Vol.5 No.6, 12 April 2005

US Economy Goes Walkabout: Can South Africa Defend Itself?

There has been a rash of articles expressing the concern that the South African economy is highly vulnerable to external factors, notably short-term speculators, the continuing demise of the Dollar and the rapid growth of the trade deficit. Neither the Governor of the Reserve Bank nor any author has presented a 'how to' position that could defend South Africa's interests. Most likely, we will routinely batten down the hatches with high interest rates that reward foreigners but punish South Africans.

South Africa mirrors some of the elements that are causing the implosion, long underway, of the US economy. Foreigners now increasingly own what were American national assets. Over 66% of its "listed" companies are owned by foreign TNC's. The banking sector is almost entirely foreign owned. That 'fire-sale' will continue as the United States must borrow close to $1 trillion, or over $2 billion each and every day of 2005, from foreigners to finance its trade and Budget deficits. This makes what is left of American assets cheap on foreign markets. The trade deficit has reached record levels, 5.7% of GDP, three times what is conventionally considered sustainable.

The US is becoming a subsidiary of people who may not have its best interests at heart. The myth of American power is just that, a myth. America was once a powerful nation until it pissed it all away. The US economy is exceedingly vulnerable, threatened every day by a decision to shift to the Euro (as hinted by Japan, India, South Korea, Russia and, indirectly, China in the last few days), a calling-in of debts, a slight shock to interest rates, and its too political macro-economic management that maintains budgetary ill-discipline.

The exodus of American assets, such as the sale to the Chinese of IBM's personal computer, is just beginning. Each borrowed dollar represents a claim against American productive capacity. That must be paid. Foreigners will not allow the US to inflate its way out of the debt. They will demand a few factories in return.

The New York Times believes that, "The dollar is heading down, no matter what" (April 2nd. 2005). Speculative hedge funds and government support from those countries that wish to maintain exports to the US (the same that are now publicly signalling a move into Euros) are buoying up the $. Any graduated rise in US interest rates may not suffice to attract the necessary funds. Any suggestion that the US rate may peak at a level lower than expected leads to the dollar falling. High rates will pop the property boom and leave millions of households cash strapped. The falling $ has not yet raised exports, providing no corrective to the trade deficit. The same editorial believes the $ must fall another 20% first! An underlying reason is the movement of productive capacity offshore.

South Africa's trade deficit, driven by consumer imports, is now unsustainable, 4% of GDP (R57 billion). That is twice Tito Mboweni's prediction of a year ago, that it would not exceed 2%. It is financed up to 70% by short-term speculative inflows, rather than longer-term foreign direct investment (IMF study), leaving the economy extremely vulnerable.

South Africa shares the policy quandary of the US. We may be more fiscally disciplined but as an 'emerging market' we are defenceless. The only discussion as to what to do, as for years now, centres upon the interest rate. The singular aim of inflation targeting is the mirror image of the international Monetary Fund's narrow market fundamentalism, which suits developed economies driven by rising aggregate demand. The economic and social punishment meted out by the Reserve Bank's very high real interest rate policy amid desperate unemployment is not commonly acknowledged. The policy has little relation with South Africa's dual (global and marginalised) economy, driven by rising costs, including the need for massive social grants.

South Africans face the conventional cycle of rising interest rates to contain consumer spending, higher bond rates that punish homeownership, a falling Rand with a likely slow uptake of exports, higher cost imports, greater indebtedness and no new jobs - all essentially to keep foreigners investing to cover the deficit and, from there, to buy the country at a discount.

There are things to do to regain greater control over our economy:

1. Government should broaden the Reserve Bank's charter. The US Federal Reserve, for instance, is primarily concerned with maintaining employment, secondly with currency stability and only thirdly with inflation.
2. Right now, the sentiment is that high oil prices demand further interest rate cuts so that spending and its drain on the current account are tempered. The truth, rather, is that high petrol prices already temper household and company spending.
3. How can interest rates be lowered 3% to 4%, into alignment with our trading partners, so that the economy is internationally competitive, without raising consumption? Bank computers can be instructed to lower the effective rate on loans and mortgages by varying amounts, maybe by just 0,5% to start. The balance, 2,5% to 3,5%, is still charged, but those "costs" are diverted to bank client savings accounts.
4. Such savings would total R19-billion and R26-billion annually at 2,5% and 3,5% respectively on bank loans currently worth some R800 billion. The sums could be lent to a National Investment Fund that "contracts out" their use to existing agencies to lend to companies or to government. Rates would be low.
5. This would ensure that the monies "saved" do not simply end up financing enhanced bank business by their granting bigger consumption loans and bigger bonds.
6. Lower interest rates would help lower the value of the Rand, likely to still rise as the $ falls, drive exports, take up the slack of unused productive capacity, now near 20%, and fund new private investment and government's need to accelerate capital and social spending.
7. Such an intervention would raise domestic savings markedly, channel it into investment, reduce the reliance on foreign capital and ease government's debt redemption. These are all national socio-economic goals the banks care little about and the Reserve Bank currently does not act on.
8. The subsequent receipt of interest and other earnings to individual and company "savers" would help offset the effects of higher interest rates in future.
9. Introduce the 'Tobin Tax' on all foreign transactions. The daily turnover on the SA foreign exchange market is R9 billion. At a mere 0.1% transaction tax, done by bank computers, this could bring the government two-thirds of current revenue, some R200 billion. Lowering tax rates is a part of defending the economy.

© South African New Economics Network 2006. Page generated at 17:05; 24 September 2006