How much is too much? Finance in South Africa
South Africa has a large and sophisticated financial sector. The country also has one of the highest levels of inequality in the world and a stagnant growth rate unlikely to put the problem into reverse. As Dr Desné Masie explains, this isn’t a paradox. Part of the low-growth, high-inequality story is the over-financialisation of South Africa’s economy.
South Africa’s economy faces stagnation, with economic growth rates at less than 2%. This relative standstill is coupled with, by some measures, one of the highest levels of income inequality in the world. Orthodox accounts of the country’s current economic malaise cite high levels of unemployment, infrastructure failings, public debt and fractious labour relations as contributing factors. But these accounts exclude a significant structural problem in the economy – over-financialisation.
The gains made by financiers in the early stages of South Africa’s democracy are proving a poor contributor to sustained, high, broad-based economic growth. These outsized gains to finance, relative to the economy at large, are rooted in the conglomeration of mining and finance during apartheid. But this dominant role for finance has not been reversed in the democratic era – instead, financialisation has accelerated in the past 20 years. A series of macroeconomic policies, which reflected the economic market-liberal orthodoxies of the time, have increased the extreme financialisation of the economy to its detriment.
Financialisation is the growth of financial markets and the insertion of finance into every aspect of socio-economic life through increasing the importance of financial motives, institutions and elites. Financialisation has taken place across the world economy at startling rates over the past 30 years. This is evident in the increasing share of the financial sector in the global economy, the quantity of financial assets held relative to non-financial assets, the rates of remuneration in the sector, particularly at the executive level, and the increased power private financial institutions hold over public policy. A diminished corporate tax base has accompanied this period of financialisation, as capital mobility, banking secrecy zones and illicit financial flows increase outside of active regulatory oversight. This reduced tax base has contributed to recent increases in inequality and systemic instability, which financialisation further facilitates through outsize growth of, and highly correlated risk in, financial assets.
Financialisation further creates a tendency toward inequality. It draws capital towards the control of assets, living off the interest accrued rather than investment in physical capital and increased production. The latter is more likely to contribute to higher rates of employment and sustainable growth. This tendency is summed up by the economist Thomas Piketty as R>G (returns to wealth are greater than the rate of economic growth).
This is not to say that finance is not useful and necessary. But, for a small open economy, such as South Africa’s, a delicate balance must be reached. Policy makers must signal openness for productive investments while at the same time fending off predatory speculators and keeping investments in the productive and labour-absorbing economy rather than bidding up, or seeking to control, asset prices.
Apartheid’s legacy
The inequality level in South Africa is not only one of the highest in the world, it is also highly racialised, having developed through the political economy of apartheid. Although the overthrow of apartheid achieved political equality, the economic structures that reproduce inequality are still present.
By the 1970s, the economy was organised around what Ben Fine and Zavareh Rustomjee call the “minerals energy complex” (MEC). Fine says that capital controls meant MEC profits not illicitly transferred offshore were confined to “accumulation within the South African economy itself, causing conglomeration across the economy”, and the expansion of a “huge and sophisticated financial system as cause and consequence of the internationally confined, but domestically spread, reach of the South African conglomerates”.
South African capitalism became one of the “most highly concentrated and conglomerated forms of capitalism”, exemplified through the immense power accumulated by the mining houses in the 1950s and 19 60s, according to the economist Alan Hirsch. He says the mining companies “simply bought up most of the rest of the economy when gold prospects started to dim”, with the result that “in the 1980s when companies from the United States, Europe and the United Kingdom disinvested their South Africa holdings, the only available buyers were the already huge South African financial/mining house conglomerates”.
Fine points out that “the conglomerates attached to the MEC had been frustrated in globalising their operations” and therefore pressed for liberalisation of capital controls imposed in the debt freeze of 1985, and held “little or token commitment to the economic and social restructuring and expansion of the local economy other than in furnishing continuing and secure profitability to feed into their globalisation”.
This was the state of play in the political economy when the mining companies realised apartheid was no longer economically sustainable.
Financial expansion under democracy
By the early 1990s twilight era of apartheid, the country was almost bankrupt, and the economy was buckling under significant political stress. Business wanted the ANC as the incoming ruling party to create conditions that were conducive to finance and to liberalise capital controls. These demands were at odds with the social democratic poverty alleviation and infrastructure development provisions the ANC wished to pursue in its Reconstruction and Development Programme (RDP). The liberalising business forces won out. In 1996 – just two years into ANC rule – the inflation-targeting, pro-positive real interest rate, fiscally constrained and capital control liberal provisions emphasised in the Growth, Employment and Redistributive Plan (GEAR) replaced RDP.
GEAR and RDP both contained some redistributive provisions. However, the economic policy direction agreed upon concentrated on an incremental – rather than structural – market-focussed change. Some poverty alleviation alongside allocating some rents to the black, often politically connected, middle class would take place. But the overall structure preserved white, highly-conglomerated capital, and an export-led over a distributive agenda.
The process of financial market liberalisation was already started in the 1980s (see graph 1), only to intensify during the transition to and then the beginning of ANC rule.
Under pressure from the mining/finance conglomerates, and international finance, the ANC-led government oversaw not just liberalisation of the financial sector, but its expansion relative to GDP. South Africa’s already large and sophisticated financial services sector grew from 15.3% of the economy in 1994 to 21.4% of GDP in 2009.
Research by Hamid Rashid shows an outcome of this financial sector deepening is that relative to GDP, South Africa has one of the highest global portfolio capital inflows (investments in the stock market) and consequently has the largest stock market in Africa, the 19th biggest in the world. Relative to the size of its economy, South Africa’s stock exchange is enormous.
Only Hong Kong and Switzerland have higher stock market capitalisation to GDP ratios. South Africa is the only BRICS nation where portfolio inflows are larger than foreign direct investment (FDI) inflows. This presents a problem as portfolio inflows are much more volatile than FDI. Capital invested in a stock can come and go pretty much as it pleases, whereas structured financing for a new plant is far less liquid. South African trade unions have long advocated a legal mandate for a portion of the nation’s pension funds to be used for infrastructural investment, rather than invested in shares.
Portfolio inflows can also contribute to the current account deficit through dividend incomes accruing to overseas shareholders. Portfolio inflows also contribute to a strong rand, although countervailing forces have seen the rand fall in value in recent years, which increases the cost of labour and local inputs for foreign investors and reinforces consumption and import biases, which can make the cost of doing business more unpredictable according to Rashid. The rand’s volatility has been aggravated by it being a favourite of currency speculators in the global carry trade.
Currency speculators borrow cheaply in a hard currency with a low interest rate, such as the dollar or yen, to profit by reinvesting in currency instruments with a higher yield, such as reals or rands. The practice has been criticised because it can be destabilising for so-called “fragile currencies” during market turmoil.
The finance curse
In their book, The Finance Curse: How Oversized Financial Sectors Attack Democracy and Corrupt Economics, Nicholas Shaxson and John Christensen argue that an overreliance on finance can be as analogously damaging to economies as the resource curse, entrenching unemployment, poverty and inequality. They describe a process where not only does the financial sector increase in size but non-financial firms become more highly leveraged, coming to have similar incentives to financial firms. As the economy is financialised, so too is politics, with financial elites gaining a greater influence, both formally and through the creation of norms, over policy.
This process is also associated with increasing levels of household debt, both as credit is made more available and more extensively marketed. This debt spending makes up for shortfalls in aggregate demand caused by relatively stagnant wages or unemployment for the majority of workers.
In South Africa, where household debt sat at around 65% of GDP in 2008, working class debt is a force of social destabilisation. High debt repayment levels, reducing take-home pay, was one of the underlying causes of the strike at Lonmin’s Marikana mine that ended in the police massacre of 34 miners in August 2012. Patrick Bond has pointed out that “the ‘scale jumping’ [of debt] required from SA’s national insertion into the world financial system” entailed the Reserve Bank setting interest rates at a level amongst the world’s highest, leading to “unpayable levels of unsecured consumer debt”. Marikana, therefore, represented a fusing of the micro financial with the macro. The workers confronted their local financial crisis of debts to local “mashonisa” loan sharks, partly structured by macro policies, and the crisis became displaced into the national economy with the Moody’s credit rating downgrade of government debt.
The process of financialisation that started in the late apartheid era and carried on at pace in the democratic era has helped to create a perfect storm of interlocking social and political challenges. Moody’s ratings agency has recognised that South Africa’s enormous structural inequality is holding back the economy and threatening social stability. From shiny boardrooms to miners’ informal shack housing, the economy’s overdominance by finance is leading to economic choices that increase inequality and undermine long-term social and economic stability. The country needs to rethink its relationship to finance – and realise that bigger doesn’t always mean better – if hard-won political equality is to translate into greater economic equality.
