It is a little odd that COSATU, writing under the name of Zwelenzima Vavi in the same way that Communist intellectuals used the pen-name of Josef Stalin during his dictatorship in the Soviet Union, should choose to expound its economic theory in the Mail and Guardian. The Mail and Guardian is a right-wing newspaper, anti-ANC and to a great extent neoliberal. It’s as if the American Socialist Workers Party should choose to present its new platform in the wages of the Wall Street Journal. But perhaps things are not what they seem. They usually aren’t.
Let us not go there, where the evening is spread out against the sky like a voter etherized upon a ballot-box. Let us rather go and visit what “Vavi” is saying. Let us also number the statements to make them easier to refer to.
1. The rich are getting richer and the poor are getting poorer.
2. Economic growth is a bubble which is damaging the productive sector of the economy and making the economy more vulnerable.
3. There is too much financialisation and the government should do something about it.
4. There is not enough productive investment, especially in manufacturing, as a result of the free market.
5. Most of these problems are promoted by conservative monetary policy.
6. Short-term capital inflows have been bad for the economy and too much money is flowing out of the country in dividend payments to foreigners.
7. The current account deficit is a big problem, and the exchange rate of our currency is too high, because of the Reserve Bank’s fear of inflation which would be promoted by allowing the value of the currency to fall.
8. Big companies which are monopolies need to be disciplined and subordinated.
9. Small businesses should be supported more, especially because they like COSATU.
10. BEE is bad.
11. We need to bring back the agricultural marketing boards of the apartheid era.
12. Industry faces unfair competition from abroad because we don’t use import tariffs and export duties enough. (Possibly here export subsidies are meant.)
13. Not enough is being spent on the industrial strategy by the government and its policies are bad for it.
14. There is not enough public infrastructure investment by the government.
15. The Treasury is too powerful, and too friendly to big business, which explains why the government is running a surplus, which is bad.
This is dumbing down what was already dumbed down for the benefit of the dumb audience of a dumb newspaper, but you get the general idea. To what extent is all this true? Also, where does it lead? The Creator hesitated a little, partly because of the need to engage with the galaxy and partly because the Mail and Guardian promised to publish another article explaining what all this would lead to, but of course, they lied. One might have expected so, for reasons which shall appear. Let us deal with these assessments numerically.
1 is true. The rich are getting richer — more so than they should. The poor are feeling poorer because things which they are paying most of their income for, are getting more expensive, so even if they aren’t really getting poorer in money terms, their wealth buys them less. There is, however, one problem with all this; the rich are also feeling the pinch, with the rise in interest rates (which doesn’t affect the poor because they can’t get credit) and the rise in the petrol price (the poor don’t have cars). Hence, any planned change has to accommodate the fact that the rich, far from generously wanting to share more with the poor, will be shouting for support for themselves and pretending that this will help the poor (for instance, demanding cuts in interest rates).
2 is pretty much false. South African economic growth is not a bubble; it is not largely based on financialisation. It is largely based upon two factors; the redistribution of wealth promoted by the government (which is significant even though it is limited) and the increased demand for minerals as a result of the growth of Asian industry. The former is sustainable; the latter is not, and is going to be the cause of South African economic crisis. There is a degree of bubbling (for instance, insurance, real estate and medical aid schemes) but these do not dominate the economy.
3 is, in consequence of the above, nevertheless true. Financialisation is when you prefer to invest in unproductive activities because they give a higher return than productive ones. Basically, organised bucket-shopping. This is quite common in South Africa, and it is obviously undesirable because while it makes a profit for the individual investing, it does not provide the “multiplier” effect which productive investments (which generate jobs) would do. Again, however, the question is how to deal with this. Many institutions investing in financialisation are also investing to a lesser extent in productive activities; simply destroy the financialised institutions and you risk tearing productive investment down with it and causing a wholesale economic crisis. Any meddling would thus have to be careful. There is little sign in the COSATU argument that this is what is proposed. (Actually, very little is proposed.)
4 is also true, but only up to a point. Investments such as tourism or service industries are not as productive as investments in manufacturing, in the sense that they do not make physical objects which can be exported or eliminate the need to import physical objects. Therefore, all other things being equal one would like to see more investments in manufacturing. On the other hand, tourism and service industries often employ more people than manufacturing, being less capital-intensive in many cases. Hence, investment even in these areas is more desirable than no investment at all. Ideally there should be a balance of investment, but it is difficult and even dangerous to ensure this, since this would entail taking an enormous amount of control over the national economy. If this were done by people who were lazy or incompetent, it could be destructive.
5 is, bluntly speaking, false. It is more false than 2, and probably more intentionally so. In principle it would be possible for economic growth to be a bubble, but it is not really possible for bubble economies, financialisation and lack of proportionate investment in manufacturing to be caused by monetary policy. To believe so, you would have to be Milton Friedman and believe that everything is a product of monetary policy. It is not. It is possible to argue that the government could improve the economy by altering the supply of money (for instance by massive borrowing), or the availability of money (by lowering interest rates). However, this would not eliminate the problems identified in the earlier points. Instead, other measures would have to be taken in order to make sure that the more available money, whether state-supplied or bank-supplied, was spent wisely. The alternative could be simply to accelerate the roulette wheels in the casino economy — that more money would be ploughed into ever less sensible investment. This was approximately what happened in the United States when Reagan lowered interest rates, deregulated banking and borrowed largely, and one consequence of this was the Savings and Loan crisis which emerged towards the end of his term of office.
6, however, is true in a broad sense. Short-term capital inflows are not bad things in themselves, but stability is desirable and stability requires long-term inflows. Alternatively, it requires that capital stays in the country and is used productively. The problem with short-term inflows is that they can be withdrawn rapidly, which weakens the economy; this is not just a Third World problem, for it has been a perennial crisis in Britain (it was the reason for the collapse of the pound in 1992, which ironically occurred just after the Conservative Party was re-elected because it was deemed more able to manage the economy than Labour).
The business about “dividend payments to foreigners” sounds a bit xenophobic. In fact, some South African companies have sold shares to foreigners which means that those foreigners are getting money out of South Africa. In the same way, foreigners who have invested in South African physical plant are also getting money out of South Africa in the form of profits; they would not have made the investment if they did not expect to make something out of it. Objecting to this only makes sense if you are objecting to foreign investment in South Africa at all — if you are calling for a kind of socialist siege economy, which Patrick Bond proposed in Commanding Heights and Community Control. There is no doubt that this would be bad for the economy in both the short and long term, and it would also wreck our society and probably lead to a counter-revolution overthrowing the government.
7 is right about the current account deficit. This is a problem because we cannot sustain it, though in the short term we can lure in foreign money with which to pay, sooner or later that will run out. Therefore we need to reduce the amount we are buying or increase the amount we are selling. The suggestion, however, that reducing the exchange rate of our currency would solve this problem is absurd. It should work for a short time after the value of the currency against other currencies fell, but quickly the matter would equalise — after all, our currency is much less valuable than it was in 1994, so if the argument were true, we ought to be much better off now than we were then, and in current account terms we aren’t.
In fact, any substantial increase in the money supply, if channelled towards productive investments, would probably increase the current account deficit, since a great deal of manufacturing plant cannot be made here and must be imported. This would be made worse if the value of the currency fell, for temporarily, before costs and prices equalised, foreign goods would be much more expensive.
The most effective way to cause the value of the rand to fall would be to encourage people to sell rands and buy foreign currency. This could best be done by dramatically reducing the interest rates; people buy South African currency because the returns are better, because the relative interest rates are higher. If they could get better rates elsewhere they would sell rands and buy bhat or roubles. As a result we would have a glut of rands in this country and a shortage of foreign currency, which could make buying anything from abroad rather difficult — in fact, it would approach the siege economy concept again.
High inflation is not a massive problem, but it does hit people with money in the bank. If government policies led to high inflation, there would probably be capital flight. Unfortunately, one of our current problems is capital flight. It seems that COSATU wishes to make this worse. More accurately, it seems they are proposing policies which would make this worse without realising it.
8 is no doubt true in the sense that it is better to have a single reliable, intelligent agent managing the economy, and having large companies managing it instead is as unwise as having overmighty barons and dukes ruling big chunks of the country and disregarding what the King has to say. Of course, this requires that the central government be both powerful and sensible, for big companies with nothing to lose can do a great deal of damage to the economy, and unfortunately many South African companies have powerful friends abroad. Hence there must be extreme care that these companies are controlled rather than just annoyed.
9 is a bit of a misrepresentation of the actual statement, but basically it is an argument in favour of small businesses as opposed to big businesses. Everybody claims to love small businesses, of course. Some small businesses are indeed startlingly successful. All the same, it is dangerous to assume that a small mining company or a small power company will be automatically better-off than a big one. What is a problem is that big companies have the power to impose their will on the government, as in point 8. But in a sense, if small companies have great lobbying power, they could do that too. This is not necessarily good.
10 is legitimate within its limits. BEE has not been what it set out to be, essentially because black corporate capitalists have turned out to be just as greedy and corrupt as white ones; indeed, they have largely got together with white ones, and the result is President Zuma. Of course, all other things being equal it is better that blacks have a seat at the capitalist table, which BEE has provided. In a sense, BEE was a distraction from the real attempt to take charge of the economic system. Eliminating BEE would not resolve any of the problems which we now possess.
11 is also legitimate within its limits and, unlike the previous point, has some broader validity. Agriculture in South Africa was cushioned from the vagiaries of price fluctuations by the various Marketing Boards, although these also functioned as a system for ensuring the political loyalty of the large farming community. The farming community is no longer so large, proportionately, and thus is less politically important, and this is one reason why the marketing boards were abolished. Nevertheless the marketing boards could, potentially, keep consumer prices lower for agricultural products, through state subsidies for those prices. This would interfere with the World Trade Organisation’s plans, and thus the WTO disapproves of such structures and would probably impose sanctions upon South Africa. This would not necessarily be disastrous, but it needs a good bit of planning first. After all, the WTO benefits the rich, so the rich were all for the abolition of the marketing boards; to cite one example, in Argentina the upper classes successfully blocked an attempt to keep food in the country to hold prices down, claiming, with the assistance of their Supreme Court, that it was illegal and unconstitutional. (Remember those three words; they are the last refuge of the affluent scoundrel.)
12 is also true, but once again we are up against the WTO (and also the World Bank and the International Monetary Fund) and large multinational corporations. Also, of course, we are up against our own ruling class. Then again, we are up against the very logical fact that we would like to sell our stuff abroad. Obviously, if South Africa is refusing to import anything and insisting on exporting lots of stuff, countries will be reluctant to buy our stuff unless it is very good or very cheap, and the trouble is that a lot of the stuff we have to sell is neither particularly good nor particularly cheap on the world market. Hence, blocking out imports may also block our capacity to export. So there are huge political problems, problems of global capitalism, and also problems stemming from the policy itself. Protectionism is not always a bad thing, but it is not always a good thing either; it is certainly possible to featherbed companies which do not really deserve protection (though this has been systematically exaggerated by neoliberal economists who pretend that protectionism is always bad; the era of import-substitution, from the 1940s to the 1960s, was an era of rapid industrialisation in many countries including South Africa).
13 is definitely not true. It would undoubtedly be better if the government spent more money on industrialisation, but that is not the same as spending money on the industrial strategy. Nor is it necessarily true that government policies are bad for industrialisation; the current crisis caused by interest rates is a world-wide crisis, which cannot easily be solved. The industrial strategy as it is, did not work much better in 2004 when interest rates were low. No, the problem is not on poor application of an industrial strategy; this is an excuse much like the excuse of the International Monetary Fund, when a structural adjustment programme (now usually known as a poverty relief plan) fails; you didn’t do it right. In fact the problem lies in depending on an “industrial strategy”, which means trying to get corporate capitalism here and abroad to shape up and fly right, and which entails giving them pots of money in return for very little. Instead you should simply promote local industrialisation, as was done in the past.
14 is probably true. Also, public infrastructure spending is too skewed towards large, capital-intensive corporations using machinery rather than people, and too focussed on roads and not enough on rail, light rail and urban renewal generally. On the other hand, there is enormously more public infrastructure spending than there used to be a few years ago, because there is more money. At the same time, in the distant past under apartheid when there was a lot of public infrastructure spending, this was largely because there was less spending on other things such as health, education and social grants, and because public infrastructure was easily recycled into big white-owned corporations who were friendly to the government. In short, promoting such spending can cut out other money, and can lead to corruption — and, of course, it can lead to boondoggles like the Gautrain.
15 is partly true in its first phrase, more accurately true in its second phrase, and absurdly wrong in its third. The power of the Treasury lies in its power to prevent what it considers overspending. A bean-counting attitude can undermine the capacity of a Ministry to function effectively; for instance, Housing has been starved of money because the Treasury is rightly suspicious of its projects, but at the same time that means that not enough houses get built. If Ministries were more effective in themselves, the Treasury could be more relaxed. But they are not, and a Santa Claus Treasury which gives everybody what they want will spend the nation into bankruptcy in a few years.
It is well known that the Treasury is sympathetic to the needs of big business. This is a truism, but no less true for that. The reason is that big business has the capacity to harm the overall economy — partly because the economy has been structured so that big business can also help the economy if it so chooses. This vulnerability is regrettable, and something should be done about it, but the Treasury responds to it by trying to be as nice to big business as is consistent with its mission.
However, at the moment the Treasury’s mission is to keep the fiscus growing on a stable footing. To do this it has cut taxes, which seems weird, but in fact it has also tightened up the implementation of taxation, so in a sense the tax cuts were a quid pro quo for increasing the revenue from actual taxation. In theory, the tax cuts also ought to have lured business in, but they did not because other countries have still lower taxation. Business wants South African taxation cut to the lowest possible level, but the Treasury has refused this. Business also wants South African public spending (especially on poor people) cut, which the Treasury has refused. Hence business does not like the Treasury even if the Treasury likes business.
The fact that the government is running a budget surplus is quite remarkable. Right-wing economists at the beginning of GEAR’s implementation predicted that the economy would crumble because of a lack of borrowing (when it suited them, they were Keynesians). When this failed, they predicted that the government would spend itself into a hole. When this failed, they carried on as normal; no corporate economist ever lost her or his job through making wrong predictions — only through making statements which embarrass the ruling class. In truth the budget surplus is modest, but is happening despite a growth in public spending. It means that debt servicing has fallen sharply in every year (in this instance, high inflation will further shrink the debt-GDP proportion) which means that the government is constantly able to devote a higher proportion of spending to productive projects rather than handing it to banks. That COSATU disapproves of this suggests that COSATU either does not understand what is going on — or has other ideas in mind.
In fact the whole article was disinformation. It is necessary for disinformation to contain truth — or, at least, things believed to be truth; the article was riddled with juicy accusations familiar from anyone who has read much in the South African left, and short on detail. However, the disinformation all seemed to point in the direction of a particular cluster of policy initiatives:
1. Increase public spending by borrowing at a greater level than the level of economic growth;
2. Cut interest rates to allow the rich to borrow more (and temporarily mark the effect of an expanding national debt);
3. Eliminate restraints and controls on provincial and departmental spending;
4. Allow the currency to go into free fall versus the dollar;
A number of problems which are not soluble by such methods were identified. However, the article pretended that such methods will have some effect on these problems. Hence it is likely that these four policies will be pursued. The following are the probable real reasons why such policies will be pursued:
1 will allow the government to channel money to its rich friends, and to its own pockets, without at first appearing to harm the economy — instead there would be a temporary boom, and when the boom collapsed the government could claim that it had done its best to stimulate the economy and that the problems (which it had created by endebting the state) were structural in nature.
2 will allow the government’s rich friends to obtain more money. It will also probably promote inflation, since that money is not necessarily going to be wisely spent. Also, it will undoubtedly expand the bubbles in the economy about which the article rightly complained. However, it is important to remember that leading Zuma supporters are virtually all devoted to economic bubble-blowing.
3 will promote corruption in the government, a natural product of the anti-Treasury, anti-conservative policies implicit in the article, but also a product of Zuma-style thinking. Zuma’s methods are to essentially ignore policy in the regions while making sure that the regions are controlled by Zuma supporters; thus in return for political loyalty, corruption and incompetence are winked at. Very much what the press complained about in the Mbeki era, but more serious because of the removal of the restraints which Mbeki introduced.
4 is inevitable anyway with a cut in the interest rate under current economic conditions, but is also likely because under Zuma there will be (there already has been) a gradual collapse in business confidence. Loosening up controls will mean a fall in the currency. No doubt the Zuma finance capitalists are already taking a position in the market which will enable them to profit by it (buying lots of foreign currency before the crash will enable them to earn loads of rands when the currency collapses, with which they can quickly buy assets in South Africa for subsequent sale to foreigners — and they will be in the best position to know when such a crash is imminent, so they will be in the best position to gain). They will pretend that the rand is “finding its natural level” and that the dwindling currency is “promoting competitiveness”. Watch them.
Put these issues all together and it appears that about five years down the line, around the second Zuma term of office, South Africa will face economic conditions which it will not be able to escape from; a situation rather like Zimbabwe in about 1995.
So it would appear that good, or at least not altogether bad, analysis is being turned into disinformation for exceptionally bad policy. This is the standard operating procedure of the Zuma regime. It is not something for us all to look forward to with glee and confidence.