[OPINION] State Capture & Credit Rating Agencies in SA
It is the dependency of the state on business that predisposes states under capitalism to be inherently captured by capital. Without business investment, the state cannot generate revenue from taxation in order to undertake its function. If the state leadership or governing political party presides over a declining economy characterised by unemployment and insufficient state revenue to finance social services, it runs the risk of electoral defeat. So, it is in the material self-interest of the state’s incumbents for business to invest.David Masondo
Since the release of the former Public Protector’s State of Capture report and subsequent appointment of the Commission of Inquiry into State Capture chaired by Judge Zondo, a lot of ink has spilled over the meaning and analytical utility of the concept of state capture and how it works. Some critics of the state capture concept, either deny the existence of state capture at all or simply state it is not a new phenomenon.
Lurking behind the debate on the state capture phenomenon is also who has power over the state and how it is exercised. In other words, who rules, and how? And what are the best conceptual tools to analytically describe this mode of rule?
The World Bank defines state capture as an instance in which “control or power passes from state officials and elected representatives to non-state corporate interests”. This is concerning because non-state business actors are not accountable to the electorate and thus put the legitimacy of the elected government into question.
The current South African debate on the phenomenon of state capture is based on impoverished conceptions of state power. Not only because it has drawn our attention essentially to one family that has allegedly unduly influenced certain parts of the state working with some officials and politicians to illegally capture and amass state resources. But mainly because the debate has focused almost exclusively on the most visible forms of state capture such as bribery, party political funding as well as corrupt and non-corrupt social networks. As a result, the inherent power of business over the state, which does not only reside in direct control, remains clandestine.
In this article, I argue that business neither needs to use the more overt mechanisms such as outright bribery, corrupt patronage networks; nor have its own political and administrative representatives in the state to wield power over the state; nor have to undertake the undisguised and flagrant political mobilisation against an elected government as we have seen during the 2016-2017 Save South Africa business-led mobilisation. Instead, the ability of business to capture the state largely lies in business’ ability to make large donations to political parties, as well as ownership and control of the investable resources, which enable business to shape state policy action; including political appointments such as cabinets.
The article uses Credit Rating Agencies (hereafter referred as rating agencies) that is, Moody’s, Standard & Poor’s (S&P’s) and Fitch3 to illustrate how business under the leadership of financial capital, captures the state without using overt mechanisms such as bribery. Contrary to the view that rating agencies merely provide information to potential borrowers of money, I show that rating agencies have become important in influencing state policy action in the quest to attract investment, which may or tend to undermine the democratic will of the people, including national sovereignty.
The article starts by showing the pitfalls of the dominant conceptualisation of state capture, followed by a discussion on how the state is inherently captured by business in general and financial capital in particular. I then continue by showing how the credit rating agencies enable financial capital to exert its influence over the South African state. The article ends with a discussion on possible ways in which the less visible forms of business capture can be combated.
PLACE AND ROLE OF CREDIT RATING AGENCIES IN INVESTMENT
Credit rating agencies play a major role in enabling investors under the leadership of financial capital to exercise their power over where and when to invest. For the larger part of the 20th century, rating agencies played a key role mainly in the USA and European markets. It is only in the 1980s that rating agencies started to play a prominent role outside developed capitalist countries when states in the global south started to increasingly borrow money in international markets. In the 1960s and 1970s, the USA was willing to provide grants, soft loans to third world countries to ward off the Soviet Union in the context of the Cold War. Since the 1990s, the USA has been actively encouraging African states to be creditrated by the agencies so that they can gain access to private global financial capital.
Before we discuss the role of rating agencies in enabling financial capital to capture the state, it is important to discuss the importance of money credit and associated financial institutions (e.g. insurance companies, mutual funds, divisional investment banks and pension funds) – in investment for economic growth.
The main role of financial credit institutions is two-fold. The first is to mobilise financial resources from different economic actors. Second, is to redistribute the mobilised funds to different actors and economic sectors. If the cost of money capital is high, investments ought to yield higher returns, otherwise the investment will not be profitable. The lower the rating the higher the cost of borrowing and servicing debt. So, how loaned-money is invested; and its cost, influences the growth or stagnation of certain economic sectors.
Governments also borrow funds through bonds to finance budget deficits. The South African government – debt is at R2.7 trillion and pays R180 billion interest on its debt annually. As mentioned earlier, rating agencies assess and provide information to financial investors about the ability of private companies and governments to repay debt on time.
The rating range extends from the best AAA (triple A) to worst D (default). The rating depicts the possibility of debt non-payment. A triple A means there will be no default; and triple B means there is some risk for default, but still worth investing (investment grade). Anything below BBB is junk. In 1994 South Africa had a BB rating which was the lowest grade. Between 1996 and early 2000s due to budget surplus in 2002 associated with the global commodity boom, South Africa received favourable credit ratings. Since the global crisis, South Africa has experienced fiscal crisis leading to downgrading. Credit rating agencies play a major role in enabling investors under the leadership of financial capital to exercise their power over where and when to invest. The higher the probability for default, the higher the cost of borrowing. Conversely, a positive credit rating translates into lower interest rates, thus lowering borrowing and debt service costs. So, if the borrower is considered as likely to default, the cost of borrowing and debt repayments become higher.
The assessment of the rating agencies can encourage or discourage investment. The agencies are very important for investment flows in two respects. Firstly, investors use their assessments to determine whether to invest their monies in certain companies and nation states. For instance, Regulation 28 of the Pension Funds, prohibit pension funds being invested in junked states. In 2001, the US pension managers bought South African bonds because of good rating.
RESISTING ALL FORMS OF STATE CAPTURE
In the current context of the dominance of capital, there is no qualms about state officials and politicians attracting private sector investment. But it (i.e. capital) must, through certain policy instruments, be subordinated to the immediate interests of the working class. Otherwise, it will be making a mockery of ANC conferences and general elections and their democratic outcomes. Furthermore, it is now well known that critical problems such as institutional destruction by corrupt state officials, politicians and non-state actors are true and real, and must be tackled head-on.
The battle-cry of this article has been to critically examine the undue influence of the rating agencies on the democratic post-1994 state and urge us not to treat the agencies as ideologically neutral and infallible. The year 2011 saw huge criticism of the credit rating agencies. For example, the IMF disagreed with Moody’s rating of South Africa’s fiscal position38. Furthermore, both the National Treasury and South African Reserve Bank disagreed with rating agencies downgrading of SA.
The City of Johannesburg attacked the rating agency for describing the city as insolvent40. In the same year, the former US President Obama criticised the rating agencies for making a ‘terrible judgement’ after S&P downgraded US’s sovereign debt for the first time in history. The rating agencies have also been seen as conflicted and profiting from Wall Street. The USA government through its Financial Crisis Inquiry Commission found that agencies also enabled the 2007/08 global economic crisis. Moody’s and S&P’s were later fined for enabling the global economic crisis by making incorrect assessments. The above-mentioned three rating agencies have also received criticism from BRICS countries for being bias against global south states in favour of developed countries.
Lobbying, party political funding, corrupt and non-corrupt social networks between state officials and politicians and business have always been an integral part of overt business state capture mechanisms. Business’ economic power, which is opaque, is the most critical business state capture mechanism which gives investors de facto veto power over state behaviour and action.
Financial capital has established, through rating agencies, an additional channel of influence over state policy and action. That is to say, rating agencies have also become institutional enablers for financial business to determine where to invest, which has also shaped nation-state policies and actions. However, both the overt and opaque business-influence enhancing mechanisms are complimentary in enabling business state capture. The ability to influence and corrupt state officials, politicians and organisations are derived from business ownership of economic assets. Therefore, the fight against state capture must take place on two levels, namely state institutional and private ownership of the economic resources which enable business state capture.
At an institutional level, deploying incorruptible and competent state officials and political leadership in the state should be accompanied by strong institutional design that makes it difficult or impossible for the business to exert undue influence on state actions and to guard against the abuse of power by individual state officials and politicians.
Business investment power lies in its ownership of the economic resources, whereas working class power lies in its ability to withdraw its labour power and mass protests and exercising the right to vote. We, therefore, need to strengthen working class movements as a counter-veiling social force against business state capture. It remains to be seen if the SACP in its current form and orientation can be an organisational force to mobilise and organise the working class as a countervailing force against capital; financial capital in particular as aided by rating agencies in the current conjuncture.
Whilst the recent business-led Save South Africa Campaign played a key role in fighting against the hollowing-out of state institutional capacity, it should not be surprising if, in the future, business undertakes active mobilisation and participation in anti-government activities and building of alternative right-wing coalitions to fight against progressive policy actions using the rhetoric of anti-corruption.
The recent experiences in Latin America (e.g. Brazil) have shown how, when they lose elections, right-wing parties resort to anti-corruption campaigns to delegitimise progressive left political parties and movements and present these movements as threats to good governance. The ANC as a disciplined force of the left, must take a strong stance against corruption including making institutional reforms and – consistently punishing individual corrupt conduct regardless of whom is involved, as part of advancing the revolution. However, progressive institutional reforms will remain susceptible to reversals by business until a different socio-economic system is installed.
David Masondo is an ANC NEC member, writing this in his personal capacity.
This is an extract of the opinion which first appeared in ANC's Umrabulo Issue 44, click here for the full piece.