South Africa and the global economy Andrew Feinstein When I arrived at the University of Cambridge to undertake postgraduate studies in economics, a famed post-Keynesian professor asked me where I had done my undergraduate economics. I responded that I hadn’t, that my first two degrees had been in clinical psychology.”A far better training for studying economics,” he replied. Never has this been truer. The story of the South African and global economies in 2001 has been, and in 2002 will be, about confidence rather than tinkering based on economic analysis.
Many economic events, especially booms and recessions, are either caused by, or deeply influenced by, the psychology of herd behaviour. In a dialectic with no clear starting point or conclusion, analysts describe what the”fundamentals” should mean to consumers, who respond accordingly. Market players fear being caught long and, therefore, sell, which reinforces the initial pessimism and so a vicious psychological circle is created. Runs on individual stocks or categories of investments are a consequence of a key player getting out of the investment and everyone following suit to avoid being burned. This reaction, ironically, often results in the collapse of the company or asset in question ensuring that everyone is duly burned. The importance of confidence in the world economy has been intensified by the uncertainties personal, political and economic engendered by the horrific events of September 11. Whereas in 1989, with the collapse of the Berlin Wall, George Bush Snr announced the dawn of a New World Order, 12-years later, with the implosion of the World Trade Centre, George Bush Jnr presides over what the Economist magazine has described as The New World Disorder. This defining moment of our epoch has made the present and the future seem less predictable than they were just a few months ago. Having been front-row spectators to something almost unbelievable that could have happened to each one of us, raises questions not only about our own safety (even mortality) but also about the shape of the world we live in. This personal insecurity inevitably effects our economic behaviour. Even before September 11 the spectre of economic recession had dampened the euphoria that had accompanied the longest boom in modern economic history. What has made this downturn different is that the length of the boom had led some economists to think the business cycle had been vanquished. It hasn’t. But the nature, severity and duration of the downturn has consequently been very difficult to predict. So the impact of September 11 has clearly been a further worsening of what was already a pretty grim picture. A consensus view of economists would put global growth at between 0,8% and 2% this year and 1,9% to 2,8% next year. Organisation of Economic Cooperation and Development economies are expected to grow at 0,8% this year and 1,5% next. Japan remains the basket case, but the euro zone and, especially Germany, look surprisingly weak. The risks in these forecasts are almost all on the down side. But because of changes in the business cycle, and the difficulty in measuring the economic impact of September 11, economists’ forecasts show a far wider variance than is normally the case. In broad terms the best-case scenario is a V-curve recession, that is, a rapid descent followed by a rapid recovery. The events of September 11 might even facilitate this as central banks have reacted swiftly to loosen monetary policy in an effort to avoid recession and the United States has started to administer a massive fiscal boost to aid infrastructural and sector-specific business recovery. In this scenario, which is quite likely, the world economy will, on the back of a recovery in the US, return to more robust growth in the second half of next year. A more pessimistic scenario would see a U-curve trajectory in terms of which the recession would last about 18 to 24 months with the world economy only experiencing a gradual upturn at some point in late 2003. There is, of course, the Armageddon scenario in terms of which the global economy implodes, as in the 1930s Depression. This would be a consequence of a drawn-out military engagement in which most oil-producing countries turn against the US and its allies contributing to a meltdown of the financial system. The meltdown will have been preci-pitated by the failure of massive corporations with excessive debt profiles and the collapse of the economies of heavily indebted developing countries. This is highly unlikely. An L-shaped growth trajectory, that is, a long period of sclerotic growth, is, however, an outside possibility. Two significant events that could have a long-term bearing on the global economy in addition to the key factor of the behaviour of consumers in the US and to a lesser extent the euro zone, the United Kingdom and Japan are the physical introduction of the euro (which will symbolically unite the zone and further ease economic interaction) and the entry of China into the World Trade Organisation. South Africa has been less badly hit by the global slowdown than most other emerging markets. Growth forecasts have nevertheless been reduced, but amid continuing competent management of the economy. The big story of the South African economy this year has been the disappearing value of the rand. Restored, and increased, growth is central to the key challenge facing South Africa: improving the material quality of life of the poor and, thereby, reducing inequality. As the experience of South-East Asia and Southern Europe has demonstrated, it is only in a high-growth environment that welfare and development can be meaningfully improved. Failure to address this most iniquitous legacy of apartheid will create social instability that will itself undermine the prospects for growth, creating a vicious circle of poverty and no growth, each feeding off the other. South Africa’s growth performance (likely real gross domestic product growth of 2,1% for this year, 2,5% for next year and 3,2% for 2003) is relatively solid when compared to other emerging markets. The fundamentals remain sound with the inflation trend still encouraging and the 20 weeks of import cover being the most solid position ever achieved. This stability and competence has been deservedly rewarded by the upgrading of South Africa’s investment rating by Moody’s. While in many respects the significant weakening of the currency has had negative consequences, our”currency nationalism” causes us to ignore or forget about the benefits of a weak rand, particularly the competitiveness of our exports (as the commodities sector, in particular, can attest). The reasons for the weakening of the rand are manifold: the situation in other emerging markets (particularly Argentina); the continuing fiasco in Zimbabwe; the snail’s pace of privatisation; a number of technical factors (leading to a thin and easily disruptable rand market); possible hedge-fund activity; and continuing political concerns. The biggest danger of the falling rand is that the monetary authorities might feel they have to do something. To attempt to intervene would cost the Reserve Bank a fortune and achieve nothing. Remember Chris Stals’s attempt to take on the currency markets in the late 1990s? It cost the South African taxpayer billions and had absolutely no impact on the currency. Such intervention from the present governor seems unlikely. With respect to the causes of the weakness: It can be argued that the best opportunities for privatisation may have been missed over the past two years and to press ahead now in such a poor market would be foolish. While the government’s more vigorous approach to Zimbabwe is to be welcomed it is probably a case of too little too late. On the political front, issues such as: the perceived policy differences within the African National Congress alliance; the bizarre and unsubstantiated allegations of a plot against the president earlier this year; the cost of the arms deal and manoeuvrings surrounding it; and, most particularly, credibility problems around the handling of HIV/Aids, will continue to unsettle domestic and international sentiment.
Only transparent and judicious leadership and a bold, more coherent intervention to address the Aids crisis will move political sentiment. The recently tabled medium-term budget policy statement suggests competent management of the economy will continue. A moderate easing in fiscal policy, while maintaining a medium-term commitment to ending government dissaving, is an appropriate strategy in these uncertain times. However, an ever-worsening situation in Zimbabwe in the lead up to, and possibly the aftermath of, the presidential election could again have a negative impact on our economy, particularly during the first two quarters of next year. Thereafter, besides holding the line on fiscal and monetary policy and improving micro interventions, South Africa’s best hope for a good economic year rests on homo-economicus: an improvement of sentiment towards the country’s internal politics as a consequence of positive leadership and greater confidence in the global politic, manifesting parti-cularly in the response of consumers (especially in the Organisation of Economic Cooperation and Development countries) to the continuing effects of September 11 and to any future, unpredictable, yet likely, events in the new world disorder. In other words, it’s about psychology, stupid. Andrew Feinstein is a former ANC MP who now works in the financial services sector