Walking through the doors

11 Sep 2008 06:00 -

In the first of a two-part series, Cosatu general secretary Zwelinzima Vavi, argues that capital must be disciplined.

In the first of a two-part series, Cosatu general secretary Zwelinzima Vavi, drawing on the expertise of a panel of economists convened by Cosatu, argues that capital must be disciplined

We want to walk through the doors and use the new environment created by the Polokwane conference to begin to debate about economic and other policy options.

By drawing together a panel of leading progressive economists as part of our ‘Walking through the doors project”, we want to position the labour movement to use the emerging space.

We gave our panel the task of answering this question: is the economy moving in the right direction, and if not what are the key problems which need to be addressed?

The economists questioned the mantra that government’s economic policies have been a ‘success story”, achieving ‘macro-economic stability” which paved the way for a period of sustained economic growth, and that this is beginning to reverse the tide of our inherited legacy.

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A deeper analysis shows, in fact, the opposite: that macro-economic and other policies are deepening the structural problems of the economy, entrenching inequality, and making the economy ever more vulnerable and dependent particularly on financial markets.

Even with current policy shifts, overall economic policies continue to be inappropriate, are based on fundamental misunderstandings of the real economy, and ignore lessons of international comparative development in the last decade.

The recent ‘consumer-led boom” is not addressing, but rather exacerbating, the negative features of our economy. The major difference now, is that the relatively small black middle class, weighed down by debt, is being incorporated into the apartheid enclave of luxury consumption by a minority.

The majority suffer the ravages of unemployment and poverty wages. The ‘boom” has created an economic bubble, financed by unsustainable debt, which threatens to implode and leave us even worse off than before. As the productive sector of the economy has been undermined and the ‘resource dividend” squandered, we are now more vulnerable to economic shocks, inequality is being worsened, and the majority have been made more dependent on social grants.

These patterns are not despite relatively high growth, but a direct product of the type of growth we are pursuing.

The panel has identified the following challenges of current economic policy.

The growing financialisation (domination by the financial sector) and lack of productive investment in the domestic economy, combined with the growing outward internationalisation of South African firms.

This is exacerbated by the character of our financial sector—banks tend not to finance long-term investments, unlike the East Asian model. Government policy has not intervened to influence the allocation of capital and financial markets have subverted our development goals.

We are witnessing a problematic change in the structure of production and investment. This has seen the decline of the manufacturing sector and productive investment.

Instead, we focus on sectors such as tourism, services, real estate and the financial sector. As labour we are concerned with the associated growth of atypical, unprotected and badly-paid work. Free-market policies have encouraged inappropriate investments like state incentivised minerals processing, and smelters; ‘easy rent” service sectors like mobile phones, bubble-induced property development, speculative financial services and private security services.

The cycle of speculation, consumption and unproductive investment is promoted by conservative monetary policy and high real interest rates, which continues to dominate other areas of policy. Crude free-market policies are unable to deal with the contradictory goals of policy which are to curb rampant conspicuous consumption while, at the same time, promoting productive investment. Liberalisation of exchange controls has subjected South Africa to destabilising inflows and outflows of capital, which affect our domestic asset base.

This unsustainable debt-driven consumption was financed by short-term capital inflows (themselves dependent on high interest rates). These resources have been squandered in largely unproductive investment in the economy.

In 2006 investment in the top 10 sectors was in non-manufacturing sectors. An alleged growth-driven boom has left the SA economy possibly poorer, with large outflows of capital in dividend payments to foreigners.

The current-account deficit is a function of the lack of diversification of the economy. We are over reliant on imports for capital and intermediate goods, as well as consumer goods. We have failed to capture our ‘resource rents” from production and export of our raw materials.

At the same time, our exchange rate (the relative value of the rand) is artificially high on the back of cheap energy and resources, despite our high trade deficit.

Inflation targeting entrenches this pattern, and boosts high interest rates, because depreciation in the exchange rate would raise inflation.

Large firms in South Africa are using their power, and the space given to them by government policy, to entrench their monopoly positions.

This continued monopolisation and concentration in some areas of the South African economy raises the challenge of disciplining capital.

This needs to include subordination of finance capital to developmental goals, the control of capital flows, consideration of various instruments which can be used to discipline firms and state ownership in strategic areas.

Conservative economic policies have mainly benefited a certain section of capital. Less powerful fractions of domestic capital, particularly smaller domestic producers, share some of Cosatu’s unhappiness about elements of these policies.

The BEE strategy is reinforcing the current growth path and buying into the existing business model. BEE has not been realigned to the emerging industrial policy.- While apartheid agrarian policies tended to favour farmers, power has shifted in the last decade to agro-processing, with the abandonment of regulation through marketing boards, and the consequent domination and abuse by cartels in this sector.

Trade patterns under liberalisation have retarded structural change, and subjected industry to unfair competition from abroad.

Opening up to the ‘chill winds of competition” has reduced our economic policy autonomy. We have abandoned the use of trade policy as a way of altering relative prices in our favour, by failing to strategically use import tariffs and export duties.

There is no coherent regional development strategy. This is necessary to deal with regional imbalances, and to unlock a regional industrial strategy which could make South Africa a hub for intermediate products, capital equipment and consumer durables, as opposed to the current one-sided export strategy.

The emerging industrial strategy is being contradicted by fiscal and monetary policy. The prospects of developing a coherent strategy for growing productive activity and employment in the manufacturing sector, and broad-based industrialisation, is now being undermined by resistance from treasury to resourcing the new industrial strategy, and a lack of alignment of other areas of policy with this strategy.

Government, our social services, and the economy are suffering from the legacy of destruction, or undermining, of state capacity, including the shortage of key delivery personnel. Despite all the hype about massive infrastructure investment, levels of public investment are now well below those in the Seventies as a proportion of GDP.

Treasury and the power of capital in the state remain dominant. Fiscal policy is used to ensure low deficits or a surplus, instead of stabilisation of the real economy and employment creation.