How bad is it going to be then, eh?
The Big Fat Fuss over Freddie-Mac and Fannie-Mae has flopped flat as a flail. Yesterday the hype boomed the markets in the direction of the stratosphere, but since they were deep in a well, their movement was only perceptible because of the eager shouts of the corporate economists, for which, read ruling class propagandists. Today the markets resumed their grim slide. No surprise.
Basically, nothing has changed. The U.S. has builded its economic house upon the rock of debt and low-wage service industries. Unfortunately debt can be pumped up only so high before it begins to deflate. The mass employment for hamburger-flippers and Starbucks baristas is not injecting enough money into the economy now that the paper-hatted “management associates” can no longer sustain the loans for their cars and pay the interest on the mortgage on their houses. As for the cigar-sucking Masters of the Universe on Wall Street, you cannot run an entire national economy on yachts, limousines and a steady trickle of foul-stinking, dysenteric bullshit.
What will be, will be. The United States will stop consuming as much as it has in the past. The dollar, which is currently rising just because the euro is falling, will eventually fall. The Chinese will be left with an immense glut of manufactured goods which they cannot sell. They will dump the goods at record prices, but they will also start shutting down their surplus factories. Tens of millions of Chinese will be out of work, and the dumping of goods will throw other manufacturing industries all over the world out of work in sympathy. Commodity prices — especially minerals — will fall, as will energy prices. The world stock markets will continue to plummet, as they are now, but probably faster as everybody tries to get out of the market before things get much worse.
Then the Americans will be left with debts which are so much worthless paper. The Chinese will retrench and stop investing in American Treasury securities; indeed, they will probably sell them, especially as their value falls with the dollar. The Americans will no longer be able to buy their imports; since they will still be importing oil and other commodities, they will cut back on imports of manufacturing further. That will cause depression in Europe. The three main productive zones in the world will, for the first time since 1973, all be in depression together, and probably will all be in a worse depression than they have seen since the second world war. Banks will go bankrupt; heavily-endebted firms, confronted by soaring interest rates and plummetting profits and stock value, will collapse. Governments will try to cheat each other and will probably mainly succeed in cheating themselves. The rich will find ways to continue avoiding paying taxes and taking any positive action which costs them anything.
No doubt many governments and financial institutions will advise governments to balance their budgets, cut back on public spending, and privatise whatever they can. Under the circumstances there will be a global fire-sale of national assets unprecedented since the Asian markets crisis. But there will be nobody buying.
How bad? Pretty bad. 1929? Probably not quite so bad. 1873? Perhaps worse. A thirty-year economic slowdown, then, accompanies by grand-scale political turmoil.
Just what does that mean for us, eh?
South Africa at present has a current account deficit, meaning that we are importing more value than we export. Since what we export are commodities whose value is falling, this is going to get worse. We have to finance our deficit by foreign inflows of dollars, much like the United States, and much like the United States we cannot expect this to carry on in an economic crisis. Hence we are soon going to have to limit our imports. On the other hand, the World Trade Organisation more or less forbids any action taken to limit imports — tariffs, for instance. The WTO has been enfeebled by the collapse of its dogmas, but it is still a dangerous poison-fanged dog to challenge.
South Africa exports agricultural commodities and minerals, and some manufactured goods. Some of these goods are going to be needed, but there is going to be a fall in demand which will lead rapidly to gluts — especially as internationally, everybody is going to be facing a crisis which will lead everybody to drive for exports. We can’t compete with the richer countries which can subsidise their exports and defy the WTO. Therefore our international trade is going to suffer. Unfortunately, thanks to our opening up to international markets, all our trade, in a sense, is international trade; it is priced according to international standards. Therefore all our trade is going to take a knock.
If we export less, our exporting activities will potentially be reduced. Farmers will throw labourers out of work. Mines will close down, as will factories. Unemployment will rise rapidly. As a result, there will be less money in the local markets, and therefore industries and services catering to locals will find demand falling. They, again, will start laying workers off. If this continues, government revenue will fall, because with less economic activity there will be less to tax — especially there will be less customs revenue and less revenue from VAT. It’s probable that government projects will stall — perhaps there will even be layoffs in the public service. This is all, potentially, very ugly stuff.
South Africans are heavily indebted. Many people will not be able to service the interest on their debts, having lost their jobs. The banks will try to foreclose, but in a dwindling market there will be little advantage in taking people’s houses and cars away if the bank cannot sell them. (This is basically what the Americans, Europeans and now even the Chinese are starting to discover.) Meanwhile the fact that companies are going bust all over the place will put a lot of strain on the banks. It is perfectly possible that the banks will start cutting back (insurance companies are already laying people off) and will also become less sympathetic to lending. In other words, just as the country badly needs more access to credit, the banks are going to start freezing it off — another thing which is happening in America at the moment. Of course if credit is harder to get, it will be harder to address the problems of lack of markets; for instance, a farm or a factory will not be able to change over to a more profitable crop or manufactured commodity, because such changes cost money. Therefore South Africa’s economic flexibility, such as it is (not nearly flexible enough) will suffer.
Is it all bad news? Probably. However, there are possible ways of addressing some of the problem and perhaps these are worth mentioning even though they may well not be implemented — especially since just as all this is taking place we shall be having a general election and a changeover from the relatively competent and honest Mbeki team to the incompetent and corrupt Zuma team — not ideal circumstances. It is a bit as if in 1932 the Americans, responding to the Great Depression, had triumphantly rejected Franklin Roosevelt and instead elected Joe McCarthy as President.
But one can leave the economic analysis, such as it is, of the Vavi/Nzimande clique for later. Rather think of how things could be handled in an ideal world, in which such people would spend the rest of their lives shovelling gravel onto sieves and then tamping it down into holes in dirt roads near Zoar. How can South Africa get out from under the crisis?
A major problem is capital flight. Rands are not very useful when sent abroad, but they can be changed into foreign currency at a discount, at least for the moment. (Obviously if this process becomes too powerful, as it will if there is a real economic crisis, then the rand will lose its value and become as impossible to exchange as the Zimbabwe dollar. But rich South Africans would have made a lot of money before that would happen.) However, when rands go abroad they are not being invested in South Africa. They are not generating jobs, nor applying the “multiplier effect” so beloved of Keynesian economists. Therefore, a logical step is to impose exchange controls, essentially entitling the government to veto the transmission of funds abroad. This veto has to be used wisely, of course (foreigners would not invest in South Africa if they were not allowed to send any money home) but in essence if the flow of capital abroad is staunched, the logical thing to do with the capital is to invest it in South Africa.
However, nothing is clearer than that capitalists cannot be trusted to invest their money wisely. Hence the state has to develop an effectual means of improving the situation by itself. The state has limited resources; how to use those most effectively? The answer is to develop a way of giving as much money as possible, distributed as widely as possible, to the poorest possible people — preferably, the people who currently have no income at all.
The most natural way to do that is through a public works programme. Suppose that half a million people currently unemployed and unable to find work were given the opportunity to earn R20 000 a year, plus subsistence and minimal shelter (let us say that providing this would cost R10 000 a year for each of them) by doing very basic work with picks, shovels, saws, hoes and wheelbarrows (let us say that providing the equipment and administering the programme would cost R5 000 a year). All told, let us say that these half a million people are each absorbing R40 000 a year, of which R20 000 goes directly to the individuals or their families (who are exempted from having to feed them), R10 000 goes predominantly to small businesses and rural communities capable of providing food or basic accommodation facilities, maybe R5 000 goes to small businesses capable of providing the necessary tools, and R5 000 goes to the bourgeois bureaucrats administering the projects. That comes to a total of R20 billion, of which R10 billion would go entirely to the poor, R7,5 billion would go partly to the poor, and only R2,5 billion would go definitely to the middle class. Maybe you would have 20 000 people doing the supervision and administration, averaging R125 000 each. Nice work if you can get it.
Where would this money come from? It could be borrowed. That’s less than 2% of the gross domestic product. It could be obtained through raising taxes by about 5%. You takes your choice, and then pays your money. In either case it is affordable (2% is likely to be little more than the economic growth rate). In either case, however, money which would be sitting around in South Africa relatively unproductively would be given to very poor people, who would spend virtually all of it on buying food and services in South Africa. (Maybe they would also be buying Chinese clothing, but that would be a question of whether the WTO would still be strong enough to keep us from imposing tariffs.) In other words, it would be a direct shot in the arm for the economy, which would probably grow much faster as a result.
But also, what could these people do? They could mend gravel roads, helping out Zwelenzima, Blade and Kgalema. Or they could clear away alien vegetation. Or they could mend dams, or restructure the landscape in other ways. They could assist in the building of structures such as wind and ocean-thermal power plants. They could repair municipal structures, schools and clinics. There are a million things to do which need to be done and are not being done out of apathy or lack of cash.
Of course there are plenty of other actions which need to be taken to buttress South Africa against the economic crisis. We need to build up local manufacturing, and yet the manufacturing needs to be simple and cheap, to be labour-intensive. We need to build up the capacity to manufacture manufacturing equipment itself — which is necessarily going to be expensive and capital-intensive. While South Africa is a global backwater, while the big players are focussing on their own problems and not trying to waste time on robbing foreigners — this is the time when South Africa needs to start building itself up, as it did between 1930 and 1945. But we cannot do that unless our economy holds together, and to do that we need to start spreading the money around. Now.