Fi­nan­cial folly

Finweek English Edition - - Economic Trends & Analysis - Cheaper money and a weaker rand won’t pro­vide a rel­a­tively pain­less so­lu­tion

THERE’S NO “SHOCK” about the fact that South Africa is now of­fi­cially in re­ces­sion. That out­come was cer­tain many months back. The South African econ­omy is over­whelm­ingly de­pen­dent on global macro trends. When the world as a whole booms – or at any rate se­cures a rea­son­ably sat­is­fac­tory level of growth in real gross do­mes­tic prod­uct – this coun­try in­vari­ably fares at least mod­er­ately well.

But when the broad global econ­omy suf­fers a ma­jor set­back (and the cur­rent crash is the most ex­ten­sive in post-1945 his­tory) that has a ma­jor ad­verse im­pact – sooner or later – on SA. Though many in­stances can be cited in sup­port of that view, per­haps the most il­lu­mi­nat­ing is what hap­pened in 1988 and even over the three years 1987 to 1989. SA then faced chronic “in­sur­gency” prob­lems do­mes­ti­cally – and was un­der in­creas­ingly in­tense siege from sundry for­eign fi­nan­cial and trade sanc­tions. On the sur­face SA’s econ­omy should at that stage have been in a state of im­me­di­ate chronic dis­as­ter. How­ever, the re­al­ity was some­what dif­fer­ent.

In 1988 our econ­omy grew by 4,2% in real terms – the best per­for­mance since the ar­ti­fi­cial gold-based surge of 1979/1980.

Also, be­tween 1987 and 1989 the ag­gre­gate rise in GDP was al­most 9% – bet­ter than, for ex­am­ple, the equiv­a­lent records of both 1993-1995 and 1997-1999.

That clearly seems com­pletely coun­ter­in­tu­itive. How could “pole­cat” SA have done slightly bet­ter – in terms of eco­nomic growth – in the late Eight­ies than the in­ter­na­tion­ally hailed “rain­bow na­tion” did for most of the Nineties?

The an­swer is that had very lit­tle – if any­thing – to do with SA’s in­ter­nal pol­i­tics and eco­nomic poli­cies. The world econ­omy flour­ished in the late Eight­ies and, vi­tally, that fu­elled strong global de­mand for SA raw ma­te­ri­als ex­ports. Over 1988/1989 SA en­joyed an av­er­age an­nual rise of 7,6% in the real value of ex­ports of goods and ser­vices. That wasn’t quite as buoy­ant as 1995/1996 (9%) or as sus­tained as 20052007 (7,2%).

But it was what pe­ri­ods of strong SA eco­nomic growth have al­ways been tra­di­tion­ally founded on. Sharply in­creased for­eign de­mand for SA prod­ucts in 1987/1988 was es­pe­cially noted from Asia. Then as now, the Far East was far more in­ter­ested in what it needed from SA than in de­bat­ing po­lit­i­cal moral­ity. So SA could get by, in good times, even with sanc­tions.

Yes, there were big long-term bur­dens build­ing up from those sanc­tions. But, with bit­ter irony, those would ul­ti­mately fall pri­mar­ily on the new demo­cratic or­der that came into place from 1994.

Cru­cially, though, com­mod­ity ex­port vol­umes and prices are capri­cious. They can change swiftly from the greatly ben­e­fi­cial to the gloomily dis­mal. When that lat­ter de­vel­op­ment oc­curs SA is in­evitably hurt. We’re now painfully re­minded once more of that tru­ism. Griev­ous hard times in­ter­na­tion­ally – see ac­com­pa­ny­ing graph – are tak­ing a heavy toll on SA.

That brings a crit­i­cal ques­tion right back into glar­ing fo­cus: What can SA do, if any­thing, to re­duce its vul­ner­a­bil­ity to the ups and downs of the com­mod­ity cy­cle?

That vi­tal is­sue is where the ANC Gov­ern­ment has been largely un­suc­cess­ful eco­nom­i­cally – not that the apartheid regime did any bet­ter.

It’s a re­cur­ring left­ist/pop­ulist com­plaint that from 1994 ANC eco­nomic pol­i­cy­mak­ers have paid too much at­ten­tion to fi­nan­cial dis­ci­pline and too lit­tle to cre­at­ing more jobs and more out­put. Maybe so – to some very lim­ited ex­tent.

How­ever, the as­sump­tion of many (though most def­i­nitely not all) of those crit­ics is that this ba­sic dis­ci­pline is largely in­im­i­cal to op­ti­mum eco­nomic growth. That is, of course, a long-dis­cred­ited prim­i­tive eco­nomic fal­lacy. But there are oc­ca­sions, as now, when bud­getary and mon­e­tary re­straint may have given way tem­po­rar­ily to eco­nomic pump-prim­ing.

The em­pha­sis, though, is heav­ily on tem­po­rary. In­ter­est rates in the United States, West­ern Europe and in many other re­gions and coun­tries will some time ahead need to show pro­por­tion­ately hefty rises from near-zero lev­els. Han­dling the tran­si­tion down the line from fend­ing off the dan­gers of de­fla­tion to com­bat­ing the far more fa­mil­iar threat of inflation will present mas­sive re­newed chal­lenges glob­ally for cen­tral banks, fi­nance min­istries and gov­ern­ments.

But here, at least, is one area where SA shouldn’t have too many dif­fi­cul­ties. If SA has erred on the cau­tious eco­nom­i­cally then nec­es­sar­ily it will have less need for dra­matic fu­ture pol­icy changes.

It can ob­vi­ously be ar­gued SA’s fi­nan­cial au­thor­i­ties might have done more than they have to fight off re­ces­sion. But un­til this coun­try gives eco­nomic growth a higher pri­or­ity than so­cial en­gi­neer­ing it’s folly to be­lieve cheaper money and a weaker cur­rency will pro­vide a rel­a­tively pain­less so­lu­tion.

Mean­while, SA will still lurch from time to time be­tween the edges of boom and bust, mainly as the global econ­omy dic­tates.

HOWARD PREECE howardp@fin­week.co.za

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