Opinionista Bongani Mbindwane 6 September 2015

Towards a 25th century African economy

In the run-up to the all-important African National Congress 2015 national general council, I submit Volume 2 of my input on South Africa's economy debate.

In Volume 1 last week, I discussed what South Africa gets right and the country’s non-negotiable economic architecture, I also discussed how gross domestic product (GDP) is not the best tool for assessing economies and I proposed that, instead of GDP, South Africa should look at using the Social Progress Index to better measure the real economic experience and its impact on people.

On the labour relations front, I noted the irrefutable evidence that, in fact, South Africa has a rather liberal labour law framework as the infographic marked ‘figure 18‘ below shows. South Africa has labour laws that are as relaxed as those of highly developed economies. The argument that labour laws ought to be relaxed to expand job creation is thus totally without basis. When the Democratic Alliance’s (DA’s) Mmusi Maimane and business mogul the DA’s Herman Mashaba demand the watering down of labour rights, theirs is an unfair demand for profit maximisation aimed at the perpetual enslavement of the hard working and the most exploited.

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The job creation bottleneck in South Africa is largely due to local investors who are on a deliberate investment strike while earning huge profits and spending these on the continent and abroad or just hoarding the cash assets as interest rates remain positive. The slow pace of investment is not concomitant with the performance on the Johannesburg Stock Exchange in the last seven years.

Blaming labour and other regulations for the lack of reinvestment are flawed arguments as profit making and taking occurs under the same regulatory environment. This strike should compel the African National Congress (ANC) national general council to insist that exchange control policies remain as is and that the government consider negative interest rates on certain levels of cash in the bank to encourage the deployment of the cash for purposes of reinvestment.

The business sector in South Africa is not one to be proactive on many growth-positive aspects, instead requiring the law to compel companies to be good corporate citizens in all aspects of commerce.

What should be understood by proponents of short cuts to growth is that South Africa has leapfrogged past abusive cheap labour. The country has a highly sophisticated market, which should be prepared for the 25th century.

South Africa is not going to be a cheap labour factory for developed countries. Most of the DA’s economic ideas are centered on creating cheap jobs and sweatshops in the thousands, jobs that will leave workers in poverty and create a nation of vendors who mortgage their homes to obtain loans to start selling peanuts from street stalls. The DA wants to achieve this through the mass issuing of title deeds for community homes, after which it says “people can create their own employment through leveraging these homes for bank loans”, a disaster only perfect for bankers and loan sharks who will later own mass housing from failed loans with the resultant credit and housing crisis.

In Volume 1, I also discussed the new struggle frontier after the defeat of colonisation and Apartheid, the most crucial of all struggles towards a free world order. The establishment of a fair playing field in world commerce and globalisation with a stronger role for the International Monetary Fund (IMF) on the international monetary system and a say in how the US Federal Reserve monetary policy interventions impact on world economies from time to time, the conversion of special drawing rights to international reserve currency, and a broader-based currency system, diversifying from the current unipolar US dollar-based international monetary system toward a quadripolar system (US dollar, Euro, Renminbi and special drawing rights).

The introduction of this new struggle into South African politics is crucial in that there is no local economic intervention policy that will ever fully manage the impact of the systematic and structural importation of inflation by South Africa and other emerging economies other than confronting the unipolar US hegemony and making it more representative.

The former Bretton Woods Institutions (World Bank, IMF, Bank of International Settlements) must be transformed in line with the principles of inclusive global economic architecture.

The ANC, as the government of the most sophisticated African economy, should be at the forefront of demands for a new global economic order and should issue a strong statement on the US’s failure to ratify the IMF 2010 reforms. Former IMF managing director Dominique Strauss-Kahn’s reform work must be taken up. His 2010 IMF reform package aimed to level the playing field amongst IMF members.

The Strauss-Khan package saw far-reaching reforms of the IMF special drawing rights quotas and governance, with 95.32% of its representatives voting for reform.

The Zuma administration should be equipped with national general council resolutions for the next Group of 20 (G-20) summit in Antalya, Turkey, this November to push for a more representative global economic and financial system. With 87% of global GDP represented and 65% of the world’s population, the G-20 is the most strategic platform,. having created the Financial Stability Board, which now monitors global financial risks, and institutionalised the Basel Capital Accord, with its powers to monitor bank stresses globally.

About 60% of the world’s currency reserves are in US dollars, the dollar also covers about 82% of international transactions. South Africa should place this as the greatest risk to global order, peace and security let alone economic risk as the US dollar will sooner or later falter and crash.

As the US did in 1973, when it unilaterally abandoned the Bretton Woods system it had helped create, it will not hesitate to drop the world again with a useless currency while it engineers its own local recovery. The US did so in 1971 when it abandoned the gold standard (the Nixon shock) and forcefully introduced its fiat currency as the only global currency instead of gold, which gave the US a permanent wealth-generating mechanism. The events of 1971 and 1973 will recur and the US will deal with them in the same manner.

This thinking should not exclude how we view China, as we recently experienced, when China sneezes it causes a global flu, which shows the interrelation between the Renminbi and US dollar . This August saw a massive $5.7-trillion erased from the value of stocks worldwide.

Companies Act – The new international trends on venture capital have changed from a single angel investor platform to a broader public platform, this calls for the Companies Act be amended to enable raising of money via crowd funding or sourcing locally and internationally (without a registered prospectus), this should be a priority for the Small Business Development Ministry. This is useful for small businesses, solopreneurs and entrepreneurs too. With crowd funding you can be looking at as little as R10.000 for a coffee shop or a fencing business or a movie or a creative software business.

This is the best way of having the public participate in the economy. To encourage this sector, individual tax incentives must be incorporated. Should an individual invest in a crowd funding scheme, the invested amount would carry a tax credit similar to Canada’s ‘flow through tax credit’ system.

Commodities – To fix risk spread and commodity sector woes, *South Africa’s pension funds should be mandated to have physical gold or platinum in their asset spread, the dollar will collapse in the medium term and these metals will be the only safe haven. Currently the laissez-faire attitude to asset allocation may lead to the over concentration of the allocations spread. This can be addressed by amending Regulation 28 of the Pensions Fund Act to make the 10% allowed for commodities compulsory.

While all Brics (Brazil, Russia, India, China and South Africa) countries other then South Africa have been increasing their sovereign gold holdings, South Africa has not followed suit, instead supported the US dollar. The South African Reserve Bank should be mandated to increase its gold holding reserves.

Policy should be formulated for Armscor to regard gold, platinum, and uranium alongside bullets and warships as assets it must hold in bulk as part of the country’s defence strategy. The Treasury should allocate enough resources to the defence minister to be a buyer of these metals which will also eliminate the position of South Africa being just a price taker on commodities.

To enhance long-term commodity vibrancy, the Cabinet should instruct that an investment coin to be minted to celebrate political freedom, taking from the Kruger Rand, a Mandela Rand should be minted in platinum. The Kruger Rand was first minted in 1967 to promote a collapsing gold mining sector in South Africa at a time when the country was the number one producer. By 1980, the Kruger accounted for 90% of the gold coin market globally, accounting for over 70% of gold mined.

South Africa has not created a mandated coin since Paul Kruger’s Kruger Rand, which currently tops international investment coins. At least 100,000 ounces of platinum could be removed from the annual supply by a well-marketed coin, thus contributing to demand while enhancing South Africa’s brand internationally. However, the coin must have a government mandate as is the case with the American Silver Eagle and others.

Mining – There is worrying element to Mineral Resources Minister Ngoako Ramatlhodi’s recent promises of taxation tapering to the miners, an idea fraught with technical difficulties akin to a direct bail-out of the mining sector. Attempts to taper any of the miners’ tax will challenge the spirit of the constitutional meaning that ‘minerals below the soil’ belong to the public, the people of South Africa who, through any tax taper, will be compensating miners to mine.

A high-risk exploration venture capital fund for private emerging black miners with the state taking a 10% free carry shareholding should be considered to encourage development in the sector; the 10% will act as a realistic windfall taxation buffer.

New calls by the extreme left to nationalise mine operations aim to nationalise miners’ corporate debt and must be rejected as befuddled and out of touch.

Nuclear power – As South Africa considers investments in new nuclear power plants, with the only funding model suitable so far being that offered by Russia’s state-owned Rosatom, it follows that there is no way Russian President Vladimir Putin will allow Rosatom to finance and build a power plant for South Africa, given its huge shale gas ambitions. A choice will have to be made between the two and the national general council should deliberate on this.

Unlike gas, nuclear is not likely to contribute heavily to job creation and sustainability. With over 90% of the South Africa’s power generation coming from state utility Eskom, nuclear power will only entrench this hegemony whereas gas could introduce a healthy mix with private generators coming on stream.

Zimbabwe – One of the most important and urgent considerations for the national general council is the question of a bail-out of Zimbabwe by South Africa. Zimbabwe is important and should be looked at as a part of an internal economic stimulus. The bail-out should include infrastructure development like roads via the Limpopo Roads Agency and the like. The effect of this investment in Zimbabwe will be that of economic agglomeration as Zimbabwe’s economic stabilisation will expand the Southern African Development Community market.

The debate and discussions on the ANC national general council 2015 should be pre-occupied with creating and promoting developmental policies that take a proactive approach to removing prejudices against the poor, and underrepresented groups in society, in particular Africans. DM

*Disclosure: the writer has interests in global physical commodities markets.

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