South Africa’s coming fight over capital flight

The Triple Crisis Blog is pleased to welcome Patrick Bond as a regular contributor. He is a political economist and Director of the Centre for Civil Society at the University of KwaZulu-Natal School of Development Studies in Durban. His research focuses on political ecology (climate, energy and water), economic crisis, social mobilization, public policy and geopolitics.

At a time South African trade unions are under fierce attack from big business for winning above-inflation wage increases through strikes, and for opposing both informal labor outsourcing and a state-subsidized sub-minimum wage for youth, the sibling of former president Thabo Mbeki is helping restore balance.

According to businessman-intellectual Moeletsi Mbeki, speaking last week to the white-dominated opposition party, “Big companies taking their capital out of South Africa are a bigger threat to economic freedom than African National Congress Youth League president Julius Malema.” (The latter, a tycoon through crony deals, recently achieved notoriety for advocating the nationalization of mines.)

It is a ripe time for such in-your-face challenges to orthodoxy here, given the post-apartheid elites’ hostility to exchange controls.

South Africa suffers stagnation, 35 percent unemployment and the highest Gini coefficient measuring income inequality of any large country. After generalized overproduction during late apartheid followed by deindustrialization and financialization, the 2000s commodity boom – including the soaring gold price – failed to generate jobs or recirculate profits. SA’s real estate price rise was four times that of the U.S. from 1997-2008 and then collapsed by 15 percent, while once-vibrant consumer spending is hampered by overindebtedness. SA banks’ ‘impaired credit’ list now has 8.5 million victims (up from 6 million in 2007), representing nearly half of all SA borrowers. That figure includes many of the 1.3 million people who lost jobs in the 2009-10 downturn and haven’t got them back.

The overvalued currency (the Rand) and imminent arrival of import-maniacs from Walmart make matters worse. When asked about that retailing behemoth, Moeletsi Mbeki questioned the neoliberal agenda that his brother decisively implemented: “In South Africa we think we will just open the doors and everything will be hunky dory. Of course it won’t.”

The doors swung open not only to East Asian consumer imports but also the other way: to rich South Africans and the country’s largest firms, which were allowed to leave with apartheid-era loot. Mbeki complained that there was never “an explanation for why companies had been allowed to list in London. On what basis did they allow them to go, to move their primary listing? Why did they approve it? What did they get out of it?”

Tough questions, especially because the outflow of profits, dividends and interest payments to Anglo American, DeBeers, Old Mutual and Liberty Life insurance, SABMiller beer, Mondi paper, Investec bank, Didada IT and BHP Billiton mining has raised the current account deficit to 7 percent in 2009, leading The Economist to rank SA most risky of 17 peer economies. Although the deficit then fell, SA’s foreign debt has soared to cover payment outflows: from $25 billion inherited by Nelson Mandela from apartheid to more than $100 billion this year.

How to exit the crisis? The International Monetary Fund’s annual Article 4 Consultation was released late last month, and simply reiterated conventional banker wisdom. In meetings with SA Treasury officials, IMF “Staff recommended stronger fiscal consolidation beyond the current fiscal year than currently being considered” as well as “policies to moderate real wage growth.” The IMF praised the SA Reserve Bank’s “prudent” policies “together with a flexible exchange rate” which allegedly “helped dampen the adverse effects of those global cycles.” In reality, SA’s volatile currency crashed by 15 percent or more five times since 1994, thanks to 30 separate relaxations of exchange controls.
But if you dare suggest merely a “small tax on inflows to try to curtail inflows or at least change their composition,” IMF staff point out “significant drawbacks”: “it likely would raise the government’s financing costs. Second, even if this were to help engender nominal rand depreciation, absent wage restraint it is unlikely this would enhance competitiveness.”

The rebuttal is easy: eschew competitiveness and impose exchange controls on outflows of capital to address capital flight, and then systematically lower interest rates because amongst the 50 largest economies, SA’s are second highest only to Greece. In the process, manage the appropriate decline in the rand’s value. But to boost effective demand and internal linkages, assist workers return to at least the wage/profit share they had won by the end of apartheid: 54/46, compared to just 43/57 today.

Imposition of capital controls would be a first step away from perpetual economic crisis. Given IMF conservatism (after raised hopes of a conversion to exchange controls earlier this year), it is to Mbeki’s credit that he has tabled capital flight as both a moral and economic challenge, and it is now up to civil society to more forcefully demand solutions.

September 14, 2011 | Posted in: Uncategorized | Comments Closed

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