New South African Review 1. Anthony Butler
in January 2010; the ratio between FTE and employment opportunities estimated from Department of Public Works, ‘EPWP Report for the Period from April 2008 to March 2009’, Annexure A, downloaded from www.epwp.gov.za in January 2010.
The government also created low level employment opportunities directly through the EPWP. In the first half of 2009, it created 225 000 employment opportunities, the equivalent of about 78 000 full-time jobs. That meant it provided around four out of five of all full-time equivalent positions created under the micro-economic measures in the national response to the crisis. The EPWP was expected to grow to 610 000 full-time equivalents by 2013/4 (EPWP 2010). That target equalled around 10 per cent of all unemployed plus discouraged work-seekers in the third quarter of 2009.
The government response was notable for its failure to address a looming problem: the appreciation of the rand. In the NEDLAC document, the state agreed with the main economic stakeholders on the importance of a competitive currency (NEDLAC 2009, p. 8). Yet in late 2009, the rand was stronger against a trade-weighted basket of currencies than at any time since 2006, although it did not reach the historically strong levels of 2004 and 2005 (SARB 2010, p. S-103). The value of the currency had recovered by about 20 per cent from the beginning of 2009. That, in turn, made it harder for South African producers to compete with imports and on international markets.
Table 17: Trade-weighted value of the rand, monthly average, 2004 to 2009
Source: For data through October 2009, series on trade-weighted value of the rand from South African Reserve Bank. Zipped data files for the Quarterly Bulletin No 254 – December 2009. Downloaded from www.reservebank.co.za in January 2010. For data from October 2009, South African Reserve Bank. Quarterly Bulletin, March 2010. Page S-78. Downloaded from www.reservebank.co.za in April 2010.
The rise in the rand was mimicked in other emerging markets. It apparently reflected the efforts of the central banks of the global North to stimulate their economies by pumping funds into their economies and restraining interest rates. Institutional investors from the industrialised economies responded by looking to short-term equity and bond holdings in middle-income countries. In the case of South Africa, after an outflow of R5 billion in the third quarter of 2008, inflows climbed to R41 billion in the third quarter of 2009. In nominal terms, that was higher than all except two quarters in the previous twenty years. Inflows fell back to R23 billion in the following quarter – still substantial compared to previous years.
In response to the appreciation in the rand, in late October 2009 the Treasury relaxed some exchange controls. The argument was that this would foster an outflow of capital to offset inflows from the rest of the world (Treasury 2009a, p. 9). As of January 2010, this strategy had not visibly affected the value of the rand, although the trade-weighted data were not yet available. More important, even if it succeeded, South Africa would have traded national resources for short-term, unreliable foreign inflows into stocks and bonds. That outcome seemed likely to make it more difficult in future to mobilise national savings to support developmental investments.
In contrast to the South African strategy, Brazil imposed a 2 per cent tax on investment in equity and bonds, explicitly to deter short-term inflows that were propping up its currency (Silverblatt 2009). In effect, the Brazilian government found that sustained economic growth required a stable and weaker currency more than increased imports fuelled by short-term portfolio investments from abroad.
Table 18: Quarterly capital flows (balance on financial account), first quarter 1990 to third quarter 2009.
Source: For data through the third quarter of 2009, series on quarterly change in financial account from South African Reserve Bank. Zipped data files on balance of payments for the Quarterly Bulletin No 254 – December 2009. Downloaded from www.reservebank.co.za in January 2010. For the final quarter of 2009, South African Reserve Bank. Quarterly Bulletin, March 2010. Page S-103. Downloaded from www.reservebank.co.za in April 2010.
THE CRISIS AND SOUTH AFRICA’S DEVELOPMENT STRATEGY
The international crisis was associated with far-reaching structural changes in the world economy. That, in turn, has implications for South Africa’s longer-term development strategy (see Makgetla 2009). In particular, profound shifts in international markets made it seem even less likely that South Africa could grow on the basis of manufactured exports, although that remained the official core of government’s industrial policy.
The emphasis on exporting manufactured goods largely shaped the discourse on industrial policy worldwide and in South Africa (see Hausman et al 2007). It largely reflected the belief that the rapid economic growth in East Asia from the 1960s was rooted in vigorous industrial policies to support manufacturing for markets mostly in Europe and the US. In South Africa, the Department of Trade and Industry (dti) argued that ‘long-term increases in employment – in all sectors of the economy – needs to be underpinned by higher growth in the production sectors of the economy, led by manufacturing’, with a strong focus on encouraging tradable goods production in particular (dti 2010, p. 6).
This view of East Asian industrialisation neglected three factors that enabled effective industrial policy there. First, East Asian countries generally enjoyed relative equality and social cohesion (see Campos and Root 1998), which meant both capital and workers were more likely to agree on economic growth as a social panacea. In particular, measures to raise productivity prove more acceptable in economies with high levels of low-wage employment than in economies with low employment, where growth through rising productivity in export sectors actually limits employment creation. Second, the United States provided extraordinary levels of support because it saw the East Asian countries until the 1990s as a bulwark against communism. Finally, over the past half century the region as a whole gradually developed logistics infrastructure and market institutions that vastly reduced the cost of exporting to and communicating with the global North. Obviously, none of these factors applied in South Africa.
The international economic crisis laid bare a fourth obstacle to a growth strategy based on manufactured exports. That strategy explicitly assumed virtually unlimited demand in the global North, and in particular the US. If countries could produce competitively, they would be assured of adequate demand. Yet the downturn of the late 2000s could be understood as a crisis of inadequate demand resulting on the one hand from deepening inequalities in much of the North and on the other from the suppression of wages to support continued exports in much of East Asia, including China, as well as some European countries.
The growing imbalance in demand was reflected in the huge balance of payments surpluses enjoyed by the rapidly growing economies of East Asia. The recycling of those surpluses laid the basis for the credit bubble that led to the financial crisis of late 2008. Once the credit bubble burst, demand for imports by the global North contracted sharply.
The prospects for resuming export-led growth remained unclear at the end of 2009. While economic expansion resumed in China and other Asian economies, exports remained far below the levels of 2008. To replace