The Treasury and SARB are failing to manage our economy to promote growth and development – we need much lower interest rates and tighter exchange controls!
Date: 10 November 2010: NUMSA Submission to the Joint Meeting of the Standing Committee on Finance & Select Committee on Finance, (National Assembly and National Council of Provinces), [Hearings on the 2010 Medium-Term Budget Policy Statement (MTBPS)], Committee Room E249, Second Floor, National Assembly Wing, 09:30

The Treasury and SARB are failing to manage our economy to promote growth and development – we need much lower interest rates and tighter exchange controls!

Introduction

The National Union of Metalworkers of South Africa (NUMSA) welcomes this opportunity to engage government on some of the proposals in the MTBPS and we trust that the Minister, the Honorable Pravin Gordhan will live up to his promise when he says that“development is not about numbers, it is about people and improving the quality of their lives”(MTBPS Speech 27 October 2010).

In hindsight, NUMSA welcomes the Minister’s commitment to root out corruption and to initiate more stringent control over procurement practices. However, as a trade union we would have felt more comfortable if the Minister put more emphasis on the promotion of the buy local campaign and beneficiation and that the underlying thrust of procurement will be the creation of decent jobs and the need to increase our capacity to produce locally. This in turn will stimulate the growth of our manufacturing sector and reduce our dependency on imports. The Governor of the Reserve Bank has suggested that now is the time for the country to take advantage of the strong currency (Rand) and purchase capital equipment necessary for infrastructural development. In the short term this reasoning might sound very attractive, but as they say the devil is always in the detail: any one in the know will tell you that contracts associated with the purchase of capital equipment have longer term implications in the form of purchasing of spares, sales and after service and that this where most companies make the bulk of their revenue – such contracts are usually determined by the exchange rate and in a volatile market such as ours anything is possible – what might appear to be a bargain in the short term could just as easily turn out to be a very costly venture in the long term. So we should try and procure as much as we can locally and build our capital goods sector on all fronts (promoting beneficiation, enhancing our skills, creating more employment) As Maree, et al. (2008:1)[1] once said in a paper to delegates attending the South African Sociological Association XIV Congress at the University of Stellenbosch, beneficiation can only be successful if “value is added at every stage of production”.

At the same time NUMSA takes note of the comments made by the People’s Budget Coalition (PBC) in response to the Medium Term Budget Policy Statement (MTBPS) released in Parliament on the 27 October 2010. NUMSA believes that the PBC response serves to highlight some of the concerns of civil society, particularly at a time of rising unemployment and increased levels of socio-economic inequalities – conditions that have been exacerbated by the global economic crisis and fragile free market policies that continue to benefit the rich and powerful at the expense of the working class and poorer communities.

NUMSA also wishes to raise its concern over the cost of basic services and utilities (electricity, water and transport) and that consumers will once again have to service the debt of State Owned Enterprises (SOE’s):

Reliable electricity supply, clean water and better transport services have to be paid for over time, and so we will see further rises in tariffs and user charges over the period ahead. (MTBPS Speech 27 October 2010)

Radical Transformation

South Africa needs a ‘radical transformation’ in our growth and development trajectory, as Finance Minister Pravin Gordhan put it in his Medium Term Budget Review on Thursday. There is no doubt in anyone’s mind that the current trajectory is economically, socially, politically and environmentally unsustainable.

The President and Cabinet were correct, last Wednesday, to call for a “new growth path for the country that will place employment at the centre of government economic policy”. But is that what the Treasury and the SA Reserve Bank (SARB) are delivering, or do they remain within the ‘neoliberal’ mindset that puts financial capital at the centre of government economic policy?

The economic challenges South Africa faces today can be summarized as four elephants in our lounge, which neither Treasury nor the SARB seem to have noticed:

  • we need a realistically-valued rand – not one that pleases banks and importers – and there are two ways to lower the overvalued rand that have not been put on the agenda properly: first, rapidly lowering interest rates to global norms andsecond, in the process, imposing capital controls on outflows (rather than loosening them as Treasury just did),[2]for otherwise,if there is the substantial rate cut our economy requires, then money will flee SA and cause the current account deficit – the G20’s highest – to soar even higher, again making our economy the most risky amongst emerging markets;[3]
  • the SARB’s accumulation of currency reserves – now $42 billion - is illogical and counterproductiveas a tool in addressing the overvalued rand, first because to raise the reserves under present circumstances (by selling rand to lower its value, by buying hard currencies) requires too much hot money (i.e. short term debt that must be repaid), and second because too much faith is being placed in the US dollar even though, by all accounts, it is certain to decline steadily in value;
  • the Treasury’s reduction of the government’s budget deficit this year is excessive, given that our internal public debt/GDP ratio has a great deal of room to grow, while at the same time the SA foreign debt is becoming a severe danger; and
  • the Treasury’s spending on infrastructure is too capital-intensive and ignores crucial community-oriented infrastructure upgradesrequired for acceptable transport, community facilities, schools and clinics, household water/sanitation, environmentally-friendly energy and affordable electricity, as witnessed by vast coal-fired power stations and nuclear energy, fast trains in Gauteng and perhaps to Durban, toll roads, dams to supply mining houses and commercial agriculture and last year’s soccer stadiums (and perhaps 2020 Olympics facilities).

The elephant that everyone does seem to want to talk about– above-inflation wage increases won by NUMSA and other unions this year, in some cases following long strikes (which in some cases offset the wage increases completely) – is in fact a mouse:

  • even after the wage increases for transport, electricity and public sector workers came into effect, the rate of inflation for October 2010 was recorded at an extremely low 3.2%, so those arguing against labour on grounds of inflationary pressure were proven wrong;
  • those arguing that labour is taking too much of the social surplus are also wrong, because with the exception of 2004, every year since liberation in 1994 has witnessed the rate of profit increases far in excess of the rate of wage increases, as even the International Monetary Fund reported in its September 2010 Article IV statement on South Africa; and
  • those arguingthat due to inflexibility, our workers are difficult to fire are also incorrect, as South Africa has witnessed 1.5 million job cuts since the Great Recession began in early 2009, and a study by the Organisation for Cooperation and Development found that of major countries, only the US, Canada and UK have a more flexible labour market regime.

Figures 1 and 2: SA workers are underpaid compared to capital, and too easy to fire

Sources: IMF Article IV statement, September 2010
As for macroeconomics, the Treasury sees things differently: not only has Treasury suggested a ‘social compact’ with wage restraint, but the Department has also confirmed that South Africa will not deviate from the macroeconomic path that it has followed since 1996. Last Wednesday,the Treasury issued this misleading statement, which is at the core of the problem with macroeconomic policy :

“As a small open economy with low domestic savings and relatively high financing needs, South Africa cannot fully offset the impact of massive global capital inflows, barring a much sharper tightening of fiscal policy that diverts resources towards substantially larger reserve purchases.”

The statement is misleading for several reasons:

  • First, we would like South Africa to rapidly transform from being a ‘small open economy’ into a larger, much better balanced, more equal and more environmentally responsible economy, which would require us having much less vulnerability to the vagaries of the world economy.

The dangers we face by being an ‘open economy’ include the much more severe reaction to the recent world crisis we faced than most of our peers, as well as the wasting of our non-renewable natural resources, exported (usually unprocessed or semi-processed) at a song to the West and East Asia instead of being beneficiated locally or held for future generations’ use. This transformation could could easily be addressed on two fronts:reimposition of exchange controls on outward flows,[4] so as to manage a currency devaluation but also prevent our periodic currency crashes (five since 1996, which the SA Reserve Bank inevitably responds to through high interest rate increases and hence slowdowns in economic growth; and reversal of the 1990s-2000s free trade policies, so as to prevent further deindustrialization and job losses (which the SA Department of Trade and Industry is at least aware of, and resists European Union Economic Partnership Agreements).

Figures 3: SA currency crashes

Sources:I-NetBridge; IMF Article IV statement, September 2010

  • Second, the Treasury statement is misleading because of its suggestion that SA suffers ‘low domestic savings’, especially because the implication is usually that interest rates must be raised as an incentive to save – even though they are far higher than the world markets, as witnessed in SA bonds carrying an 8% rate compared to 2% in the West.

The basic problem is that working-class people have suffered a dramatic rise in unemployment and a worsening of urban poverty since 1994 according to Government’s own statistics, and hence have less disposable income to direct towards savings. And yet, at the same time, South Africaremains awash in financial liquidity.

The real estate market has not undergone a sufficient correction after soaring by 389% in real terms from 1997-2008, the highest bubble in the world (double the second-highest, Ireland). And the Johannesburg Stock Exchange is back to its bubbly pre-crisis highs. With skyrocketing unemployment – continuing into the third quarter of 2010 with no relief in sight – it is easy to understand why South African banks are now suffering an enormous increase in non-performing loans, a far higher rise than in our peer economies.

Figures 4 & 5: SA’s extremely high interest rates and huge rise in non-performing loans

Sources: SARB Quarterly Bulletin; IMF Article IV statement, September 2010

  • Third, Treasury misleads by threatening that if we want a lower-valued rand, the way to do so is through the SARB accumulating ‘substantially larger reserves’. But to accumulate further amounts of the US dollar and Euro when both regions are suffering long-term decline, is illogical and counterproductive. SA’s reserves are still dangerously low given our huge short-term debt (thanks to hot-money liabilities) and the worsening current account deficit. Still,some of the $42 billion should be used to pay back earlier, more expensive foreign debt. As FNB recently projected, SA’s foreign debt will by 2012 be at the same level (45% of GDP) that PW Botha faced in September 1985 when he had to default on $13 billion in liabilities. Today we have $85 billion in liabilities, mostly since 2005 so as to cover the enormous drain of capital due to outflows of profits, dividends and interest. This became acute after SA’s largest corporations relocated to London, New York and Melbourne.A drain of payments(not SA’s trade account) is responsible for our plummeting current account balance, reminding us that we need exchange controls on outflows.
  • Fourth, a further misleading feature of the statement is the threat that Treasury might build up foreign reserves through “much sharper tightening of fiscal policy” as if this is an appropriate policy consideration. During an ongoing crisis of the sort we remain within, deficit spending should rise to make up for a stagnant private sector, by all accounts.

To be sure, SA’s budget went from a surplus of 0.5% of GDP in 2006 to a deficit of 7.6% in 2009. But notwithstanding this increase, by 2015 the SA government’s gross debt is projected to be less than 40% of GDP, whereas Mexico, Turkey, Brazil and India will have debt/GDP ratios of between 40% and 70%, and the EU and US will both record between 100% and 110% debt/GDP ratios. South Africa is certainly not overborrowed when it comes to state debt, and instead much greater Treasury commitment is required to address the vast developmental backlogs we suffer.

For example, instead of a new round of white-elephant mega-projects that will have the same capital-biased results as the last, we need a broad-based infrastructure empowerment strategy. At present, transport for the masses is underfunded in most of the country (except for a thin strip stretching from OR Tambo Airport to Sandton) and local roads need maintenance; there are dire shortages of community halls and crèches; schools and clinics[5]are in disrepair; municipal water and sewerage systems are falling apart; household electricity access is declining due to extreme price increases (127% over four years); and home solar systems are underfunded.

These kinds of broad-based infrastructure empowerment investments in our neglected communities would have much greater labour absorption prospects than the mega-projects promoted by Government and big business, and they would also reduce the community protests that still indicate very high levels of often very sharp conflict.

The observations above are not difficult to find in technical reports by major agencies, but unfortunately, there has been inadequate debate in the SA business and mainstream press about either a dramatic drop in interest rates – which NUMSA has proposed since 2008, when then SARB governor Tito Mboweni raised them to highly destructive levels – or about the merits of imposing exchange controls as part of a careful strategy, tested across the world, to protect South Africa from the foreign vulnerabilities that everyone is acutely aware of. As in the case of excessive interest rate increases in 2008 and the lethargic lowering of rates in 2009, NUMSA again will take the lead to raise these macroeconomic problems for our society.

We would do well to consider the arguments of the UN Conference on Trade and Development’s Trade and Development Report 2010, for confirmation that a new growth and development strategy based on rising domestic demand (achievable through higher wages and lower interest rates) is not only crucial for South Africa’s own sake, but for the health of the world economy:

China, and to a lesser extent India and Brazil, are leading the recovery, not only in their respective regions but also in the world… Further domestic demand growth in other large emerging-market economies in the South would certainly help to make their industrialization and employment less dependent on export markets. It might also create a larger market for other developing countries that produce consumer goods…

In the 1980s and 1990s, developing countries placed a growing emphasis on production for the world market to drive expansion of their formal modern sectors. It was hoped that this could trigger and accelerate a virtuous process of output growth, and steady gains in productivity and employment. However, that hope was seldom realized. In many countries exports did not grow as expected due to a lack of supply capacities and insufficient competitiveness of domestic producers on global markets. In others where exports grew, the domestic labour force employed in export industries did not share in the productivity gains. Instead, these gains tended to be passed on to lower prices, so that domestic demand did not increase, which would have led to higher income in the rest of the economy. As a result, employment problems persisted, or even worsened, particularly in Latin America and Africa…

Due to strong global competition and an increasing reliance on external demand, a major concern of both governments and companies in the tradables sector is the maintenance and strengthening of international competitiveness. This has induced a tendency to keep labour costs as low as possible. But if exports do not rise as expected, because other countries pursue the same strategy, or if the production dynamics in export industries do not spill over to other parts of the economy, as in many developing countries - especially in Africa and Latin America - these measures can be counterproductive for sustainable employment creation. Given the close links between employment, output and demand growth, a strategy of keeping wages low in order to generate higher capital income to motivate fixed investment or reduce product prices in order to gain a competitive edge can be self-defeating.

UNCTAD’s Secretary-General, Supachai Panitchpakdi, also endorsed exchange controls to limit vulnerability to the world economy:

…A strategy of employment generation based on an expansion of domestic demand in line with productivity growth is more likely to succeed if it is embedded in a favourable coherent international policy framework. There will be greater scope for central banks to pursue an investment-friendly monetary policy when disruptions in the financial sector and currency volatility and misalignment through speculative international capital flows are minimized… In the absence of effective multilateral arrangements for exchange-rate management, the use of capital-account management techniques can contribute to regaining greater autonomy in macroeconomic policy-making, as has been done in various emerging-market economies.