The health of an economy is measured by its profitability. This is true for any economy in which the private sector dominates. Declining profitability leads to a drop in investment and, hence, lower employment. When considering what drives growth and unemployment in the long run, we need to look at the evolution of profits and capital accumulation, together with the technological evolution and income distribution changes that accompany them. The basic intuition here is that, though profit growth is a necessary condition for employment generation by the private sector, it is not sufficient.
This fact needs emphasising because of the debate about labour market flexibility in South Africa today. The key ingredients to a sustainable growth and development strategy are a set of coordinated policies, especially fiscal and monetary, directed towards clearly defined objectives. This, I think, separates South Africa from fast-growing emerging market economies. The real issue is not the labour market structure in South Africa, rather it is the absence of policies that limit the extent of resource leakages from the real sector.
From the beginning of the 1990s the share of national income going to profit-earners has grown at the expense of workers. This income distribution pattern indicates that workers have been failing to defend their share. The adverse shift in income away from workers has had a contractionary effect on the demand side of the economy, and made it even more difficult for firms to accumulate fixed capital. The current retail boom is a fairly recent phenomenon. These profit gains have been systematically sapped from the real sector of the economy. This is the root cause of the continuing unemployment crisis.
The share of national income going to profit-earners picked up from 38% in 1990, reaching a high of 45% in 2002, and then falling slightly to 42,5% last year. The wage share, on the other hand, fell from 51% to 45% over the same period. Current calls for labour market flexibility have to contend with these facts, as they indicate a gradual weakening of the power of unions over the decade.
Over the past decade the average annual gross profit rate on fixed capital in South African has been 18,6%. The annual rate of accumulation of fixed capital over the same period was 1,3%. Private businesses alone were accumulating at 2,19%, so that the drag emanated from lower than average rate of public investment. Simple calculation shows that in either case, the saving rate required to finance such an accumulation process does not exceed 12%. In other words, less than 12% of profits are re-invested in fixed capital, and the rest finances liquid capital or raw materials and inventories, is consumed, finds its way into speculative financial assets and, ultimately, gets out of the country.
It is highly unlikely that 88% of private-sector profits get consumed, finance inventory accumulation or purchase additional raw materials. What is likely to have happened in the past decade though, is that firms have worn down fixed capital in trans-forming tied-up money into more liquid assets. This in turn allowed investors agility to quickly exploit short-term profit opportunities. In the light of this situation, it is understandable why the government feels betrayed by private business, and thus opts to turn to its own assets — state-owned enterprises — for stimulating the rate of capital accumulation in the economy.
The inherent danger with the continued “liquidation” of the productive base of the economy is that it spawns all sorts of socio-political problems. On the one hand, it makes the task of building an economically united South Africa virtually impossible. On the other, it increases the vulnerability of the economy to short-term capital flows. What is required is a set of coordinated policies oriented primarily towards promoting real fixed capital accumulation. But there needs to be appropriate and well-coordinated fiscal and monetary policies in place, which must include an approach to the exchange rate.
The private sector’s role is to give momentum to a process that already has been given direction by the government. This was long ago realised by Keynes who, when the world economy was in the throes of a major crisis, conceived that “socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will cooperate with private initiative”. He was very suspicious of the ability of a “merely monetary policy directed towards influencing the rate of interest” lifting the economy out of under-employment, and urged for the state to take on “ever greater responsibility for directly organising investment”. The new emphasis on state-owned enterprises, and expanded public works programmes, is definitely a step in the right direction.
Chris Malikane is an economics lecturer at Wits University