Did the last world recession move SA ahead or back?

A decade after the international economic catastrophe, analysts are still trying to take stock of its impact

It has been a decade since the start of the last great recession. What has happened to the world since then? How did it affect SA? The widespread answer to these questions is bewilderment. Explanations vary. Experts differ. Even the cause of the sudden financial crisis that sent the world spinning into a long, tortuous recession in 2008 remains somewhat opaque. In all the retrospectives published over the past 10 years, the proximate cause of the crisis was often blamed on investment banks slicing and dicing large portions of their debtors’ books and reselling that risk as well, ironically, to each other.

The iconic feature of the crisis was an opaque financial instrument called collateralised debt obligations — a collection of debts mainly in the property markets that were merged into large bundles, notionally in order to reduce the risk. But instead, their opacity and ubiquity increased it. This is why one of the smallest and the riskiest of the New York investment banks, Lehman Brothers, became the poster child for the start of the crisis.

But behind the crisis lay a much larger and more nebulous force: hubris. The Cold War had ended, the Soviet empire had collapsed, commodities were enjoying a most spectacular bull run, China was growing like blazes, and property prices were exploding.

The cause of the crisis was not only the greed of investment banks. It was a greedy world which felt it finally had a firm grasp on how to develop nations, how to grow wealth and how to increase prosperity. It was a crisis not of ignorance or malfeasance, but of overconfidence. And those factors have led to great disappointment among leading commentators about what the world learnt and didn’t learn from the past decade.

Financial Times columnist Martin Wolf points out that the economic crisis of 1939 and the stagflation of the 1970s prompted radical change in ideas about the role of the state and markets. They were seen as a great opportunity for great change. He writes about 2008’s global financial crisis: “Have politicians and policymakers tried to get us back to the past or go into a different future? The answer is clear: it is the former.”

Philip Stephens, a leader writer also at the Financial Times, says the legacy of the global financial crisis could have been a reimagination of the market economy. Instead, it produced two big losers — liberal democracy and open international borders.

“The culprits, who include bankers, central bankers and regulators, politicians and economists, have shrugged off responsibility. The world has certainly changed, but not in the ordered, structured way that would have been the hallmark of intelligent reform,” he said.

George Packer in The New Yorker writes that the US lost (and ultimately regained) 9-million jobs, but the recovery was excruciatingly slow.

“Economically, the country has changed surprisingly little since 2008. The big banks have returned to risky practices … the distribution of income and wealth in America is as lopsided as ever. Despite almost 10 years of economic growth, real wages are stuck at their precrisis level, while corporate profits are soaring and stock prices have reached record highs. All the misshapen economic trends of the previous decade are still with us,” he writes.

These are gloomy narratives from global economy writers, but is their narrative that “nothing has changed” really true?

The one great positive that ought to have emerged out of the crisis was how fast and effectively central banks — and to some extent governments — around the world reacted to the crisis. With 1929 distinctly in mind, central bankers flooded the financial systems with liquidity, facing down the fear mongers who argued this would lead to rising inflation. They acted in concert, and with force, including SA’s Reserve Bank, then under Gill Marcus.

Even financially, these gloomy narratives are somewhat at odds with the global facts on the ground. Inequality has exploded in the old world, but globally, it has declined over the past 20 years. That, sadly, is not true of Africa or SA in particular, but the past decade has seen a huge decline in serious poverty, from 28.8% in 1999 to 18% at the start of the crisis. World Bank figures don’t go back further than 2013, but the financial crisis did nothing to slow down this improvement, for which the latest figure is 10.9%. As the great centres of poverty, China and India, embraced a version of free market economics, their poverty rates declined massively.

Even in the old world, some changes for the better have been registered. Banks are hugely deleveraged as reserve banks have leveraged up. Public and private sector debt has been stable for a decade— at very high levels, it must be said.

These reflections are driven by where one was during the crisis and its aftermath, and they reflect something of the mood of the old world whose power and authority had been fading, a trend enhanced and underlined by the crisis.

And yet, there is one international trend that seemed to have crossed all borders: the fraying of the social contract. Every financial crisis, as Packer points out, creates its own imagery.

“The great recession that accompanied the financial crisis didn’t bring back bread lines or industrial strikes. This time, the desperation was quiet and lonely: a pile of mail at the doorstep of a deserted house in a brand-new subdivision; a foreclosure judge presiding over a stack of files; a middle-aged man playing video games all day with the shades drawn; a retired woman trying to get a human being on the phone at the bank.”

The social dimensions of the crisis became quickly visible in the Tea Party and Occupy Wall Street in the US; rising nationalism in Europe, and the shock of the UK’s Brexit vote; and the election of US President Donald Trump. Even identity politics, such as the #MeToo movement, are part of this trend. The common denominator behind these social developments can be captured in a single word: cynicism.

SA took its own path during the global financial crisis, but it was powerfully shaped by these international trends.

Investec’s chief economist Brian Kantor says SA was initially able to withstand the global crisis rather well. This country’s banks were never involved in the kind of financial manoeuvring that was common of US and European banks, and they never held the toxic debt. They were better capitalised, and more conservatively managed.

SA was also lucky to be holding the soccer World Cup in 2010, which provided some economic stability. The country went into recession very briefly in 2009 but bounced back, and growth was middling to good until 2014.

But it was a grand moment of missed opportunity. The big global trends, including the emergence of China as the world’s workshop, the rise in identity politics and the fraying of the social contract, hit SA like a whirlwind. The rate of descent of the mining sector began to increase just as the government began to tighten the regulatory noose. SA’s nascent manufacturing sector, so dependent on the mining sector, began to wobble, and the construction sector is feeling the full brunt of the decline. Growth has become volatile and has consistently missed the government’s very modest targets.

Politically, the economic success of the Mbeki era, during which services to the poor were massively increased despite modest increases to the fiscal burden, led to a kind of economic arrogance and overconfidence in the ANC, and the left wing of the party grabbed power.

Yet the unique character of the aftermath of the crisis in SA was felt in the nature of the ruling political elite, which suddenly became open to industrial-scale corruption. That cynicism filtered into segments of the private sector too, partly a consequence of the global phase of cynicism and partly the result of the deliberate undermining of state institutions.

One of the global consequences of the crisis is that politics has moved to the fringes, and that is still with us. But this is the character of politics — it swings on a pendulum. In times of economic stability, left-wing governments often get elected as voters sense the possibility of better services and larger benefits. In times of economic crisis, right-wing leaders often emerge.

Ultimately, the financial crisis might not be the change agent that could have heralded a better future, but at least we may be heading back to a better past.