/ 1 May 2009

Spending to save ourselves

Reaction to the global economic crisis in South Africa has been fairly low key. Government claims that we are protected by a sound financial regulatory system and that the expenditures on the infrastructure programme will help stave off a drastic impact on the real economy. Government budget heads are seeking ways of adjusting allocations to soften damage to the delivery of social services.

But we have to ask whether these responses are bold enough and whether they address the fundamental issues.

Recent writing in London’s Financial Times, arguably the most illustrious economic newspaper in the world, suggests they are not. The paper is running a series of opinion pieces by distinguished economists on the theme ”The Future of Capitalism”. One article points out that ”the Conservatives are breaking with the neo-liberal absolutism of the past 30 years — [shadow chancellor George] Osborne repudiated laissez-faire economics, [distancing his party] from the now clearly bankrupt ideology of the free-market fundamentalists”. Gordon Brown has also spoken of the end of the Washington Consensus.

The FT‘s experts are not content with ideological critique, but urge unconventional monetary policies: expanding the money supply, allowing inflation to rise moderately and other measures. Martin Wolf, the paper’s most distinguished writer and the author of the liberal bible, Why Globalization Works, says: ”Neither huge fiscal deficits nor massive monetary expansions are themselves an unmanageable threat, provided the regime itself remains credible.” Alan Greenspan admits that there was a ”flaw” in his policies and that his view of the world was wrong.

The FT has even advised the United States government editorially to ”support demand, keep people in their homes and workers in their jobs”. Remarkable advice indeed to the least socially responsive government in the world and a huge admission of the failures of reliance on market forces.

The recent meeting of the G20 also spent much effort discussing ”fiscal stimulus” packages, which have now been applied universally, though there was disagreement on the appropriate scale, with the US and United Kingdom being the most bold.

These misgivings about free-market fundamentalism and neo-liberal economics were elaborated by Nobel prize winner Paul Krugman in the International Herald Tribune. ”Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free-fall … strong fiscal expansion would actually enhance the economy’s long-run expansion … fiscal austerity would reduce, not increase, private investment … deficit worries are misplaced … public debt isn’t such a bad thing as many people believe. People who think that fiscal expansion today is bad for the future have it wrong.”

How different is the tone and content of these debates to those in South Africa! Here we talk about ”caution” and prudence, pretending that job losses are not happening or that firms are not going bust. The unfortunate truth is that our socioeconomic fundamentals have been in trouble for a long time, with the crisis reinforcing the deep problems in our economy.

We must now ask whether we have been mesmerised for too long by the constant urging to practice ”stabilisation economics”, low budget deficits and the rest of neo-liberal positions, despite the obvious failures around us.

The Harvard panel of economic advisers to our government reported that, during the first decade of democracy, there was a ”very large increase in unemployment and income inequality remained very high — third in 86 countries”.

The World Bank report of December 2007 said that ours is a ”society where deeply entrenched poverty, illiteracy, unemployment and loss of human dignity for the majority coexists with first world lifestyles at a par with the richest countries in Europe”.

The point about these reports is that they indicate strongly that a focus on our financial sector is not enough. Our real economy — mining, agriculture and manufacturing — are not performing well, hence our major unemployment problem and hence the substantial poverty and inequality.

Some of us have persistently drawn attention to the weaknesses in our real economy. Unfortunately, because of the hegemonic beliefs in the priority of macroeconomic stability through monetary and fiscal ”discipline”, attention has been diverted and our productive capabilities have stagnated. It is time to redress that imbalance, even if we have to proceed incrementally.

We need bolder, disciplined spending to renew our manufacturing, ensure that we once again become a ”producing” economy and not a ”consuming” economy, and enjoy the protective blanket of a strong domestic market to cushion us from the hazards of imbalance in imports and exports, as well as from the turbulence of the global casino financial system.

Full report (PDF)

Click here to read the full Nedlac document

Some of the propositions cited above are reflected in the modest but important Nedlac document Framework for SA’s Response to the International Economic Crisis, arrived at by consensus between government, business and labour.

Here is a document that has the potential to rebuild national confidence in our economic capabilities and divert us from our favourite national pastime — slandering public personalities.

Prof Ben Turok is an ANC MP and the author of a new book, ”From the Freedom Charter to Polokwane; the Evolution of ANC Economic Policy”. He is the editor of New Agenda