Instead of pointing to inflexible labour markets as the cause of South Africa’s unemployment problems, the Reserve Bank should look to its own policies, reports Charles Millward
TWO remarkable events connected to the Reserve Bank took place last week. First, Gencor announced that it would transfer (with the permission of the bank) the greater part of its assets, some R25- billion on a total market capitalisation of R31-billion, to its offshore subsidiary, Billiton. Henceforward, the country’s second largest mining house will cease to be a South African company. True, its shareholders will remain in the majority South African for the moment, but long-term it will, likely as not, become just another British company.
Second, the Reserve Bank governor Chris Stals lent his weight to the conventional wisdom of local businessmen that an inflexible labour market is the root cause of the country’s unemployment problem.
Faced with the reality of declining employment levels despite modest growth in the economy, the business community, now supported by the bank, has opted to blame labour for the problem. The alternative would be to re-examine Gear, the government’s macro-economic strategy.
Thus we have a society, until recently bitterly divided, where the business community blames a newly enfranchised labour constituency for the country’s economic ills and, simultaneously, one of its leading companies removes itself and R25-billion of capital from the local scene at the stroke of a pen.
South Africa’s situation is not unique. Many times in history have the moneyed and working class experienced a profound mutual distrust, although the situation locally is perhaps worsened by the fact that the classes are stratified on racial lines.
American historian William Shirer, in his book The Collapse of the Third Republic, traced the origins of France’s precipitate military collapse in 1940 to profound divisions within the society. In the aftermath of World War I, a war-ravaged and deeply indebted society struggled for years to repay the massive war debt and bear the enormous cost of rebuilding the devastated regions.
In Shirer’s words, describing France in the 1920s: “The selfishness of the moneyed class in avoiding any financial sacrifice to help put the country back on its feet later struck many French historians as shocking … And in their fanatical regard for their capital and profits, which was matched only by their disregard for the salvation of the country, they spirited their capital abroad to such a massive extent as to make inevitable a fall of the currency, the bankruptcy of the treasury and a lack of capital at home to finance badly needed reconstruction, and, in particular, to enable the farmers, the little businessmen and the shopkeepers to get a new start in the difficult post-war world.”
The permission given to Gencor by the Reserve Bank is quite remarkable in the light of the fact that exchange controls remain firmly in place in South Africa.
True, this type of shifting of assets abroad occurred when Derek Keys was minister of finance on a smaller scale. In late 1993, he allowed Gencor to locate its holding in Richards Bay Minerals offshore, allowing some $30-million of dividends to flow out of the country in commercial rands (the financial rand was then still in place) to finance the acquisition of Billiton. The current transaction is merely a larger version, the principle being the same.
Of course, the bank has complete discretion in such matters and makes its decisions on the loose criterion of what is “good for the country”. No doubt Gencor executives persuaded the bank that the success of the Billiton acquisition in recent years justified the current transaction.
The less charitable might suggest that Billiton’s success was due as much to a firm and rising aluminium price in an upward bout of the commodity cycle as to any particular brilliance on the part of its new management. Be that as it may, the bank has pronounced – “has given its warm support”, according to Gencor chief Brian Gilbertson – and the bulk of Gencor will leave these shores.
What will South Africa get in exchange? Well, the Gencor/Billiton team will now have an offshore asset base of some R25- billion and dollar earnings equivalent to perhaps R1,5-billion per annum against which they can gear up or raise additional capital. If successful, there will, hopefully, be enhanced dividend flows back to the South African shareholders and a possible long-term benefit to the balance of payments.
If unsuccessful, they have simply mortgaged a large South African asset to play in the international mining market, and ongoing profits from the South African assets will be used to repay their mistakes.
Exchange controls have had a particular place in South Africa for the last 50 years, the reason being that perennial crises of confidence about the political future have left the country vulnerable to a massive exodus of capital.
Indeed, so severe has the threat been that the country has had, on occasion, to resort to the financial rand mechanism and even a debt repayment moratorium to protect its reserves. Has the recent political miracle then justified the steady move towards exchange control liberalisation and the recent Gencor move in particular?
Consider that recent record gross reserves of nearly R20-billion still barely represent three months’ import cover. Consider further that a significant portion of gross reserves originate from the interest-rate arbitrage created by the bank artificially holding domestic interest rates at real levels of 10% and more.
This results in corporate South Africa, or that part which can borrow offshore, borrowing dollars and ending up with a fully covered rand interest cost substantially below domestic rates.
Equally, foreign speculators in local bonds can show returns of up to 10% above those available in dollars and other hard currencies for as long as the rand remains stable. The resulting inflow of short-term capital results in an unstable and over- valued rand.
Precisely this situation pertained in February 1996 before the rand commenced its 30% slide. For that matter, the last experiment in strict monetarism from 1983 to 1985 saw interest rates peak at around 25% in mid-1985 and shortly thereafter, the collapse of the rand, as short-term bank lines and speculative capital were withdrawn.
The situation is not significantly different now. The relative stability of the rand at present is a short-term phenomenon resulting from deliberately engineered high short-term interest rates. When the market wakes up to the economic realities, as it did in February 1996, the adjustment will be sharp and painful, as it was then.
Ironically, the Reserve Bank is keenly aware of the structural problems facing the South African economy. Stals himself recently acknowledged that addressing unemployment is South Africa’s crucial problem. According to the bank’s own economists, the recession from 1989 to 1993 was worse in terms of job losses than that in the 1930s. Yet South Africa suffered disproportionately worse than the rest of the world because of the bank’s adherence to a strict monetary policy and a high real interest-rate regimen that continues to this day.
The combination of one of the highest real rates of interest in the world, together with the automatically over- valued exchange rate which this implies, has crippled the small business sector, particularly manufacturing, in recent years.
Together with the structural problems inherent in South African industry of inflated input costs resulting from the historical cosseting of primary industries in steel, aluminium, copper and others, many manufacturers have been unable to survive. The decimation of the white goods, clothing, textile, footwear and heavy engineering industries is brutal testimony of this.
Yet the Reserve Bank has chosen to blame one particular component of South Africa’s economic equation, namely labour, for the ills besetting industry. At the same time, it allows a major corporation to export its capital base, exchange control notwithstanding.
One is drawn to the conclusion that a cynical bank is facilitating the flight of capital from South Africa while mouthing platitudes about the need for greater labour productivity. The real economic problems go far deeper and are to no small extent caused by the bank itself. Perhaps the Reserve Bank officials, together with the recently exported South African corporations, have adopted that gloriously French approach to the future, Aprs nous le deluge.
— Charles Millward is an independent corporate finance consultant