YONELA DIKO: Govt criticism comes too easy for Vusi Thembekwayo
President Cyril Ramaphosa, from the moment he took over the Presidency in February 2018, defined himself as an economy president. Since then, all his steps have been ordered by that aspiration. The president knew, as US economist Larry Summers once said, that confidence is the cheapest form of economic stimulus', and he began in earnest to deal with all the issues that various experts said were standing in the way of economic confidence and investments.
He started this by choosing a cabinet that the country could have a great measure of confidence in, getting credible boards in state-owned enterprises, credible leadership in governing institutions such as the South African Revenue Service, National Prosecuting Authority and others. Then he began to settle policy issues (especially the mining charter), clarified our approach to nuclear and independent power producers, and overall rebuilt battered relationships between government and business.
As a sign of confidence, The President's first South African Investment Conference attracted over R300 billion. His second investment conference attracted R363 billion. The president's train moved with great vigor and determination, something that Vusi Thembekwayo pointed out time and again in various media interviews .
Despite all these valiant efforts by the President, the economic growth of the country has gotten worse, unemployment keeps going up, and our fiscus is getting depleted, with our debt to gross domestic product skyrocketing. How do we explain this painful dichotomy?
There are of course a galore of self-serving explanations, which unfortunately signal a troubling monolithic thinking within our economic profession. Eskom was the elephant was the room, and now South African Airways is taking up that space too; an unsustainable public sector wage bill; and the arrests of big fishes will bring back confidence in the economy that our justice system is restored. It’s a whole new set of requirements that must now be addressed, since the first set that the President embarked on did not seem to do the trick.
You can bet your last million that after all these concerns have been resolved and the economy does not grow, a new set of requirements that government must fulfill will emerge to explain the lack of growth.
History of course is littered with such monolithic thinking from elite groupings who are not analysing facts but are speaking for each other’s validation. In 1851 France went through a devastating economic crisis. The wool and cotton industry, which at that time carried the French economy was experiencing plummeting prices and very weak trade, with companies lying idle and laying off workers.
The owners of business at the time were quick to point out that the bruising political battle between the President of the new republic, Louis Bonaparte, and the national assembly were at the centre of the economic woes. Political uncertainty, a possible coup d'etat, non-functioning beaurocracy and a paralysed political system were cited as the reasons means of production were frozen, demand was low, investments meagre and shrinking economic activity. Businesses were looking for certainty and the political climate was giving anything but confidence.
The truth of course is that while the prices and demand of wool and cotton were plummeting in France, they were also doing the same in England, which at that time was experiencing a relatively stable political environment. The reasoning about political instability as the cause for France's economic woes therefore did not apply to England.
Other experts at the time, including Karl Marx, went into detail explaining the French economic turmoil and how its causes lay right under the nose of business. Firstly, they noted that by October of the same year, the economy had recovered, right at the time the political crisis was getting worse. To these experts, the economic crisis boiled down to two things: overtrading and overspeculation. This means that both France and England businesses "engaged in more business than could be supported by the markets".
The reason for this overtrading and overspeculation was because the cotton and wool industry had experienced great boom the previous year, 1850, and speculators thought the following year would boom even more, encouraging strong production and stock trade due to the future prospects. When that turned out to be all hype: factories were burdened with too much stock and prices plummeted, creating a cascade that resulted in the depressed trade environment of 1851.
According to the United Nations report World Economic Situation and Prospects 2016, as quoted by Nobel Prize winning economist Joseph Stiglitz, eight years after the global crisis, private sector investments in developed countries had gone down by 54% ,and 44 million people were unemployed - 12 million more than in 2007. This was at a time when the cost of capital (interest rates) was at its lowest, free flow of capital, and great liquidity because of quantitative easing by most developed countries. Since 2008, most developed countries have managed a maximum of 2% economic growth (those that have been fortunate), and some have seen negative growth.
So in countries that have no Eskom problems, no public sector wage problems, no corruption, the lowest cost of capital and an investment friendly environment, there is no economic growth. How do we explain that? Do we have another laundry list of explanations for these two?
If we eliminate all the prejudicial analysis about our economy and the doctrinaire thinking of our experts, we can finally have an honest conversation and hopefully find lasting solutions. Since 2008, all investment institutions have been looking for risk-free but decent returns. From the interest rates the South African Reserve Bank pays on excess reserves commercial banks keep, to buying back their own equities and other financial assets, investors prefer liquid assets, cash, stocks, bonds, even mutual funds to messy and riskier investment in the real economy, where they must build infrastructure, employ people, deal with fluctuating demand, negotiate with unions, and pay taxes.
This has resulted in the financialisation of the economy. According to academic research, while originally, the money we save or borrow would be channelled to productive investments via financial institutions, today only 15% of money flowing from financial institutions actually makes it to productive investments. The rest is used to buy existing assets, real estates, bonds, stocks all in pursuit of quick value in order to sell and make profits.
Financialisation slows down the economy because the money that is supposed to be spent in productive pursuits, moves around financial houses being traded for one form of financial asset to another without ever reaching the ground. There is money to be invested, the conditions are favourable for real investments but people have become more risk averse and have also found financial assets, much more preferable and profitable than the investments in the economy.
The question then is not whether we should get investors back into our economy; the question is _how _do we get investors back into the real economy. This is not only a South African question and we must all answer it honestly and boldly. The ANC's answer to this quagmire has been a few proposals including to have some prescribed assets. Prescribed assets would then force the financial sector, by law, to allocate a certain percentage of investments into certain government approved instruments. Stiglitz thinks this is no different to what the International Monetary Fund (IMF) does when they lend money to the developing countries. IMF put conditions on where and how their loans should be invested, with the hope that such an investment will have maximum impact on economic growth and development of the country.
The private sector has cried foul on the suggestion, because developing the economy is not their concern, making returns on investments is and if they can make even little returns with no risk or little risk, that is the path they will choose.
The other option is for government to fill in the missing private sector investment gap and engage in a massive infrastructure spend, which will not only create jobs and stimulate the economy, but will develop infrastructure that will assist the private sector when they return into real economy investment. Government has just announced such a massive investment in infrastructure over the medium to long term.
When government leads economic stimulation, it is able to set the rules and manage common private sector exploitation and selfish investments. Once these infrastructure investments begin to yield fruit, no private sector investor will want to be left behind with such massive returns on investment.
Financial assets used to be an extension of assets in the real economy. Now they have metastasize into an industry of their own, capable of undermining the real economy. Clearly new rules in the market are needed, otherwise those who already have assets will continue to trade among themselves, continuously taking assets from the poor through rents and interests, the rich getting richer and the poor falling off, leaving a world of bitter and angry citizens thrown outside the economic bubble simply because they arrived late to the party. Perhaps Vusi is speaking for these people, and just needs to look into the mirror as a venture capitalist who is looking for a quick buck rather than starting real bricks-and-mortar businesses.
If we don’t change our approach to economic growth, the President is going to keep getting investments, and the country is going to keep drowning.
ANC Branch Executive Committee Member for Gaby Shapiro Branch in Rondebosch Cape Town. Follow him on Twitter.