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Publication Details

Reference
Bond, Patrick (2011) The coming fight over capital flight. The Mercury Eye on Civil Society : -.

Summary

At a time trade unions are under fierce attack from big business for
above‑inflation wage increases and for opposing both labour brokers and
a state‑subsidized sub‑minimum wage for youth, the sibling of former
president Thabo Mbeki is helping restore balance.

Moeletsi Mbeki opened a profound economic debate with a remark to the
Democratic Alliance last Tuesday: “Big companies taking their capital
out of South Africa are a bigger threat to economic freedom than ANC
Youth League president Julius Malema.”

You could argue that Mbeki didn’t do the argument full justice,
asserting that “Capital flight means there is no capital for
entrepreneurs in South Africa.” That’s probably not true, for local
financial markets are as speculative and liquid as ever, especially now
that the real estate bubble is gradually deflating.

More pervasive problems that prevent both entrepreneurship and job
creation include constrained consumer buying power, the market dominance
of monopoly capital in most industries, and excessive trade liberalisation.

Consumption is stagnant largely due to overindebtedness: the banks’
‘impaired credit’ list now has 8.5 million victims, representing nearly
half of all SA borrowers. That would include many of the 1.3 million who
lost their jobs in the last downturn and haven’t got them back.

And even if they did, there is very little scope for local entrepreneurs
to open up the manufacturing facilities that president Jacob Zuma last
week unhappily observed were virtually all in white hands. Waves of
imports are still descending on South Africa thanks to the overvalued
rand, as many more local industries will understand once Walmart begins
cheap imports in earnest.

Asked about the entrance of that US retailing behemoth, Moeletsi Mbeki
was correct to ridicule the neoliberal agenda that his brother so
decisively implemented from 1994, assisted by Trevor Manuel, Tito
Mboweni and Alec Erwin: “In South Africa we think we will just open the
doors and everything will be hunky dory. Of course it won’t.”

The doors swung open not only to East Asian imports but also the other
way: to rich South Africans and our biggest companies who left with
apartheid‑era loot. In 1995 they lobbied hard for the abolition of the
Financial Rand (finrand) dual exchange rate and for permission to
relocate financial headquarters from Johannesburg and Cape Town.

Mbeki complained that there was never “an explanation for why companies
like Anglo American and Old Mutual had been allowed to list in London.
On what basis did they allow them to go, to move their primary listing
from South Africa to London? Why did they approve it? What did they get
out of it?”

There are tough questions, especially because the outflow of profits,
dividends and interest payments to Anglo, DeBeers, Old Mutual,
SABMiller, Mondi, Investec, Liberty Life and BHP Billiton is the main
cause of South Africa’s dangerous current account deficit (far worse
than the trade deficit), and in turn, our soaring foreign debt.

I think the answer is not necessarily the implied backhanders that we
now know characterise Zumanomics, as exemplified by Limpopo Province
Malemanomics. The more durable answer is more difficult to grapple with
than mere ‘corruption’, for at stake now is ideology.

This was abundantly evident in the report released late last month by
the International Monetary Fund. Every year the IMF provides SA with an
“Article IV Consultation” and in mid‑2011, it’s evident that
last‑century orthodox ideology prevails.

In its meetings with Treasury officials, the IMF recorded how
“Discussions centered on the timing and strength of the required exit
from supportive policies” which translates into cutting the budget
deficit. “Staff recommended stronger fiscal consolidation beyond the
current fiscal year than currently being considered.”

Orthodox ideology typically blames workers and the IMF was true to form,
advocating “policies to moderate real wage growth.”

As for capital flight to London, New York and Melbourne? No worries, say
IMF staff: “Relatively low public and external debts, mainly denominated
in domestic currency, and adequate international reserve coverage offset
risks from currency overvaluation and current account deficits funded by
portfolio flows.”

'Relatively low'? Our $100+ billion foreign debt is, in reality, a very
high proportion of GDP, with even FNB economists concerned about SA
approaching mid‑1980s crisis levels. The increase in foreign reserves
from $40 billion to $50 billion over the last 18 months offsets only
half the rise in foreign debt over the same period.

What does the IMF know about debt crises, anyhow? Orthodox thinking left
the institution utterly unprepared in 2008 for the world’s worst
financial crisis since 1929, so its lackadaisical attitude should ring
alarm bells in Pretoria.

Don’t count on it, for when the labour movement helped replace Mbeki
with Zuma, Manuel with Pravin Gordhan, and Mboweni with Gill Marcus,
they failed to replace neoliberalism with the social democratic
(“Keynesian”) ideology they still vigorously promote.

This is evident given our extremely volatile currency, with more crashes
since apartheid ended than any other country I know of except Zimbabwe.
Nearly 30 separate relaxations of exchange controls since 1994 is the
main reason.

The IMF doesn’t care much, praising the Reserve Bank’s “prudent”
policies “together with a flexible exchange rate” which allegedly
“helped dampen the adverse effects of those global cycles.” (Huh?
Replace ‘dampen’ with ‘amplify’ for accuracy’s sake.)

More nonsense: “Although the government’s borrowing requirements
remained large, they were easily met through the issuance of rand
denominated bonds and bills at low interest rates against the backdrop
of large capital inflows.”

The IMF ignored a recent Reserve Bank admission that of fifty major
countries, only Greece has higher nominal rates.

The diabolical implications of IMF logic are now clear, when it comes to
the exchange controls we need to address Moeletsi Mbeki’s concerns.

For if you suggest merely a “small tax on inflows to try to curtail
inflows or at least change their composition,” IMF staff point out
“significant drawbacks”: “it likely would raise the government’s
financing costs. Second, even if this were to help engender nominal rand
depreciation, absent wage restraint it is unlikely this would enhance
competitiveness.”

The rebuttal is easy: put exchange controls on outflows of capital, to
address capital flight, and then systematically lower interest rates and
manage the appropriate decline in the rand’s value, to the point workers
can return to at least the wage/profit share they had won by the end of
apartheid: 54/46, compared to just 43/57 today.

As South Africa again barely broke into the World Economic Forum’s top
fifty countries in business competitiveness last month, the prevailing
neoliberal ideology is clearly both ineffectual and inhumane. Control of
capital flight is the first step away from this perpetual crisis, and
let's hope this debate is more constructive than the one on nationalisation.

Patrick Bond directs the UKZN Centre for Civil Society.

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