Nationalisation Of The Mines In South Africa Economics Essay

South Africa is currently engaged in a heated debate on whether to nationalize the country’s mines, the outcome of which will greatly affect the future of the economy as well as the well being of millions of individuals. Nationalization is “the act of taking assets into state ownership. Usually it refers to private assets being nationalized.”(wordiq.com). Nationalisation is generally seen as a means of redistribution and as a means of protecting strategic industries. However, it does entail various costs and challenges. In this essay, I will highlight various aspects of nationalisation, elaborate on key aspects, and present my concluding remarks on this topic.

History of nationalisation in South Africa

During the Apartheid era many enterprises were nationalised, for example ESKOM and the steel industry. This was done in order to protect these strategic industries in their infant stages, as well as to guarantee South Africa’s ability to sustain itself, in light of the sanctions being drawn up against the Apartheid regime. Nationalisation was part of the economic policy under the rule of the National Party. Under the leadership of the ANC, party officials began lobbying for the nationalisation of various industries. In fact, the Freedom Charter which states “‘the mineral wealth below the soil, the banks, and monopoly industries shall be transferred to the ownership of the people as a whole” is used as a base argument by ANC Youth League leader, Malema for nationalisation of the mines. In fact, Malema emphatically proclaimed that “Naitionalisation will become ANC policy”

Advantages of Nationalisation

Advantages of Nationalisation include greater income and distribution of wealth to members of society. Currently South Africa is one of the most unequal societies in the world and nationalisation will bridge the gap between rich and poor. In addition, nationalisation leads to the government playing a more active role in distribution as private enterprises do not always consider the welfare of the country’s inhabitants. The country’s minerals could further benefit the domestic economy instead of being exported. The revenue generated from public enterprise would form part of total government revenue, thereby increasing amounts available to spend on social welfare such as education and welfare. If the mines were turned over to the government, more job creation could take place and skills development would be initiated. South Africa’s economy could become wealthier as precious resources would remain within the country’s borders.

Disadvantages of nationalisation

However, nationalisation does come at various costs. Some of these costs include the general operation and running of the mines, possible shutting down of the mines, as well as developing the mines. If the government has not shown any signs of profit, these costs will still have to be incurred, which could be detrimental to the economy and the well being of the individual South African. Government debt would increase at tremendous rates and this will spill over and result in great fiscal deficits. Furthermore, it distorts various prices and it could lead to corruption as the government officials might be looking out for their self interests. South Africa could become less competitive with other mining giants such as China and Chile, if by nationalisation, minerals aren’t extracted through least cost techniques. Logistical issues, such as transport and storage could become an issue if the government has not set into place agreements and contracts with suppliers. Many nationalized enterprises lack the necessary technological and human capital and they are not subjected to the discipline of the market. Nationalisation entails huge startup costs which could take many years for the enterprise break even. Another disadvantage of nationalisation is a reduction in the corporate taxes received by the government which could result in the South African citizen paying more taxes in the event of the nationaisation of the mines not being successful.

South Africa’s experience

The state run national broadcaster, the SABC has been plagued by, financial woes, lacked the necessary leadership and has suffered huge losses to viewership numbers. Nationalisation also causes uncertainty in the financial markets as corporate require an environment which is financially, politically and economically smooth without much interference from government. . Resources are scarce, therefore during this time; resources may become depleted, resulting in huge losses for the South African economy.

Eskom, being a nationalized enterprise since the apartheid era has experienced many setbacks and financial failures in recent years. Being a government enterprise, one can argue, that certain structures within the firm, do not operate as efficiently as it would, if it was subject to market conditions. For example, Eskom’s inability to sustain and maintain various power plants and meet consumer demand have led to numerous black outs and price hikes. In fact, prices hiked to 23.6 percent and Eskom suffered various losses. The editor of Tax Central blames this loss of ‘bad management’.

“Eskom’s financial loss came even after the power utility upped its tariffs in 2008 and again this year. The company warned that there was also a funding shortage of R80bn needed for expansion. ‘Eskom is working urgently with both government and Nears to close this gap and is confident that this can be done’ said Eskom chairman Bobby Godsell.” Clearly Eskom has been inefficient. Being a public sector enterprise there is a lack of accountability.

International experiences

Under the rule of Mrs. Indira Gandhi, banks in India were nationalized, a few of these banks were, the Central Bank of India, Bank of Maharashtra and Dena Bank. The banks were nationalized after the partition in order to help the government realize its socio-economic objectives. Other reasons were to reduce the private banking monopolies and to have greater regulation of India’s financial markets and banking system. However, it was not entirely successful as various limitations such as; increased expenditures resulted in inefficiencies and increased costs. Many government officials interfered in the administrative activities of the banks and corruption was rampant. The lack of competition amongst the banks and poor infrastructure resulted in India’s banking system failing to perform optimally during the 1980’s.

African economies that have dabbled in nationalisation have fared very poorly. A prime example is the Zanu PF’s confiscation of white farmer’s land in Zimbabwe. These farms were transferred to the local people who became the new owners of the land, however, weren’t able to maintain or use the resources efficiently as they had limited knowledge and skills in agriculture. In Botswana, the nationalisaton of the diamond mines is seen as a classic example of a private-public venture that benefits various stakeholders. However, Botswana is still rampant with poverty and extreme inequality. Clearly this partnership only benefits a select few.

Hugo Chavez wanted to nationalize the country and turn it into a social state. He has nationalised telecommunications, electricity, steel companies and a few major oil companies (Ingham, 2009). The Venezuelan economy has grown significantly under Chavez’s leadership. He has managed to distribute the mineral resources of his country and reduce and redress the imbalances that existed amongst the rural poor and the urban rich. Being a hotbed of oil wells, Venezuela has benefited from the steep rise in the prices of oil and the profits derived from the nationalisation are used in various social programmes, such as healthcare and education.

According to Julius Malema in a speech given in the Western Cape, “The government revenue that is generated from taxes will not be able to build better lives for all South Africans. Government cannot solely rely on taxes to deliver better services to majority of our people. South African will not be able to deal with the housing backlog, free education access, better healthcare, safety and security, employment of particularly youth if we are not in control of the key and strategic sectors of the South African economy. The wealth of South Africa should benefit all who live in it.” He stated further that nationalisation was in accordance with the aims of the Freedom Charter, however, Suzan Shabagu fired back at Malema, stating that nationalisation has never been part of ANC policy and that nationalisation will not happen ‘in her lifetime.’ With such conflicting views within the state, one wonders how the programme of nationalisation of the mines will be successful, if the aims and conditions cannot even be agreed upon.

Clive Coetzee, Kwazulu-Natal Treasury economist stated that the mining industry supports the four macroeconomic goals, economic growth, employment, a low inflation rate and a surplus in the balance of payments. He further states that in 2008 around 500 000 people were employed in the mining sector which contributes to 6, 1% of total non-agricultural formal employment. This is without the indirect effects of mining; if these effects are taken into account another 500 000 jobs are likely to exist. I believe that the private sector already has the necessary capital as well as human resource proficiency to maintain and sustain this sector. Therefore there is no reason to nationalize the mines in South Africa

If nationalisation is to be successfully implemented various pre-requites and conditions are required, and these need to be clearly defined and stated. The aims and goals of nationalisation need to be elaborated in depth. Details of how nationalisation will benefit the country as well as corporate entities need to be communicated. Planning needs to incorporate a wide variety of aspects, and specific details need to be revealed. Increased clarity on whether nationaliation will be undertaken with or without compensation, and in the former case, where will the funds come from? Will the state issue bonds, or resort to other methods of finance? The government will have to set up committees to deal with various contingency cases and ensure that the transition is well-managed. Relationships with various stake-holders need to be considered together with enviromental impacts, and a review of the redistubion process. All these entail significant costs, and the government must get into the specifics. In the end, the question remains do the benefits outweigh the costs?

Concluding remarks

In Conclusion, there is much controversy surrounding the issue of nationalisation and there is much doubt regarding the government’s ability to run efficient enterprises, given their poor historical performance in managing state enterprises. Focus should be on clarifying the goals and objectives before nationalisation can become feasible. Nationalisation is, and will not be feasible, unless strict policies are put into place. Furthermore, the South African public is far too intelligent to believe in the promise of the proverbial pot of gold at the end of the rainbow.