Kameraad Mhambi

Ex deputy finance minister  Jabu Moleketi warned in the UK’s Financial Times yesterday that any major policy shifts by the ANC would be suicidal. Moleketi is one of the ministers who resigned in protest at the sacking of Mbeki.

banana controversy, originally uploaded by phitar.

With a massive current account imbalance South Africa is a country that survives “at the mercy of foreign investors” said Moleketi.

Why thank you Mr. Moleketi. Just where we want to be. Foreign investors is after all that steadfast, long term, principled and socially conscious lot.

And Mr. Moleketi has helped us become dependent on them.

Now Mhambi has lefty sympathies but I do see the vital importance of foreign investment, don’t get me wrong.

But in supporting a strong rand and not nurturing (and protecting) local manufacturing, like China, and other Asian countries have done, Trevor Manual and Mr. Moleketi has done the poor and whole country – a massive disservice.

As Moeletsi Mbeki, Thabu’s brother noted on the legacy of the Mbeki administrations economic policy (before it was ended).:

“The election of Jacob Zuma at the rowdy ANC conference at Polokwane has led many people to worry about the future of the country’s economic policy.

The underlying assumption is that Zuma and his trade union and communist backers will disrupt what are perceived to be the good economic policies of the current ANC administration.

I differ. The current government is NOT pursuing good economic policies.

Many of its policies are detrimental to the majority of people and to the country’s future.

I must admit, though, that these policies do benefit a powerful and vocal minority — perhaps a quarter of the population.

But ANC government policies have contributed to about half a million farm workers losing their jobs in the past decade and a half.

This has resulted in an estimated two million people, if we include all family members, losing their homes.

Another example is that of the collapse of South Africa’s footwear industry as a result of reckless trade liberalisation policies.

In 1997 the industry employed 23600 workers; 10 years later it employed only 10000.”

I cant agree more.

My girlfriend is a shoe designer. I have seen first hand how factories stand empty in the Cape and expensive machines are sold off to companies operating in the east.

I have mentioned before that allowing companies like Anglo and Old Mutual to list off shore was another of Trevor Manual’s big mistakes.

But Lucky for us Trevor and Jabu did not have the gall to lift all the paranoid capital protection measures the Nats built. Else we would no doubt have, like much of the West, now have had a banking crisis or critical proportions.

Hillary Joffe in yesterday’s Business Day How ‘bananas’ give SA shelter from the storm explains the strength of the South African banking system.

“…one might have expected that SA, of all places, would have had a subprime crisis, given the political pressure for banks to lend more to low-income earners. But SA has prided itself on having a world-class banking system. And that’s the other irony — our banking system wasn’t nearly first world enough to allow for the more exotic and excessive derivatives trade that ended up destabilising the global financial system. “

In short, our rules and regulations did not allow for the kind of financial instruments that Warren Buffet called financial weapons of mass destruction.

Joffe again:

“That SA’s banking system is, so far, immune from any of the direct effects of the global credit crunch is thanks to regulation in the broad sense — banking regulation, but also credit regulation and foreign exchange controls. Regulators (and policy makers) deserve some credit, but it’s not necessarily that they were geniuses — more that they were a product of SA’s often quirky history, which bred an almost obsessive caution about the financial sector.”

South Africa had our own mini crisis in in 1982 and 2002 and of course economic sanctions. All lead to more regulation. Especially the 2002 crisis had a great impact on our policy makers.

“…in the wake of the crisis, banking regulators became ultra-cautious and even more determined to be more first world than the first world.”

But its the exchange controls that has helped most.

“But SA’s exchange controls, which have been liberalised over the years but never shed, did even more to prevent excesses. Not only did they prevent financial institutions in SA from investing directly in subprime paper and other toxic assets, they also limited the development of markets in credit derivatives, for example, because regulators wouldn’t allow exposures that might mean money would have to flow out of SA.”

One result?

“Only 3% of the funding of SA’s banks is foreign. Even if Europe’s banks, for example, ceased all loans to SA’s banks, the effect would be tiny. “

Jabu meanwhile told the FT that SA can not act as if its an island. “In this current environment to talk about fundamental change of economic policy is suicidal.”

Notes the FT, a paper not known for its left wing sentiment, that  Jabu may be right. However a change of policy by SA, mused the FT, might be eminently sensible otherwise.:

“…economists and policymakers point out that the acute sensitivity of investors – already jittery over the intentions of Jacob Zuma, the ruling party leader whose allies led the palace coup against Mr Mbeki last month – may be preventing South Africa from taking decisions that many say would be eminently sensible.

South Africa is being held hostage due to our current account gap said the FT.

“Even if Wall Street were not imploding, South Africa would be particularly vulnerable to investor sentiment because of the yawning deficit in its current account. Constraints on exporting industries, a lack of domestic manufacturing and an appetite for costly imports have conspired to open a deficit equivalent to 9 per cent of the economy’s entire annual output.”

Currently jittery investors are already withdrawing money. The fall in the currency is bad for the South African economy, an economy structured around the wealthy. It will make imports dearer. And this will push up inflation.

But As Michael Power a strategist at Investec Asset Management has noted in an article Currency and the Economy: Think about how SA works before you pick your rand a while ago:

“My essential view — which I have doggedly maintained for more than a decade — is that the rand remains structurally overvalued. The main reason I give is that the rand’s current trading range is trapped in the straitjacket of what works for SA’s first economy. But, at this elevated rate, the overvalued rand prevents the second economy from having even the remotest of chances of working, literally and metaphorically.

The result? We have unemployment of more than 25% as a quarter of all South Africans remain priced out of the global labour market, plus 12,7-million South Africans living off social grants from the national treasury, all set within a dichotomous di-conomy where those who live in the formal first economy (myself included) cannot begin to understand what it means to live beyond it.”

Moeletsi Mbeki makes the same point.

“Goldman Sachs has, I think rightly, predicted that, 30 years from now, South Africa will be in nowhere near the dominant economic position it occupies in Africa today.

Many things about the South African economy are going the wrong way. The fastest- growing sectors of the economy do not export, and they absorb the least amount of labour. These are financial services, real estate, business services, construction, trade, transport and communications.

The sectors that are the leading exporters and thus should absorb the most labour — manufacturing and mining — are in fact declining.”

The FT notes that the central disagreement between the Mbeki supporters and those of Zuma is inflation targeting. And the FT thinks the Zuma-ites has a point. SA’s current target is well below that of the US.

“The principal economic battleground between Mbeki loyalists and Zuma allies has been the central bank’s inflation-targeting mandate, which has seen the bank ratchet up interest rates to 12 per cent to try to bring inflation of 13.6 per cent back within the target band of 3 to 6 per cent.

Analysts from across the political spectrum have argued that a country where at least one in four people is unemployed would be better served by a broader target, making some provision for fostering growth or creating jobs. But though such a shift would merely bring the mandate into line with that of the US Federal Reserve, any tinkering risks being punished by investors.”

Those pesky investors again!

Mhambi agrees with Investec’s Mr. Power. We as a country should decide on what side we want our bread buttered.

Our currency should not only be low. It should be kept stable so business can plan and invest in productive capacity. What the Motlanthe government should do is peg the rand low just like China did.

Initially investors might take fright. But if South African manufacturing recovers and grows it will come back. They want to make some money after all.

Michael Power again:

“Now comes SA’s hangover. Retail sales growth is negative. Some house prices are falling. Car sales have not been this bad in years. Our purchasing manager s’ index is well below 50. And to cap it all, those fickle foreigners — shame on them! — are leaving our shores with their capital and dumping our rand in the process. Sound familiar? It should — SA has become a mini-US.

It is time to catch a wake-up, SA. Is this roller coaster we are riding going to be the way we continue to run our economy for ever and a day? Is our economic development plan to become little more than a case of surfing the ebb and flow of the credit cycle, while all the time being subject to the capricious kindness of strangers and their capital? Will we ever remain little more than a slave to America’s unhealthy rhythms? Must we wait for the planets to align in our favour again, enjoy the party that follows, only to rue the hangover that follows thereafter? And worst of all, by far worst of all, are we in the first economy going to continue to avoid addressing the plight of those trapped in the second economy, unemployable in today’s global economy given today’s rand’s exchange rate?”

Power wrote this 6 months ago. We might be in for far more than a hangover. What is sure is that the Western economies will experience quite serious recessions – if not more – in the coming years. They might drag South Africa into recession.

But so too are the Anglo-Saxon ultra laissez fair doctrines of unregulated markets discredited. State intervention at critical junctures can put our economies on the right path. That is what we need now.

South Africa should look East and help its poor.

It’s time to go Bananas.

Related deployments:

1. A year of change – 2009
2. Can the world stop the Minsky moment?
3. British jobs for British workers
4. International assesments of Zuma
5. Mark Gevisser and Alec Russell in London