SA can’t stop the world and get off
Post-Mbeki there’s no place for any financial ‘adventuring’
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
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.