Committee for the Abolition of Illegitimate Debt

Corporations and workers alike are ill prepared for the period ahead, especially if it entails another export-led drive through SEZs, particularly if the 4^th Industrial Revolution plays a major role in maintaining links to otherwise-fraying global value chains. Historically, the main era in which worsening vulnerability to the world economy was witnessed began in the 1980s, once sanctions hit hard and the government of PW Botha defaulted on its $13 billion in foreign debt, in 1985. But after a re-engagement with global capital once sanctions were lifted, South Africa spent the 1990s deindustrialising during a decade of increasing volatility in the world economy. At that point, notwithstanding Nelson Mandela’s strong leadership in consolidating democracy, at least ten fateful decisions made South Africa even more subject to the volatility in world trade, finance and direct investment.

This history is worth reviewing, because in subsequent pages, the South African economy’s underlying problem of overaccumulated capital can then be put in political context. The overaccumulation drive on occasion resulted in severe crises, but with different forms. A falling corporate profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. rate from levels amongst the world’s highest in the 1970s resulted in pressure on the economy that helped end apartheid, but under conditions of imposed (elite-pacted) neoliberal policy. Another very high profit ranking in the 2000s coincident with high commodity prices, but then led to financialisation (i.e., higher relative debt and share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. -portfolio ratios, as well as illicit financial flows), worsening uneven spatial development (within cities and between rural and urban livelihoods), and an amplification of environmentally-damaging minerals-extraction systems. To place renewed emphasis on SEZs as a means of solving the resulting socio-economic problems is unreasonably ambitious, this paper concludes.

Post-apartheid neoliberal economic policies accommodated, accentuated and displaced the crisis conditions noted above. Although great rhetorical effort is made to address social distress through fiscal policy (e.g. social grants and education), the reality is that policies in the monetary, financial and international spheres are amplifiers of inequality, and therefore make the potential for South African producers to sell them to the local market.

StatsSA’s estimate of the ‘Upper Bound Poverty Line’ (UBPL), including food plus survival essentials, was R779/month in 2011, or R26/day. The percentage of South Africans below the poverty line was then 53 percent. At the University of Cape Town SA Labour and Development Research Unit, Budlender et al (2015) argued that StatsSA was too conservative and the ratio of poor South Africans was actually closer to 63%. It would be much more appropriate to use what is increasingly considered a genuine poverty line among international political economists, which is $7.40/day, or roughly R110/day (Hickel 2019). That level would mean roughly 85% of South Africans survive under the poverty line.

The sustained poverty, inequality and unemployment that South Africa’s producers currently confront are reasons for pessimism about an economic recovery. But the most important constraint to the potential for prospering SEZs is a deeper problem than public policy typically admits: capital’s durable tendency to overaccumulation.

The adoption of neoliberal macro-economic policies that undermined the majority’s living conditions the most prevailed under the presidencies of Nelson Mandela (1994-99), Thabo Mbeki (1999-2008), Kgalema Motlanthe (2008-09 as caretaker for eight months), Jacob Zuma (2009-18) and Cyril Ramaphosa (2018-present). Globally, too, most national regimes adopted neoliberal macro-economic policies, occasionally augmented by welfare policies grudgingly approved by the Bretton Woods Institutions (Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. 2003). What is extraordinary in South Africa, though, is that this condition is maintained within what is often, rhetorically, quite radical African nationalist rule, turbulent though it has been. Two presidents – Mbeki in 2008 and Zuma in 2018 – were victims of palace coups in large part because of growing social unrest.

Using both coercion and consent, the ANC leaders have suppressed the energies of a working class often judged the world’s most militant (World Economic Forum 2017), along with radical social movements and community protesters alike (Alexander et al 2018). With protests remaining fragmented and single-issue in nature, the single most and embarrassing feature of post-apartheid political economy – perhaps aside from Mbeki’s AIDS denialism and the post-apartheid era’s systemic, clumsy bouts of corruption – may well be the fact that South Africa became the world’s most unequal country, overtaking Brazil, after 1994 (World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

2016).

Adverse international and local conditions for South Africa’s Secial Economic Zones

One obvious reason the elites have gained such extraordinary wealth since the end of apartheid is venal corruption. This problem is, within the state, of an average intensity in international terms, for South Africa ranks 73^rd in the latest Transparency International (2019) corruption perceptions index measuring politicians and civil servants (worsening slightly from 71^st least corrupt in 2017 and 23^rd in 1996). In contrast, the PwC (2018) economic crime report continues to rate Johannesburg-Cape Town-Stellenbosch-Durban corporate sector as “world leader in money-laundering, bribery and corruption, procurement fraud, asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). misappropriation, and cybercrime” (Hosken 2014); for “eight of ten senior managers commit crime” (FM Fox 2014). The Steinhoff business empire’s collapse in 2017 followed by a major regional bank (VBS) only confirmed how weak financial regulation at Treasury and the SA Reserve Bank had become.

To illustrate the systemic lack of accountability in fiscal and financial policies and the conniving role of major accountancy firms, fraud in state procurement
contracts is the single largest state expenditure annually. Leading Treasury official Kenneth Brown estimated in 2016 that vast shares of the annual tender budget are lost to overcharging by corporate suppliers of outsourced goods and services, “(i)t means without adding a cent, the government can increase its output by 30-40%… That is where the real leakage in the system actually is” (Mkokeli 2016). The 2016-19 revelations about the Gupta and Bosasa empires’ grasp over vital state organs, politicians and officials generated estimates of more than R100 billion in damages, but Brown’s estimates suggest that state spending transfers far more to elites than previously understood: R240 billion annually.

South African firms not only sell services that are vastly overpriced to the state, they in turn specialise in widespread tax dodging and offshore “Illicit Financial Flow” transfers of income, estimated at $21 billion per annum for 2004-13 by Global Financial Integrity (Kar and Spanjers 2015). Financial regulation of Base Erosion and Profit Shifting, misinvoicing, transfer pricing and other tax dodges appears non-existent; Ramaphosa himself was regularly implicated in billions of rands worth of Lonmin, MTN and Shanduka financial offshoring to zero-tax havens including Bermuda and Mauritius (McKune and Makinana 2014, AmaBhungane 2015).

The points above relate to social resistances and economic waste created by widespread corporate corruption, which are vital aspects that provide constraints to the sort of profit-making that SEZ investors expect. However, there are much worse problems to discuss next, dealing with the underlying problems in the South African economy – structural flaws associated wiht the kinds of neoliberal strategies of which SEZs are exemplars.

  Structural Economic Context and Periodic Overccumulation Crises

In the next pages we consider deeper structural economic processes associated with the state’s failed neoliberal policies. These include: 1) long-term (50-year) tendencies to the overaccumulation of capital that have never been properly resolved; 2) a resulting stagnation in the productive sectors of the economy (as witnessed when South Africa’s corporate sector profit rate fell to dangerously low levels by the late 1980s before a dramatic 1990s turnaround, before another recent plunge); 3) the mid-1990s closures of labour-intensive industries and the widespread replacement of workers with machines (causing a dramatic rise in unemployment); 4) the ascendant class power of export-oriented and mercantile capital, as well as domestic and international financial capital during the era of financialisation; and 5) the dominance of “Washington Consensus” ideology. The latter was devastating to macro-economic policy debates, especially once the Soviet Union’s crash diminished the confidence of African nationalists, Communists and trade unionists during the early 1990s, leaving the Mandela government to adopt a neoliberal agenda (Bond 2014).

For the purposes of linking macro-economic policy responses and inequality to overaccumulation crisis, we show below how in South Africa, from the early 1990s, the more backward fractions of capital in the main cities’ industrial districts were destroyed by international competition. The overaccumulation tendency was then experienced again from the early 2010s, once the global commodity super-cycle peaked. Given the simultaneous rise of fictitious capital (i.e. paper representations) and amplified uneven development, we contend that inequality can only be addressed in a manner that not only cuts against the grain of prevailing neoliberal public policy, but also that transcends typical Keynesian measures (in one of the best such recent arguments, Padayachee 2018 calls for merely a temporary imposition of exchange controls). To do so, the next sections consider in more detail the core problem of overaccumulation crisis, followed by macro-economic policy compromises during the 1990s, and resulting fiscal policy, monetary-financial processes and international economic relations.

Overaccumulation has various symptoms. Given the intercapitalist competition within and between industries which leads to ever rising capital intensity and hence overproduction, there is a tendency for gluts to develop: high inventory levels, unused plant and equipment, excess capacity in commodity markets, idle labour and bubbling financial capital. The latter seeks rates of profit that are increasingly difficult to identify in the economy’s real sector. Hence corporations shift profits from reinvestment in (overaccumulated) fixed capital into purchasing fictitious capital, a process that stalls the devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the overaccumulated capital since credit displaces (across time) the need to pay for the goods and realise the profits (Harvey 1982).

How does overaccumulation reveal itself in South Africa? Quarterly estimates of the general rate of profit over 1960-2016 suggest the economy has experienced two major phase changes in the pace and rhythm of capital accumulation. The rate of profit exhibits a cyclical tendency to fall, mainly driven by the tendency of capital intensity to rise. The economy experienced a crisis of absolute overproduction of capital in the mid-1980s. This crisis was not only characterised by stagnation in the mass of profits, it was also characterised by a halt in capital accumulation. Thereafter, the rate of profit recovered primarily because of the fall in the capital-output ratio, although it failed to reach the levels seen in the 1970s. By 2012, the economy entered a new crisis of overproduction of capital characterised by stagnant profits and prolonged overaccumulation, which makes it impossible for economic growth to recover.

Gross Fixed Capital Formation, in Constant Rands, 1960-2017

Source: World Bank

Quarterly fixed capital stock is a proxy for genuine capital accumulation (not including fictitious capital, i.e. the paper representation of capital). When the crisis rate of profit is above the actual rate of profit, the economy experiences overaccumulation. Between 1960 and 1998, the profit share remained fairly constant, fluctuating around 0.495. Thereafter the profit share rose sharply in the early 2000s and started declining after 2007. On the other hand, from the early 1960s to the mid-1980s, the capital-output ratio rose persistently (Malikane 2017).

The Quarterly Rate of Profit 1960-2016

Source: Malikane 2017

Capital Intensity and the Profit Share, 1960-2016 (2010=1)

Source: Malikane 2017

It is therefore the increase in capital intensity which explains most of the decline in the rate of profit between 1960 and 1984, a process also recognised by Nattrass (1989). During the neoliberal phase, the profit share remained fairly constant on average, but the capital-output ratio fell. Once again the recovery of the rate of profit over this period is largely explained by changes in the capital-output ratio. From 2002-2006, the profit share remained constant but the capital-output ratio continued to fall. During the great recession after 2008, the economy experienced both the fall in the profit share and the increase in capital intensity. The sharp increase in capital intensity at the onset of the great recession can be explained by the fact that the recession led to a sharp drop in output, which led to a sharp increase in the capital-output ratio (Malikane 2017).

The configuration of the components of the rate of profit after 2010 is similar to the one between 1982 and 1995. During this period, the economy experienced a crisis of absolute overproduction of capital. The historical minimum rate of profit that prevailed in 1984 was 6.6%, the same rate of profit prevailing in 2014. Nevertheless there is an important difference between these two periods. During the crisis in the 1980s the profit share was slightly rising, but during the current crisis the profit share has been falling.

Lastly, consider the “normal” rate of profit, the long-run that would prevail if all capacity ¬were fully utilised (Shaikh 2016: 826). Having controlled for fluctuations in capacity utilisation, the neoliberal recovery occurred in the early 1990s, corresponding to the beginning of the democratic era in South Africa. However, the extent of the recovery did not lead to as high a peak in the normal profit rate as in the 1960s. The sharp changes in the normal rate of profit correspond to conjunctural political events that characterise the turbulence of the South African socio-economic formation (Terreblanche 2002: 342). However, the underlying trend in the rate of profit remained downwards, and this falling trend in the rate of profit ultimately choked the growth of the mass of profits and, as Prinsloo and Smith (1997) note, capital accumulation became insufficient to cover depreciation between 1989 and 1993.

The Normal Quarterly Rate of Profit, 1960-2016

Source: Malikane 2017

To sum up the rhythm of late-apartheid overaccumulation, after the mid-1980s, capital intensity stopped rising. Overproduction had peaked in early 1984, and thereafter the rate of capital accumulation plummeted and fluctuated around zero. The overaccumulation crisis lasted for roughly two years, because the mid1985 economic meltdown cleared away a vast swath of capital.

The Dynamics of Capital Intensity, 1960-2016

Source: Malikane 2017

More recently, although the current crisis of overproduction of capital started in late 2012, there is still a substantially positive rate of capital accumulation, with the IMF IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org (2016) regularly reporting South African profit rates in the top five of advanced and emerging economies. The plateau of most commodity prices until the 2014-15 crash allowed the extractive industries to drive what was still a substantially positive rate of capital accumulation. But that in turn signalled a much more prolonged overaccumulation crisis than in the 1980s. Then from early 2015, the rate of capital accumulation collapsed, as witnessed also in the share valuation crash of the world’s main mining houses, most very active in South Africa. The market capitalisation of Anglo American and Lonmin fell more than 90% in 2015, while Glencore and BHP Billiton dropped by more than 85%. The prospects of a recovery in the light of this configuration of the rate of capital accumulation and the rate of profit are therefore non-existent (Malikane 2017).

A more explicitly pro-business president, Ramaphosa, took state power from Zuma in early 2018. But in spite of Zuma’s reputation for frivolous spending, corruption and other forms of economic carelessness, the Treasury and Reserve Bank were relatively insulated from ‘macro-economic populism’ (as was used to describe Venezuela under Chavez, for example). Indeed there have been very few if any changes in macro-economic policy between the two regimes. We can observe this, next, in considering fiscal policy, followed by monetary policy and international economic relations.

  Post-Apartheid Fiscal and Monetary Concessions

When white capital broke from the white state to join forces with the neoliberal factions of the ANC during the early 1990s, this was an opportunity to shape public policy in their interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , as one of the central means of restoring profitability. The demise of the Soviet Union had removed all confidence from the ANC’s left factions, especially the SACP. The near-bankrupted Treasury was awarded an investment grade by credit ratings agencies in 1994, thus subjecting South Africa to much international financial pressure. In late 1993, an International Monetary Fund (IMF) loan of $850 million had cemented the more neoliberal elements of the apartheid government’s budget. Following South Africa’s longest-ever depression, from 1989-93, and with private gross fixed investment still at desultory levels through the 1990s, the new government was subject to a barrage of advice for re-entry to the world economy, in search of elusive Foreign Direct Investment. In the years prior to the commodity super-cycle, it was only in 1997 that a momentary uptick recorded, when a third of Telkom was sold to Malaysian and Texan investors.

Out of apparent desperation once the Rand crashed in early 1996, the RDP office in the presidency was shut down and by mid-1996, a team comprised of local neoliberal economists (all white) and two World Bank economists devised the Growth, Employment and Redistribution (GEAR) policy. A budget deficit cut-back from 9% of GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. ratio to 3% – the European Union standard – was the GEAR target. By 1998 fiscal austerity was being felt in many of the line departments, thus adversely affecting service delivery. To broaden the revenue base, the IMF had promoted the imposition of a Value Added Tax (VAT) in 1991 instead of more progressive taxes. While Imraan Valodia and David Francis (2018) argue the zero-rating of basic foodstuffs makes VAT increases relatively more favourable to poor than rich consumers, revenues could be more equitably raised under a strategy of higher direct taxation on corporations and the rich.

During the 1990s, several other macro-economic compromises exacerbated the fiscal squeeze. These including repayment of $25 billion in apartheid-era foreign debt; cuts in the primary corporate tax rate from 56% to 38% during the 1990s (and then down further, to 28% by the early 2010s); falling customs duties and tariff revenues once South Africa joined the General Agreement on Tariffs and Trade on adverse terms in 1994; and the decision to allow wealthy South Africans to remove their apartheid-era capital to offshore sites. The latter entailed the 1995 cessation of the Financial Rand (Finrand) dual-currency exchange control system, mainly liberating the richest South Africans to remove their wealth forever; and the 1999-2001 permission given to some of the largest firms on the Johannesburg Stock Exchange (JSE) – AngloAmerican, De Beers, Old Mutual, SAB/Miller, Mondi, Investec, Didata – to relist their primary financial homes in London and New York. (Earlier individual permissions to remove apartheid-era capital had been given to BHP Billiton – formerly Gencor – as well as Liberty Life insurance.) Prescribed assets on institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. (to require purchase of state securities) had earlier been phased out, and the two big mutual insurance companies – Old Mutual and Sanlam – were allowed to switch to private ownership, thus compelling the state to source its domestic borrowings in a more expensive financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. than during apartheid.

Fiscal expenditure was never strong enough to offset these biases, because due to the pressure from international credit ratings agencies plus intrinsic conservativism in Treasury, social spending as a share of GDP was in post-apartheid range of 5-8%, compared to a 22% average of the world’s 40 largest economies (only four countries were lower – India, Indonesia, Mexico and China – while France and Finland maintained social spending of more than 30% of GDP [OECD OECD
Organisation for Economic Co-operation and Development OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/ 2016]). This reflected fiscal choices within the Treasury, for at the same time, state spending/GDP did rise from its 2003 low point of 24% to 33% by 2018 (with a deficit level of just over 4%). Meanwhile, aggregate public debt as a share of GDP soared from 27% in 2009 to 53% in 2018, as a result of stagnant per capita GDP growth over the period. The makeup of public spending was simply not sufficiently redistributive to take advantage of low-income consumer’s much lower leakage of spending than, for example, the wealthier citizens and corporations prone to purchasing luxury imports or park their savings in unproductive, speculative sites like the JSE, where there is little if any relationship to real-economy investment. Other biases in fiscal policy include health spending, where the wealthy receive tax write-offs for private medical expenses, as well as corporate concessions on municipal services tariffs and electricity (Special Pricing Agreements are especially generous to two giant mining houses, BHP Billiton and Anglo American, whose per unit cost of power is one tenth the rest of society). The extractive-industry corporates are also lightly taxed – through royalties and income taxes – on their depletion of non-renewable resources, which also exceeds $20 billion per annum (Bond 2018). These are just some of the ways that ‘corporate welfare’ exceeds the state’s social spending.

In addition, much fiscal activity that should be inequality-reducing, such as schooling, is not in South Africa. Sometimes that reflects the apartheid legacy in which those with closer proximity to good state services maintained them after 1994 as a result of residential re-segregation processes. As a result, there is regular rubbish collection in traditionally white neighbourhoods, but none to speak of in shack settlements where a third of a typical city’s residents live. Because the catchment area for schools also reflects this geographical bias, experts argue that public education – typically taking 15% of the South African national budget annually – does not reduce but cements inequality (Spaull 2013).

Another reflection of privileged geographical location leading distorted fiscal policy and inequality-exacerbating outcomes, is state economic infrastructure funding. So too does state spending on defence, public order and safety – because geographically there is more money spent in rich than poor areas to protect property and residents, but also in terms of defense spending, the wealthy have more to lose if national sovereignty is violated militarily. A final category of fiscal spending that amplifies class power is debt servicing, since financiers and other wealthy bondholders benefit most, as a result of South Africa’s historically-high real interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. .

All of these considerations (and many others) reflect a long-standing dispute (Bond 2015; Forslund 2016) with the World Bank (2014, Woolard et al 2015) regarding a supposed ‘highly redistributive’ impact (from rich to poor) claimed by the Bank and many important allies in their fiscal analyses. Woolard et al (2015) argued that the Gini Coefficient falls from 0.77 to 0.59 thanks to Pretoria’s ‘comprehensive’ expenditures, which include state education and healthcare spending. In 2016, the Bank (2016, 151) estimated that a reduction in inequality by “over 7 points in the market income Gini” occurred through fiscal policy. By 2018, however, the IMF (2018b) admitted that such analysis “excludes important taxes (such as corporate income, international trade, and property taxes) and spending categories (inter alia, infrastructure investments)…” With such vast gaps, not to mention the other points discussed above, the Bank analysis suggesting a redistributive state simply falls apart.

Similar concerns must be expressed about monetary policy. Indeed, by allowing the current account deficit to soar after 2001, as a result of a new stream of profit and dividend outflows associated with the relisting of major firms on the foreign stock markets, much higher levels of foreign indebtedness were then required to pay that outflow. The inherited $25 billion foreign debt (of all borrowers) soared to more than $183 billion by 2018. And this, in turn, required South Africans to pay a higher real interest rate than ever before, typically amongst the top five in the world for 10-year securities amongst several dozen countries that sell these in international markets. This premium was paid long before junk ratings were imposed from April 2017.

Historically, the late 1980s witnessed a sharp turnaround from counter-cyclical to pro-cyclical monetary policy, once a neoliberal (Chris Stals) replaced a more politically-sensitive Reserve Bank Governor (at crucial moments, Gerhard de Kock had kept rates low to please the Pretoria regime). The dramatic rise in real interest rates in 1989 was exacerbated in 1995, by another ratcheting of real interest rates as a result of the Finrand liberalisation: to compensate for the outflows (benefiting the wealthiest), the Reserve Bank’s high returns to inflows hurt all debtors. Those included a new (often first) generation of black borrowers, and the April-September 1998 crash of the Black Chip shares on the JSE was even greater than the stock market’s overall 45% fall from peak to trough.

Source: South African Reserve Bank

As the crash unfolded, the currency also collapsed once Russia defaulted on its foreign debt, confirming the fragility in emerging markets. After spending the country’s hard currency attempting to defend the Rand’s value, Stals gave up and instead simply raised interest rates by 7% within two weeks. The shock rise followed a steady increase in the real interest rate the Reserve Bank charged its own borrowers (the repo, or repurchase rate) from 2.5% in 1993 to 12.5% in 1998. That increase exacerbated bankruptcies (the repossession rate) for black business borrowers who had collateralised their debts with stock market shares. Hence the 1993 and 1996 decisions by Constitution drafters to give the SA Reserve Bank formal ‘independence’ were, in those respects, extremely costly to the society.

Interest rate management is not only aimed at keeping money inside the country. In orthodox hands, a monetarist perspective considers money supply the driver of internal prices. Thanks to the Reserve Bank’s high interest regime since 1995, inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. never reached the levels of the 1980s, and indeed in recent years, Consumer Price Inflation was reduced to 5.1% for the wealthiest fifth of the population over the 2009-17 period. However, for the poorest two thirds of South Africa, it was nearly two full percentage points higher, according to the IMF (2018a, 76), partly as a result of higher administered prices (especially electricity) and food prices as drought periodically cut domestic supply.

Another aspect of monetary management (considered in the broadest terms), is the financial system’s supervision and regulation. The ‘Quantitative Easing’ loose-money strategy adopted by the North’s central banks from 2009-15 was based, first and foremost, upon ensuring banks would survive the Great Recession, and secondly, upon the need to artificially reflate global effective demand. In South Africa, supervision and regulation of the financial system always received praise from the World Economic Forum (2017) Global Competitiveness Reports, usually ranking in the world’s top ten.

But in reality, there are major problems with supervision and regulation, as witnessed in the delinking of the South African financial system from the real economy. Reflecting the financialisation process that was explained in theoretical terms above, South Africa’s overaccumulated capital has not been reinvested, in the form of profit streams plowed back into plant and equipment. The main way the financial markets have taken over such flows of idle capital, is through a level of stock market overvaluation, an ‘irrational exuberance’ (as Alan Greenspan termed this process in the US) that is the world’s worst, measured using the Warren Buffet Indicator. By that measure, which is a national stock market’s aggregate share value to GDP, the JSE grew rapidly through January 2018, reaching a ratio (350%) higher than any other ever measured, 3.2 times higher than the world average. Although real estate markets were adversely affected by the 2009 recession and subsequent political uncertainty, from 1997-2008 South Africa’s landed property grew faster than any other in the world, twice as high the next largest bubble market, Ireland’s (The Economist 2009).

Had there been political will, the Treasury and Reserve Bank could have addressed these bubbles, since many were based upon the chaotic search for financial returns. For example, a “Henry George Tax” on undeveloped land would have lowered the returns to speculative acquisitions, and a strong mode of forced class-integration within residential projects – so that affordable housing is mixed with luxury accommodation – would have prevented so much investment money in upper-income gated communities. There could readily have been “Tobin Tax Tobin Tax A tax on exchange transactions (all transactions involving conversion of currency), originally proposed in 1972 by the US economist, James Tobin, as a means of stabilizing the international financial system. The idea was taken up by the association[ATTAC and other movements for an alternative globalization, including the CADTM. Their aim is to reduce financial speculation (which was of the order of 1,500 billion dollars a day in 2002) and redistribute the money raised by this tax to those who need it most. International speculators who spend their time changing dollars for yens, then for euros, then dollars again, etc., as they calculate which currency will appreciate and which depreciate, will have to pay a small tax, somewhere between 0.1% and 1%, on each transaction. According to ATTAC, this could raise 100 billion dollars on a global scale. Considered unrealistic by the ruling classes to justify their refusal to adopt it, the meticulous analyses of globalized finance carried out by ATTAC and others has, on the contrary, demonstrated how simple and appropriate such a tax would be.

ATTAC : https://www.attac.org/ ” disincentives for financial transactions above a certain value (even Zimbabwe applied such a tax – of 0.02% on every bank transaction – although without any real attempt at progressivity in late 2018, given the ultra-neoliberal orientation of Finance Minister Mthuli Ncube, hence it was universally despised).

Rising Stock Market Overvaluation, Johannesburg Stock Exchange, 1975-2017

Source: World Bank

However, in contrast to what was possible (sometimes termed “financial repression”), some of the main regulations pertaining to financial were deregulated, sometimes even out of existence. These included the Finrand dual exchange-rate to penalise offshoring; the corporate listing requirements; the building societies’ domination of home mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral. bond lending; and the very existence of the major insurance companies Old Mutual and Sanlam as mutual societies. In the case of usury rate protections against excessive interest rates (especially on small loans), major exemptions were made to existing regulations (Bond 2014).

Along with the relatively high interest rates paid to savers due to conservative monetary policy, these processes had the effect of intensifying inequality, as wealthy South Africans externalised their assets and as the mutual ownership that had preserved working-class wealth for generations suddenly reverted to private ownership of existing shareholders. Several banks that were on the verge of failure were merged thanks to a generous Reserve Bank bailout loan, creating the Amalgamated Banks of South Africa. (Smaller banks were not so fortunate, as no bailout was considered for the African Bank or VBS in recent years.) Pension funds Pension Fund
Pension Funds Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets. that required longer-range investment consideration were converted to provident funds that could be drawn down by beneficiaries overnight.

Moreover, the degree to which the regulators’ oversight was inadequate to the task of maintaining financial system coherence was illustrated repeatedly by banking scandals. For example, Illicit Financial Flows unveiled by data leaks – scores of rich South Africans people and firms named in the HSBC, Panama Papers and Paradise Paper scandals from 2015-17 – were never acted upon. At least 17 banks were involved in the manipulation of foreign currency transactions; but their exposure in 2016 occurred in the Competition Commission, not the Treasury nor the Reserve Bank. The financial accountancy profession became a laughingstock, for repeatedly giving positive ratings to companies Steinhoff, VBS bank and African Bank.

Supervision and regulation were also weak when it came to consumer indebtedness, until the 2005 National Credit Act tightened lending requirements. But inadequate protection against informal lenders remains a major problem, because with a lower share of the post-apartheid national surplus going to labour as opposed to capital (a 7% relative decline from 1994-2016), the working class became overindebted. The crisis year was 2008 because of rapid interest rate increases, although they were then partly reversed as the global financial meltdown unfolded. In 2004, household debt/GDP was 55%, but soared to nearly 90% in 2008, before declining to 70% in 2019. The National Credit Regulator (2017, 43) recorded nearly 25 million credit-active consumers in 2017, of whom “39% had impaired records.”

Indeed, the debt of the bottom decile of the population rose to a full third of household asset value by 2015 (IMF 2018a, 76), while for the top decile it was only 9%. Differential pricing of financial services means that wealthier borrowers pay lower rates (and get higher rates when savings), compared to the micro-finance industry that lends to poor and working-class people. The IMF (2018b, 18) study of financial markets confirms that “bottom quintile households account for 33% of loans from ‘mashonisas’ (higher-cost informal lenders) compared to 8% for the top quintile.”

In sum, the monetary and financial management of South Africa’s economy was characterised by supervisory laxity, deregulation, corporate corruption and excessive financial speculation. These aspects of inequality-amplifying macro economic policies were, in turn, exacerbated by South Africa’s increasingly vulnerable relationship to a volatile world economy.

Many of the policies in the fiscal, monetary and financial-regulatory spheres are the outcome of international pressures, revealing power in excess of domestic policy sovereignty, and thus an inability to break out of South Africa’s inherited class, race and gender inequality. Specific levers include the $25 billion apartheid debt repayment; the relationship with the Bretton Woods Institutions (both the 1993 IMF loan and World Bank policy advice); ascension to the World Trade Organisation WTO
World Trade Organisation The WTO, founded on 1^st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

, which compelled lower tariffs on manufactured goods; exchange control liberalisation; and the delisting of the main Johannesburg and Cape Town corporations (Bond 2014).

Defenders of the ANC’s turn to globalisation point to the commodity super-cycle during which the four main mineral exports – platinum, coal, iron ore and gold – did exceptionally well from 2002 until the crash of 2015. Unfortunately for South Africa, however, the firms controlling these minerals required their payments to be made to international head offices in foreign currency, so the profits, dividends and interest (‘balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. on income’) component of the current account deficit soared to a high of 7% of GDP in 2009, and subsequently were in the negative 2-3% range (IMF, 2018a, 17). Yet South Africa’s net foreign investment position is positive (since 2014), in part because Naspers bought a third of Tencent for a tiny fraction of its late 2010s’ $572 billion market capitalisation peak.

In other words, exchange control liberalisation has permitted the likes of Naspers to retain earnings in overseas shares or leave those profits abroad. Worse, further outflows are occurring at a more rapid pace, the wake of the February 2018 decision by Treasury to permit an additional $38 billion of institutional investor funds to move abroad (exchange controls on these funds were relaxed from a 75 to 70% local investment requirement). Yet with just $50 billion in reserve holdings of hard currency, the IMF (2018a, 35) correctly termed these “below adequacy” by at least 30%.

The macroeconomic policies discussed above may work for a few East Asian countries able to run current account surpluses and not suffer from extreme financialisation, commodity price volatility, world-leading corporate corruption, the highest unemployment rate in the industrialised world, 65% poverty, durable racism, gender superexploitation, and the sustained overaccumulation of capital. The world’s worst inequality is, in many respects, a direct casualty of the combination of underlying economic crisis tendencies – ‘structural’ in nature – and neoliberal public policy, that in developmental contexts assigns ‘agency’ and the lack of it, to marginalised communities.

The policy implications of overaccumulation, as derived from the analysis above, include the inability of the state to impose fiscal austerity without harming capital accumulation. However, the state’s ability to raise the mass of profits through austerity and tax cuts is of concern. Amplifying such a policy in coming months and years, via public spending cuts and ongoing failure to invest, would generate increasing anger amongst the working class, which may lead to a political crisis. Indeed, even on narrow economic grounds, fiscal austerity measures are contradictory, because they also reduce the critical rate of profit below the actual rate, which soon increases capital intensity and puts downward pressure on the rate of profit (Malikane 2017). Most importantly, given this structural background, the SEZ push is highly questionable.

  Treasury’s Last-Straw Export-LED Growth Pro-SEZ Strategy

As this policy paper goes to press, renewed endorsements of exports and SEZs have again been offered by Finance Minister Tito Mboweni, as part of the Treasury’s ‘Economic Transformation, inclusive growth, and competitiveness’ strategy (along with other controversial ideas such as privatising Eskom’s coal-fired power station fleet instead of more rapidly shutting them down, as the world requires to avoid catastrophic climate change). Like the failed 1996 Growth, Employment and Redistribution policy which was imposed in a ‘non-negotiable manner,’ this document parachuted from Treasury, stunning the ANC’s ‘Tripartite Alliance’ partners in the trade unions and Communist Party, leading to their rapid rejection of the process and content. Meanwhile, most mainstream commentators and analysts are celebrating Mboweni’s forceful, non-consultative approach, as they desperately seek relief from the persistent stagnation and decline in corporate profitability.

Endorsing a World Bank advisory document (Purfield et al 2014) written prior to the commodity price crash of 2015 and the growing recognition of ‘slowbalisation,’ this out-of-date, neoliberal mandate should have been tempered by the harsh realities discussed above. To recall, these barriers to exports include South African capital’s worsening investment strike; imminent world recession and potential full-fledged capitalist crisis; pre-existing deglobalisation processes (declining trade/GDP, FDI/GDP and cross-border finance/GDP rates, as well as rising xenophobia and anti-immigrant policies); the ongoing Chinese economic slowdown and difficulty of BRI displacment; the shrinkage of global value chains; the likelihood of increasing costs for faraway trading Market activities
trading Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit. transactions due to shipping and airline carbon taxation ; Africa’s worsening debt crisis; Trump’s chaotic trade war, with not only China but many other countries including South Africa; and the adverse impact of Brexit on South African exports anticipated in late 2019. Together, these factors require a rethink of the old strategy, which can be considered as export-led decline.

Instead, from Mboweni’s office, the old-fashioned neoliberal mantra continues :
South Africa needs to promote export competitiveness and actively pursue regional growth opportunities in order to leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. global and regional value chains for export growth (Purfield et al. 2014). Exports have been identified as a key driver of economic growth. Technologically sophisticated exports, in particular, are crucial to structural transformation as it enables an economy to move from low- to high-productivity activities (Republic of South Africa, 2019, 50).

The word ‘competitiveness’ is used in the Strategy paper 107 times (five times more than ‘inequality’ or ‘equality’). The ‘crucial’ high-tech export sector is essentially non-existent in South Africa, with the exception of the auto industry’s integration into the global value chains, a mid-1990s policy increasingly viewed as an extremely costly mistake, even by former proponents (e.g., Kaplan 2019). The Motor Industry Development Programme (MIDP) provides Duty Free Allowances, Import Rebate Credit Certificates, and Production Asset Allowances worth R212 billion from 1995-2012 and closer to R50 billion annually since. But aside from enhanced auto industry profits, the results has included rapidly-shrinking auto sector employment (from 250,000 in 1994 to 76,000 in 2019), the failure to meet even 10% of the 2008 new production targets for 2019 (which were for more than a million cars, compared to actual output this year closer to 600,000), an ongoing auto sector bias towards overpriced luxury automobile production for a tiny share of the transport-starved market, and uncalculated ecological damage. Indeed the generosity of the MIDP helps explain why South Africa has underspent on public transport and failed to establish an affordable electric car industry. Indeed the MIDP has long rewarded the practice of cheating on greenhouse gas emissions by the likes of unethical car companies, especially the notorious German firms Volkswagen/Audi, BMW and Mercedes/Daimler (Ewing 2017).

As for new high-tech exports, although this paper did not address the ‘Fourth Industrial Revolution’ (4IR) debates due to space constraints, it is obvious that a profound strategy of socialising technology is required. This was achieved in the early 2000s by activists (against the government of Thabo Mbeki) with AIDS medicines through an exemption to the Trade Related Intellectual Property System of the World Trade Organisation, and once roll-out of free drugs to more than five million HIV+ patients began within the public sector, the life expectancy of the average South African rose from 52 in 2005 to 64 today. The contrast could not be greater, to the kinds of job-destroying, surveillianc-enhancing cowboy-capitalism 4IR changes that are anticipated in the months and years ahead, driven by Big Data from the U.S. and China, at the expense of employment, sovereignty and privacy.

To the Treasury’s credit, there is at least a passing, honest acknowledgement of just how difficult further export-led growth will be :
In recent years the focus on supporting trade growth has embraced behind-the-border issues as many countries have been unable to compete in global markets despite greater (often preferential) market access. This shift recognizes that a firm’s ability to compete in international markets is the combination of a complex set of demand- and supply-side issues, including macroeconomic policy, infrastructure, and related services, transport and logistics, and coordination failures. There is an increasingly challenging global export environment (particularly in traditional markets and manufactured goods). For this reason, South Africa needs to shift its focus towards increasingly attractive regional growth opportunities which hold significant potential to increase intra-regional exports and foster growth and economic development in the region (Treasury, 2019, 50).

However, the failure to tell readers about Africa’s economic downturn and poor prospects for current account balances as debt crises worsen, is revealing. As a result, the strategy won’t work on its own market-driven terms. That reality, in turn, will compel Treasury to make South AFrica’s production systems much cheaper, so as to enhance competitiveness. Mboweni’s strategy appears to be attacking both regulations on corporations and the labour market, starting with a small business wedge within SEZs, as a ‘pilot’ for the broader neoliberal agenda:

The government should consider full or partial exemptions for small businesses from certain kinds of regulation (e.g. the extension of bargaining council agreements) can assist small businesses (and other new market entrants) – SEZs can be used as potential places where these types of interventions can be piloted (Treasury 2019, 7).

Source : Friedrich Ebert Stiftung Policy Paper #1/2 on South Africa’s Special Economic Zones in Global Context September 2019 By Eric Toussaint, Ishmael Lesufi, Lisa Thompson and Patrick Bond