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Zumanomics Revisited
The Road from Mangaung to 2030
By Raymond Parsons Jacana Media (Pty) Ltd
Copyright © 2013 Raymond Parsons
All rights reserved.
ISBN: 978-1-4314-0793-4
CHAPTER 1
Global economic perspectives
And the Banker, inspired with a courage so new
It was matter of general remark,
Rushed madly ahead and lost to their view
In his zeal to discover the Snark.
But while he was seeking with thimbles and care,
A Bandersnatch swiftly drew nigh
And grabbed at the Banker, who shrieked in despair,
For he knew it was useless to fly.
He offered large discount – he offered a cheque
(Drawn 'to bearer') for seven-pounds-ten:
But the Bandersnatch merely extended its neck
And grabbed at the Banker again.
Without rest or pause – while those fruminous jaws
Went savagely snapping around –
He skipped and he hopped, and he floundered and flopped,
Till fainting he fell to the ground.
The Bandersnatch fled as the others appeared
Led on by that fear-stricken yell:
And the Bellman remarked 'It is just as I feared!'
And solemnly tolled on his bell.
He was black in the face, and they scarcely could trace
The least likeness to what he had been:
While so great was his fright that his waistcoat turned white –
A wonderful thing to be seen!
To the horror of all who were present that day,
He uprose in full evening dress,
And with senseless grimaces endeavoured to day
What his tongue could no longer express.
Down he sank in a chair – ran his hands through his hair –
And chanted in mimsiest tones
Words whose utter inanity proved his insanity,
While he rattled a couple of bones.
'Leave him here to his fate – it is getting so late!'
The Bellman exclaimed in a fright.
'We have lost half the day. Any further delay,
And we shan't catch a Snark before night!'
– 'The Banker's Fate', The Hunting of the Snark, LEWIS
CARROLL
We begin by reviewing some of the elements arising from the recent developments in the global economy. If we look back over the past few years we will see that, when we examine the global economy, it has become more than a cyclical phenomenon. The tectonic plates have shifted dramatically since 2008 and even now we are not yet certain when or where they will finally settle.
What was clear for a start was that:
* The financial crisis of 2008 was likely to be the most traumatic global economic event since the Great Depression in the early 1930s.
* There would be 'after-shocks', the nature of which at that stage was uncertain but has subsequently become apparent in the Eurozone.
* So-called 'decoupling' between developed and developing countries would be severely tested.
* In any case the impact of the 2008 crisis would take several years to play itself out.
* As a small open economy SA would not escape the effects of the global recession.
* Unlike the 1930 Great Depression the global response to economic contraction since 2008 has been unprecedented in terms of monetary and fiscal accommodation.
* The notion of countercyclical fiscal and monetary measures was also accepted in SA and has been implemented since 2009.
The SA economy nonetheless still took a knock. In 2009 gross domestic product (GDP) growth reversed itself from 2.5% in the previous year to –1.7%, with nearly a million jobs being lost quite rapidly. Technically, SA went into a brief recession. Compared with some other countries, whose percentage of unemployed almost doubled in a short period, SA's overall unemployment rate rose only slightly. But this is more a reflection of the extent to which we had come to live with an unacceptably high official unemployment rate of about 25%, rather than that SA escaped very lightly in terms of job losses.
Since the economic crisis of 2008 the global economy has not yet recovered its momentum. Just when we thought the world was successfully pulling out of its recent recession, there were new challenges. The European Union (EU) has been in trouble, and for once the word 'crisis' was not an exaggeration but a description. The eurozone crisis did not create the sovereign debt crisis; it merely exposed it. The dramatic and far-reaching impact of the financial crisis of 2008 has been playing out since then and will probably indeed register in history as the most significant economic event since the 1930s.
To disentangle the events and the explanations that have sprung from recent global developments is therefore a huge task and we can only briefly do justice to them here, as we grapple with the continuing challenges of national economies that are still performing below par, in some cases well below par. At the international level, we should nonetheless note the following broad perspectives on what has happened globally in the past few years.
Firstly, 'the market' as such did not fail: one part of one sector did, with serious contagious consequences. 'Financial capitalism' was the weak link in the chain. The way sub-prime debt was securitised, spliced and sold on with no underlying risk or value was wrong, irresponsible and damaging. Executives of large publicly owned banks were strongly incentivised to 'maximise shareholder value' in ways that gave excessive personal gain. There is understandable anger about what has happened. Everyone has become frustrated with financial globalisation but it is easier to point out the flaws in the system than to correct them. While the recent crisis has highlighted the need for better rules, agreement on many regulatory issues has proved elusive. The right question remains: 'What kind of financial regulation works best?' There is no single obvious global answer, but it is being addressed nationally.
Secondly, governments also failed. Regulations and state institutions such as Fannie Mae and Freddie Mac in the US contributed to a highly vulnerable situation. Debt became too cheap. Low-income households were encouraged to place large, leveraged, unhedged and unidirectional bets on the United States (US) housing market. The responsibility for the crisis therefore needs to be shared. There is enough blame to go around at several levels to explain the systemic failures both in 2008 and also the subsequent sovereign debt crisis in the eurozone.
Thirdly, the failure was also one of intellectual understanding, both by existing regulators and by many economists, especially in the US. It may be argued that the so- called 'experts' should have seen it coming, but the fact remains that they did not. Private sector models of risk management were clearly defective. The few warning voices were ignored and the power to intervene, which already existed among regulators, was not used timeously or wisely. Indeed, over-complex regulation in some areas may also have contributed to the crisis. Academic economists are now revisiting standard macroeconomic models with a view to possible modifications to capture new realities.
Fourthly, while financial innovation is often good for liquidity and economic activity, that is not the whole story. The dangers in innovation lie in possible unintended consequences, especially in regard to the underpricing of risk. We saw this with the toxic derivatives which Warren Buffett, generally considered one of the world's most successful investors, described as 'financial weapons of mass destruction'. Yet as the former US Federal Reserve chairman Alan Greenspan and others have warned, creativity and innovation in finance should not be completely neutralised, as these risks remain an essential ingredient of progress in the larger economy.
Fifthly, the consequences of what goes wrong in the global economy are magnified by its highly interconnected and interdependent nature. The impact is then multiplied through the markets and investors by that intangible – but profoundly powerful – factor called 'confidence'. Internationalism has indeed given rise to the 'global village' and its interdependence. Globalisation has brought great benefits but we cannot overlook the costs. It has created social and political tensions between winners and losers.
Finally, we must recall that economic history reminds us that the recent financial crisis is merely a severe example of the panics and crashes that have happened before. In his 1978 classic study of 'bubbles' – Manias, Panics and Crashes – Professor Charles Kindleberger described 'the cycle of manias and antics results from the procyclical changes in supply of credit' as overoptimistic corporates and consumers assumed more debt during booms, only for banks to abruptly cease lending in the 'busts'. Lenders and borrowers have regularly in history overestimated borrowers' ability to repay debts. When the realities become clear, banks wobble and confidence in the financial system declines.
Economic catastrophes – financial panics, hyperinflation, debt overload, depressions, and social conflicts – separately or together, have always generated crises of confidence. Yet as painful as they usually are, they have not come close to wiping out the cumulative gains in average living standards the world over. Recent decades have seen hundreds of millions of people globally lift themselves out of poverty. Global GDP has grown fivefold since 1950, so more people have access to more things than ever before. The driving force behind the reduction in world-wide poverty in recent decades has been economic growth. All of this is both a consequence and cause of globalisation.
These grand-scale shifts nonetheless present new challenges, not all of which the world appears presently able to handle successfully, especially financial integration. Policymakers also need to ensure that the benefits of global economic integration are shared sufficiently widely so as to maintain support for open trade and to limit protectionism. The human costs of change and progress are indeed too often easily overlooked in this process.
Not that global economic cooperation occurs on the scale it should do, given the changing balance of power in the world economy. 'Economic globalisation has outpaced political globalisation,' says the NDP. This is relevant to regional influence in global institutions such as the International Monetary Fund (IMF), World Bank and the World Trade Organisation (WTO), as pressure on the 'rules of the game' mount. The emergence of Brazil, Russia, India, China and South Africa (BRICS) as a serious international player is seen by many observers as one key effort to develop more 'countervailing power' in the global economy.
In emphasising the relevance of the BRICS countries to global developments such as the future of the global monetary system, Jim O'Neill (2001) says: 'These issues affect the entire world and the BRICS deserve fitting representation at the major international councils. To achieve this they cannot just wait for the current incumbents to make way or invite them in. They need to seize the influence their size demands'.
Whatever the eventual outcome, it cannot be 'business as usual', and globally the system is undoubtedly facing a future with a difference. We have hopefully learned at least some lessons. The 'rules of the game' are being adapted where possible to facilitate greater stability and equity. In the long run the big challenge is to make the opportunities of globalism all the more apparent, its dangers less threatening. The structural shifts in the global economy and the opportunities available remain vulnerable to a range of systemic risks. Financial globalisation, especially the accumulation of large cross-border liabilities, may eventually require a corresponding globalisation of governance, including international deposit insurance.
The McKinsey Global Institute released an authoritative study in 2013 showing just how 'balkanised' the global financial system has become since 2008. The rate at which cross-border capital flows are growing annually is 1.9%, compared with nearly 8% before the financial crisis. Most of the pullback reflects eurozone debt crisis. Some analysts such as Professor Paul Krugman and even the IMF say that less financial globalisation may be a good thing, given the turbulence of the past few years. But we need to understand that financial 'balkanisation' also comes with its own possible drawbacks – especially for emerging markets dependent on capital inflows, and which could be at risk if financial 'protectionism' is carried too far.
From a business cycle perspective, the combined monetary boost in recent years in key economies has been a powerful elixir for global investor confidence. Aggressive monetary expansion in big economies like the US has until now been good for the rest of the world economy, not bad. It has also helped to finance SA's balance of payments, given the shifting global patterns of risk perceptions. Global inflation seems to be well anchored at present, though policy adjustments will nonetheless become necessary in due course as the world economy slowly recovers and 'normality' is restored. Cheap money in the developed world will eventually come to an end.
There has rightly been on-going concern about recurring negative developments in the European Union (EU). Not only because Europe is about one quarter of the global economy, but also because the EU is perhaps the world's most benign example of globalisation. On the tests of the free movement of goods, people and capital, the EU has still largely done well on the first two, but as previously indicated the movement of capital has suffered severely in the wake of persistent sovereign debt and banking stresses. Nonetheless, a bird's-eye view of the world economy as a whole suggests that, despite some regional setbacks, it is slowly but surely moving towards a new balance of global forces and eventual renewed prosperity. The IMF's estimate of 4% growth in the global economy in 2014 remains unchanged at the time of writing.
The global experiences of the past few years have demonstrated that all countries have some cards to play in the face of adversity, and SA has been no exception. The eventual outcome will depend on how well individual countries are able to respond and their degree of resilience in doing so. How they are seen to be managing their short-term and long-term challenges will be an important 'confidence' factor, and this is also true of SA.
In assessing where the emphasis must now fall in deciding future policy in SA, it is necessary to distinguish clearly between the factors in the global economy over which a country like SA has little or no control and the factors over which the country does have control, such as its domestic policies. As a small open economy, SA remains highly dependent on global economic trends, yet it must nonetheless develop the flexibility and adaptability needed to address new opportunities and risks, as the international and African economic landscape changes.
Both the African economic outlook and SA's role therein are also at a crossroad and we need to assess the opportunities afresh. SA's contribution to sub-Saharan Africa's GDP has declined from 50% in 1994 to 30% in 2012, with the IMF forecasting that SA's share of sub-Saharan African growth will fall to about 25% by 2018. While SA should be pleased that Africa is growing more rapidly and closing the per capita income gap with SA, it means that SA's economic significance in the region is shrinking. Yet the economic and business prospects for Africa have never seemed better, as evidenced by the recent World Economic Forum (WEF) on Africa held in Cape Town.
A strong sense of hope and opportunity now prevails therefore about Africa as a whole. In 2012 sub-Saharan Africa was the second fastest-growing region of the world today, trailing only developing Asia, with output growth of 5% on average. Average GDP growth for the continent is about 6%, but as The Economist in a positive survey of 2 March 2013 says, 'only if Africans raise their ambitions still further will they reach their full potential. The challenges that remain are to build infrastructure, root out corruption and clear the tangle of government regulation that is still holding the continent back.' As for SA there remains a message in the recent 2013 forecast by the African Development Bank of about 6.5% for economic growth in Africa if SA is excluded – but only 5.4% if SA is included. Why?
CHAPTER 2
The South African Economy: Past and prospective
Just as the motion of every body in the solar system affects and is affected by the motions of every other, so it is with the elements of the process of political economy.
– Alfred Marshall
It is common cause that SA faces serious socio-economic challenges. Countless 'diagnostics' and programmes have confirmed it over several years. There is wide agreement in both the public and private sectors that the goals of our society include the achievement of sustainable economic growth (ideally to more than double the recent average growth rate of 2.5% p.a.) to generate new jobs and create rising living standards, as well as providing at least minimum levels of living conditions and opportunities for personal development for all members of society. In short, growth rates high enough to successfully address the triple challenges of unemployment, poverty and inequality in SA.
(Continues...)
Excerpted from Zumanomics Revisited by Raymond Parsons. Copyright © 2013 Raymond Parsons. Excerpted by permission of Jacana Media (Pty) Ltd.
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