Addressing the African Development Bank in Tunis last week, Nobel prize-winning economist Joseph Stiglitz warned that while bankers and policy makers may be patting themselves on the back for preventing a financial Armageddon, academics are more interested in the question of when the next financial tsunami will strike.
Stiglitz, whose contrarian views are gaining popularity in developing countries, argues that the United States has failed to address the core reasons for the 2008 financial collapse and that another crisis cannot be ruled out. Furthermore, Stiglitz raises the concern that an equity bubble may be forming in emerging market equities.
With the developed world awash with liquidity on the back of unprecedented stimulus policies, large flows of money have moved into emerging markets, which are expected to recover more rapidly than the developed world, resulting in dollar market returns in excess of 70%.
In light of Stiglitz’s fairly gloomy predictions, South Africa needs to position itself for further volatile times, but the good news is that in some quarters, South Africa’s financial model has proven fairly robust. Stiglitz says those economies that best survived the financial crisis had budget surpluses, social welfare programmes, some form of capital market controls and large foreign reserves.
South Africa scored well on the first three policy issues, thanks to a very conservative fiscal stance by former finance minister Trevor Manuel which saw South Africa building up a budget surplus while still dealing with poverty alleviation through social grants to about 12-million South Africans.
Vulnerable to shocks
But, our lack of reserves, and more importantly our dismal savings levels, leaves us very vulnerable to further global shocks. Stiglitz raised the argument that generally Africa suffers from a very low savings rate and that it needs to follow the example of Asia, which even during periods of very low per capita income always maintained high levels of savings which allowed for significant levels of investment and a reduced dependency on fickle short-term capital flows.
South Africa, by contrast, still relies heavily on foreign portfolio flows to fund our current account deficit and our infrastructure development which is why our currency remains extremely volatile, increasing the cost of business. During the financial crisis in 2008, the South African rand was one of the worst performing currencies in the world.
Stiglitz also raised key issues Africa needs to address in order to achieve sustainable growth rates — and in this regard South Africa still has a has a fair amount of work to do.
The main message, one that has been well made over the years, is that we need to develop our manufacturing industries. A worrying statistic is that Africa has actually lost industrial capability over the last 40 years. Stiglitz blames this on the “resources curse” and he makes an interesting point.
Inequality
Many resource-rich African countries have done poorly in terms of growth, have high levels of inequality and have failed to reduce poverty levels. South Africa is a classic example of a country which at national level has benefited from the riches of resources yet has extreme levels of poverty and inequality.
The curse of resources is that it tends to focus a country’s economy towards extraction rather than manufacturing and raw commodities, which have not been effectively managed through beneficiation or developed into higher value products, have a negative impact on manufacturing. As resource prices rise, so the currency appreciates. This in turn ends up destroying manufacturing jobs through an uncompetitive exchange rate.
Stiglitz believes that Africa will soon have a window of opportunity to develop its manufacturing base as wage levels in Asia have risen dramatically. This could see Chinese manufacturers moving their operations to Africa in search of lower labour costs.
However, what is of major concern to South Africans is that in order to develop manufacturing jobs we will need to significantly improve our levels of human capital through education and skills training. Unfortunately we are falling behind significantly in this area.
Although one cannot expect a miracle overnight, our latest matric results suggest that we are not moving forward, not even at a snail’s pace. If South Africa is to create an environment where growth rates of 6% are sustainable, it will only happen when we have the human capital to generate those returns.