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Reflections on the global economic crisis and its likely impact on South Africa



Extracts from the political report made to the Central Committee of the South African Communist Party

by Blade Nzimande and Jeremy Cronin


The world capitalist system is in the midst of probably its worst economic crisis since 1929. Capitalism is, of course, seldom crisis-free, and there have been a series of crises over the past decade and a half. These included, for instance, the extremely grave Asian crisis of 1997–78. This latter crisis resulted in millions of job losses and deepening poverty in many Asian countries, but it was largely confined to a single region, and it proved to be of relatively short duration, thanks in no small part to continued surging growth in China. On a world scale, the global economy suffered a disruption but continued to grow.
     The current crisis is different in many respects. In the first place, its epicentre is in the core zones of capitalist accumulation—the US and Europe—and it has struck at the heart of the financial system. Its knock-on impact across the globe is, therefore, much more profound. Given the intensified global interconnectivity (compared with 1929), the speed and reach of the knock-on impact is also greatly enhanced. While some economies will continue to grow (notably China), but at a much lower rate (now revised down to a possibly optimistic 7½ per cent for 2009—the lowest in twenty years), large parts of the world have already entered into recession, or are poised on the brink of recession. Millions of jobs will be lost, homes repossessed, businesses liquidated, and value destroyed.
     Marx was the first to provide a scientific analysis of the boom-bust cycle in capitalism, which he showed to be endemic to this mode of production. Crises in capitalism can occur as a consequence of factors extraneous to the accumulation process: wars, natural disasters, social upheavals. However, under capitalism (and in contrast to earlier forms of production), wars, natural disasters or social upheavals are more likely to be the consequences of intrinsic crises within capitalism, rather than the fundamental causes of the crises.
     Marx showed how the cyclical pattern of booms and busts was systemically linked to the fact that capitalism—unlike socialism, or earlier forms of production—is essentially production for exchange (and therefore private profit) and not for social use. In other forms of production, over-production of commodities is a cause for celebration, but under capitalism “over-production” (i.e. more than the market demands—i.e. more than can profitably be sold) triggers a break-down in the system—a crisis of over-accumulation. This in turn requires a massive wave of destruction of productive capacity (in the form of retrenchments, factory closures, liquidations, and stock exchange collapses) in order to “clear the ground” for the next round of capital accumulation through growth.
     In recent times, economists have boasted that with effective macro-economic modelling and management, together with some inherent self-correcting capacity within capitalist accumulation, we have been able to “escape” the boom-bust cycles of capitalism. Ricardo Hausman, leader of Trevor Manuel’s “Harvard Group,” presented a celebrated paper in 2005 along with a fellow Harvard luminary. In it they claimed that financial “dark matter” would prevent a big bang in the world economy. The failure to believe in this “dark matter,” the authors boasted, made “analysts predict crises that, for good reason, remain elusive.” All these boasts now ring hollow.
     Over the past five hundred years of modern capitalism it is possible to detect three broad variants of boom and bust, of cycles of rise and fall.

Relatively short-term cycles of around a decade or so

Globally, in the recent period the global economy has gone into a slump in 1974–75, 1980–82, 1991–93 and 2001–02. In South Africa the last decade of apartheid corresponded to a domestic downturn-recession, and since 1994 we have seen a general economic upturn. This upturn is variously attributed to “sound economic policies” and the “political miracle,” etc. While subjective factors like policies are not unimportant, and while the political settlement has been a key ingredient in this upturn, it is important to notice that this cyclical upturn has also had an underpinning of objectivity related to our particular capitalist accumulation path.
     This local upturn is now probably entering into a period of several years of downturn, if not actual recession. We obviously make this point in order to prepare our defences against what is likely to be a political discourse in the coming years: blame a largely “objectively” (and externally) determined downturn on “Polokwane populism.”
     These shorter-term cycles, and their national and regional characteristics, are related to the particular features of a national or regional economy, including its positioning and insertion within the global capitalist economy, and therefore they are not unrelated to longer-term cycles in the world system.
     These long-term cycles at the global level are sometimes called “Kondratieff” cycles (after the economist who first noted and analysed them). Over the past five hundred years there has been a remarkably consistent cyclical pattern, occurring roughly over 50-year periods, with booms and growing profit occurring over a 25-year period, followed by another 25-year period or so of diminishing rates of profit, of deepening crisis and decline.
     The present long-term cycle in the world capitalist system began in 1945, with the upswing reaching a turning point around 1970–73. Since then, globally we have been in a long downturn—longer than normal, partly because capitalist-aligned economists and central banks and multilateral institutions (like the IMF), believing that they had finally “beaten” recession for ever, introduced a range of interventions which we can now see have simply delayed and deepened the full-blown crisis in whose midst we now are.
     Finally, there is another, even longer-term cyclical (rise and fall) process within capitalism.

The geographical shift in hegemony

Marx, Lenin and others following them have demonstrated how capitalist development is characterised by high degrees of combined and uneven development. It is a global system characterised by geographical zones of various importance within the accumulation process: core zones, semi-peripheral zones, and marginal or peripheral zones. Within this hierarchical system there is a tendency for a single zone, region or country to emerge as the dominant hegemon. Over the past five hundred years the hegemonic centre of capitalist accumulation has shifted from the Italian city-states (notably Genoa) to the Netherlands (mid-seventeenth century) and to Britain. Since 1870 the United States has positioned itself as a challenger to British hegemonic domination, and since 1945 the US has been the uncontested dominant capitalist power.
     The emergence of a hegemonic power is usually characterised by a greater productive and technological dynamism than its rivals. In its declining years (and the decline might last for a long period) core centres of production shift to other localities, and the economy of the waning hegemonic power is increasingly characterised by “financialisation”—the increased investment of surplus in speculative activities. This pattern is evident in all hegemonic societies; and since the early 1970s, as US hegemonic dominance has begun to wane, a ballooning financialisation process has been evident there.
     In addition to these three “rise and fall” patterns typical of capitalism there is a fourth factor that needs to be considered in regard to the world capitalist system.

Absolute limits to capitalism

Capitalist ideology is premised on the illusion of limitless resources, making ever-expanding production possible, and desirable. However, there are absolute limits to capitalist production and reproduction: the depletion of non-renewable natural resources, the destruction of the environment and with it the bio-physical preconditions for human survival, and (this applies specifically to capitalism) social and class struggle against the increasing immiseration of the working class.
     The first two issues speak for themselves. The capitalists’ constant attempt to intensify the rate of exploitation of workers in order to stave off falling rates of profit have absolute physical limits. (There are only so many hours a worker can work per day for any length of time.) Capitalism (particularly in the era of globalisation) has sought to bypass this limitation by relocating productive activity to new centres of accumulation (South Korea or China, for example). However, as has happened in South Korea, and is now happening in China, it takes two or three generations for workers to organise for better wages, working conditions, and social wage measures. Short of an intensified class struggle everywhere, the space for shifting production to areas of cheaper labour is closing down.

The present crisis

The present crisis is particularly severe because it involves the confluence of all four of these factors in differing degrees.
     For around a hundred years (1870–1970) the US witnessed an unprecedented trend (occasionally interrupted by short-term downturns) of rising productivity and rising real wages for the working class. This economic reality lies at the basis of the “American dream” and of the “consumerism” and relative passivity of the US working class—a car and a suburban home being the epitome of the American “way of life.”
     Since the early 1970s the US’s hegemonic domination has been challenged by Japan and the Asian Tigers and some European economies—leapfrogging in terms of technological and industrial plant investments, rendering US industrial plant (fixed investments) increasingly unprofitable. This has led to US capital moving to other locations or moving into increasingly speculative financial activities. At the same time, US mass consumerism has been kept afloat through increasing credit, despite declining real wages since the early 1970s.
     Export-oriented Asian (especially Chinese) manufacturers and Third World oil-producers became the production sites, while US consumption propped up global market demand. The US has been running huge current account deficits: by 2006 the US current account deficit was at $800 billion (or 6 per cent of GDP). China, conversely, has played a crucial role in financing this US deficit, and therefore US consumption. China has now accumulated the world’s largest foreign exchange reserves ($1.6 trillion in mid-2008).
     This symbiotic but unsustainable reality premised on growing US consumption was further propped up by a variety of “creative” financial instruments developed largely by the US financial sector. Among these were “sub-prime loans”—housing loans to those who basically could not afford them, in which the initial interest rate was sub-prime but with the interest rate escalating over the duration of the mortgage, on the assumption that as the borrower progressed careerwise so there would be an increased capacity to pay instalments. (Note that this is not very different from many BEE deals—in which black “investors” acquire shares on loan, on the assumption that the shares will always go up and they will be able to repay the loan). These sub-prime loans were then “diced and sliced” (i.e. mixed up with other, more viable loans) and sold on by the direct mortgage institutions to banks and other financial institutions.
     The collapse of the sub-prime market has been the catalyst of the present all-round crisis. It has seen one of the top four investment banks in the US, the hundred-year-old Lehman Brothers collapsing, and other banks and the mortgage lenders (Fanny Mae and Freddy Mac) having to be rescued, often through nationalisations. The dicing and slicing of sub-prime and other toxic loans has meant that major financial institutions in the US and Europe in particular have no idea of what they are sitting on. This has led to a reluctance of banks to lend to each other, and liquidity in the real economy has dried up. Major global manufacturers (like Nokia, for instance) can still access cash from banks, but their hundreds of small suppliers cannot get loans, and production across the globe is being impacted. On top of this, demand in the US and Europe is in recession, and this is impacting heavily on major global manufacturers, like China, where there have already been hundreds of thousands of retrenchments.
     In many respects we are in uncharted waters, and no-one can say for sure exactly where it is all headed. There are, however, a few basic predictions we can make.

There will not be any significant short-term recovery

The relative decline of US economic supremacy (which has been slipping since the mid-1970s) has now been greatly accelerated. The US will probably still emerge as the most powerful economy, but the world will have become significantly more multi-polar.
     While multi-polarity offers possibilities, potentially more breathing space and alternatives, for the global South, it is the people of the South (and workers and middle strata in the North) who will bear the burden of the crisis. It is possible that dynamic developing economies, like Brazil, India, and China, may be partially de-linked from the recession, but none will escape its impact. China, with its US-oriented, export-led growth strategy, will face very serious challenges.

South African challenges

The global economic crisis presents the left with major possibilities but also serious challenges. The transformation of our productive economy has become all the more necessary. But it will also become more difficult as declining global demand for our exports will impact on jobs and on state fiscal resources.
     We will also encounter an intensified ideological battle, from those outside the ANC and indeed from within the ANC itself. With their backs to the wall, but with massive resources, our resident neo-liberals of all stripes are fighting an ideological battle to prevent any sensible, democratic debate opening up within our country on economic policy evaluation and change.
     We have been here before. In the critical 1994-96 period a similar ideological battle was waged to capture the new government’s economic policy agenda. This included demonising, caricaturing and belittling alternative perspectives, especially when they came from the SACP and COSATU. It also included constant threats about what “global markets” would do to us if we dared challenge anything in the neo-liberal gospel. This theme was repeated over and over.
     And that is exactly what is now being repeated—except that last time we were being told there were no alternatives to the Washington consensus; now we are being told that the crisis of this very same economic agenda is so great that we had better not risk changing anything.
     This was exactly the parting shot from the outgoing deputy finance minister, Jabu Moleketi, speaking in the week before the Alliance economic summit. He told the London Financial Times that it would be “suicidal” for South Africa to change economic policies. “Any sudden policy shifts by South Africa’s new leaders would be ‘suicidal’ for a country whose economy survives at the mercy of foreign investors, according to one of the architects of the recent years of stability.” (7 October 2008)
     Notice the sleight of hand in this sentence. On the one hand we are told that our economy has achieved “years of stability” and on the other we are told it “survives at the mercy of foreign investors.” What kind of stability is that? But according to one of our architects of stability, Comrade Moleketi, the seas are so choppy now that we shouldn’t try to turn our ship around.
     Typical of this line of reasoning is a caricature of what we are actually attempting (supposedly “a total U-turn”). What we are arguing for is exaggerated, the better to be able to demonstrate our “lack of wisdom.”
     A similar view is repeated in the “Bottom Line Column” of the Business Day (30 October 2008). Under a headline “Left snatches defeat from jaws of victory” we are told that while the crisis of capitalism means that “the left might have won this round of the intellectual argument” it is a hollow victory, because the left won’t be able to do anything practically. “SA’s current account deficit is likely to be 7,7 per cent of GDP and rand volatility remains a headache. Ironically . . . [the left’s intellectual victory] means it will be deprived of the means to deliver on its promises.”
     In short, we are being told that if the tossed coin lands on heads, the neo-liberals win. If it lands on tails, the left loses.

“Communist economic putsch”?

Following the important mid-October Alliance economic summit, some parts of the media have gone out of their way to hysterically scream “communist ideological putsch,” “left-wing U-turn,” etc. The hysteria with which this is done is designed not to inform readers but to precipitate market panic and thus to goad ANC and government leaderships into distancing themselves from economic policy resolutions.
     While the unreconstructed Cold War neo-liberals play this rooi-gevaar (red peril) card, other, less zealous and more cynical neo-liberals dismiss the resolutions of the Alliance economic summit as “just rhetoric.” In their view the ANC leadership is allowing its alliance partners to “let off steam.” They are going through the motions of “consultation” the better to continue with business as usual.
     And so we have a long-winded debate that goes round and round, with the ultra-neo-liberals arguing that “nothing must be allowed to change” and the reconstructed neo-liberal elites arguing, “Don’t worry, it is impossible for anything to change.” They seem to be disagreeing, but at heart they agree. (Heads they win, tails they win.)
     We might be inclined to ignore all this if it were not likely to impact on parts of the ANC and government. But, unfortunately, this is not something we can take for granted.
     Consider an interview with the Minister of Finance, Comrade Trevor Manuel, conducted by the London Financial Times in the immediate aftermath of the mid-October Alliance economic summit. Clearly referring to the main resolutions from the summit, Comrade Manuel speaks dismissively: “We need to disabuse people of the notion that we will have a mighty powerful developmental state capable of planning and creating all manner of employment. It may have been on the horizon in 1994 but it could not be delivered now. The next period is likely to see a lot more competitiveness in the global economy. As consumer demand falls off there will be a huge battle between firms and countries to secure access to markets.” (28 October 2008)
     In the space of a few lines we have all the spurious moves we noted coming from the neo-liberals above. In the first place, Comrade Manuel exaggerates and implicitly ridicules the resolutions of Polokwane and the Alliance summit on the developmental state. (Interestingly, when talking to the local media he has been more restrained.) He then says that a major job creation programme led by a developmental state “may have been on the horizon in 1994 but it could not be delivered now.” In other words, it is no longer possible to contemplate serious state-led job creation programmes because of the crisis in the global economy.
     But what was Comrade Manuel saying a few years back when there wasn’t the global crisis? In 2000 he told the Sunday Independent: “I want someone to tell me how the government is going to create jobs. It’s a terrible admission, but governments around the world are impotent when it comes to creating jobs.” (9 January 2000). Then it was never possible, now it is no longer possible.
     A few years ago change of economic policy was supposedly “unthinkable”; now it is an “unmentionable.”
     Let’s be clear. When we deny the caricatured claim of wanting a total change of policy, we in the SACP are not apologising for, or concealing, our real views. Nor do we deny seeking to influence and to learn from our Alliance partners. But while the idea of a dramatic “left U-turn” emerging, out of the blue, from Polokwane might be flattering, it is spurious.
     It is spurious because important (but uneven) changes in economic policy have been under way for several years: the defeat of the accelerated privatisation drive, for instance, or the preservation of at least some exchange controls, despite GEAR’s commitment to their abolition; or the acceptance that the willing-selling willing-buyer approach to land reform is inadequate.
     There has been an increasing agreement, across the Alliance, that we need to transform our present growth path, that we need to transform our productive economy. There is also a clearer appreciation that macro-economic policy cannot be a stand-alone, and its evaluation must be based on its short and longer-term impact on job creation and poverty alleviation.
     Finally, the developmental state we have been increasingly speaking about is essentially an agreement that the state cannot be confined to being an overwhelmed and under-resourced welfare dispenser on the one hand and a macro-economic boss-boy on behalf of the markets on the other. In our situation a developmental state means, primarily, a state that mobilises our national resources to transform the current accumulation path to one based on a state-led industrial policy. The mid-September Alliance summit helped to confirm and to consolidate these strategic perspectives.
     Of course these policy shifts did not come easily. The left within the Alliance (and we remained within the Alliance) fought long and hard for them. We had to endure plenty of insults, but we stuck the course.

Five myths about the South African economy

Central to the neo-liberal campaign to block serious economic debate and policy evaluation in our country is a series of inter-related myths about the state of health of our economy.
     Myth number 1. “Over the last decade South Africa has witnessed ‘unprecedented’ growth.” It is true that since 1994 there have been fourteen years of successive growth. Between 1994 and 2003 this growth averaged 3 per cent. Between 2004 and 2007 it averaged 5 per cent. It is now likely to dip again to around 3 per cent.
     While sustained if moderate growth is not a negligible achievement, we should remember that it is growth relative to the deep ditch into which white minority rule had finally driven the economy by the early 1990s. In the last decade of apartheid there was either no or negative growth for most years. To produce growth out of this low point did not necessarily require rocket science.
     Moreover, a decade of growth is far from being “unprecedented,” as is so often claimed. Between 1963 and 1973 the apartheid economy grew for a full decade at an average of 7–8 per cent. As this apartheid-era growth should remind us, economic growth on its own doesn’t tell us who is benefiting, or even whether a high growth rate is a good or a bad thing for the majority.
     Myth number 2. “We have managed our economy well since 1994." The last decade and a half has coincided with a huge surge in global growth. In particular, over the last years there has been a major commodity boom that has benefited most of our key exports. With a prolonged global recession now in sight, and with slackening demand for commodities, we have to ask ourselves whether we have used the boom years to place our economy on a sound, sustainable and more equitable basis. Or have we largely squandered the opportunity?
     An honest answer would have to admit that, in many respects, we have lost opportunities that may not return. The changed global reality does not make change impossible, it makes it all the more necessary. But transformation will now be more challenging in many respects.
     Myth number 3. “All the basic economic fundamentals are in place (and shouldn’t be tampered with!).” The smug complacency about what has been achieved over the past decade and a half is basically a class complacency. For South African monopoly capital in general the past fifteen years have been a period of great profitability, of a widening gap between their executive salaries and the wages they pay their workers. It has been a decade of opportunities to disinvest out of South Africa.
     For workers, however, the past fifteen years have seen retrenchments initially soar and then level off into largely jobless growth. Unemployment peaked close to 40 per cent and is now stuck around 33–35 per cent. There has also been wide-scale casualisation, so that those in employment often find themselves below the radar screen of progressive labour-market legislation. The past fifteen years have also seen widening income inequality, making South Africa one of the worst-performing countries in terms of the GINI coefficient measurement of income inequality. However, important social programmes (including grants, low-cost housing, and water and electricity provision) have helped to lessen absolute levels of poverty.
     The idea that economic “fundamentals” can be reduced to a few macro-economic indicators while ignoring unsustainable levels of unemployment and inequality is a class-biased assumption.
     Myth number 4. “Owing to sound economic management, South Africa is a safe haven in the current global turmoil." In its 78th annual report, published in June 2008, the Bank of International Settlements rated South Africa (along with Turkey, the Baltic states, Hungary and Romania) as one of the states most at risk in the current turbulent global reality. Of course the fact that the BIS made this finding should not necessarily lead us to accept it as gospel: the BIS failed to remotely predict the impending scale of bank failure in the US. But the BIS report should certainly give us pause for thought.
     The BIS finding was based in particular on South Africa’s precarious current-account situation (the difference between our export earnings and import expenditures). Since the June report our current-account deficit has worsened. In October 2008 our trade deficit widened to R7.1 billion, largely as a result of a R2.2 billion increase in imports of machinery and electrical appliances. On a cumulative basis from January to September the deficit stood at R62 billion, compared with R55 billion in the same period last year. The fact that South Africa has become a net food importer for the first time ever is a further aggravating problem.
     It is hard to predict exactly what the short and medium-term global turbulence holds in store for our current-account deficit. The rand is tending to depreciate against the dollar and the euro, and this will improve our export competitiveness—but the global downturn will lessen demand for our exports. The global downturn has brought the price of oil down to levels last seen two years ago, but this decline is partly offset in turn by the declining value of the rand.
     In short, our current-account deficit—which basically reflects on our failure to drive an aggressive industrial policy programme, particularly in manufacturing and agriculture, over the last fifteen years—will remain a serious point of vulnerability.
     Myth number 5. “Our financial sector is healthy.” Although our own financial institutions appear to be well regulated and have not been as severely exposed to toxic loans as their international counterparts, they have not been entirely immune either. Standard Bank has some exposure to derivative shareholdings, and Old Mutual lost more than $1.4 billion when its shares in Bear Sterns turned out to be almost worthless. Hopefully, these remain limited cases.
     But can we boast of a healthy financial sector when we have had one of the world’s worst housing-price bubbles? when household debt has quadrupled, to more than R1.1 trillion, in the past five years? when more than 6 million South Africans can’t pay their debts? when, in the first quarter of 2008, South Africans spent 82,3 per cent of their income servicing household debt, compared with 60,2 per cent in 1998? and when six thousand vehicles and two thousand homes are now being repossessed every month?
     Myth number 6. “The choice is between no change and imprudent macro-populism.” We cannot be imprudent, but neither can we be complacent about where our economy is. We must reject the false choice of either an unsustainable welfarist “macro-populism” on the one hand or “no change,” where, supposedly, the government continues to implement “prudent macro-economic policies” while the markets do the rest.
     Our problems are structural. We have to transform the systemic features of our persisting growth path that is reproducing the crises of our society: unemployment, poverty, inequality, skills shortages, diminishing food security, and current-account vulnerabilities. These crises impact, in turn, on other major headaches, including crime levels and unsustainable household indebtedness.
     Too often the debate on economic policy is reduced to the wisdom or otherwise of inflation-targeting or a small budget deficit. These are important issues that no doubt need prudent handling. But they are subsidiary matters.
     At the Alliance economic summit we agreed that our key priorities need to be job creation, major improvements in education, health care, and the criminal justice system, and serious rural transformation. These key priorities must not be handled as trickle-down welfarism but as integral components of a state-led industrial programme that transforms our excessively commodity-based export-dependent and capital-goods-import-dependent growth path. This is neither a dramatic abandonment of macro-economic prudence nor a complacent sitting on our hands, hoping the markets will somehow solve everything.
     Myth number 7. “Thank God.” When South African financial institutions appear to be less vulnerable to the sub-prime crisis than institutions elsewhere, when things are not as bad as they might be, we are asked to believe that something miraculous has occurred.
     Consider a recent speech delivered at the University of Pretoria by the chairman of Richemont and Remgro, Johann Rupert. He told his audience: “I am a proponent for the abolition of exchange controls, but I must agree with [the] finance minister, Trevor Manuel, that we were saved by foreign exchange controls. Certainly some of my banker friends and fund managers would also have been seduced by the higher yields available in the sub-prime and other markets. So, for once, thank God for foreign exchange controls." (Business Times, October 26, 2008)
     It is possible that we have benefited from divine favours in the recent past. It would be remiss not to acknowledge that Comrade Manuel has resisted the big-bang removal of exchange controls constantly advocated by the media’s “economic specialists,” by big-business circles, and by the DA and IFP in parliament. However, in line with GEAR commitments to progressively remove exchange controls, the Minister of Finance has introduced no fewer than twenty-six relaxations of exchange controls over the past eight years.
     The residual presence of some exchange controls in South Africa isn’t particularly due to divine intervention, or to the Minister of Finance. Instead it has a great deal to do with protracted struggles from within the ANC, and especially from the SACP and COSATU ,in opposition to the hasty and excessive liberalisation measures that were introduced from the mid-1990s.
     In particular, the SACP-led Financial Sector Campaign eventually compelled Treasury Department officials to deal legislatively and otherwise with our financial institutions and their unwise lending inclinations. The Credit Act and the extension of banking to a wider internal market were the results of the campaign.
     It is now conceded by many mainstream commentators that both these measures (along with exchange controls) have played a key role in protecting our banks from the global crisis. Thanking God is a way of obscuring the role of popular mobilisation in impacting positively on economic policy.
     Johann Rupert might not want us to remember this fact. But we have not forgotten.

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