Fiscal Policy Stance That Hinders Structural Change

These powerful corporations generally oppose the allocation of government expenditure, including debt, towards the structural transformation of economies. In South Africa, and globally, they have advocated for the lowering of taxes on income, financial instruments and corporations. Over time, governments have raised less tax revenue and borrowed more from the wealthy who benefit from interest on this debt. The South African government has chosen macroeconomic and finance policies that have hindered the formation of a developmental state and structural transformation and supported financialisation and the extractive practices of the most powerful corporations. 

In his 2022 book, The ANC Billionaires, Pieter Du Toit includes interviews with leaders of the largest corporations that revealed their fears that Nelson Mandela and other African National Congress (ANC) leaders would fall under the influence of relatively smaller corporations which were looking to buy influence. After years in prison and exile, members of the ANC and other liberation movements who would go on to become political leaders and senior officials of the government did not have pensions and personal wealth. Michael Spicer of the Anglo American Corporation told Du Toit, “We had people who had nothing, and they’ve got large families, and then they see how others are living who have been here and they’ve built up capital, and then they say we should be on that level, and why aren’t we?” While the elites of the largest corporations were giving ANC leaders access to luxury accommodation and cars and placing influential black people in board positions, the aspiring business elites were also looking for politically influential people to support their enterprises.

Since Apartheid, There Has Been a Battle for Market Share

The South African Competition Commission has repeatedly warned of the negative impact on the economy of the extremely high concentration of almost every economic sector. Gabriel Palma, who developed the Palma Ratio (PR), classifies countries with a PR of 3, e.g. Brazil, as having extreme inequality. He classifies inequality in South Africa with its PR of greater than 7 as “obscene inequality”. The elites of the most powerful corporations have included politically influential black people in their businesses and boards since the transition from apartheid to democracy. These elites, who now include a small number of politically influential black people, have huge influence over the government. Unemployment and inequality have worsened post-apartheid while large corporations have increased rent extraction. Low levels of investment have led to deindustrialisation and lacklustre growth. At the same time, there are aspiring elites in business, including many white businesspeople, who have struggled to increase market share since the apartheid era, and politically influential people, who have not been absorbed into the wealthy and large corporation elites, who are willing to use any means to grab a larger share of the South Africa economic pie. As a result, government departments and state-owned enterprises (SOEs) have become sites of corruption and capture, damaging service delivery and eroding key infrastructure. 

The elites of the most powerful corporations have included politically influential black people in their businesses and boards since the transition from apartheid to democracy.

In the post-apartheid era, the most powerful elites have used the new politically influential members of their elite to amass more wealth. Their corporations have generally not invested in productive activities but have financialised and extracted wealth while maintaining market dominance. These choices – supported by government leaders – have suppressed economic growth and opportunities for entrepreneurship. Aspiring elites have increased fraud and corruption within the government and SOEs. Austerity has further eroded state institutions and weakened their resistance to corruption. These dynamics have worsened the prospects for economic development and growth. Growing unemployment and poverty, bailouts of SOEs and other government expenditure requires more debt. The flawed global financial architecture exacerbates these growing sovereign debt problems.

The views expressed are solely those of the author and do not represent those of his employer or the Heinrich Böll Foundation.