SANE Views

Vol.3 No.18, 02 June 2003

What Chance for a G8 Rethink?

By Margaret Legum

Hindsight famously helps us see the blindness of previous authodoxy: we now find it amazing that the apartheid authorities literally stuck to their guns right up to 1990. Is it similarly predictable that the G8's meeting next week will come up with the same clearly failed formulae for dealing with a world economy threatened with nose-dive?

The chances of a re-think by the G8 are not good. At their meeting last week, the G8 Foreign Ministers trotted out the old shibboleths about 'structural reforms and sound macroeconomic policies' - despite listing the dire domino effects of world recession. But old authodoxy is beginning to have doubts. The Economist, weekly supporter of global free markets, has pointed out that free capital flows have been disastrous for developing countries across the globe.

This focus on mobile capital is a major summersault, getting to the heart of the global problem. The mobility of capital, unlike that of labour or resources, means that democratic mandates collapse before the threat of withdrawal of investment funds if governments do not follow policies that suit the interests of capital. That threat has forced governments into measures that operate against national economic development.

Freely mobile capital has created a huge casino in the sky, as purely speculative capital flies about the globe, destabilising economies and currencies. This is especially toxic for developing countries with less 'fat' to fall back on and currencies that are abnormally vulnerable to speculation.

South Africa, for example, has watched hundreds of billions of rands flow overseas because we opened our capital market. Global free capital has created wild fluctuations in the value of the rand, making life impossible for exporters and importers alike. It has forced us into a high interest rate policy that directly contradicts the needs of the internal economy. It has required obedience to the financial services sector that absorbs the lion's share of the GDP and has to be consulted by government more than any other.

Global free capital has forced South Africa, like others, into an export-led path of growth that ignores the basic requirement to develop the internal market. So it has created two economies, marginalising half our population by sucking economic activity from the poor areas to the rich.

And it has forced us into trade policies that overall suit developed economies. Before the era of compulsory global trade for all, every developed country built its economy behind tariffs of some kind. But since capital was deregulated, developing countries have not been allowed to enter global markets at the pace that suits them. The 'rule-based' World Trade Organisation works for rich nations who in practice make the rules and whose sanctions against transgressors can be effective.

The result is that we continue to lose jobs - and hence internal purchasing power - because in the race for global competitiveness we are systemically handicapped. The million jobs that have gone since 1998 have deprived 10 million people of a livelihood - according to labour economist Terry Bell, who calculates that ten people live on each wage. That means something like R40 to R50 billion has been deducted from the purchasing power of poor South Africans since 1998. The process continues. Thousands more jobs are currently threatened in export sectors, including car components and textiles, as a result of the stronger rand. No one predicts a reduction in unemployment short of an unrealistic 5% annual growth rate.

That is a massive disincentive to local and foreign investment and hence national economic growth - apart from the picture of abject poverty it paints. Small wonder our high unemployment and the poverty of our people have reduced our international investment rating. Malaysia comes out high. Malaysia is not averse to closing its capital exchanges when it suits it.

The Economist is right. The deregulation of capital has indeed laid waste to South Africa's potential. We did not have to take out loans from the IMF like other African countries - who paid the price of structural adjustment with a collapse in incomes and employment as well as health and education services. Under threat of departure by footloose capital, we had only to swallow their theory that obedience to its demands would ensure our development.

Sadly, if the G8 sticks to its orthodoxy, South Africa will probably continue to comply. But sooner or later we must reject two illusions. One is that rich countries will drop their trade barriers and internal subsidies to allow countries like ours fair access to their economies. They will not - for reasons they express as 'political constraints'. That is, elected politicians will not put their own electorates' interests at risk for the sake of poor people overseas. Hoping that they will is whistling in the wind.

The other is that unregulated capital will automatically spread development from the rich to the poor. It will not, because that is not where the profit lies. Profits derive from governments' ensuring low tax regimes, plentiful deregulated labour and a world market for their product. That is why the US is trying to put conditions about free capital in their trade agreements.

Profits also derive from large local markets: hence continued investment in rich countries with more government regulation. But large local markets do not arise in developing countries trying to compete in unregulated global markets. So the best hope for the world economy is for a global focus on developing local markets and local economies. That would activate now dormant populations with new purchasing power. To do that we must deliberately regulate capital, so that it no longer has the power to determine national priorities.