SA can’t stop the world and get off

Post-Mbeki there’s no place for any fi­nan­cial ‘ad­ven­tur­ing’

Finweek English Edition - - In The Spotlight - HOWARD PREECE howardp@fin­

THERE’S A MAS­SIVE GAP be­tween cur­rent tidal out­pour­ings of global eco­nomic gloom and the full-pic­ture re­al­ity – cur­rently, any­way. That also ap­plies vi­tally to the sit­u­a­tion in South Africa, again on the hard ev­i­dence to date. Now that’s not to pre­tend the cur­rent eco­nomic sit­u­a­tion in most of the world gen­er­ally, in­clud­ing SA in par­tic­u­lar, is re­motely happy. That would be ab­surd.

The in­ter­na­tional boom be­tween 2001 and 2006 – which saw an ex­traor­di­nary rise in the liv­ing stan­dards of bil­lions of peo­ple – has for the mo­ment come to a nerve­jan­gling end. But that’s no cause for the gross over­dos­ing on mis­ery that’s now tak­ing place so widely.

Start by putting re­cent high-pro­file na­tional and global de­vel­op­ments – dis­turb­ing as col­lec­tively they ad­mit­tedly are – into a cru­cial medium- to long-term per­spec­tive.

I’ve just spent five weeks in Bri­tain. Had I re­lied only on the broad can­vass of the me­dia there (with some sparkling ex­cep­tions) I’d have come to some dis­mal con­clu­sions: • There’s real risk, es­pe­cially in the United States and Bri­tain, of a re­turn to a “De­pres­sion”. That’s a mea­sure of how of­ten ref­er­ence is made to 1929 and all that. Prop­erty val­ues have ap­par­ently plunged so pre­cip­i­tously that houses are avail­able at fire-sale prices – or would be if avail­abil­ity of mort­gage fi­nance hadn’t ap­par­ently largely ceased to be avail­able. Other pop­u­lar views in­clude: • The eco­nomic sit­u­a­tion must be bet­ter, rel­a­tively any­way, in the rest of the Euro­pean Union as a whole. Though emerg­ing mar­ket economies, led by China and In­dia, have done fan­tas­ti­cally, this is the time for more cau­tion about pump­ing vast sums into fixed and port­fo­lio in­vest­ment into those na­tions. That last point is why SA has to act so care­fully.

The im­me­di­ate panic in mar­kets last week – when it briefly ap­peared SA’s Fi­nance Min­is­ter Trevor Manuel had quit the Trea­sury per­ma­nently – showed just how vul­ner­a­ble SA is.

What­ever the struc­ture of gov­ern­ment in SA post-Mbeki, there’s no place for any fi­nan­cial “ad­ven­tur­ing”. A coun­try that’s come to de­pend ex­ces­sively on for­eign cap­i­tal in­flows must live by the rules of that game. It’s also fool­ish to think the Euro­pean Union or China, In­dia, etc, will pay all SA’s bills.

The Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment re­ports that real eco­nomic growth showed an ab­so­lute fall of 0,2% in the EU in sec­ond quar­ter 2008. The drop in Ja­pan was 0,6%, the worst per­for­mance since 2001 (Q3). In the US there was a pos­i­tive rise of 0,5%.

Of course, things could eas­ily get worse in the US and maybe a lit­tle bet­ter in the EU. But the fig­ures con­firm what this col­umn has long urged – that the old adage about the US sneez­ing and the rest of the world catch­ing cold still has a great deal of va­lid­ity.

Rose­mary Righter, eco­nomics colum­nist at The Times (Lon­don) ob­served on 22 Septem­ber: “Over the past three months nearly US$30bn has drained out of emerg­ing mar­ket bond and eq­uity funds while $50bn flowed into US eq­uity funds. Of the es­ti­mated $17 tril­lion wiped off global eq­ui­ties over the past year, the fall in US mar­kets ac­counts for only about one-fifth of the losses. Falls have been far steeper in the emerg­ing mar­kets.”

Righter added: “The flaws in US cap­i­tal­ism have gripped and ag­o­nised the world. But its strengths – flex­i­bil­ity, open­ness and sheer size, warts and all – re­main ex­cep­tional. The fates of emerg­ing economies, in­clud­ing China and In­dia, re­main bound up with that of the ma­ture in­dus­tri­alised economies.”

A long-term per­spec­tive

is needed.

Against that back­ground let’s look at the ex­tended per­for­mance of the tra­di­tional ma­jor economies: • Bri­tish house prices are over­all worth more than dou­ble the val­ues of five years ago. Al­low­ing for inflation, that still leaves a hefty in­crease in real terms of around 70%. The Dow Jones share in­dex in the US surged by 100% – roughly from 2 000 to 4 000 – be­tween 1988 and 1995. That prompted Alan Greenspan, then head of the US Fed­eral Re­serve (cen­tral bank) to warn of “ir­ra­tional ex­u­ber­ance” on that coun­try’s eq­uity mar­kets. At 11 800 (at the time of writ­ing) the Dow is way off its ap­prox­i­mate 14 000 peak. But it’s still com­fort­ably above its 1995 level in real terms. Av­er­age real liv­ing stan­dards in the US are twice the level they were 40 years ago – and they have risen at more than that in Bri­tain and ap­pre­cia­bly faster still in France, Ger­many and the rest of the EU, all off lower bases. China has en­joyed enor­mous eco­nomic growth, as has In­dia. So did Ja­pan and then South Korea in ear­lier pe­ri­ods. This coun­try has done rea­son­ably well this cen­tury. But SA can’t ul­ti­mately count on any­thing but its own poli­cies and ef­forts – and world eco­nomic con­di­tions – to re­gain and re­tain that mo­men­tum.

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