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Address by Deputy President Kgalema Motlanthe titled “Reflections on Key Global & Local Economic Events”
at theGordon Institute of Business Science (GIBS)

Deputy President Kgalema Motlanthe and CEO of GIBS, Nick Binedell - photo GCIS

Johannesburg, 18 November 2011

I thank you very much and appreciate this opportunity to share my humble opinion with the Gordon Institute of Business Science.

Just over a week ago the bank rating agency Moody’s Investor service downgraded the stability rating of South African banks from “stable” to “negative”. This downgrade took place in spite of overwhelming evidence that South Africa's banks avoided the global credit crisis because of regulatory mechanisms that prevented irresponsible lending and reckless investment in assets bundled to the US subprime housing market that precipitated the current crisis.

Moody’s decision to revise our outlook downwardly from stable to negative demonstrates the superficial way in which world rating agencies tend to conduct their assessments, and at most reveals a broader lack of consensus on what needs to be done to resolve the current world crises.

It is just three years since the world faced its first major recession since the Great Depression. This recession was unique in that, for the first time, the dominant paradigm of the Washington Consensus that a free-market system could self-regulate and self-correct, could no longer be sustained.

As governments around the world scrambled to find resources to recapitalise their failing banks, it became increasingly clear that unregulated capitalist development and neo-liberal approaches to world economics were not the panacea for protecting the world against insatiable self-interest and greed. In essence, the crisis exposed systemic failure in markets and the over reliance on speculative “boom and burst” financial instruments within markets under the guise of rational expectations and self-regulation.   

It exposed the vicious cycle that the capitalist system was caught in. Ridding on boom wave in housing markets from the mid-90s, US banks went beyond the real economy. They entered the realm of fiction by creating a wide range of financial instruments which were over-exposed to toxic assets, packaging and bundling these as shares to be sold to unwitting investment banks such as Lehman Brothers.

This eventually eroded global savings of many, including the poor and pensioners’ investments in the US market. In such an environment of over-subscribed sub-prime lending and over-indebtedness, the markets failed to factor in the reality that lowering interest rates would not have significant effects on demand. As it is now a matter of history, lowering of interest rates had no impact on improving demand. People lost their jobs and defaulted on their loans, while the housing market became over supplied and prices dropped.

Our banks where less affected because of measures implemented against the threat posed by over indebted consumers and unregulated financial markets.We implemented the National Credit Act along with other consumer and financial sector regulations. We were therefore cushioned from being caught in the storm of failing financial markets.

This does not however imply that South Africa was not adversely affected by the economic downturn which followed the financial crisis.

South Africa was severely affected by the decline in international demand and a temporary withdrawal of investment funds. As a result of this and high levels of domestic indebtedness we lost nearly a million jobs during 2009.

It is in this context that the government took the bold decision to embark on government driven investment in infrastructure and to use fiscal interventions to cushion the poor.  

The government placed job creation and the creation of sustainable livelihoods at the centre of our recovery strategy. We viewed the crisis as an opportunity to restructure the economy and to improve co-ordination and cooperation with business, civil society and organised labour. In this way we managed to work together with business and organised labour to ensure that companies did not retrench workers without clear plans for re-employment, re-skilling. Some companies adopted measures such as temporary shutdown and short-time during low demand periods as alternatives to wide scale retrenchment.

We took steps to improve the social wage by linking the public infrastructure investment programme to a radically Expanded Public Works and Community Work Programmes.

We continued to improve social equity through the provision of adequate government services, ensuring universal access to basic services, health care and affordable transport and providing access to affordable and quality education.

I have taken the time to outline our approach and policy towards this ensuing crisis because the latest assessment of South Africa’s outlook by Moody’s reveals a lack of understanding of this approach.
Indeed, Moody’s downward revision was unexpected because it came shortly after we tabled through the Minister of Finance, a Medium Term Budget Policy Statement in which we reaffirmed our commitment to sound macroeconomic policies and our determination to stick to a sustainable fiscal path in the face of high levels of uncertainty directly arising from sovereign debt problems in Europe.

The 2011 MTBPS sets out its unequivocal response to the crisis by:

·       Committing to maintain moderate real growth of around 2.3 per cent in overall government expenditure so that the deficit would fall from the projected 5.5% of GDP to close to 3% by 2014/15;

·       Undertaking to cut spending on non-core items with the view to changing the composition of expenditure by  allocating increasing amounts towards capital expenditure and investment in the    productive capacity of our economy so that it can be more competitive and create more jobs

It is for these reasons that in our view, the fiscal framework contained in the MTBPS adequately responds to the current crisis and the specific challenges that we face domestically.

We therefore respectfully disagree with Moody’s statement and the interpretation drawn from the dynamic nature of our political environment.

As you know there is one ANC in government. The policies that we pursue in government are the policies of the ANC. The ANC is fully behind the Medium Term Budget Policy Statement, and the fiscal path contained in it.

While there may be debate in the ANC there is a high level of discipline in government and we have proven over time that we stick to our commitments.

Of course we must acknowledge that this is not always understood by the public, the media and as we now know, ratings agencies too. We expect everybody and the rating agencies to carefully consider the issues before making judgements which could influence investors negatively.

It is in this context that we have welcomed the announcement by Walmart to invest in South Africa. Walmart has carried out an extensive assessment which gives us the thumbs up as a prime destination for foreign direct investment. Walmart is willing to invest billions of dollars in new and permanent capacity in South Africa. What this means is that other companies   can use this technical assessment to inform their investment decision in South Africa.

Programme director,

Ironically, the rating mechanism failed to forewarn the world about the potential of an ensuing Euro zone debt-crisis, including the crisis in Greece, which has prompted the European Commission to call for the regulation of rating agencies themselves. At closer scrutiny, the global economic system appears to have moved too far ahead of the capacity of its political system to engage with it effectively. Nowhere is this more obvious than in Europe today.

The scale of the sovereign debt crisis in Europe is not matched by a political system with the capacity to support the contributions required by all European countries and the reforms required by many.

The tensions between globalisation and democracy in the unification of Europe have not sufficiently addressed the inherent contradiction between the sovereignty of states in a regional economic bloc.

Some thinkers such as Professor Dani Rodrik, have gone to the extent of arguing that economic globalisation cannot be pursued simultaneously with democracy and national determination.[1]

His view is that , “Even though it is possible to advance both democracy and globalisation ... this requires the creation of a global political community that is vastly more ambitious than anything we have seen to date or are likely to experience soon.... Democratic global governance of this sort is a chimera.”  His suggestion is that as long as sovereign nation states exist, especially democratic ones,
economic globalization is more likely to be in tension with the concept of self-determination.

This helps us understand what is happening in Europe today. In the final analysis Europe’s economic integration has, without doubt, moved too quickly ahead of its political integration. Left in this form, the solutions to the European sovereign debt crisis face a challenge of having to balance the existence of Greece as a democracy and the European Union’s ability to implement and control measures to pull the country out of its debt problems.  

The same is true for several other countries in Europe, faced with very tough reform regimes. This is the difficult challenge facing Europe and other organisations such as the G20, as they stand ready to support Europe in appropriate ways going forward.[2]

Programme director;

The problem facing the sovereignty of states and their impact on the globalised economy no doubt carries wide ranging implications for the response to the global economic crisis. This situation is exemplified by the loss of co-ordination and commitment to the process agreed to at the London G20 Summit held in April 2009, following the 2008 meeting in Washington, to respond to the crisis.

As you would recall, The London Summit declaration made huge progress in addressing the crisis, in several ways. It strengthened the capacity of the IMF to respond to the crisis, while at the same time setting into motion an important reform of the governance structures of the IMF.

In addition it made important progress in getting international agreement on reforms of the regulatory environment in the financial sector.

In this way the summit managed to address both short-term and longer-term causes of the crisis simultaneously. And yet, since London, the G20 seems to have lost some of its force as a unified response to global problems.

In its current form, the G20 epitomises the absence of a global political community that we described in the context of Greece in the European Union. In essence the G20 exists as a “premier forum for international economic cooperation” but it is not, to all intends and purposes, a global political system.

While we have the United Nations as an outstanding international representative institution for addressing conflict and development challenges worldwide, it has not yet become a global government that can address the tensions of economic globalisation effectively.

Some of these “non-core” activities that have arisen out of the G20 processes have led to valuable developments in cushioning some of the effects of the crisis. We are pleased, for example, at the outcome of the Development Working Group which has made commitments on infrastructure development, agricultural development, commodity price stabilisation, and support for taxation systems in developing countries, which are likely to prove very valuable for Africa.  

The importance of the Development Working Group of the G20 goes beyond enabling the long-term sustainable growth of the world economy.

It is also key in helping to legitimise its existence amongst the non-members of the G20, most of which are developing countries.

The G20 has also made progress in other areas since London. It has for example established mutual accountability, committing countries to report key economic indicators and policies to each other, which is a step forward towards greater international economic cooperation.

Thus for a relatively small country like South Africa, trying to engage effectively in all aspects of G20 activity has become more complex, especially as we carry the view of the continent. For this reason, the task of focussing on the core issues in the G20 has been compromised by the size and complexity of the G20 agenda. To address this challenge a decision has been taken to strengthen the role of the G20 Troika, which we hope will streamline oversight of the agenda. While the G20 is an imperfect institution, it is needed more than ever given the absence of a global economic governance body to manage the crisis.

Ladies and gentlemen,

One of the key players in the world economy is China, as we all know. Like other large developing countries, China has been extraordinarily important to the world economy in recent years. Its contribution to world growth has been greater than any other country in recent history. China’s growth is therefore very meaningful for Africa as it has become an indispensible element of improved growth in Africa over the past decade. Be that as it may, Africa needs to find ways to encourage partners like China and India to become much more involved in the development of value-adding production and services within the continent.

Africa needs to build capacity in infrastructure and human resources, and to continue to improve competitiveness. Some African countries have already engaged with China to persuade the Chinese to help in the establishment of manufacturing industries in Africa, and, in this regard, a number of projects have been started.

Africa should not be afraid to use its bargaining power as it has the largest access to resources such as minerals, oil, and fertile agricultural land.

This then raises questions about our own relation to foreign investments in our own country.

As we have noted before South African competition authorities need to prevent the abuse of market power and must encourage economic integration with the rest of the world to support competition. The unintended consequence of less nuanced application of competition laws has left many South African companies vulnerable to take-overs by foreign companies. Mergers and acquisitions of South African companies should be favourably considered to the extent that they improve our capital base and capacity to play competitively in the global market.

Government’s approach must therefore actively encourage the creation of new firms and expansion of existing firms that leads to the growth of local industries enabling them to play in the global market.

Foreign Direct Investment in South Africa must be long-term in its outlook, encouraged by our progressive state policies to support growth in the market and the strategic direction of investment in labour intensive production.

Programme director,

The challenges posed by the current global economic environment on the developmental State are many and require clear and appropriate policy responses, especially for developing countries.

As we noted at the start of the finance crisis in 2008 the opportunities for development out of this crisis lie in:

·       increased public investment in economic infrastructure;

·       introducing effective industrial or sector strategies and ensuring higher levels of private sector investment and entrepreneurship;

·       pursuing the transformation of the informal economy activities and its integration into the formal economy;

·       improving and streamlining government delivery and regulation;

·       improving economic efficiency; and

·       committing to macroeconomic policies that support decent work and sustainable growth”[3]

In this regard this is finding renewed impetus through the National Development Plan published by the National Planning Commission. The plan has committed, amongst other things, to government-driven investment in infrastructure and the deepening of the industrial strategy as outlined in the new growth path and Industrial Policy Action Plan 2.

These critical areas will require support from business leaders such as yourselves to ensure its success.

Government cannot achieve these ideals without your help and participation, and we hope that working together we can do more to achieve a better life for all South Africans.

I thank you.
 


 
 
 
 
 
 
 
 
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Nov/Dec 2017 Edition

 
 
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