Or­der! Or­der!

‘Ab­so­lutely clear fi­nan­cial mar­kets need dis­ci­pline’

Finweek English Edition - - Economic Trends & Analysis -

THE GLOBAL ECON­OMY seems to have avoided – as I al­ways took for granted it would – the Ar­maged­don sce­nar­ios that were be­ing so widely touted only a few days ago. But there are hefty costs to be paid, di­rectly and in­di­rectly, for that es­cape.

South Africa will have to pay some of those bills, even though this coun­try has emerged rel­a­tively un­scathed from the im­me­di­ate tur­moil. Over­all, world eco­nomic growth – how­ever it’s mea­sured – will be ap­pre­cia­bly less over the next cou­ple of years than was still gen­er­ally ex­pected just three to six months ago. In large part that’s the hang­over con­se­quence af­ter the ex­ces­sive binge on credit and con­sumer spending.

True, while the world still tot­ters near the edge of multi-faced re­ces­sion – or at any rate, is be­lieved to be – there will also be some scope for in­ter­est rate cuts. That will be seen in SA.

But the name of the in­ter­na­tional game now is pru­dent re­straint. In fact, Jean-Claude Trichet, pres­i­dent of the Euro­pean Cen­tral Bank, has even gone so far as to sug­gest: “Per­haps what we need is to go back to the first Bret­ton Woods sys­tem, to go back to dis­ci­pline.”

Trichet says: “It’s ab­so­lutely clear the fi­nan­cial mar­kets need dis­ci­pline: macroe­co­nomic dis­ci­pline, mon­e­tary dis­ci­pline, mar­ket dis­ci­pline.”

Some com­men­ta­tors ar­gue that cen­tral banks should be charged only with inflation con­trol, within tight lim­its. They shouldn’t have to be in­flu­enced, as the US Fed­eral Re­serve vi­tally is, and so also the SA Re­serve Bank (among many oth­ers), to try and bal­ance the short-term needs of eco­nomic growth as well as price re­straint.

Of course, there’s an in­evitable ten­dency to over­act in one di­rec­tion af­ter patent er­rors the other way. That po­si­tion can later sig­nif­i­cantly un­wind.

But tight fis­cal and mon­e­tary poli­cies will surely take pri­or­ity over the im­me­di­ate out­look for growth in most economies in the com­ing cou­ple of years as some ver­sion of nor­mal­ity re­turns.

That may well, on re­cent ex­pe­ri­ence, be for the best. How­ever, it means there’s hardly go­ing to be any great scope for fis­cal and mon­e­tary eco­nomic stim­u­la­tion world­wide. That es­pe­cially in­cludes SA, with its weak rand, mas­sive deficit on its cur­rent ac­count of the bal­ance of pay­ments and greatly ex­ces­sive inflation.

Glob­ally, that at­ti­tude will be nec­es­sar­ily neg­a­tive for the out­look for com­mod­ity prices. That’s an­other im­por­tant mi­nus for SA. This coun­try has, along with vir­tu­ally all other economies heav­ily re­liant on pro­duc­tion of raw ma­te­ri­als, al­ways been es­pe­cially de­pen­dent on trends in growth in in­ter­na­tional real gross do­mes­tic prod­uct (GDP). That fac­tor has been in­vari­ably im­por­tant also to SA’s man­u­fac­tur­ing sec­tor.

Fur­ther, it’s all too painfully ev­i­dent that those who ab­surdly be­lieved the over­all global econ­omy had “de­cou­pled” from the United States have been proved dis­mally wrong. A pop­u­lar view was that Asia, led by China, had sup­planted the US as the dom­i­nant in­flu­ence on the world econ­omy.

On that as­sump­tion, it was re­peat­edly claimed in SA, this coun­try could hitch it­self in­creas­ingly surely to Asia.

The tra­di­tional eco­nomic/fi­nan­cial link­ages be­tween SA and both West­ern Europe and the US were steadily los­ing rel­e­vance in the new “Asian era”, that ar­gu­ment con­tin­ued. There’s much po­ten­tial truth in that ap­proach from a long-term stand­point. How­ever, over the near and medium term there are ma­jor flaws.

The Lon­don Fi­nan­cial Times noted in a lead­ing ed­i­to­rial com­ment on 14 Oc­to­ber: “Asia’s eco­nomic model for the past decade has been straight­for­ward: make stuff, sell it to the US, use the prof­its to fund in­vest­ment and re­peat. It has worked well.”

But the news­pa­per added: “ The fi­nan­cial cri­sis has left the US and other ex­port mar­kets in bad shape. Ex­port-led growth has served Asia well and can con­tinue to do so. But ex­port-led growth that re­lied on the US to run a vast trade deficit was al­ways un­sus­tain­able, how­ever, and vul­ner­a­ble to pre­cisely the kind of re­ver­sal that has now hap­pened.”

The FT con­cluded: “Asia’s ex­porters should, be­lat­edly, en­cour­age do­mes­tic con­sump­tion and pro­vide some de­mand both for them­selves and their strug­gling part­ners.”

That’s very much in line with the at­ti­tude taken by this col­umn for the past 10 years. It also matches the pre­scient cau­tion a decade ago of Larry Sum­mers, US Trea­sury Sec­re­tary. He warned the world econ­omy could not fly in­def­i­nitely on one en­gine, per­ma­nently hooked to the US as “ul­ti­mate im­porter of last re­sort”.

That time has now ar­rived. Peter Foster, in the Lon­don Daily Tele­graph of 11 Oc­to­ber, re­ported: “De­spite ini­tial re­silience to credit crunch woes in the West, In­dia’s econ­omy is wob­bling.” China still pros­pers hand­somely, but it has some big so­cio-po­lit­i­cal wor­ries.

Ahead, SA must count pri­mar­ily on its own ef­forts. ¤

HOWARD PREECE howardp@fin­week.co.za

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