Tag Archives: economic policy

South Africa – President Zuma’s economic (mis)management

January has provided no reprieve for South Africa’s embattled President, Jacob Zuma. Anti-Zuma protests continue apace, the most recent headline-grabber being a giant ‘Zuma must fall’ banner erected by activists in Cape Town.  Economic indicators meanwhile continue to spiral downward, heralding further political unrest ahead. The IMF recently revised South Africa’s growth projection for 2016, nearly halving its original estimate to a mere 0.7%. This poor outlook is in part due to external factors—notably falling commodity prices and rising borrowing costs. Yet much of this decline is also self-inflicted. It is a testament to Zuma’s dangerous politicking, which in turn, speaks to a more fundamental malaise within the ruling ANC, a party at the mercy of competing patronage-seeking factions.

Zuma has had to fight off a succession of political scandals throughout his career. Since assuming office in 2009, criticism over corruption and policy uncertainty has continually dogged Zuma personally, as well as his government. And yet, in December of last year Zuma managed to outdo himself, unleashing market chaos after changing his Finance Minister three times over five days.

On December 9, he shocked South Africans and foreign investors alike when he replaced his respected minister, Nhlanhla Nene, with a little known ANC backbencher, David van Rooyen. Rumors quickly spread that Nene was fired due to his unwillingness to sacrifice fiscal discipline in order to satisfy Zuma’s personal political interests. Nene had opposed a bid by the lossmaking state-owned company, South African Airlines (SAA), to renegotiate an aircraft deal with Airbus. The chair of SAA who was in favor of the renegotiation, Dudu Myeni, is a close Zuma ally. What’s more, the President also felt compelled to issue a highly unusual statement, denying allegations that he is romantically involved with Myeni.

The apparent sidelining of Nene for political reasons raised serious questions regarding the credibility of the Treasury, long seen as one of South Africa’s strongest institutions. Zuma’s decision sent the rand tumbling to all-time lows against major global currencies. It wiped R169bn of equities listed on the Johannesburg Stock Exchange and R52bn off the local bond market. Protests also broke out across the country as South Africans called for Zuma’s ouster. Facing pressure from within his own party, Zuma finally acquiesced. Four days after he fired Nene, the President announced the return of respected former Finance Minister Pravin Gordhan to head the Treasury.

Gordhan has gone some way towards reassuring markets. He has reaffirmed the Treasury’s commitment to fiscal discipline at a time when the cost of repaying South Africa’s public debt has become the single greatest drain on the national budget. He also successfully upheld Nene’s original position, rejecting the SAA bid to renegotiate its deal with Airbus.

Nevertheless, observers and financial commentators in particular underscore the lasting damage incurred as a result of Zuma’s gamble. Recent credit rating downgrades have brought South African bonds close to junk status while investors increasingly question the lack of policy direction and the uncertain prospects for South Africa’s commodity-dependent economy.

More worrying still is the reigning political uncertainty. Zuma’s own future is on the rocks, with many citing this year’s local government elections as a key test. A poor showing for the ANC could trigger Zuma’s early removal from office.  But Zuma’s immediate future aside, a succession battle is already underway for the ANC top post. Next year’s leadership congress is likely to pit Zuma’s former wife and current head of the AU Commission, Nkosazana Dlamini-Zuma, against current Deputy President Cyril Ramaphosa. Zuma’s own preference would be to retain his current position as party leader and to see Dlamini-Zuma becomes presidential nominee. The dynastic quality of such an arrangement is problematic in and of itself, but it would also contravene ANC precedent, which dictates that one person should hold both the position of presidential nominee and party leader so as to prevent competing power centres from emerging. Ramaphosa’s potential candidacy is hardly a reassuring alternative, though, given his own checkered record. Corruption allegations abound while South Africans will not have forgotten Ramaphosa’s alleged implication in the 2012 Marikana massacres and subsequent cover up.

For now, the ANC has remained outwardly united in defending its President. However, intra-party tensions abound as competing ANC heavyweights jockey for positions. Against this troubled backdrop, it is unclear how South Africa’s ruling party can prevent what some interpret as the weaknesses of Zuma’s personal leadership style from remaining a fixed element of the ANC status quo. Indeed, Zuma is not alone in his willingness to indulge political cronies; any successor will have his or her own patronage network to satisfy. This situation means it will only become more difficult for the ANC to convince South Africans, as well as foreign investors, of the government’s political (and economic) credibility.

 

 

Latin American Presidents and International Capital

Although events in Argentina have grabbed international headlines and in Venezuela, the president of the Assembly (and one of his bodyguards) have become embroiled in allegations about a narco-trafficking ring, I have decided to return to something I discussed last year (and once again engage in some self-promotion – sorry).

As I told you in that post, with two colleagues, Christian Arnold and Nina Wiesehomeier, I have been working on a project that is using the annual addresses of Latin American presidents as data in order to derive some comparative understanding of executive politics across the region.

Every year, Latin American presidents make a speech to the national assembly (akin to the US State-of-the-Address). This is an institutionalized event, where the president is constitutionally obliged to make this speech at an appointed time each year and report on the initiatives of the executive over the last year, and the proposed agenda for the year ahead. We have been interested in who the president is primarily speaking to when they make these speeches, and we suggest there are two audiences: the legislature and the international economy.

We have collected speeches for 68 presidents across thirteen Latin American countries between the years 1980 and 2014 and have employed computational models, based on the scaling algorithm Wordfish, to scale these speeches (relative to each other within each country).[1] The first part our project was interested in the institutional incentives the president may have to move in the policy space, and our research has indicated that this seems to be largely driven by the legislative support of the president and their executive power.

Right now, we have been exploring the effect of international market pressures on the positions that presidents take. Latin American countries face significant pressures from international capital, be it in the form of the IMF, banks or bonds and presidents have switched their policy orientation in response to exchange market crises.[2] We are interested in the effect that international capital has on the behavior of the president. Specifically, does the president change their revealed policy stance on economic policy in response to the preferences of capital? And if so, what effect does this have?

To explore this, we have developed an automated method of extracting the portion of the speech where the president discusses all matters related to the economy. We then re-scale this economic dimension only, with the method I briefly described above. This gives us a reasonable approximation of the economic policy position of each Latin American president (in our thirteen countries) in a given year. Below, you can see two graphs combining the general overall position of presidents, and their economic position, in two different countries. Unsurprisingly, in Venezuela, the economic position is closely related to the overall position. This is what we might expect, given the main political cleavage in Venezuela at the moment probably runs along an economic (redistributive/statist vs. market) dimension. In Colombia, the economic position is less important for the overall position of presidents. Again, this is what we might expect, given the importance of security-related issues for politics in Colombia. compare_econ_ven compare_econ_col

With these measures, we have done some basic analyses to see what shapes the economic positions that presidents assume. Unsurprisingly, presidents in Latin America are highly responsive to international capital. When under IMF programs, presidents assume a position on the right. The higher the level of bank or bond debt, the further right the political position (although this effect is greater for bank debt). And when there is a currency crisis, presidents move to the right, and do so sharply. We interpret all of this as a signaling game, whereby presidents will adopt economic positions favorable to capital when they are in desperate need of short-term inflows of finance (crises); or when they believe doing so might create some space (from banks and the IMF) to pursue policies more amenable to their electorate.

Of course, all of this is all very tentative. Any thoughts or suggestions would be very welcome!

[1] More detail on Wordfish can be found here.

[2] Some excellent recent research has explored this. See Stephen B. Kaplan 2013. Globalization and Austerity Politics in Latin America. Cambridge University Press or Daniela Campello 2015. The Politics of Market Discipline in Latin America: Globalization and Democracy. Cambridge University Press or Erik Wibbels. 2006. “Dependency Revisited: International Markets, Business Cycles and Social Spending in the Developing World,” International Organization (Spring 2006): 433-69.