Lynda Loxton
THE increased globalisation of the world economy is expected to have wide-ranging effects on both investors and consumers, Old Mutual International Asset Managers economic strategist Nigel Morgan said this week.
Briefing journalists on his latest Market Focus, Morgan outlined why the kind of “neo- liberal” policies detested by Cosatu and others were needed in today’s world.
He said the worldwide move to more open economies and freer trade had made competitiveness the watchword as companies found themselves having to compete with imports on both quality and price.
This made the consumer more powerful than ever before and also served to lower inflation. But lower inflation had its pitfalls as well, Morgan warned.
Most people, he said, had been brought up in an era of high inflation and based certain fundamental decisions on that experience. For example, they might buy a house that costs slightly more than they could afford, expecting the kind of inflation-linked salary increases of the past to help pay for it in years to come.
Lower inflation, however, meant salary increases were also lower and that a house could become a significant burden in the future.
Another drawback was that lower inflation plus competitiveness had also resulted in large-scale retrenchments as companies cut costs. They then often took back those same workers on a contract basis at lower wages, thus breaking the power of trade unions and putting an end to the concept of a life-long job.
Investors would have to watch all this carefully, Morgan said. Because of the more competitive, cost-cutting approach, some companies would be forced to close while other would rise in their place. This process would be helped along by the consumer movement, which, “being sceptical of the claims made for their products by the established corporations [had helped] the rapid spread of information on new products deemed to offer good value”. Companies that failed the test would go under.
Low inflation and increased competitiveness also had implications for governments, Morgan said. “In the inflationary period, huge debt burdens were not a problem,” he said. “Inflation eroded the real value of the debt at a rapid rate, and although interest rates tended higher for almost 40 years, they tended to be low relative to inflation.”
With low inflation, on the other hand, real interest rates were positive and large debt burdens were onerous. As a result, the emphasis was on cutting Budget deficits and debt and running up large current account surpluses, usually through increased exports.
As a result, “competitive devaluation has come to be seen as an attractive policy,” Morgan said.”Economic activity is focused on exports and investment, rather than consumer spending or government functions. This policy package has become the new orthodoxy, though populist resistance from groups losing power or privilege continues.
“Repeatedly, however, even when a populist party wins power … they are found to pursue an orthodox policy. In a competitive world, governments compete to be the most competitive.”