South Africa's financial fragility south Atrican economist Patrick South African economist Patrick Bond says it's time to get off the global financial roller coaster. Or at least help to straighten the tracks. As the Asian economic miracle fades into the distance, even economists of the international Establishment are seeking intellectual answers outside the 1980s-90s "Washington Consensus. " Politicians can't be too far behind.
Writing in South Africa's Business Day on 5 June, Greta Steyn damns the vast waste of Reserve Bank money - and dramatic rise in SA foreign debt - involved in trying to stabilise the rand during the last days of May. Not to mention short-term interest rate increases which bring the real (after-inflation) Bank Rate to over 12%, compared to a target of 4% in the government's Growth, Employment and Redistribution strategy. ("Reserve Bank turfs out the textbook," Business Day, 5 June)
This bought only a brief respite. Kentier power is so immense that last week US Treasury Secretary Robert Rubin proclaimed, "I think it would be fair to say that the situation facing the world today with respect to financial stability is unprecedented."
But it is not unprecedented. Behind the still unfolding crisis are two phenomena that periodically haunt the world economy: overproduction and bouts of financial speculation. Together these amplify what political economists term "uneven development": the incessant zig-zag race of capital across the globe in search of an investment portfolio that balances returns and risks. The most recent arc of emerging market destruction caused by hot money in-and-outflows ran from Mexico (1994) to Brazil (1995), South Africa (1996), Eastern Europe (early 1997), Southeast Asia (late 1997, 1998) and Russia (1998).
How did the markets spin so badly out of control? At root, by virtue of their tendency to overproduction (supplying goods and services beyond the scope of existing markets), highly capitalised businesses typically find themselves with profit streams that cannot earn a high enough rate of return if reinvested in yet more production. Hence they seek out, and often generate, speculative outlets.
Historically, systematic overproduction and speculative bubbling have occur14 International Viewpoint #302 red in "long waves"-- roughly from 1825-45, 1872-92, 1929-48, and 1973present. In each case, roughly 30% of the world's nation-states, not to mention vast commercial tortunes and yet more human capital, ended up effectively bankrupt, before global economic growth recovered.
In the grand rethink now underway about controlling such excesses, South Africa remains sadly behind the times. Commitment to fiscal and monetary austerity seems unshaken amongst both economic policy makers and leaders of the financial community, encouraged by publications like Business Day.
How else does one read Business Day's editorial analysis when the Asian crisis broke last year? "Some good could come to SA from east Asia's misfortune if it drives home the message that any deviation from sound economic policies carries a cost down the road. Finance Minister Trevor Manuel and Reserve Bank governor Chris Stals could usefully cite east Asia as they resist calls from business, unions and other interest groups to stray from fiscal and monetary discipline. ("Lessons from Asia," 5 September 1997)
Nine months later, observes Steyn, "One can only wonder what trade unionists and leftwing members of the African National Congress will make of the punishment the markets have doled out to Finance Minister Trevor Manuel and Stals for ostensibly perfect policies."
East Asian lessons are not for the left end of public opinion alone: voices of resistance to austerity and deflation are emerging across the spectrum. Steyn mentions investor George Soros's "concerns last year that the capitalist system was failing the developing world because financial markets 'overshot."
Soros has been joined, more recently, by World Bank Chiet Economist Joseph Stiglitz, Harvard Institute for International Development head Jeffrey Sachs, former US Secretary of the Treasury and State George Schultz (who now calls for the IMF to be shut down), former US Secretary of Labour Robert Reich, and Henry Kissinger. Just a few of the famous names whose censure of orthodox IMF logic gets passing mention in the South African press.
In January, Stiglitz delivered a paper which pointed out that "the policies advanced by the Washington Consensus are hardly complete and sometimes misguided... the advocates us privatization overestimated the benefits of ph-atization an underestimate co 40% per year] there is no evidence that inflation is costly... The focus on freeing
‚wold up markets, in the case of financial market liberalisation, may actually have had a perverse effect, contributing to macroinstability through weakening of the financial sector."
It was perverse - though judged "sound" at the time - to let South Africa's financial reforms precede adjustment and growth, by dropping the finrand in early 1995, which sucked in hot money that year but subsequently caused a 30% currency crash. Sachs sums up the rigid commitment to fiscal and monetary strategies succinctly: "The situation is out of hand... Without wider professional debate, the IMF has decided to impose a severe macroeconomic contraction on top of the market panic already roiling these [Asian] economies."
The costs of contraction are severe both to the peoples whose unemployment rates are doubling overnight while the social wage plummets, and to the global economy, which is witnessing dramatic trade disequilibrium as more countries -including even the Japanese - begin to degenerate into competitive currency devaluations. SA's export-led growth strategy will collapse if present price trends continue.
Logically, there is also a growing political backlash. In the US, a peculiar leftright congressional alliance has so far blocked $18 billion in IMF funding this year and stalled both the Multilateral Electronic Viewpoint Some of the articles for the next issue of International Viewpoint are already viewable at our web site. We are slowly adding a downloadable archive of articles published in previous issues www.internationalen.se/sp/ivp.html The International Viewpoint list server enables you to receive all our articles, as soon as they are translated into English. Several weeks carlier than they are available in paper form! As well as announcements and updates from our sister urganisations around the world We also have lists in French and Spanish. Subscription is free. To add your name, send a message to: <100666.1443@ compuserve.cons. eternational Diewpoint Is at [email protected]
Agreement on Investment and President Clinton's "fast-track" trade negotiating authority.
If the Washington Consensus is in obvious retreat intellectually, practically and politically, are we at the stage where in polite company we can finally discuss strategies concerned less with inflation, and more with full employment? Less aimed at international competitiveness at all costs, more at meeting basic needs through intelligent subsidies and crosssubsidies? Less with selling the family silver, more with strategic state interventions in areas such as infrastructure, housing and land reform where markets are failing?
A worrying sign is the limited discourse on defending the rand from hot money speculators. For Steyn, "There were three courses of action open to the Bank when the rand came under pressure... 1) leave the rand to find its own level... 2) hike interest rates to squeeze arbitrage gaps and draw in new foreign capital... 3) intervene in the currency market."
But a fourth option - capital and exchange controls to guard against speculators while reflation begins - is now more sensible than ever. After the 1994-95 Mexican meltdown, the IMF acknowledged the desirability of controls on inward financial flows (these have also protected Chile and Taiwan). Moreover, as recently as 1990, 35 countries (including South Africa) had a dual exchange rate (although the apartheid-era Reserve Bank did not seem to take enforcement 'seriously). At the global scale, Nobel Laureate James Tobin has proposed a 0,5% tax on buying and selling foreign exchange.
By all accounts, the biggest threat to global economic order is now the spectre of deflation. In a few months, South Africans taking leadership in the Non-Aligned Movement and a Director's chair at the IMF/World Bank (while retaining the presidency of UNCTAD) should be working feverishly against global financial fragility, in part by promoting the Tobin Tax, global reregulation of finance, and Third World debt cancellation (including apartheid debt).
The historic opportunity for South African global leadership at the end of the 1990s parallels the opportunities for domestic reform witnessed at the decade's outset. The question, then and now is, will we grasp the moment? * © the author, and Business Day, Thursday I June. Patrick Bond lectures at Wits University, South Africa.
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