SANE Views

Vol.5 No.4, 11 March 2005

Making the Financial Sector Productive

Margaret Legum

Hands up who cares when stock market details are given out on the radio. On SAFM they are misleadingly called 'the economic news'. If indeed they were you could justify the repeated slots in the news, and a full half hour at prime evening time. But they have very little to do with the economy as most people experience it. Otherwise that 'news' would be properly explained, replacing the gobbledegook of 'headline earnings, 'financials', 'derivatives' 'acquisitions', and the trading of billions of rands.

Of course the value of the rand is important to the real economy. It helps or hinders exporters and importers; and its volatility creates instability in employment. But the rand is only a small part of reporting about the financial news.

Contrary to carefully fostered myth, the financial sector - the banks and the 'asset managers' - is only marginally productive within the economy. It uses the nation's savings to trade in currencies and stock market shares and bonds.

When a sale is made all that happens is that the seller has received money from the buyer. The company whose shares are being traded - or the country whose currency is involved - does not get that money.

We are led to believe that our savings are being 'invested' in real economic activity - employment and the creation of goods. And so it is, once in a blue moon, when a productive enterprise issues new shares in order to raise money. Then our money goes to put up a factory or plant some crops or employ some people. That is called 'venture' capital, and it is a small part of the work of the financial sector

With that minor exception, the billions in the financial sector operate within a virtual economy of their own. Our savings move about the world picking up profits through buying low and selling high. It is not called speculation, because that is a nasty word. But that is what it is.

That money is also invested in property, whose value will predictably rise - partly because land is limited, and partly because you are 'investing' in it. It is called 'passive income', because once you have bought it you do not have to work for it to bring you money. It is also passive in that it produces nothing more, and employs nobody over time.

Even more serious, the financial sector holds literally billions of our money out of use. Look at the reserves of the companies involved. That money is as good as hoarded as far as the real economy is concerned. In the old days people hoarded cash by putting it under their mattresses; that was disapproved because it restricted trading, production and the expansion of the economy. The financial sector has our money under its mattress.

This has many downsides. It constricts the economy - as surely as if Trevor Manuel had doubled taxation. It risks our savings by speculating with them, and that is especially dangerous when it comes to pensions. Because of the resources it commands it has inordinate power and influence: why else would a national broadcaster turn off so many in the obscurantist interests of a few.

The economy as a whole needs that money. Budget after budget regrets the 'limited resources' available to finance the huge need for schools, technikons, hospitals, railways, roads - and the teachers and nurses and social workers and police, without whom whole sections of our people are sinking into unproductive helplessness and even death. We exaggerate successes, because we don't know what to do about it.

The financial sector needs to yield its billions for investment in the economy. That can be done in a number of ways, once we accept the necessity and get over the terror of facing them down. We can seriously tax all currency transactions and those on the stock market in a way that limits volatility by discouraging trading for small margins - and brings in a lot of revenue. Something like R6 billion is traded each day on our exchange: even a small tax on that could transform our national revenue take.

We can tax unused reserves held in the sector. And/or we can require that pensions, for instance, are invested in the national infrastructure - through government-backed inflation-linked bonds that will totally secure the future of pensions while using the money to expand the economy and employment..

And we can limit the right of the financial sector to up and leave the country in which the nation's savings have been made. We can limit the right of people with capital created here to take it to where taxes are lower or workers will accept even lower wages, so that their 'passive income' grows even faster than it does at home.

The government is elected to develop our economy. Asset managers are not elected: they are only doing their job, and it does not include developing our economy and employing our people. They need to be roped in to help.