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					DIRECTORS’ REPORT
MARCH 2001

   Directors’ Report
   The Advocacy Project
   Research and Publications
   Website
   Media Networking and Coverage
   Training Division
   Free Market Award
   Tributes
   Thanks
   Attachment 1
   Attachment 2
Directors’ Report
The August 2000 Report described our concern over the disappointing failure of many of South
Africa’s civil servants and politicians to adopt sound principles of law and respect the rule of law in
the drafting and implementation of old and new laws. This trend continues and, in our view,
deserves intensified attention.
      Professor Richard Epstein was brought to South Africa primarily to contribute to a climate of
appreciation for the rule of law and this formed the substance of his keynote address to our
conference in July 2000. Copies of his address have been widely circulated in an attempt to
influence the nature of legislation adopted in South Africa.
      There is a popular cliché repeated like a mantra to the effect that the government has “the
fundamentals in place” and yet, it is typically added, “foreign and local investors have not
responded positively, and we have not achieved high growth”.
      In truth, this tends to be a reference to the activities of only one department, the Department
of Finance. It has managed to contain government spending, deficits and taxes. This is indeed a
laudable achievement. However, most other government departments do not “have the
fundamentals in place”. On the contrary, some of them have the fundamentals so completely out of
place that it is amazing that the economy has not been more adversely affected.
      In the early years after transition historic policies were adopted, most notably articulated in
the Growth, Equity and Redistribution (GEAR) policy. The two most impressive departments were
agriculture and transport which articulated and initiated far reaching liberalisation and privatisation
policies. These policies are still, in theory, in place, and are supposed to be the policies of all
government departments, and government at the provincial and local levels.
      Sadly, we have not moved from first to top GEAR, and, in many instances are in reverse. This
Directors’ Report addresses areas of concern where previous reports concentrated on positive
developments.
      Although there have been some positive developments, especially in court judgements, the
general trend in legislation and policy emanating from many government departments is towards
less and not greater economic and civil liberty. This trend is reflected in the “mostly unfree”
category given to South Africa in the 2001 Index of Economic Freedom published by the Heritage
Foundation and the Wall Street Journal. The rating was negatively affected by restrictive trade
policy, labour and other regulations, high government expenditure as a percentage of GDP, and
failure to enforce laws protecting intellectual property rights. South Africa cannot afford this
regression if savings and investment, and particularly foreign direct investment, is to fuel the
economic growth that is needed to alleviate the country’s poverty and unemployment.
      Some of the erosions of civil and economic liberties are intended to correct past wrongs, yet
many of these measures have the effect of benefiting an elite, already privileged minority at the
expense of the majority, whilst others will have long-term harmful effects on everyone. The
designers of these programmes and policies do not intend their activities to have perverse effects
but the consequences remain harmful, on balance, to the intended beneficiaries.
      One of the most problematic aspects of the need to redress inherited imbalances is a
continuing failure to appreciate the proven ability of market forces, especially high growth, to do so.
      What follows is an analysis of some of the areas in which civil and economic liberties have
been eroded or are threatened.

ASSET FORFEITURE
The asset forfeiture legislation allows the government to seize the assets of people suspected of
being involved in crime. The principles of due process and the rule of law do not have to be
followed. The Asset Forfeiture Unit does not have to prove that targeted assets are the proceeds of
crime.
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       In Asset Forfeiture, as in other contexts, there tend to be unacceptable unintended
consequences when recognised jurisprudential principles are ignored. One of these is that Asset
Forfeiture leaves suspects without resources needed to defend themselves. In practice the AFU has
been seizing all assets, including those lawfully acquired, leaving suspects impoverished and
defenceless in the face of prosecution for serious offences.
       In principle, the legislation also does not make provision for the return of assets seized from a
suspect who later turns out to be innocent.
       Legislation of this nature is in conflict with the rule of law and has dangerous possibilities for
the victimisation of innocent people for personal, political or business motives. The law is in direct
conflict with the idea that justice requires a presumption of innocence until guilt is proven to the
satisfaction of an independent judiciary.
       Needless to say, we are mindful of the need to combat crime effectively and the fact that there
are asset forfeiture laws in other countries. In advanced democracies such laws are subject to crucial
checks and balances omitted from our law. Furthermore, the solution to the severe crime wave in
South Africa is not for government itself to display a lack of respect for good law.
       As the eminent 18th century jurist, Sir William Blackstone, said: “It is better that ten guilty
persons escape than one innocent suffer.”

Actions
–    The Asset Forfeiture Unit – a warning from history by RW Vivian – Briefing Paper.

FINANCIAL ADVISERS
Numerous drafts of legislative proposals for the regulation of financial advisers were circulated
before the process culminated in the Financial Advisory Services Bill, 2000 which awaits approval
by parliament. The FMF has argued every step of the way that the economic freedom of lower
income South Africans will be affected detrimentally by the proposed legislation. The insurance
industries of both the UK and Australia have been badly damaged by similar legislation. The
legislation will prevent lower income people from becoming financial advisers because of its
excessively onerous compliance requirements and will prevent them from having access to financial
advice and services.

Actions
–    In September 1999 Eustace Davie submitted a comment on the Consultative Paper: Proposal
     on the Future Constitution, Role and Function of Ombudsmen in the Financial Services
     Sector.
–    In October 1999 Eustace Davie submitted a comment on the Revised Draft of the Financial
     Advisory and Intermediary Services Bill.
–    In January 2000 Leon Louw submitted a comment on the Financial Advisors Bill.
–    In February 2000 Eustace Davie submitted a comment on the Government Supervision of
     Asset Management by Insurance Companies Bill.
–    In July 2000 Eustace Davie submitted a comment on the Financial Advisory and Intermediary
     Services Bill.
–    Would you join the dangerous world of financial advice? by B Benfield – Briefing Paper
     published and distributed.
–    Would you start a new life assurance company in South Africa? by B Benfield – Briefing
     Paper published and distributed.

INTELLECTUAL PROPERTY
A constitutional court case is currently being fought over the legitimacy of legislation that overrides
rights in intellectual property that are guaranteed in other legislation as well as in international


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conventions. The issue at stake is vitally important and is covered by what Professor Richard
Epstein described as “the rule that grants limited privilege for cases of necessity”.
       He describes the rule as follows:
“… the common law in England and the United States, and the earlier Roman Law, … recognised
that the basic rules of property will normally be suspended in the face of necessity. This necessity
exception is narrowly defined to cover only those cases where there is imminent peril to life or to
property. Where it is in place the owner of the water cannot on strict principle use force to defend
his water against the demands of the stranger consumed with thirst. Indeed, necessity inverts the
usual relationship between owner and stranger, for the party in need is entitled to use force in
order to wrest the water from its owner. Similarly, a ship’s crew caught in a storm may use force to
take refuge at a lakeside dock, and a traveller caught in a storm may take refuge in a barn or,
perhaps (if there be no peril to the owner), in a dwelling house as well.
       The necessity principle carries with it, however, a correlative duty: just compensation to the
owner.”

The current dispute in South Africa is over intellectual property in patent rights protecting the
manufacture of pharmaceuticals. According to press statements the Department of Health appears to
be attempting to invoke the Epstein rule of “necessity”. Questions that arise are:
1.    Is a government entitled to invoke the rule on behalf of large numbers of citizens?
2.    Does infection with HIV fulfil the narrowly defined exception that there should be “imminent
      peril to life”?
3.    If the first two questions are answered in the affirmative, how is the correlative duty to be
      satisfied, that there should be just compensation to the owner?

Setting aside patent rights in pharmaceuticals so that generics can be imported does not appear to
meet the narrow definition required by Epstein’s necessity rule. In particular, the legislation
contains no provision for compensating the owners of the intellectual property in pharmaceuticals
for the taking of their property rights.
      Those who support the taking of the intellectual property without compensation have lost
sight of the long-term implications of such an action. The price could be very high. Firstly, if the
property of pharmaceutical companies can be taken in this way, a precedent is established for
anyone’s property to be taken without compensation. No one’s property will be entirely safe.
Secondly, South Africans may gain access to AIDS drugs but they could lose large investments in
pharmaceutical manufacture in the future. Thirdly, further erosion of our economic freedom will not
affect only investment in pharmaceuticals, it will tend to discourage foreign investment in other
industries as well.

Actions
–    Intellectual property rights, foreign trade and investment by LM Louw – Briefing Paper
     published and distributed.
–    South Africa’s battle with AIDS and drug prices by WD Reekie – Briefing Paper published
     and distributed.
–    In July 2000 Prof Richard Epstein addressed a breakfast audience on Intellectual Property
     Rights.

LABOUR
Most of the discussion on the labour laws concentrates on the effect they have on businesses.
Disputes also regularly occur between labour unions, business organisations and government over
various aspects of the labour laws. Everyone, except the labour unions and some international
labour organisations, agrees that South Africa’s labour laws exacerbate unemployment.


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      What is missing from the discussion is the fact that the labour laws deprive both the employed
and unemployed of their rights to make whatever contractual arrangement they wish with
employers. A fiction is maintained that the employee is powerless in the face of the overwhelming
power of the employer. However, employers and their employees are mutually dependent. Based on
the notion of the powerless employee, the labour laws also deprive employers of the contractual
rights they should enjoy under laws founded on just principles. Simultaneously, however, the laws
prevent vulnerable unemployed people from getting jobs by prohibiting them from accepting
nothing less than the minimum conditions set by the legislation.

Actions
–    The FMF has been supporting, with sponsorship from the Friedrich Naumann Foundation, the
     work of the Malamulela Social Movement for the Unemployed (MSMU). This organisation is
     lobbying government to allow the unemployed to contract freely with employers, and
     especially small employers. If MSMU is successful in its quest, unemployment could be
     substantially reduced and economic freedom advanced in South Africa.
–    In November 1999 Leon Louw and Temba Nolutshungu led evidence on the Promotion of
     Equality and Prevention of Unfair Discrimination Bill.
–    Laws Affecting Small Business – Labour published by the Friedrich Naumann Foundation;
     launched and distributed.
–    Jobs creation and government policy by JL Jordan – Occasional Paper published.

MEDICAL SCHEMES
Legislation has been adopted that imposes costly obligations on medical schemes and jeopardises
their financial viability. Schemes and their members have in the process been deprived of many of
their common law contract rights. The schemes have been compelled to accept new members who
are poor health risks without being allowed to charge compensating higher premiums. Premiums
charged to healthy and younger members have consequently had to be raised to pay the cost.

Actions
–    In October 1999 Eustace Davie submitted a comment on the National Health Laboratory
     Services Bill.
–    Eustace Davie gave evidence before the Melamed Commission (on which Professor Reekie
     served as a Commission member) on the financing of health care.
–    Health-care options for South Africa: Lessons from the UK and USA by WD Reekie – book
     published and distributed.

MINERALS
Government has published the Mineral Development Bill, for comment. This Bill provides, inter
alia, for the nationalisation of all mineral rights without compensation. This is in direct conflict
with the governments repeated undertaking, especially to international investors, that
“nationalisation is off the agenda”.
       According to the preamble “mineral resources is (sic) the common heritage of all South
Africans and belongs collectively to all peoples of South Africa; it is the universally recognised
right of a state to exercise full and permanent sovereignty over all it (sic) natural resources…”.
These and other statements in the Bill are simply and factually incorrect. Apart from mineral rights
presently owned by the state, they are in fact and in law privately owned in South Africa. The
declared purpose is to “right past wrongs” but past wrongs are to be exacerbated as the Bill also
provides for the confiscation of the mineral rights of traditional communities. In the real world
government is already the owner of extensive mineral deposits. It has proven itself before and since
transition to be a hopelessly inefficient utiliser of minerals, either for empowerment or for general
economic purposes. Before confiscating private assets which have been characterised by a mining

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industry which is universally recognised as a world leader government should get its own house in
order, preferably by privatising that which is already nationalised.




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Actions
–    In 1999 the Foundation did a presentation on High Growth Economies to the Parliamentary
     Portfolio Committee on Mineral and Energy Affairs.
–    In 1999 the Foundation presented detailed mineral and energy policy recommendations to the
     Parliamentary Portfolio Committee on Mineral and Energy Affairs during the committee’s
     public hearings on their budget vote.
–    In 1999 the Foundation led evidence on the Green Paper on A Minerals and Mining Policy for
     the RSA.
–    In 1999 the Foundation did a presentation on High Growth Economies to the South African
     Petroleum Industry Association (SAPIA).
–    In 1999 the Foundation led evidence on the Draft White Paper on the Energy Policy of the
     RSA.
–    In July 2000 Prof Richard Epstein ran a mineral rights workshop at the Foundation.
–    In July 2000 Prof Richard Epstein addressed a meeting of mining and government
     representatives on mineral and property rights. His speech was published and widely
     distributed.
–    The Foundation is in the process of preparing a comment on the Minerals Bill.

MONEY LAUNDERING
The Prevention of Organised Crime Act imposes the responsibility on business organisations,
including banks, to report any “money laundering” activities that come to their notice. Any
organisation that fails to report such activities can be fined on conviction up to R100m and the chief
executive can be imprisoned for up to 30 years.
       This draconian type of legislation has its origins in the USA as part of that country’s “war on
drugs” which has resulted in many infringements upon the liberties of the American people. The
USA has brought strong pressure to bear on other countries to introduce legislation similar to theirs
and may have influenced its adoption in South Africa. However, whilst the USA is amongst the
freest countries on earth, not everything its government does advances liberty.

SMOKING
Confusion has reigned over the anti-smoking legislation adopted by Parliament. One of the most
erroneous ideas contained in the legislation is the designation of privately owned hotels, businesses,
shopping malls, offices and other property as “public places”. Property rights of the owners have
been taken without compensation and the freedoms of South Africans commensurately diminished.
       In the absence of such legislation, owners and tenants of buildings, by agreement with
employees, and subject to the consumer sovereignty of the market, would decide for themselves
whether to allow or disallow smoking on their premises. Customers and clients would exercise their
own choices to frequent or work in areas where smoking occurs or to avoid such places. A society
that respects property rights gives people better opportunities to engage in co-operation and
peaceful voluntary exchanges. The anti-smoking legislation has eroded liberty, imposed substantial
costs of compliance on an already struggling economy, and reduced respect for the law among those
who will disregard it.
       Not surprisingly the legislation has already caused unforeseen problems. In some
communities, especially “working class” and low-income communities, the law is and will continue
to be ignored. The protagonists of the law are conspicuously out of touch with the real world
experienced by the majority of South Africans.
       Equally, many private places adopted no smoking policies without and before adoption of the
law. Many offices, factories, restaurants and homes have been characterised by the private
prohibition of smoking. The market is conspicuously competent to provide for the rights and needs
of all concerned.


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Actions
–    Smoke gets in your eyes: The economic welfare effects of the World Bank-World Health
     Organisation global crusade against tobacco by Deepak Lal – Monograph published and
     distributed.
–    WHO, what and why? Trans-national government, legitimacy and the World Health
     Organisation by Roger Scruton – Occasional Paper published and distributed.
–    Smoked out: Anti-tobacco activism at the World Bank by Richard Tren & Hugh High –
     Occasional Paper published and distributed.
–    Tobacco policy: A matter of principle by LM Louw – Briefing Paper published and
     distributed.

TAXIS
Taxi owners and drivers are not very popular among members of the general public, and other
drivers in particular. The Free Market Foundation warned the government during the early 1980s
that there would be “taxi wars” unless there was deregulation. A popular myth has arisen that taxis
were once “deregulated”. All that happened was that licensing boards under antiquated law decided
to arbitrarily license half of all taxis. Government was unwilling or unable to enforce prohibition on
the remainder which meant that taxi owners took the law into their own hands. Those with licences
argued, correctly, that it was unfair for the government to require them to have a licence without
enforcing the law against unlicensed taxis. Those who had been denied licences argued, equally
correctly, that it was unfair to give some licences whilst denying them arbitrarily to others.
       The failure to deregulate is the direct cause of the “taxi wars”, and of the general climate of
disrespect for law that has come to characterise the taxi industry. There is nothing inherent about
taxi owners or drivers that explains the problem. Government interference is the sole and direct
cause. Instead of discontinuing the cause the government has now decided to exacerbate it by
proposing a new and exceedingly costly regime, commonly called “taxi recapitalisation”.
       When government decided to intervene in their businesses and compel them to replace their
vehicles with a type of vehicle mandated by the Department of Transport they did not receive any
sympathy or support. However, the erosion of the rights and freedom of the taxi owners diminishes
all our freedoms.
       Government demands that taxis maintain a high level of mechanical safety as well as driver
proficiency would have been consistent with the rules applied to all road users and therefore
consistent with the rule of law. The specification of a particular type of vehicle for use as taxis is,
however, a despotic action that constitutes an unjustifiable interference in the affairs of taxi owners.
Once again the property rights of citizens are not being respected.

Actions
–    Nationalising the taxi industry: What not to do by JM Harris – Briefing Paper published and
     distributed.
–    Participation in government committees.

CONSUMER PROTECTION
One of the most draconian laws ever adopted in South Africa was the Harmful Business Practices
Act. Instead of it being abandoned or revised fundamentally, it has been perpetuated at national
level, and similar acts have been adopted in some provinces.
       Needless to say, the free market philosophy is that there should be vigorous and unambiguous
consumer protection against all unlawful and unethical business practices. What all protagonists of
democratic values and procedures agree on is that such values and procedures should not be
sacrificed in the process.
       Not surprisingly, there have been a number of court judgements against the Business Practices
Act and its successors.

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      The legislation provides for, inter alia, the following:
     The arbitrary prohibition of hitherto lawful business practices.
     Arbitrary discrimination – a business practice undertaken by a particular person or company
      can be and has been prohibited, whilst remaining lawful for others.
     Appointment of curators to take over the management of businesses, even though they are
      solvent and have done nothing unlawful.
     The liquidation of businesses, even though they are solvent, and the distribution of assets
      according to priorities at variance with other laws such as Company and Insolvency
      legislation.
     The banning of individual businesses.
     Search and seizure of assets and information.
     Freezing of bank accounts.

There are corresponding laws in other countries, but there are critical differences. Elsewhere there is
no violation of the principle of separation of powers. In South Africa the Executive can make law
by declaring businesses or business practices unlawful, without all the checks and balances taken
for granted in formal legislative processes. The Executives in other countries have no quasi-judicial
powers. Having investigated suspected violations of pre-existing law, matters are referred to the
courts for prosecution. In our view, the South African law is fundamentally inconsistent with
democratic values and should be replaced by executive and administrative structures for the
protection of consumers under clear and unambiguous laws, subject to adjudication by an
independent judiciary where all the requirements of due process and the rule of law are observed by
trained experts.

Actions
–    Research of consumer protection in other countries.
–    Liaison with consumer movement.
–    Dissemination of information.
–    Assistance to victimised businesses.

WATER
Water, including rain, has been nationalised in South Africa. Owners of farms and other properties
with streams, rivers and dams have had their ownership rights in the water on their properties
expropriated without compensation. The alternative of clear ownership rights and markets in water
would have achieved government’s stated objective much more effectively and the nationalisation
of water rights are consequently doubly regrettable.

Actions
–    A future for tradable water rights (2nd edition) by RJ Grant – Briefing Paper published and
     distributed.
–    Nationalisation of water and minerals by LM Louw – Briefing Paper published and
     distributed.




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The Advocacy Project
July 2000 - February 2001
During the period covered by this report the Free Market Foundation has concentrated on the
following 22 issues: African Renaissance, Civil Liberties, Competition Policy, Constitution, Crime,
Education, Energy (Fuel & Electricity), Financial Markets and Services, Health, Intellectual
Property Rights, Labour, Land Reform, Major Economic Issues, Marketing and Retailing
(Consumer), Minerals, Privatisation, Rule of Law / Discretionary Powers, Small Medium and Micro
Enterprises (SMMEs), Tariffs, Transport and Water. E-commerce is a recent addition to this list.
      Actions taken in respect of each issue fall into the following categories: Evidence / comments,
Workshops / seminars etc, Meetings / networking, Publications, Research / monitoring legislation
and Articles / media.
      The table on page 16 details the number of actions taken for each issue and category.
      In brief, the Foundation has:

    led evidence / commented on 3 occasions including to:
–    traditional leaders, Contralesa, Bafokeng Royalty and the National House of Traditional
     Leaders on Creating an enabling environment for the peaceful and rapid development of the
     rural areas of South Africa (see Attachment 1), and
–    the Parliamentary Portfolio Committee on Finance on Capital Gains Tax (see Attachment 2);

    convened / attended / spoke at / participated in 34 workshops / seminars, most of these at
     the request of businesses etc, including:
–    an Economic Society of South Africa seminar on South African Trade and Export Initiatives
     at which Minister Alec Irwin (Department of Trade and Industry) spoke, and
–    the launch of the Employment Equity Registry at which Minister Membathisi Mdlalana
     (Department of Labour) spoke;

    held 189 meetings with parliamentarians from all political parties and government
     officials from numerous departments and networked with, for example:
–    the Western Cape Amalgamated Liquor Traders Association,
–    the South African Property Owners Association, and
–    the Malamulela Social Movement for the Unemployed;

    produced and disseminated 16 publications including:
–    South Africa’s battle with AIDS and drug prices by WD Reekie (Briefing Paper),
–    Nationalising the taxi industry: What not to do by JM Harris (Briefing Paper), and
–    Black markets and smuggling: An unintended consequence of government intervention by R
     Bate (Occasional Paper);

    conducted research and monitored legislation on 34 occasions; and

    published articles or been quoted in the media or networked with reporters 16 times, for
     example:
–    the Cape Times published ‘Human capital’ crucial to SA’s economic growth which quoted
     from both Prof Richard Epstein and Justice Pius Langa, speakers at the Foundation’s July 27
     Good Law conference’
–    the Sowetan carried Brilliant idea – but will it work? and quoted Leon Louw in respect of taxi
     regulation, and

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–        the Sowetan carried ‘Raise tax exemption to R1-m’ which quoted from Prof Brian Kantor’s
         submission, on behalf of the Foundation, on capital gains tax.

The Free Market Foundation’s Cape Town office continues to be primarily responsible for the
Advocacy Project which aims to:
–    improve existing legislation and encourage new legislative initiatives which will provide a
     better legal and administrative environment for free enterprise;
–    develop a consensus among a broad spectrum of representatives from government, business,
     academia and the NGO sector regarding the development of the private sector;
–    strengthen the ability of the Cape Town facility to influence policies which are important to
     the private enterprise environment; and
–    increase government and public awareness and understanding of the issues relevant to the
     private sector which are, or should be, part of the legislative debate.

Issues                           Evidence /   Workshops    Meetings /   Publications   Research /   Articles
                                 Comments     / Seminars   Networking   *              Monitoring   / Media
African Renaissance              1            0            13           0              0            2
Civil Liberties                  0            1            1            2              1            0
Competition Policy               0            1            33           0              1            0
Constitution                     0            0            0            0              0            0
Crime                            0            0            0            0              0            0
E-commerce                       0            0            2            0              0            0
Education                        0            0            0            0              0            0
Energy (Fuel & Electricity)      0            0            2            0              0            0
Financial Markets and Services   1            0            11           2              12           3
Health                           0            2            21           3              5            0
Intellectual Property Rights     0            2            1            0              0            0
Labour                           1            3            43           1              0            0
Land Reform                      0            0            9            1              0            0
Major Economic Issues            0            6            20           4              1            8
Marketing and Retailing          0            1            3            1              0            0
Minerals                         0            4            4            0              3            0
Privatisation                    0            0            1            0              4            0
Rule of Law / Discretionary      0            1            0            0              0            0
Powers
Small Medium Micro               0            2            7            0              0            0
Enterprises
Tariffs                          0            0            2            0              0            0
Transport                        0            0            9            2              2            1
Water                            0            0            0            0              0            0
Other                            0            11           7            0              5            2
TOTAL                            3            34           189          16             34           16




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Research and Publications
MONOGRAPHS, OCCASIONAL PAPERS & BRIEFING PAPERS PUBLISHED

MONOGRAPHS
Money, central banking and monetary policy in the global financial arena – Jerry L Jordan
Few institutions are more pervasive than money. It has evolved as a means of facilitating trade. It is
a means to as well as a store of wealth.
      Money, as a unit of account, facilitates understanding of relative price movements. Prices
signal to producers, consumers and investors where there are shortages, surpluses or profit
opportunities.
      When there was a brief period (in historical terms) of competition between paper-money
receipts, banks competed in terms of their creditworthiness. Poorly managed banks (in the eyes of
depositors and users of notes) would be avoided. The currencies of well managed banks would be
preferred. In terms of Gresham’s Law – good money drove out bad. With a government monopoly
of money the principle is reversed. Bad money drives out good.
      If money is not credible, if its value is consistently subject to possible change (up or down),
then economic performance is damaged. Inflation, or deflation, obscures relative price movements.
      When the general level of prices moves, “noise” is introduced and it becomes difficult to
distinguish a relative change in price. Signals are misinterpreted. Goods that consumers want are
not produced, or are overproduced. Investments that should be made, are not, while still other
investments do occur where markets do not exist to absorb the output. Waste and inefficiency is the
outcome.
      Inflation harms the wealth of debtors (who are repaid in less valuable currencies) while
deflation damages borrowers. And it is not a coincidence that inflation is more pervasive than
deflation. The biggest borrower is government, and it controls the presses which print the money it
uses to pay off its debts. Between countries, if one currency falls relative to another, foreign
investors suffer. Their investment then pays dividends or interest in a currency which buys less.
Naturally business avoids investments in countries with falling exchange rates.
      Individual freedom also depends on good money. Privatised money would make exchange
controls redundant. South African businesspersons can only invest a limited amount beyond our
borders. In other words the government monopoly of money has resulted not only in inflation but in
an infringement of freedom. Movement of people, of goods, of services and of capital is restricted.

OCCASIONAL PAPERS
Black markets and smuggling: An unintended consequence of government intervention
– Roger Bate
Smuggling costs governments around the world billions in lost revenues and prevention efforts
every year. These losses fuel an illegal economic sector and amount to a major redistribution of tax
burdens without public consent. Revenue losses resulting from organised crime-dominated
smuggling force governments to cut programmes and services, increase taxation or even run
deficits.
      Not only do organised criminals siphon off money from society, but they create billions in
expenses for society to bear. These include the costs of prevention, detection and apprehension,
justice and correctional systems and private security costs. There also are social costs that can be
associated with fear of crime: refusal to go outside at night, moving to a safer neighbourhood, pain
and suffering and loss of quality of life.
      While the economic impact of some social costs is difficult to quantify, they are nonetheless
significant. Smuggling and black markets breed disrespect for the law and put otherwise honest
citizens in contact with criminal sub-cultures.

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      The obvious recommendation is for governments with high tax rates on products to reduce
taxation rates on legal products, and decriminalise illegal products where demand is robust, since
this would alleviate the significant problems of smuggling.
      Resources would be redirected from fruitless “crime prevention” to productive activity. The
economy would have a lower corruption index and inward investment from firms avoiding crime-
ridden societies would increase.

Jobs creation and government policy – Jerry L Jordan
South Africa has some 20-30% of its labour force out of work. In the decade to 2000 some 1 million
formal sector jobs disappeared. The only major group of employees which is exempt from this trend
works in the general government sector.
      Dr Jordan warns against confusing ‘job creation’ with ‘wealth creation’. He notes that while
digging an earth dam with spades creates jobs, doing so with teaspoons would create even more.
Better to employ fewer workers and use earth-moving equipment.
      Jordan points out that new jobs in wealth-creating industries follow the demise of old jobs.
Unfortunately ‘because policymakers have no clear foresight of where entrepreneurial energies will
be directed in the future, it’s impossible for them to predict where jobs creation “should” occur’.
Rather government should simply foster an environment where entrepreneurship will flourish.
      To do this government must protect private-property rights (physical and intellectual) and
hence foster production. Also it must establish a legal framework that minimises contracting costs
and facilitates contract enforcement. In so doing it fosters trade. If government activity of this sort is
insufficient, the result is a ‘barren economic landscape’. Conversely if government overindulges in
the redistribution mode the outcome is equally bleak.
      Dr Jordan concludes by discussing the role of the government in maintaining the value of
money. The protection of the internal and external value of the monetary unit is vital if the property
rights of the individuals and firms that use it are to be protected. Without that protection, owners of
capital simply find another monetary regime where their investment does not depreciate in value.

BRIEFING PAPERS
Town planning and the market J Biermann
Would you start a new life assurance company in South Africa? B Benfield
Will a ban on “thin” plastic bags solve the litter problem? B Benfield
South Africa’s battle with AIDS and drug prices WD Reekie
Half-listening to the market B Kantor
Nationalising the taxi industry: What not to do JM Harris
Extend consumer choice to roads B Kantor

PUBLICATIONS IN PROGRESS
–    Vivian RW, The Asset Forfeiture Unit – a warning from history,
     Briefing Paper
–    Jensen V & Biermann J, Deciduous fruit, Monograph
–    Mowatt R, Reekie WD & Morris J, Intellectual property rights,
     Monograph
–    Kantor B, Financial markets, Monograph
–    Straszczvk O, Capital gains tax, Monograph
–    Louw L, Hawkers, Occasional Paper
–    Bate R & Tren R, Water, book
–    Reekie WD & Kenney H, Labour, book
–    Gwartney J & Lawson R, Economic freedom of the world 2001, book
–    O’Dowd M, Hope for the millennium, book


                                                                                                       13
Website
www.freemarketfoundation.com
The Foundation’s website continues to grow both in scope and popularity. The average requests for
pages on the website for the period May 1999 to December 2000 has increased to 105 per day.
However, the average for the period June 2000 to December 2000 was 145 pages per day, which is
a significant increase.
       Our purpose is to make the website a source of ideas for press articles as well as a source of
information for our members and others. At least ten new Policy Bulletins per week are added to
the site, covering a very wide range of issues. A copy of the Article of the Week and a list of newly
added articles is sent to the press each week. In addition, the list of new articles is sent by email to
our members.
       Articles are divided into the following categories under Publications: Competition
Legislation, Crime, Education and Liberty, Environment, Essays on Liberty, Health Care, Labour
Freedom, Land Reform, Legislation and Liberty, Macroeconomic Issues, Money, Privatisation and
Taxation. All Briefing Papers are also available on the site for downloading as are Monographs
and Occasional Papers.
       Also under Publications is Privatisation Update – South Africa. This is a list of news items
on privatisation compiled and maintained by Dr Jim Harris. The list is updated on a weekly basis
and is a useful source of information on this important subject.




                                                                                                     14
Media Networking and Coverage
–   On 28 July 2000 the Cape Times published ‘Human capital’ crucial to SA’s economic growth
    which quoted from both Prof Richard Epstein and Justice Pius Langa, speakers at the
    Foundation’s July 27 Good Law conference.
–   On 23 August 2000 the Sowetan carried Brilliant idea – but will it work? and quoted Leon
    Louw in respect of taxi regulation.
–   On 10 September 2000 The Sunday Independent published a long letter by Dr Jim Harris
    entitled Government needs to make saving more attractive to us than spending.
–   On 22 September 2000 Prof Brian Kantor’s article, Half-listening to the market, appeared in
    the Financial Mail.
–   On 17 October 2000 Temba Nolutshungu met with H Barrell of the Mail & Guardian
    regarding the demarcation of municipal boundaries and the implications thereof for traditional
    communities.
–   On 12 October 2000 Leon Louw was interviewed on free market principles by Kyk Net TV.
–   On 23 October 2000 Leon Louw met with JP Landman, editor of Finance Week, to discuss
    the implications of the contents of the Economic Freedom of the World series.
–   On 8 December 2000 Temba Nolutshungu met with Keith Mutlane, Hansard reporter for
    Parliament, regarding bills in the pipeline.
–   On 31 January 2001 Business Day published Proposed tax ‘a threat to investors’ which
    quoted both Temba Nolutshungu and Prof Brian Kantor in respect of the proposed capital
    gains tax.
–   On 31 January 2001 the Sowetan carried ‘Raise tax exemption to R1-m’ which quoted from
    Prof Brian Kantor’s submission, on behalf of the Foundation, on capital gains tax.




                                                                                               15
Training Division
FOUNDATION FOR ECONOMIC & BUSINESS DEVELOPMENT
More and more schools will get their hands on enterprise in 2001! Our expansion into the Schools
arena in 2000 culminated in the launch of our National Schools Programme in October in the
Western Cape. The official launch in the North West Province took place on 20 March 2001.
Gauteng also has 10 sponsored schools and their launch will take place later this year. The Hands-
On Enterprise Programme comprises five enterprise projects that will be introduced at schools over
the next five years. The Hands-On Market enterprise project starts this year. All schools running
Market Days will have the chance to showcase their most successful and innovative products.
Please visit our website at www.handsonline.org.za.
       Frightening figures just released state that 40% of the entire population in Southern Africa is
under the age of 15. Within the next 5-10 years 50% of these will die of AIDS or become HIV
infected. Since we are already involved in Enterprise Development at Educational Institutions and
our AIDS information project fits in very nicely with our other projects, we will be including an
AIDS information module in our schools project. Also, given the fact that there are more than 30
000 schools in South Africa, this avenue should be the ideal vehicle for promoting a proper
understanding of AIDS prevention.
       The proposed project will provide educators and children with information that will result in
attitudes and activities that will effectively prevent the spread of the HIV virus. It will also result in
more tolerance for and a more caring attitude towards those who already are the unfortunate carriers
of the virus.
       FEBDEV was requested to host a workshop for the North West Education Department from
12-16 March, in Rustenburg. 75 Master Trainers from the North West Education Department were
present. The subjects covered were Project Management, Outcomes Based Education, AIDS
Education, Substance Abuse and Life Skills.
       The 2000 National Awards Ceremony was held on 30 November 2000. MC for the occasion
was FEBDEV Director Marc Swanepeol. Norma James gave the welcome, thank you and an
overview of FEBDEV’s purpose and activities. Gail Campbell, Group Consultant, Corporate Social
Investment, ABSA, provided an encouraging word from our sponsors. Dr Alistair Ruiters, Director
General of the Department of Trade and Industry and Dr Laurine Platzky, Deputy Director General,
Department of Economic Affairs, Agriculture & Tourism, gave keynote addresses.
       Two students from Cape Technikon won the Best Researched Business Plan; Most
Viable/Innovative Business Plan was won by a student from Natal Technikon and Best Market Day
by three students from Potchefstroom Technical College. The winner of the Entrepreneur of the
Year, in the Community section, was Lydia Masoleng, a part time Marketing Management student
at Good Hope College.
       It goes without saying that nothing of the above would be possible without the generous
assistance of all our sponsors and we sincerely thank them for their contribution.




                                                                                                       16
Free Market Award
The 22nd Free Market Award will be presented to Sir Ketumile Masire, former President of the
Republic of Botswana, on 4 April 2001 at a luncheon at the Cape Sun.
      Sir Ketumile Masire succeeded the late Seretse Khama in 1980, and won the presidential
elections with a landslide 77% in 1984. Sir Ketumile Masire contributed enormously to peace,
development and governance both in Botswana and throughout Africa. He chaired, for example, the
Southern African Development Community (SADC), and was the first Vice-Chairman of the
Organisation of African Unity (OAU). In 1999 he led the Commonwealth observer group to Nigeria
and currently chairs the OAU’s International Panel of Eminent Personalities which is investigating
the 1994 genocide in Rwanda. Sir Ketumile Masire has received numerous awards for his
contribution to Africa including the Africa Prize for Leadership for the Sustainable End to Hunger.
      The Free Market Award is presented to the person whom the Foundation considers to have
made an exceptional contribution to the cause of economic freedom. The recipient is chosen by a
panel which includes the FMF’s Chairman, Deputy Chairman and Executive Director. Sir Ketumile
Masire was chosen to receive the 2000 award, but could only attend a presentation function this
year.
      Previous recipients are Prof Brian Kantor, Symond Fiske, Prof Johannes Gildenhuys, Prof
Geert de Wet, Terry Markman, Prof Nic Swart, Dr Sam Motsuenyane, Ian Hetherington, Marc
Swanepoel, Lawrence Mavundla, Jan Buter, Prof Duncan Reekie, Mrs Nonia Ramphomane, Nils
Dittmer, Prof Louise Tager, Prof Eckart Kassier, Dr John Ledger, Nigel Bruce, Michael Jwambi,
Pikkie van den Heever and Johann Rupert.




                                                                                                17
Tributes
Nils Dittmer, an Executive Committee member, Council member, and long-time friend of the
Foundation, died tragically in a car accident in January 2001. Nils grew up on a farm in the Kalahari
and studied biochemistry at the University of Pretoria. He was a successful farmer and businessman
with a special interest in the development and management of extensive pastures. He became
Chairman of the Organisation of Livestock Producers (OLP) in 1990 and in this capacity
championed the cause of agricultural deregulation and spearheaded the campaign against
Agricultural Control Boards. Due to his initiative and drive the Meat Board was scrapped and this
was a catalyst for the abolition of all control boards. Nils was awarded the 1992 Free Market Award
for his exceptional contribution to economic freedom in South Africa. Nils will be sorely missed.
We extend our condolences to his family and friends.

Ian McLeod, a long-standing Council member, died in hospital in January 2001. He first joined the
FMF Council when he was Chairman of the Ladysmith Chamber of Commerce. He was an active
promoter of free-market principles and will be missed by all at the Foundation. We extend our
condolences to his family and friends.




                                                                                                  18
Thanks
The Foundation’s work and successes are made possible by the support of our members, sponsors,
Patrons, Council members, Executive Committee members and staff – and for this we thank them.
      Our working partner in various projects, the Friedrich Naumann Foundation, enables the
Foundation to carry out a great deal of work that would not otherwise be possible. We wish to thank
Mr Reiner Erkens and Mr Wolfgang Müller for their active participation in these joint projects.
      We also wish to thank Anglo American Chairman’s Fund, BMD Textiles, CGU, Glenrand
MIB Ltd, Homechoice, Ingwe Coal Corporation, Kirchmann-Hurry Construction, Nedcor, N
Motlana, Sage Foundation, Sappi, Seven Eleven Corporation and Tupperware for their financial
support of the Advocacy Project.
      Our special thanks to our Chairman, Mr Michael O’Dowd, and our Deputy Chairman, Dr
Brian Benfield, for the time they devote to the affairs of the Foundation as well as for their
encouragement and advice.




                                                                                                19
Attachment 1
Creating an enabling environment for the peaceful
and rapid development of the rural areas of South Africa

Proposal 1
Recognise and entrench the rights of the traditional communities in the Constitution.

Proposal 2
Adopt legislation that gives recognition to the traditional decision-making mechanisms of tribal
communities.

Proposal 3
Convert all trust land and government-owned tribal land to tribal “owned land” by registering that
land in the names of the respective communities in the Deeds Office.

Proposal 4
Establish functioning mechanisms for the Provincial Houses of Traditional Leaders and the
National House of Traditional Leaders to deal with all legislative, administrative and budgetary
matters relating to areas under the jurisdiction of traditional authorities.

Proposal 5
Establish fiscal measures based on population numbers, under the control of the traditional
authorities, for the provision and maintenance of infrastructure and services, and for the general
development of the tribal areas.

Proposal 6
Transfer to the traditional authorities the responsibility for the proper functioning of local
authorities, policing, schooling, and health and welfare services in the tribal areas.

Proposal 7
Establish lines of authority that require traditional authorities to report ultimately to Parliament on
the administration of their budgets and not to any lower level of administrative or political
authority.

Proposal 8
Establish mechanisms that will allow traditional communities to maintain land registers and grant
freehold land ownership rights in their areas, with the power to confine such rights exclusively to
members of their own tribes.

Proposal 9
Recognise traditional justice and traditional courts in the tribal areas with safeguards to ensure
compliance with the Constitution.

Proposal 10
Vest decisions relating to the accession of their traditional leaders with the respective communities,
including the question of the possible accession of women to leadership roles where this issue has
not yet been dealt with.

Proposal 11

                                                                                                      20
Vest power with the respective communities to determine their own structures of leadership with no
requirement for uniformity across communities.

Proposal 12
Remove the colonial and apartheid legacy of government leaders being responsible for the
appointment of leaders of traditional communities.

SCHEDULE
Supporting notes to the document titled: Creating an enabling environment for the peaceful
and rapid development of the rural areas of South Africa

Proposal 1
Recognise and entrench the rights of the traditional communities in the Constitution.

1. Chapter 12 of the Constitution
Chapter 12 of the Constitution on Traditional Leaders is incomplete. Whereas all the other
institutions of government of the Republic of South Africa are carefully described in the
Constitution, the Chapter on traditional leaders does not set out the powers, functions or duties of
these ancient institutions. It leaves the traditional communities “hanging in the air”.

Recognition (Section 211)
Subsection 1
The institution, status and role of traditional leadership, according to customary law, are
recognised, subject to the Constitution.
The nature of what is being recognised in this subsection is not described. Traditional leaders are
consequently justified in asking: What institution? What status? What role? What customary law? is
recognised. This recognition is then “subject to the Constitution”. The drafters of the Constitution
surely did not intend that traditional leadership, as an institution should be “subject to” all the other
institutions of government that are carefully defined and described.

Subsection 2
A traditional authority that observes a system of customary law may function subject to any
applicable legislation and customs, which includes amendments to, or repeal of that legislation or
those customs.
This subsection allows a traditional authority to function according to a system of customary law
“subject to any applicable legislation and customs”. The “customs” to which customary law is to be
subject are not defined. The subsection then refers to the “repeal of ... customs”. Customs cannot be
repealed; the most a government could do would be to prohibit the observance of a particular
custom. The subsection needs clarification and revision.

Subsection 3
The courts must apply customary law when that law is applicable, subject to the Constitution and
any legislation that specifically deals with customary law.
This subsection gives no indication as to when customary law will be applicable, and in what
manner it may be superseded by other sections of the Constitution or by legislation. Greater clarity
regarding this subsection needs to be negotiated.

Role of traditional leaders (Section 212)
Subsection 1
National legislation may provide for a role for traditional leadership as an institution at local level
on matters affecting local communities.

                                                                                                       21
The required legislation should follow only after detailed negotiations on this issue between the
government and traditional leaders and should include the revisiting of the Constitution to properly
define the manner in which traditional authorities will govern their communities. The Discussion
Paper on Traditional Leadership and Institutions forms a basis for discussion but it is not
sufficiently comprehensive as it does not cover all the issues that have to be dealt with (see the list
of Proposals).

Subsection 2
To deal with matters relating to traditional leadership, the role of traditional leaders, customary
law and the customs of communities observing a system of customary law -
(a) national or provincial legislation may provide for the establishment of houses of traditional
     leaders; and
(b) national legislation may establish a council of traditional leaders.

Although section 212 purports to deal with the role of traditional leaders it does not do so. It merely
states that “legislation may provide for the establishment of houses of traditional leaders” without
defining their role.

Whilst Chapter 7 of the Constitution describes the status, objects, developmental duties and powers
and functions of municipalities and local government, Chapter 12 does not do the same for
traditional authorities.

SOME OF THE SECTIONS MISSING FROM CHAPTER 12 OF THE CONSTITUTION
Sections similar to those appearing in Chapter 7 of the Constitution dealing with status, objects,
development duties and powers (adapted for Chapter 12) could have read:

Status of traditional authorities
(A) (1) The local sphere of government, in the case of traditional communities, consists of
            traditional authorities and municipalities.
     (2) The executive and legislative authority of a traditional community is vested in its
            traditional leaders.
     (3) A traditional authority has the right to govern, on its own initiative, the local
            government affairs of its community, subject to national and provincial legislation, as
            provided for in the Constitution.
     (4) The national or a provincial government may not compromise or impede a traditional
            authority’s ability or right to exercise its powers or perform its functions.

Objects of traditional local government
(B) (1) The objects of traditional local government are –
           (a) to provide traditional and accountable government for local communities;
           (b) to ensure the provision of services to communities in a sustainable manner;
           (c) to promote social and economic development;
           (d) to promote a safe and healthy environment;
           (e) to maintain the involvement of the communities and community organisations in
                 the matters of traditional local government.
     (2) A traditional authority must strive, within its financial and administrative capacity, to
           achieve the objects set out in subsection (1).

Development duties of traditional authorities
(C) A traditional authority must –


                                                                                                      22
            (a)   structure and manage its administration and budgeting and planning processes to
                  give priority to the basic needs of the community, and to promote the social and
                  economic development of the community; and
            (b)   participate in national and provincial development programmes.

Powers and functions of traditional authorities
(D) A traditional authority has executive authority in respect of, and has the right to administer -
    (1) (a) the local government matters listed in Part C of Schedule 4 and Part C of Schedule
          5; and
          (b) any other matter assigned to it by national or provincial legislation.
    (2) A traditional authority may make and administer by-laws for the effective
          administration of the matters that it has the right to administer.
    (3) Subject to section 151(4), a by-law that conflicts with national or provincial legislation
          is invalid. If there is a conflict between a by-law and national or provincial legislation
          that is inoperative because of a conflict referred to in section 149, the by-law must be
          regarded as valid for as long as that legislation is inoperative.
    (4) The national government and provincial governments must assign to a traditional
          authority by agreement and subject to any conditions, the administration of a matter
          listed in Part A of Schedule 4 or Part A of Schedule 5 which necessarily relates to
          traditional local government if –
          (a) that matter would most effectively be administered locally, and
          (b) the traditional authority has the capacity to administer it.
    (5) A traditional authority has the right to exercise any power concerning a matter
          reasonably necessary for, or incidental to, the effective performance of its functions.

Comment on Chapter 12 of the Constitution
The lack of clarity in Chapter 12 of the Constitution is leading to increasing confusion regarding the
roles and duties of the various forms of government in the country. This confusion is illustrated by
the differences that have arisen over the demarcation of local authority boundaries and the
relationship between traditional authorities and local authorities.
       Although the traditional authorities are the institutions most capable of bringing about the
rapid economic, social and cultural development of their communities, the Constitution does not
allocate to them the necessary authority, or financial and administrative capacity to perform these
functions.
       This matter can be overcome by giving recognition in Chapter 7 and 12 of the Constitution to
the powers of traditional authorities to govern in their traditional communities. New sections called
Part C should be added to Schedules 4 and 5 to specify traditional authority matters.

Proposal 2
Adopt legislation that gives recognition to the traditional decision-making mechanisms of
tribal communities.
Prior to the drafting of any traditional affairs legislation the issues should be thoroughly discussed
and negotiated to the point of consensus with the traditional leaders and their communities. The
traditional leaders should then have the opportunity to draft the proposed legislation, in
collaboration with the Department of Provincial and Local Government, for adoption by the
Provincial Houses of Traditional Leaders and the National House of Traditional Leaders before it is
forwarded to Parliament.

Proposal 3
Convert all trust land and government-owned tribal land to tribal “owned land” by
registering that land in the names of the respective communities in the Deeds Office.

                                                                                                    23
The Trust land and the government-owned land should be converted to tribal owned-land to remove
any doubts regarding the areas of jurisdiction of the traditional authorities. The traditional
communities of South Africa have suffered many years of dispossession and uncertainty and the
time has arrived to remove all uncertainty and to provide the communities with firm title to the
small pieces of land that remain under their control. This conversion can take place simultaneously
with the settlement of farmers on state land.

Proposal 4
Establish functioning mechanisms for the Provincial Houses of Traditional Leaders and the
National House of Traditional Leaders to deal with all legislative, administrative and
budgetary matters relating to areas under the jurisdiction of traditional authorities.
These mechanisms would evolve from a process of negotiation.

Proposal 5
Establish fiscal measures based on population numbers, under the control of the traditional
authorities, for the provision and maintenance of infrastructure and services, and for the
general development of the tribal areas.
Part of the national budget should be apportioned to the traditional authorities for these purposes.

Proposal 6
Transfer to the traditional authorities the responsibility for the proper functioning of local
authorities, policing, schooling, and health and welfare services in the tribal areas.
The traditional authorities are closest to matters affecting their communities and these functions
would consequently be most efficiently carried out by the traditional authorities.

Proposal 7
Establish lines of authority that require traditional authorities to report ultimately to
Parliament on the administration of their budgets and not to any lower level of administrative
or political authority.
Local traditional authorities should report on their budgets to their Provincial Houses of Traditional
Leaders, who in turn should report to the National House of Traditional Leaders, who should be
accountable to Parliament.

Proposal 8
Establish mechanisms that will allow traditional communities to maintain land registers and
grant freehold land ownership rights in their areas, with the power to confine such rights
exclusively to members of their own tribes.
Government is granting individual title to land as part of its development strategy. This strategy
raises fears in the minds of traditional communities that their communities could be disrupted by the
sale of part of their community land to purchasers who are outsiders. This legitimate fear can be
overcome by allowing each community to maintain its own registry, possibly with the assistance of
the Deeds Office, of land held under freehold title by members of the community, subject to a
prohibition on transfer to anyone who is not a recognised member of the community.
        Although land held under limited title would have a lower market value than land held under
full title it would nevertheless increase the realisable wealth of members of the community and
allow them to borrow money against security of their property. Such land rights would bring about
an immediate increase in the development of the rural areas without jeopardising the traditional
security of the communities.

Proposal 9


                                                                                                       24
Recognise traditional justice and traditional courts in the tribal areas with safeguards to
ensure compliance with the Constitution.
This issue can form part of a negotiated agreement on traditional community matters.




                                                                                              25
Proposal 10
Vest decisions relating to the accession of their traditional leaders with the respective
communities, including the question of the possible accession of women to leadership roles
where this issue has not yet been dealt with.
This is a matter of tradition.

Proposal 11
Vest power with the respective communities to determine their own structures of leadership
with no requirement for uniformity across communities.
The discussion document on traditional affairs raises the issue of conformity amongst communities
regarding the structures of leadership and methods of accession. Traditions and customs are not
uniform and these matters should be left entirely in the hands of the various communities.

Proposal 12
Remove the colonial and apartheid legacy of government leaders being responsible for the
appointment of leaders of traditional communities.
This proposal requires no elaboration.




                                                                                               26
Attachment 2
Comment on the Taxation Laws Amendment Bill, 2001
(to incorporate the taxation of capital gains)

Part 1 – Comment on the Bill

1.    Capital Gains Tax and South Africa
Capital Gains Tax (CGT) is too complex and costly for South Africa. The original intention was no
doubt to tax the wealthy who avoid income tax by ensuring that their gains are of a capital nature
and not subject to income tax. However, the Bill imposes CGT on the gains of people of modest
means. Those South Africans who were prevented from earning capital gains in the past are to be
subjected to this “first world” form of taxation at the very time when they have gained the freedom
to invest and accumulate assets. The tax is also being imposed at a time when the “first world” is
coming to the realisation that CGT imposes an unacceptable economic cost in the form of taxpayer
compliance costs, rigidities caused by people being reluctant to dispose of assets, a reduction in
entrepreneurial activity, high enforcement costs and the loss of foreign investment.

The imposition of the tax in the manner described in the Bill is bound to have unfortunate
consequences for the economy. Taxing inflation gains is patently inequitable and will drive away
investment.

Another worrying factor regarding the Bill is the lack of consideration it shows for those who are
not wealthy – those middle to lower income people who do not understand the complexities of
taxation. Very few South Africans, including the highly educated, understand our complicated tax
laws and are capable of complying with them without skilled professional assistance. The fiscus
should aim at simplifying the laws and not complicating them even further by introducing a tax of
this nature.

The following factors need to be taken into consideration:

–     Capital Gains Tax cannot be dealt with in isolation
This comment assumes that South Africa’s overall fiscal and taxation policies are designed to bring
about the highest possible economic growth and the most rapid improvement in the economic
welfare of all the country’s people. If that is so, the introduction of this additional tax is not the way
to achieve the assumed objective. It will not be in the best interests of the country’s citizens and
especially not the citizens that have been prevented from accumulating capital in the past.

–     CGT adds to the complexity of South Africa’s tax system
The introduction of capital gains tax, which is a complex form of tax, will make South Africa’s tax
laws even more incomprehensible to the average taxpayer than they are already. It will be a
windfall for the tax lawyers and accountants who will be hired to minimise the effects of the tax,
especially on the wealthy, and will impose enormous compliance costs on citizens, including those
with very modest means. CGT will also impose high policing costs on the state, considerably
reducing the net revenue the tax is supposed to earn. Figures from other countries show that the cost
of the harm to the economy is likely to be greater than the amount of tax collected.

–     CGT will cause major distortions
The introduction of a capital gains tax as an add-on to the taxes we already have will cause major
distortions in the economy. Investors will adapt their behaviour to avoid paying the tax and the
effects on the economy will necessarily be negative.
                                                                                                        27
–     The CGT proposals make no provision
      for eliminating inflation price increases
Taxation of pseudo-profits arising exclusively from inflation price increases will amount to a tax on
savings and original capital and not on gains. Price increases arising from inflation are not “profits”.
Calculated gains should be reduced to real terms by adjusting them by the CPI; only then can real
gains be established.

The proposals in their present form are inequitable. South Africa’s monetary authorities are directly
responsible for inflation. The inflation they create erodes the purchasing power of savings and
impoverishes pensioners and the aged whose life savings dwindle away. Inflation is therefore a tax
on savings. The Bill in its present form is designed to compound the problem by directly taxing the
pseudo-gains resulting from inflation that are realised by people who attempt to protect themselves
from its pernicious effects.

Those people who are able to avoid the worst effects of inflation by holding assets do not make
gains. They merely avoid the worst effects of the decline in the purchasing power of the rand. The
quotes from the UK and Canada in your Guide to Capital Gains Tax are factually incorrect, as they
do not take account of the inflation-effect.

2.    An example showing why the tax in its current form is inequitable

A person who invests R60 000 in a unit trust for twenty years and is eventually paid out an amount
of R230 000 could face CGT on R170 000 after deducting the base cost of R60 000. The inclusion
in the income of such an individual would be (25% of R170 000 less R10 000) or R40 000. The
taxation of this “gain” which is an average of 7% per annum would clearly be inequitable because
the Bill makes no provision whatsoever for the erosion of the value of money by inflation. (N.B.
The average inflation rate over the past twenty years has been well above 7% per annum.) The
investor would be suffering a loss in real terms yet be required to pay tax on an apparent “gain” that
is solely due to inflation. (See Proposal 5.1 on Page 4).

A taxpayer with the foregoing investment could be a person with relatively modest means and the
proceeds of the investment could represent their life’s savings. Such persons should be exempted
from the ambit of the Bill. (See Proposal 5.2 on Page 4).

Another inequitable anomaly in the Bill is the failure to spread the gain over the period during
which it has accrued. A capital gain earned over a period of twenty years is treated in the same way
as a gain earned over one year. This means that a person earning capital gains of R10 000 per
annum for ten years (none of which would be taxable) receives preferential treatment as compared
to a person earning a single gain of R100 000 after holding an asset and incurring holding costs for
twenty years. (See Proposal 5.3 on Page 4).

3.     South Africa is a developing country
South Africans tend to be proud of the so-called “first world” component of their economy and go
along with the notion that “international best practices” should be adopted. They consequently fall
into the trap of burdening the citizens with taxation, legislation, regulations and administrative
systems that the country’s people do not understand and can not afford.

South African society at present is still characterised by extreme disparities in wealth, standards of
living and levels of education. A minority of the population, mainly white, is as economically
advanced as any group in the world, but the majority, mainly black, is poor and ill-educated. Within

                                                                                                     28
this majority it is estimated that around 40% of all adults are illiterate, yet despite this many
hundreds of thousands of them are running their own businesses as hawkers, taxi operators, spaza
shop owners, traditional healers, artisans, small farmers, small manufacturers and so on. These are
the people who are building the economy of the future and the legal, taxation and administrative
systems of the country should be designed to accommodate them and not be designed to cater for
the privileged few.

When the United States of America, other Western countries and the so-called Eastern “tigers” were
at South Africa’s level of development they did not have our complex laws, high taxes and large
administrations. Their total government outlays (at all levels of government) amounted to no more
than 15% of GDP (1960: Japan 17,5%, Switzerland 17,2% and Spain 13,7%) whilst their growth
rates were well above 6% per annum. South Africa’s policies should be fashioned to suit the
country’s level of development and should not follow every regulatory trend that is adopted in
wealthier countries. In fact, South Africa should now be emulating the systems that were in place in
the developed countries at the time they were at South Africa’s current level of development. These
countries are themselves discovering that high government expenditure and high taxes are
detrimental to the long-term interests of their citizens and are seeking ways and means to reduce
expenditure so as to improve economic growth.

4.    The case for reducing taxes
Taxation is inextricably linked to government spending. Sooner or later, all the money government
spends has to be taken from the people by way of taxes of one sort or another. Many studies over
many years have shown, however, that if a government takes too much, economic growth declines,
especially when the excess is spent on non-core functions. In a study published in April 1998 by the
Joint Economic Committee of the US Congress, the core functions of government were identified
as:
–     The protection of individuals and their property.
–     The enforcement of contracts.
–     The maintenance of a stable monetary regime.
–     National defence.
–     The provision of infrastructure such as national roads, and sewage and sanitation facilities.
–     Environmental protection.

In 1960, the US government’s share of the American economy was 28.4%. By 1996 it had risen to
34.6%. The authors of the study claim that if it had remained at the 1960 level, the average
American family of four would have been better off by $23 440 (roughly R175 000) per year. Even
more startling, they also claim that if the average annual growth rate of the US economy for the
period from 1870 to 1990 had been just 1% lower than it was, the per capita incomes of Americans
would now be about the same as those of their Mexican neighbours. It is worth reflecting on the fact
that at the end of the Second World War, the average incomes in Japan and Taiwan were about the
same as those in South Africa. But the two Asian economies achieved consistently higher growth
rates than South Africa and the prosperity of their citizens now, compared to ours, is plain for all to
see. Such is the power over a generation or two of compound growth rates, or the lack of them, and
such is the cost of wrong economic policy choices.

The US study examined the economic records of the OECD countries for the 36 years from 1960 to
1996. A direct correlation was found between the size of government and the growth of real GDP.
Where OECD countries confined government spending to less than 25% of GDP, growth rates
averaged 6.6% per annum. At the other end of the scale, the economies of countries with high-
spending governments grew by only 1.6%. A similar study, recently published by the cross-party
think-tank, the European Policy Forum, reached similar conclusions – low taxes boost economies.

                                                                                                    29
In 1980 government expenditure as a proportion of GDP in South Africa was already high at 30.1%.
By 1995 it had reached 37.0%. The country’s per capita GDP shrank by an average 1.2% per annum
during this period and a total of 15% in real terms. It is now back to where it was 30 years ago.

If our people were already enjoying a comfortable standard of living, we would not have to be so
concerned about growth rates. But the fact is that the majority of our people are poverty-stricken.
The evidence is compelling that if we want growth rates of 6% or more we will have to reduce
government spending to 25% or less. Lower spending will facilitate lower taxes. Lower taxes
encourage people to work harder and smarter, to innovate, to spend, to save and to reinvest in the
growth of their own businesses. As the small firms sector begins to thrive, unemployment will fall,
and so will crime. As more people are employed and more small firms are established and grow,
total tax collections will increase even though tax rates remain lower. Greater tax receipts will
enable the government to improve the delivery of its essential core services.

5.    Proposals for the mitigation of the inequities contained in the Bill
The inequities contained in the Bill could be addressed by the inclusion of the following provisions:

5.1          Inflation adjustment
We propose that government annually publish an inflation factor by which the base cost of an asset
is to be adjusted in the determination of a capital gain on the realisation of the asset. The annual
R10 000 exclusion could then be dispensed with.

5.2         Exempting taxpayers with modest assets from CGT
Capital gains tax is generally intended to be a tax on the wealthy who are able to make real capital
gains (in excess of inflation) and increase their wealth whilst avoiding income tax. However, the
Bill under discussion will tax people with very modest assets and relatively modest incomes. The
cost of administering CGT, and especially compliance costs, would be reduced considerably by
confining the tax to the real gains of the wealthy.

We propose that individuals with total “non-excluded” assets of less than R1 million (to be adjusted
annually for inflation) be exempted from CGT.

5.3          Holding costs of assets
The Bill should make provision for the length of time that a taxpayer has held an asset, especially if
there is no inflation adjustment.

It is proposed that capital gains as determined in accordance with the provisions of the Bill should
be reduced by 10 per cent per annum for every completed year the asset has been held.

Part 2 – An alternative tax system

THE FLAT TAX
Government should aim at reducing compliance costs and minimising the economic distortions
caused by taxes. Taxes change the behaviour of citizens and tax systems should therefore be
designed so as to have the least negative effect on their behaviour. South Africa’s existing tax
system could be made more citizen-friendly by introducing the following changes:

1.1           Reducing the complexity of the tax system
              by way of fundamental reform and simplification
If, for instance, the Flat Tax system developed and refined by the economists Robert E Hall and
Alvin Rabushka of the Hoover Institution, USA, were to be introduced, the change would

                                                                                                    30
encourage savings, investment and entrepreneurial activity. It would reduce compliance costs,
reduce tax avoidance and evasion, and would tax real capital gains much more effectively than the
proposed new system. Most importantly, it would simplify South Africa’s tax system to such an
extent that it would be understandable to the vast majority of taxpayers

The Hall/Rabushka Flat Tax system taxes all income at a low flat rate and has various features that
reduce complexity:
–    A generous personal allowance that exempts the poor from income tax.
–    Two postcard-size tax returns, one for Business Tax and another for Individual Wage Tax.
–    An integrated system applying the same rate to businesses and individuals, removing the
     incentive to utilise companies and Close Corporations to reduce tax.
–    Consumption is taxed whilst saving is not.
–    There are no special allowances.
–    Fringe benefits are not deductible by businesses or taxable in the hands of employees.
–    Interest is not deductible as a business expense or taxable in the hands of recipients.
–    A 19% flat rate in 1995 would have raised the same amount of federal revenue for the
     American government as the existing complex system.
–    The draft Bill for introducing this system in the USA is 3½ pages long.
–    It is very simple.

South Africa is a developing country and needs to simplify its laws and administration to enable its
citizens to understand and cope with them. Citizens should be allowed to concentrate their minds on
earning a living and not be forced to waste their time and hard-earned money dealing with time-
consuming complexity.

1.2        Reducing the costs of compliance
Professor Hall and Dr Rabushka estimated the 1993 costs to American taxpayers:

      Direct compliance costs (advice and completing returns)             $100       billion
      Tax planning costs                                                   $35       billion
      Lost to fiscus through evasion                                      $100       billion
      Loss through distortions and lost output                            $100       billion
      Cost to economy of lobbying activities                               $50       billion
      Estimated total cost                                                $385       billion

      Total individual and corporate taxes                                $625       billion

      Estimated total cost as a percentage of taxes                       61.6%

According to the authors increased economic efficiency, reduced compliance costs and lower tax
rates would have a substantial positive effect on the US economy. South Africans would benefit
even more from a simple flat tax system. The US economy can survive waste of such proportions
but the South African economy cannot.

1.3          Reducing the incentive to make wasteful investments
In considering a new and additional tax such as CGT the Minister of Finance should take into
account the cost to the economy of raising one additional rand of taxes as a result of the imposition
of the tax. A US study has shown that the tax rates and types of taxes levied have little effect on the
total tax collections as a percentage of GDP. However, they have a very substantial effect on total
GDP.


                                                                                                     31
Hall and Rabushka in The Flat Tax maintain that every one dollar of additional taxes levied in the
USA has a disincentive effect equivalent to 30 percent of the estimated tax receipts from the new
tax. However, as soon as a new tax is imposed, taxpayers change their behaviour in order to avoid
paying the tax. Large amounts of money that would otherwise go towards increasing output in terms
of labour supply, capital supply, and total output will be diverted. A substantial part of the
productivity loss will consist of time and money spent on tax avoidance. The attention of
entrepreneurs will be diverted away from productive enterprise to spending many hours with tax
lawyers and accountants in order to devise tax avoidance schemes.

Capital gains tax on share investments will have an especially pernicious effect. Increases in the
value of shares consist of a mixture of inflation and the current valuation of future income. Inflation
increases should not be taxed, as they do not constitute a profit. Income earned is already taxed in
the hands of a company and CGT on that portion of a share price increase will constitute double
taxation.

As CGT is only levied on the sale of assets there will be less sales. This will mean that the capital in
the economy will be placed in a straitjacket. Capital will no longer flow to where it is needed most –
where it will make the greatest contribution to economic growth. The rigidity in capital flows will
have a devastating effect on an economy that is starved for growth and employment creation. The
prescription is clear: if you want less of anything, tax it. So, if you want less capital investment, or
if you want capital investment in all the wrong places, tax it.

1.4         Reducing the incentive to evade taxes
Many newspaper columns have been filled in recent years with reports on tax evasion and how the
Revenue Services are dealing with the issue. Yet the evidence shows that the best way to reduce tax
evasion is to reduce the tax rates. Taxpayers who are risk-takers will evaluate the risk of being
caught against the benefit gained from tax evasion. As tax rates are reduced, more and more people
will choose to pay the taxes rather than risk being apprehended.

A culture of non-payment arises when taxpayers perceive the system to be “unfair”. Lawyers and
accountants who would otherwise advise their clients to pay their taxes become advisers, not only
on methods of avoidance, but also on methods of evasion. Friends and colleagues of taxpayers
comment with approval when hearing of instances of evasion. The moral fabric of society is then in
decay. Tax evasion easily leads to fraud and other forms of criminal activity. Instead of hiring teams
of expensive accountants to reduce evasion, government should replace the present complex system
of taxation with a simple low flat tax system that reduces the incentive to evade tax.

1.5         Eliminating the necessity for taxpayers to employ tax experts and lobbyists
An estimated 500,000 lawyers, accountants and other professionals make a living out of helping
taxpayers in the USA to comply with the requirements of their tax laws or reduce the taxes they
have to pay. A conservative estimate is that the cost to the taxpayers is in the order of $35 billion
(R260 billion). If the US adopted the Hall & Rabushka low flat tax system this expenditure would
immediately fall away and the people involved in the tax industry could turn to doing productive
work.

South Africa’s tax system is not yet as complex as the US system but it is unfortunately moving in
that direction. More and more people are turning to tax advisers. Adding a Capital Gains Tax will
accelerate the process. Such a development should be avoided if at all possible, especially with
thousands of new taxpayers entering the economy, many of whom have been historically
disadvantaged. The new taxpayers will have great difficulty in dealing with the existing complex
tax requirements without assistance. CGT will make matters worse. The tax system should be

                                                                                                     32
adapted to accommodate citizens, rather than have the citizens change or incur high costs to
accommodate the tax system.

2.    The Hall & Rabushka flat tax proposals
Professor Robert E Hall and Dr Alvin Rabushka are senior fellows at the Hoover Institution,
Stanford University, USA. They first put forward their flat tax proposals for the USA in 1981 and
published a second edition of their book The Flat Tax in 1995. The second edition includes
refinements resulting from more than a decade of debate and critical scrutiny by economists and tax
experts.

As stated above the authors propose an integrated flat tax that applies to both businesses and
individuals but with separate tax forms for the two types of taxpayer. All businesses, whether
owned by companies, close corporations, partnerships or individuals would complete the same tax
form. The simplicity of the tax system can best be illustrated by reproducing the one page
Individual Wage Tax and Business Tax forms (see attachments).

3.   Why the Flat Tax system should be adopted in South Africa
The foregoing comments are based on an economic approach to taxation issue but tax equity is
maintained by exempting the poor from income tax. In addition, the proposed simple low flat tax
system will cater for specific current South African needs. It will:
–    Be fair.
–    Reduce the cost of compliance enormously.
–    Eliminate double taxation.
–    Improve incentives to invest.
–    Make tax evasion more difficult and less lucrative.
–    Increase economic growth.
–    Encourage local investment by encouraging capital formation.
–    Create new jobs by increasing real wages and improving incentives to work.
–    Reduce interest rates immediately.
–    Make taxpayers more honest.
–    Attract foreign investment because the taxes will be simple, low and flat, and foreigners will
     not need to hire tax experts before investing.

4.    An appeal to Members of Parliament
Objections to the Hall/Rabushka simple flat tax system can be expected from vested interests,
including:
–     Taxpayers currently receiving special privileges that reduce their taxes below the probable
      low flat rate this system will produce.
–     Tax lawyers, accountants and other professionals that earn high incomes from the complexity
      of the existing system.
–     Tax experts hired by the state to deal with the current complexity and to track down those
      who are evading tax or squeezing through the loopholes.

Government should not allow the vested interests to dissuade it from investigating the benefits of
introducing the Hall/Rabushka tax system in South Africa. The authors should be invited to visit
this country and explain their system to the Department of Finance and to the Members of
Parliament.

A special appeal is consequently directed to the Department of Finance and the Portfolio Committee
on Finance to examine the Hall/Rabushka proposals. Many eminent Americans, including members
of both major parties have endorsed the proposed system. It has naturally been strenuously opposed

                                                                                                     33
by the vested interests, not least the 500,000 professionals who make a living out of the existing
complex US system. This comment is not intended to be disparaging. It merely states the reality of
the situation. Adoption of a simple flat tax system that taxes consumption rather than investment
would transform South Africa. Hall and Rabushka estimate that if the flat tax were introduced in the
US, there would be a 2 to 4 per cent increase in GDP on account of added capital formation within
seven years. South Africa desperately needs added growth of such proportions.

Form 1                                  Individual Wage Tax                                  2000
Your first name and initial                                                 Your social security no
(if joint return, also give spouse's name and initial)
Last name
Present home address and postal code                                  Spouse's social security no

City, town, or post office, province and postal code Your occupation:
                                                     Spouse's occupation:
1 Wages and salary                                        1
2 Pension and retirement benefits                         2
3 Total compensation (line 1 plus line 2)                 3
4 Personal allowance
(a) $16,000 for married filing jointly                   4(a)
(b) $9,500 for single                                    4(b)
(c) $14,000 for single head of household                 4(c)
5 Number of dependents, not including spouse              5
6 Personal allowances for dependents                      6
(line 5 multiplied by $4,500)
7 Total personal allowances (line 4 plus line 6)          7
8 Taxable compensation                                    8
(line 3 less line 7, if positive; otherwise zero)
9 Tax (19% of line 8)                                     9
10 Tax withheld by employer                              10
11 Tax due (line 9 less line 10, if positive)             11
12 Refund due (line 10 less line 9 if positive)          12




                                                                                                      34
Form 2                                        Business Tax                             2000
Business name                                                     Employer identification no

Street address                                                    Country

City, Province and Postal Code                                    Principal product

1 Gross Revenue from sales                                   1
2 Allowable costs
(a) Purchases of goods, services, and materials          2(a)
(b) Wages, salaries, and pensions                        2(b)
(c) Purchases of capital equipment, structures,          2(c)

3 Total allowable costs                                      3
(sum of lines 2(a), 2(b), 2(c))…
4 Taxable income (line 1 less line 3)                        4
5 Tax (19% of line 4)                                        5
6 Carry-forward from 1999                                    6
7 Interest on carry-forward (6% of line 6)                   7
8 Carry-forward into 2000 (line 6 plus line 7)               8
9 Tax due (line 5 less line 8, if positive)                  9
10 Carry-forward to 2001                                     10
(line 8 less line 5, if positive)




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