How the Financial Crisis Strikes Another Blow to the Poor in South Africa

By Saliem Fakir · 16 Sep 2009

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Picture: kool_Skatkat
Picture: kool_Skatkat

One of the obvious and glaring things about the financial crisis is how much of it involves saving the rich rather than the poor. And, how much the poor continue to be disadvantaged by the failures and reckless pursuits of the rich – there is certainly a deferment of their interests.

Noam Chomsky, in a recent article of the Boston Review (September/October 2009), showed how other pressing crises such as food shortages, desertification and lack of progress on the Millennium Development Goals are all being sidestepped as a result of the financial crisis.

They hardly make the news as more and more money is diverted to save those who have caused the problem in the first place. It seems that a second package of recovery measures will have to be instituted in the US and Europe in order to bring about the necessary respite from the crisis, as the first seems to be insufficient. Which simply means more money will be diverted away from the needy to the ‘have-lots’.

The US spends practically most of its stimulus package on bailouts, while China its on the real economy. The first does not guarantee a return for the US, while China renders its economy more and more resilient.

Economists such as Nouriel Roubini predict that the recovery in the developed economies is still a long way away – Roubini thinks that there will be a slight recovery and then a slump. A real recovery will only be seen many years from now. Some even suggest it will take a decade to undo the damage of the financial crisis.

What is happening to the poor globally is being mirrored here domestically.

South Africa’s own quarterly economic statistics demonstrate how vulnerable our economy is to the financial crisis. We don’t have the scale of domestic financial cannibalization as the US, but we are not safe from its reach.

The IMF predicted that South Africa’s economy would shrink by 2.1% in 2009.

The trickle-down theory of economic growth has no sturdy legs anymore – its failure marks a deferment of the promise to better the lives of the poorest of South Africans.

Exports are down and growth has pretty much stagnated. A lot is being spent bailing out the textile industry, car manufacturers and a whole range of other industries rushing to the government to be rescued.

It is very much about saving industries and the employed. Both are necessary, but the game plan for how to fix our embarrassingly high unemployment rate remains a challenge. It has been hanging there like Damocles sword for the last fifteen years.

Here too the financial crisis shifts the attention away from the needs of the poor, as energy is directed to fight the crisis. It is the most unfortunate of consequences.

It also raises questions about the depth of our economy. One only has to contrast our lack of depth with what is happening in Asia. Growth is being sustained through reliance on strong counter-cyclical measures, high savings and the expansion of infrastructure programmes. 

Asia’s quick turnaround demonstrates the depth of their self-reliance, which is both fostered at a national level and through regional integration of trade and investment. Both macroeconomic measures and the dynamism of their micro-economy assure diversity and flexibility for their economies.

The intersections and importance of the old agricultural and resource extractive industries and the new high-tech and industrialized sectors have been critical to Asia’s agility and resilience during stormy times. The agricultural base continues to be fundamental to its economic resilience.

It’s inter-regional trade and flow of capital has also favoured opportunities for both big business and small entrepreneurs. It seems that for the first time countries like China are able to demonstrate their potential to decouple partially by harnessing their own internal strengths. 

In turn, their internal growth leads to external growth mostly in those countries that have resources. They are partially responsible for lifting the commodities sectors in Africa, Latin America and Australia.

The weakness in South Africa’s economic agility and resilience has to do with dependency at various levels.

We are dependent rather than self-reliant and changing an economy from dependence to self-reliance requires a new way of thinking about our economy and most importantly valuing our people.

We are dependent on foreigners investing in the JSE, we are dependent on the good Rand to export our manufacturing goods and we are dependent on the blessings of rating agencies on whether or not we are credit worthy so others can be assured that giving us loans will not be risky. The list of dependencies can go on.

There is both an external and internal dimension to this. The external speaks very much to how others perceive our economy, when they buy goods and commodities from us, what they buy and by how much.

The internal dependence is the inadvertent consequence of politicians promising the earth such that the state has essentially turned itself into a ‘nanny-state’ having to provide all the needs of its citizens with shrinking coffers.

The state has been able to shift the income share – in the form of grants, free water, electricity, housing subsidies and land grants from the rich to those members of the populace whose share and capacity to generate income has declined rather drastically over the last fifteen years.

It is true, at one level, we have been able to alter poverty through this income shift but at another level we only dig deeper the poverty trap because the social welfare net cannot be sustainable and also inculcates a sense of hopelessness.

The outgoing Reserve Bank Governor, Tito Mboweni, noted as much this point when he gave his Steve Biko memorial lecture at UCT recently.

Mboweni noted: “…when millions of our people depend on social grants for sustenance …we need to ask ourselves are we not running the risk of these social grants becoming an end in themselves and thus nurturing a dependency syndrome, destroying the fabric of our society”.  

More than 13 million people are on grants of one sort or the other, which costs the state about R118 billion and this cost is set to rise to R140 billion by 2012.

In this respect too, public works programmes don’t offer a long-term solution. They have proven very useful for times of deep recessions and depressions, but not when we have long-term persistent unemployment.

It is effectively a different form of social subsidy because the public works programme has had to be expanded and carried for longer periods as the depths of unemployment stubbornly persist.

The situation has been made worse since the financial crisis.  In the first three months of this year, the economy shed 179,000 jobs and another 267,000 in the following three months.

The income burden cannot be totally structured so that a small population of the employed carries this burden. This is unsustainable. The income burden can only be expanded through meaningful job creation by expanding the ways that we create wealth.

The state has to find ways to create an enabling environment for self-employment at both the high and low ends of the economy.

The very questions asked here are the questions being asked by the National Planning Commission (NPC) in its Green Paper on National Strategic Planning. The Green Paper seeks to articulate a vision for the NPC and a more strident role for the state. The plan itself is not a blueprint but a proposal about a process of discussion and negotiation of priorities.

The NPC’s Green Paper admits that the reliance on the private market and a market based approach for its state enterprises has not delivered the kind of development objectives intended.

Private markets don’t operate the way governments would like them to – they are driven often by the need for a quick buck and investors usually only have the patience for short-term targets.

Besides, private capital in South Africa lives uneasily with the idea that it must carry the development burden on its chequebook.

The reliance on state enterprises to deliver the development objectives will require a radical shift in these entities’ culture. The private business model for state enterprises themselves has proven to be inconsistent with the new government’s ethic.

A governance overhaul, a shift in culture and ways state enterprises are incentivized needs to be re-examined. They, too, are caught up in short-term objectives and the obsession with bonuses leading to financial objectives as the only measure of success.

The poverty backlog remains our country’s biggest challenge.

The NPC draws attention to planning precisely because the sequencing of economic interventions and making strategic trade-offs in what we invest in has greater urgency now than before. We don’t have the time and resources to make many mistakes. We have made too many already.

The financial crisis only amplifies the issue. It erodes whatever gains we may seem to have achieved with the previous market friendly macro-economic policy. It also foils any policy sequencing and intervention that the state may have had in mind for various types of interventions to boost economic growth.

The counter-cyclical measures themselves hold no guarantees of success. It all depends on how fast and how wisely we spend our money. Many of the measures will have to be implemented by the culturally misaligned state enterprises and their propensity already to misspend, in some cases.

There are also limits to how much we can increase the tax receipts. If, there were ever a vice-like grip on the public purse it would be now.

Before the crisis we only had to pump more money to grow the momentum of the economy. We have, these days, to pump money into the economy to save the existing economy and try and spend to create new growth and economic momentum.

Most of this burden will have to be carried by an already penniless state, with little help likely to come from the private sector and the debt-ridden employed who spend more on saving themselves from debt collectors than they do saving.

In the meantime, the consequences of the crisis digs deeper into the pockets of the employed and wreaks havoc with the unemployed and underemployed. We face the prospect of further degradation of development in South Africa, if not already.

Fakir is an independent writer based in Cape Town.

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