Lost lessons from global financial crisis
In a few weeks the world will commemorate the global financial crisis, when huge swathes of the global economy slipped into a recession thanks to bad loans in the American system. And the question that arises is two-fold: how did SA fare, and are we ready for the next crisis?
The origins of the crisis could be traced from February 7 2007, when HSBC announced losses linked to US subprime loans, according to an excellent timeline compiled by Mauro Guillen of University of Pennsylvania’s Lauder Institute.
However, it would only be in September that world leaders began to seriously worry about the global economy. On September 11 2008, Lehman Brothers reported $4bn worth of losses and announced that it was looking for a buyer. When it couldn’t find a buyer, it filed for bankruptcy.
The panic soon reverberated into the real economy as the world was going through political transitions.
In the US, untested senator Barack Obama was about to become president. In SA, the governing ANC had just ousted Thabo Mbeki as president.
With the US going through a change in government, leadership had to come from somewhere, and Gordon Brown, who was interim UK prime minister after forcing out Tony Blair, stepped up. Major central banks responded by pumping cash into the economy and forcing down borrowing costs to stimulate growth. In part, this helped stop a collapse of the world economy: share prices and bonds recovered. Once elected, Obama rolled up his sleeves to breathe life into the US economy.
All governments that responded effectively to the crisis had two things in common: it was not business as usual, and global co-operation was prioritised over unilateral action. Ideology made way for pragmatism. If the state needed to nationalise private firms, it did so, and in a few cases badly run firms were allowed to fail.
As September approaches, most central banks are now unwinding the unprecedented steps they took to save the world economy. What did we do in SA? Very little is the simple answer. We muddled our way through the crisis.
With Mbeki out of the picture, Kgalema Motlanthe, a minister in the presidency who had been inserted to keep an eye on Mbeki, was elevated to take over as interim president. The remainder of Mbeki’s term was the beginning of what would become almost a decade of wasted years. Jacob Zuma and his supporters would spend the next few months micromanaging Motlanthe to purge everyone they deemed to be close to Mbeki.
Like Alan Greenspan, Motlanthe appeared to mischaracterise the crisis, hence the half-hearted response. With elections looming in 2009, the focus soon shifted to keeping the ANC in power rather than saving the economy, following a split by Mbeki’s supporters who formed COPE.
Among the half-hearted measures was a jobs fund to try to stop the surge in unemployment. Curiously, while the world was cutting borrowing costs, we were doing the opposite, and austerity followed. The economy continued to grow at a slow rate, occasionally slipping into a recession as it did in 2017 after the sacking of Pravin Gordhan as finance minister.
Zuma’s two terms in office were characterised by blaming the global financial crisis for most of SA’s economic problems almost a decade after it occurred.
Having adopted the National Development Plan as the government’s economic blueprint, the ANC went on to pay mere lip service to the plan’s implementation.
If such a global economic crisis were to occur again today, how would we respond?
For a start, Zuma is out and his successor, Cyril Ramaphosa, is refreshingly frank about SA’s problems. Although rushed, his state of the nation speech in February acknowledged the challenges as being largely of our own making.
The economy has become a priority again. Although lacking in detail, the plan to attract $100bn in foreign direct investment over the next five years shows ambition, and is a step in the right direction. Similarly, Ramaphosa’s latenight announcement about injecting an additional stimulus into the economy shows that he understands the scale of the crisis faced by this economy.
Still, several worrying things remain unchanged. First, the ANC is facing another tough election in 2019, and in the process is trying to be everything to everyone. The increase in populist rhetoric, as exemplified by its call for land to be expropriated without compensation, illustrates a deep fear of losing power.
Second, the team that was in charge during the last crisis — especially the leadership of the economic cluster and central bank — is still in office. Third, there has been no serious reflection on SA’s response to the last crisis. Fourth, the ANC still lacks execution capacity.
Finally, and more concerning, the world is now run by protectionist nationalists.
CURIOUSLY, WHILE THE WORLD WAS CUTTING BORROWING COSTS, WE [SA] WERE DOING THE OPPOSITE, AND AUSTERITY FOLLOWED