Opinionista Bongani Mbindwane 2 September 2015

What South Africa is getting right

In case I don't make it to the all-important African National Congress national general council, here is Volume 1 of my input on South Africa's economy.

There are 195 countries in the world. Over half of these are richer and more advanced than South Africa. At least 80% of these countries have functioning economies (with varying market freedom) and stock exchanges. The Johannesburg Stock Exchange (JSE) is the largest stock market in Africa and the 16th largest in the world. The JSE attracts foreign buyers using US dollars and other top-tier currencies. Foreign trades account for about 40% of the daily trades on the JSE, mainly in euros and US dollars.

In terms of efficiency and trustworthiness, the JSE is ranked in the top 20 in the world. South Africa’s financial auditing sector is ranked in the top seven in the world. The financial market is also ranked in the top seven in the world.

South Africa has to look closely at the security of private asset ownership and at how court orders relating to asset disputes are implemented.

The non-negotiable economic architecture

An efficient and robust yet fair tax collection regime is critical. The South African Revenue Service (SARS) is ranked in the top seven in the world. The independence of SARS, Statistics South Africa and the South Africa Reserve Bank (SARB) are as important as the independence of the Electoral Commission of South Africa and Chapter 9 institutions.

Countries with non-independent statistics offices tend to politically massage economic data, with bad news often being swept under the carpet, as happened with Greece. The Greek statistics office collaborated with politicians to publish fictitious data which positively inflated figures while hiding the serious debt and structural social deficiencies. When the lies were discovered, it was too late, Greece had fraudulently entered the Euro area through cooked books.

Likewise, central banks are important in how a country fares. The central bank must be independent in both form and character. South Africa has managed to create a well-run central bank, which under former governor Tito Mboweni managed to gain an international reputation as a trusted institution. The issue of correct data and predictability was key in Mboweni’s strategy.

Often what is missed is that reserve banks play a pivotal role in the management of the private banks in which we deposit our money. South African banks are ranked in the top seven in the world for efficiency, trustworthiness and regulation.

An efficient, robust yet fair tax collection regime is also critical. SARS has gained top global awards for performance and transformation. It is ranked in the top 10 in the world based on efficiency and trustworthiness, particularly under commissioner Pravin Gordhan.

With the South African rand having weakened since the 1980s, the country’s gross domestic product (GDP), which is the value of goods and services produced, grew by more than 150% between 1994 and 2014, from $130-billion to $350-billion. What remains a challenge is to spread this wealth in a fair and equitable manner amongst all commercially active citizens, which will strengthen the country in times of trouble.

Simply put, when South Africa is not able to sell its goods and services to foreigners, the domestic market should be able to pick up the slack and sustain the growth trajectory. The country has to develop local consumers who become the first line of defence when the world wobbles. This is only achievable through the transformation of industries and by empowering and deliberately promoting the middle class.

China’s stock market volatility and minor currency devaluation caused hysteria as if world markets truly believe the data coming from China. No one really knows how the Chinese economy is faring in real terms as data is often sifted through layers of reporting structures so by the time it is released it is mostly outdated.

Assessing the economy correctly

While GDP growth is not an efficient way to measure the real economy, it has been used since the US decided to do so after a proposal by Simon Kuznets to Congress.

In his 1934 report to Congress, Kuznets inserted an important sentence: “The welfare of a nation can scarcely be inferred from a measurement of national income.” The creator of GDP calculus warned the US not to rely solely on GDP to measure the country’s economic performance. The results of this warning being ignored is seen in the US’s income inequality, with the country’s top 1% owning 90% of the economy – 3-million Americans own more than approximately 300-million of their countrymen.

While there are merits to using GDP to measure an economy, it is clear that it fails to measure several important external factors for economic growth and socially balanced living. GDP is outdated and not relevant for the continent of Africa in particular. South Africa would be best advised to start looking at other measurements like the new Social Progress Index and others.

In 1968, Senator Robert Kennedy said: “GDP measures everything in short, except that which makes life worthwhile.”

Joseph Stiglitz recognised that “GDP tells you nothing about sustainability“. In more direct terms, experiences of life in Nigeria compared to South Africa will make an educated person bet that South Africa’s GDP is higher than that of its peer.

While GDP gives us a window into the economy, it does not give us a realistic overview. The use of other tools such as the Social Progress Index and others to assist the National Planning Commission with better data should be made policy.

Whilst the standard way of writing about the economy is to use GDP, writers and pundits like myself use GDP and ‘economy’ in an interchangeable way and this is always murky. It is very easy for President Jacob Zuma to use GDP to achieve ‘cute’ numbers that do not reflect the reality of his people, all he has to do is add all criminal activity, from prostitution to tik dealing, into the GDP and the deficit will look different and make credit ratings agencies happy.

Labour relations

Contrary to the notion that South Africa has draconian labour laws that keep investors away, in fact, independent research shows South Africa has rather liberal labour laws compared to Organisation for Economic Cooperation and Development or Group of 20 (G-20) economies – which South Africa aspires to be.

The labour laws are adequate, barring the issue of minimum wage legislation which could be complicated by the constitutional right to wage bargaining. A smart piece of legislation will have to be passed introducing the minimum wage legislation while also catering for a wage bargaining system. The alternative may be to remove the constitutional right, Section 23 (5) and (6) of the Constitution, on bargaining for a minimum wage. Unions will have to be consulted widely on the matter.

With all this, South Africa and its political parties correctly look inward for policy adjustments when shocks occur in the economy. There are those who believe the labour market is not liberal enough and want worker unions done away with and their power curtailed.

There are three things useful to measure a country’s level of democracy and freedom; worker union activity, press freedom and religious freedom. A free people must never accept that workers’ rights are the first to suffer when the economy falters. Slavery cannot be reintroduced in any form so that a country may prosper.

Wiping out workers’ rights will suit the JSE Top 100 and not the hard working men and women of PikitUp and the factory floor or the police and firefighters.

The new struggle frontier after the defeat of colonisation and Apartheid

The single biggest issue for South Africa is the international monetary system, which causes the country to import inflation. Whilst inflation targeting by the SARB is pro poor in the short to medium term, it however assists US hegemony in controlling world affairs via its currency. The US Federal Reserve (Fed) is charged only with setting America’s monetary policy, with consideration given only to its territory growth, inflation, and employment. The policies the Fed is charged with and implements have caused basic prices to go up in South Africa and other emerging markets, eroding the currencies of the world, which leads to risks in global financial markets – as we have seen in the past few weeks.

With this power, the world has no mechanism to talk to the Fed about its decisions and the devastation they cause around the world.

Besides a permanent seat on the United Nations (UN) Security Council for Africa, South Africa should also call for a sharp review of US powers in the international monetary system, perhaps through the G-20. The G-20 represents 87% of global GDP and 65% of world’s population. The US dollar sees on average about 82% of international transactions. About 60% of the global reserves are in US dollars, these are spread more within the G-20 economies. South Africa is a part of the G-20.

Contrast these figures with the fact that the US accounts for 24% of the global economy. This is alarming and can only be due to the US’s military might. These figures also tell a story as to why it is so hard to resolve global political crises without the US. It is not a benevolent nation; it’s a business nation.

China is not to be left out of the US dollar hegemony. With more than $7-trillion of its money loaned to America via US dollar- bonds. China is now a part of the US. In simple terms, China will not write off this debt and instead will work to protect it. As such, Zuma should work within the G-20 to not only deal with the tax avoidance by multinational corporations but also seek a revamp of the International Monetary Fund (IMF), the World Bank and all related institutions.

The playing field in world commerce and globalisation will not be levelled until there is a stronger role for the IMF in the international monetary system and some say in what the Fed does, the convention of special drawing rights as reserve currency, and a broader-based currency system, diversifying from the current US dollar-based international monetary system toward a quadripolar system (US dollar, Euro, Renminbi and special drawing rights).

Without these reforms, South Africa will continue to import inflation and a skewed balance of trade which depresses its local economy.

The IMF must be granted the right of consultation on mechanisms and policy by any international reserve currency national bank. In this way the Fed will be legally obliged to consult the IMF on its tapering or interest rate adjustments. Surely, the privilege of having your currency used in international trade can’t be for free in a free world. It must be made illegal for international reserve currencies to be used by the owner state as a political, military or diplomatic tool in global politics. The UN General Council can pass this in its next session.

The world requires a coordinated international framework and cannot move blindly into a likely (sooner or later) US sovereign default on its $20-trillion debt and the crushing of the US dollar. Should this occur, it will make the 1971 Nixon Shock look like child’s play. With global debt approaching $60-trillion, at some point something has to give. The countries holding US dollars as part of their reserves may wake up to find they are holding paper not worth its face value.

The US and China are to continue trade surpluses which do not bode well for their partners like South Africa. We must start focusing more on trade and less on GDP growth. We cannot escape the conclusion that each trade surplus these twins declare indicates value extracted from our economy as our prices grow stagnant and factories close down unable to compete with the money we spend on these two.

China alone, has an average of $150-billion global trade surplus annually and this figure represents a part of what China removes from South Africa’s local economy.

South Africa must thus be cautious in relying totally on Brics as this grouping is good only during good times and has not been enacted into law by member states.

Out of 195 countries, South Africa does better than 190 in the most crucial parts of economic and political management. Brics is not here to resolve our economic issues. Ours is to be ready, think big and be demanding. DM

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