New South African Review 1. Anthony Butler
therefore, had less capital to invest in their own activities. Stockhammer (2004) uses regression analysis to show that financialisation is associated with lower levels of capital accumulation. Froud et al (2000) show the extent to which executives of nonfinancial corporations have become focused on the concerns of the financial markets for short-term high returns, using case studies of global corporations to show how this sensitivity to financial markets has created dysfunctional behaviour in large corporations, and arguing that the narrative provided by CEOs of large corporations to financial markets is not supported by examination of the financial statements of those companies. Orhangazi (2007) uses firm level data in the US to show a negative relationship between real investment and financialisation. He argues that financialisation of nonfinancial corporations may have caused a change in the incentives of management that caused them to direct capital towards financial investments.
Much more research is required to understand the impact of financialisation of NFCs on the South African economy and on developing countries in general. Given the available evidence I argue that the largest South African corporations have become more sensitive to the demands of the financial sector, particularly the shareholder value movement. Recent corporate restructuring and the content of annual reports of these giant corporations are indications of this sensitivity. Lazonick and O’sullivan (2000) argue that the predominance of the shareholder value approach to corporate governance has been accompanied by a shift from patient to impatient capital – in other words, the increased influence of financiers and the shareholder value movement over corporate executives has caused a shift in management behaviour. Investors and management are less concerned with building and nurturing businesses over a long period of time, and have become focused on short-term returns. This behaviour is even more marked where big business has moved capital out of South Africa and increased its efforts to internationalise. Crotty (2002) says that this shift to impatient capital has led to management treating their subsidiaries not as long-term investments but as part of portfolios of assets. We have seen former South African giant corporations unload a huge number of South African businesses that they have decided are not part of their core businesses and increase their investments abroad. Froud et al (2007) argue that this increased focus on short-term financial returns in NFCs is bad for labour because decreasing employment is good for increasing profits in the short-run even if losing experienced workers may be detrimental to these NFCs in the longrun. South Africa requires capital that will make a long-term commitment to employment and building the skills of their workforces. Financialisation increases short-term motives, and therefore firms are less likely to invest in long-term skills development.
THE SOUTH AFRICAN ECONOMIC CRISIS: Financialisation and deindustrialisation
The process of financialisation occurred on top of an industrial structure dominated by the MEC where the manufacturing sector was inadequately developed and diversified. The infrastructure and institutions of the economy, developed to support the MEC, were not geared towards supporting diversified industrial development. Economic policy choices did not support investments in industry but supported a preference for liquid, financial investments. The inflows of short-term capital to the economy from the mid-1990s led to increased private sector access to credit but this increase was associated with increased debt-driven consumption by households and speculation in real estate and financial asset markets.
Figure 12 shows that acceleration in household consumption from the mid-1990s speeded up even more from 2003. Increased short-term capital flows and increased access to private debt were an important influence on household consumption. Obviously, the trade deficit was negative for years when net flows were positive but we also see a large increase in the trade deficit from 2005 which grew to over 7.5 per cent of GDP in 2008. Household debt to disposable income grew from about 60 per cent in the mid-1990s to almost 80 per cent in 2008 while household savings turned negative in 2005 and remained negative through 2008. It is worth noting that a large proportion of South Africans do not have access to credit and so the average debt to disposable income numbers reported by the SARB may well underestimate the level of indebtedness of more affluent South Africans.
The impact of growth in net acquisition of financial assets and the increased level of household debt-drive consumption are shown in the next few charts. Investment and capital formation has been concentrated in the financial services sector and the services sectors have benefited from increased consumption.
Figure 12: Trends in household consumption, government consumption, investment and trade, 1970–2007 (Real 2000, Rmillions)
Source: SARB
Figure 13 shows the top ten sectors by size of investments for 2006 to 2008. The first of these was an important year for increased debt-driven consumption, increasing minerals commodity prices and the growing house and financial asset price bubbles. During 2006, services sectors dominated investment. The other mining sector, largely platinum mining, makes it into the top ten investment sectors, as do two manufacturing sectors, automobiles and components and coke and refined products (investments into Sasol the formerly state-owned company that produces oil from coal). The automobiles and components sector was supported by increased private sector credit that led to a large growth in car sales. Manufacturing sectors do not make it into the top ten investment sectors in 2008 as a result of the declining investment in manufacturing owing to the impact of the global economic crisis.
Figure 14 shows changes in capital stock from 2000 to 2006 for all sectors of the South African economy. The change in capital stock is important to consider because there was an increased level of depreciation write downs during the period (see figure 10). The period from 2000 to 2006 was chosen to show the impact of the 2001 currency crisis and the recovery from 2003; 2007 is excluded because investment performance was affected by the start of the financial crisis. Figure 13 shows that the sectors that benefitted from investment and that had growth in capital stock were services sectors. The largest capital stock growth after general government services was finance and insurance services. Almost all manufacturing sectors had relatively low growth in capital stock or negative capital stock growth. The motor vehicles, parts and accessories sector was the only manufacturing sector that had relatively large growth in capital stock – which occurred because automobiles and components was the only manufacturing sector where government had implemented an industrial policy. It was also supported by the increased access to private credit by households.
Figure 13: Top ten investment sectors for 2006 and 2008
2006 Top 10 sectors by investment (as a % of total investment)
2008 Top 10 sectors by investment (as a % of total investment)
Source: Quantec
Figure 14: Change in capital stock from 2000 to 2006 for all economic sectors (Real 2000 prices, Rmillions)
Source: Quantec
Figure 15: Derivative market futures contracts (Rbillions, current prices)