[lbo-talk] S. Africa's flimsy economy

Patrick Bond pbond at mail.ngo.za
Sun Mar 26 20:15:26 PST 2006


----- Original Message ----- From: "Doug Henwood" dhenwood at panix.com
> Here's what the World Bank's World Development Indicators database has to
> say. Average annual growth rate in per capita GDP for SA, 1994-2004, in
> constant rand: 1.2%. If you use 1990 as the base year, the performance is
> much worse: 0.3%. Since 1990 and 1994 - base year doesn't matter much
> here - investment has averaged under 17% of GDP; for China, it's been 39%;
> India, 23%; and the US, 18%. So, SA is investing less than a rich mature
> economy when it should be investing more like China & India.

(Caveat needed on WB data - see Sanjeev Reddy's chapter in the current Socialist Register, where Doug also has a great contribution.)

So if not into real investment, where does the money go? (SA has the fifth-lowest corporate tax rate if it is included in OECD countries for comparative purposes.) Aside from offshore (because exchange controls were largely lifted in 1995 for rich folk and in 1998-2000 for corporations), the stock market index and real estate are in super-speculative mode; the IMF recorded SA's property prices as increasing by 200% from 1997-2004, far outstripping the bubbly US (only 60%). Lots of other data are in the new edn of Elite Transition which I can send anyone off list if they want. Below, an extremely good journalist writes on the same theme:

Business Report

Praise singers can't hide the dangers of a trade deficit funded by 'hot money' February 19, 2006

By Terry Bell

I will doubtless be called a Jonah for contradicting the slew of hyperbolic comment about the latest budget and the economy in general. I prefer to think that I am a realist, looking behind the statistical smoke and mirrors that has created an illusion of an economic powerhouse growing increasingly stronger with each passing year.

Yes, the economy has grown and is growing. It may even achieve that apparent holy grail of 6 percent. But so has unemployment grown and new jobs are often temporary, casual or so low-paid that they should not be regarded as jobs.

So before we celebrate, we should examine the details of this growth. Some of it comes from the increased prices of mineral commodities.

It also comes courtesy of a massive boom in the wholesale and retail sectors, based largely on a surge in imports. And it comes as a result of crime, which has ensured higher premiums for insurance firms and profits for security outfits.

The only real assessment of a country's economic well-being, I contend, is the balance on its current account, that is, the difference between the value of imports and the value of exports.

The UK-based Economist magazine has correctly noted: "A current account deficit sets alarm bells ringing." As well it should, for deficits have to be paid for from capital inflows.

To which the present praise singers of our supposed economic miracle can answer: the capital inflows exist.

They do. Except that they are, effectively, loans. The bulk of the inflows comprise portfolio investment, "hot money" playing the games available in that conservative casino, the JSE.

This money chases the highest nominal interest rates on deposits or the best dividends on shares, usually paid abroad. But unlike more conventional loans, there is no fixed time limit for its stay and it can disappear at the touch of a computer keyboard.

If we discount these potentially fickle flows of capital, we are left with a yawning, and growing, gap. The precise figures can be debated. But there can only be agreement that the deficit is large - finance minister Trevor Manuel admits to 4.3 percent of gross domestic product, which makes for more than R60 billion - and that it is growing.

This does not indicate a powerhouse. It is indicative more of a balloon. And balloons can, and often do, burst, although a much more likely scenario is that the balloon will deflate quite steadily. But it will not continue to grow under present conditions, simply because it cannot.

The reason is simple: South Africa's economic boom is not based on bricks and mortar investment or a burgeoning export trade. It is based heavily on imports and burgeoning consumer spending fuelled by massive credit growth. This is, in turn, very flimsily covered by autonomous investments that will flee at the first sign of downturn or better opportunities elsewhere.

When that happens the JSE will stop climbing; there will be "corrections", perhaps gradual or perhaps precipitous.

Manuel warned in his budget speech that "the good times" would not last forever; that we should all prepare for leaner times. For the vast army of the unemployed, that is impossible: the good times have never reached them.

Even some of the elements underlying greater profits and tax revenues are undermining the economy's future.

Iron ore, for example. Prices have boomed and record amounts are being exported, much of it to China. But China turns the ore into steel products that are starting to undercut local manufacturers.

And there are signs that the steel market is starting to slow.

Likewise, in southern Africa's once-thriving textile and garment industry, tens of thousands of jobs have been lost, with particularly deleterious effects on countries like Lesotho.

The vagaries of the commodity markets, still distorted by agricultural subsidies paid by the US and the EU to their producers, are also threatening to destroy the small, but locally important cotton industry in KwaZulu-Natal.

Yet the government, supported by the parliamentary opposition, still pursues neo-liberal, open-market policies aimed at export-led growth, while distributing some of the tax crumbs from the table of the increasingly wealthy minority, which encourages the illusion that all is well and getting better.

Business has done well, but the sword of the current account deficit hangs over South Africa's outstretched economic neck. All that stops it falling are the hands of speculators.

Of course, since the country possesses a solid economic base, not least in platinum reserves, that sword may never sever the head. But terrible damage can be wrought, causing still more pain and suffering to the body politic.



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