New South African Review 1. Anthony Butler
2003, p.33).
Figure 2: Official unemployment rates
Total unemploymenr rate drawing on revised LFS 2000–7 and QLFS 2008–9 (Percentages)
Source: StatsSA, drawing on their revised LFS 2000–07 and QLFS 2008–09
That the drafters of the Ten Year Review believed that there was macroeconomic stability in the economy during 2003 shows that they had adopted a neoliberal perspective towards economic policy. Within this perspective, macroeconomic stability is defined as maintaining a low government budget deficit (or preferably a surplus) and low levels of inflation. The authors of the Ten Year Review seem to have forgotten the currency crisis during 2001 when the rand depreciated by 35 per cent against the US dollar and the South African Reserve Bank (SARB) responded by pushing up interest rates by 4 per cent within a year. The impact of the increase in interest rates was increased unemployment: the official, narrow measure of unemployment grew from 23.3 per cent in September 2000 to 26.2 per cent in September 2001 and 26.6 per cent in September 2002. GDP annual growth dropped from 4.2 per cent in 2000 to 2.7 per cent in 2001, recovered to 3.7 per cent in 2002 and declined to 3.1 per cent in 2003. The authors of the Ten Year Review had let their neoliberal ideological blinkers blind them to all that recent macroeconomic instability.
The early 2000s was also a remarkable time because of the volatility in global financial markets as a result of the dotcom crisis. Capital fled equity markets in the US and went in search of high returns in real estate, subprime and securitised debt markets to set up conditions for the next financial crisis. The impact of the dotcom bubble was felt in South African markets; the 2001 currency crisis, referred to above, was caused by huge foreign investment portfolio outflows during 2000 that grew into a flight of capital in 2001 and the volatility in the South African economy was a result of largely uncontrolled movement of short-term capital flows into and out of the economy. The massive depreciation of the rand against the US dollar had a huge impact on the inflation rate because of the higher rand cost of imports, such as oil. The SARB responded with interest rate hikes and unemployment grew.
Figure 3: Household debt to disposable income (ratio)
Source: SARB
Uncontrolled flows of short-term capital (often referred to as hot money) were also important contributors to the relatively high levels of economic growth from 2004 to 2007. There was a massive recovery in foreign portfolio investment inflows to South Africa from 2004, and by 2006 net portfolio flows to South Africa were 7.4 per cent of the size of GDP. The impact of such large flows of the economy was huge; they caused the rand to strengthen, which had a negative impact on exports but a huge stimulatory effect on imports, and as a result, the negative balance on the current account as a percentage of GDP grew rapidly from −3.4 per cent of GDP in 2004 to −7.3 per cent of GDP in 2007 notwithstanding the large increase in global demand for minerals commodities and the large price increases for key South African exports such as platinum, coal and gold. The large current account deficit was a huge risk to the South African economy and its ability to maintain its balance of payments. In other words, the risk of a currency and financial crisis increased significantly.
The large and rapid growth in short-term capital flows is also associated with increased liquidity in the South African financial sector and increased extension of credit to the private sector. This increased credit was not used for long-term productive investment but instead was associated with increased debt-driven consumption and speculation in financial and real estate markets. The huge increases in household debt and the increased investment and employment in the retail and wholesale services sector were due to the increased credit extension made possible by increased hot money flows into the economy.
One of the consequences of the process of global financialisation was that events in financial markets shaped developments in the real sector. The debt-driven, consumption-led economic growth in South Africa was driven by increased inflows of short-term capital. At the same time, the South African financial sector was emulating the behaviour of its US counterpart (which boosted leverage and loosened lending conditions) and increasingly securitising debt and extending more debt for mortgages, car finance and consumption. There was very rapid growth in derivatives markets. The large South African corporations had also become increasingly financialised and seemed to follow the global trend whereby increasing product market competition caused many corporations to earn a larger share of their revenues and profits from financial activities and speculating in financial assets. The South African Reserve Bank’s flow of funds data shows that the South African corporate sector was speculating in financial markets more than it was investing in fixed investment (see figure 11 below).
The broader context for these economic events in South Africa are the industrial structural weaknesses of the economy and massive changes in corporate structure that have occurred in the economy since the end of apartheid. The industrial structural weaknesses stemmed from the development of the economy around mining and minerals or the minerals and energy complex (MEC), as argued by Fine and Rustomjee 1996). Much of the change in corporate structure occurred because of the responses of big businesses to democracy. The global context of increasing financialisation of nonfinancial corporations led to a massive global corporate restructuring and increased concentration of the global economy, and this process influenced the change in South African corporate structure. The global process of concentration entrenched and deepened the existing global division of labour between the rich countries of the North and the developing countries of the South. In general, rich countries controlled global economic value chains and the design, engineering, branding and distribution of products while the developing countries were, in the main, involved in either assembly manufacturing or providing low cost agricultural or minerals inputs into the global value chains. The corporate restructuring in South Africa began a reversal of previous industrialisation, leaving the economy more concentrated and more dependent on the mining and minerals sectors. These developments had a significantly negative impact on workers in South Africa.
The short period of growth at around 5 per cent per annum from 2004 to 2007 blinded many South African economists and economic policy makers to the crisis that was unfolding. The current financial crisis provides an excuse for the poor performance and high job losses in the economy but on the whole, this short period of high growth from 2004 to 2007 left the economy poorer. The decisions to adopt neoliberal economic policies, particularly macroeconomic and financial policies, have had a hugely negative impact on South Africa by allowing short-term financial flows to create macroeconomic instability that destroys industry and jobs. They have directed the misallocation capital towards speculation and bubbles in financial and real estate markets, and away from long-term job-creating productive investment. The relatively little fixed investment that has occurred is largely in services sectors linked to increased speculation in financial and real estate markets and the growth in debt-driven consumption.
INDUSTRIAL STRUCTURAL WEAKNESSES AND CORPORATE RESTRUCTURING
South African economic development occurred around the mining and minerals sectors, and the state and mining industry supported growth of manufacturing sectors with strong links to the MEC, the formation of which, according to Fine and Rustomjee (1996), was a result of the political compromise between large English mining interests and the large Afrikaner business and political establishment. It was also shaped by the politics of oppression of black South Africans and the strict control over black workers.
Most manufacturing sectors with weaker connections to the MEC have remained weak and have not received strong state support and adequate investment from the large mining finance houses that had dominated the South African economy until the 1980s. With the exception of a few sectors, such as automobiles and components, manufacturing remains dominated by sectors with