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The Current Global Economic Crisis and its implications for SA

Statement discussed and approved at the Alliance Summit
Late October 1998

The nature of the crisis

The current instability and volatility in the global economy over the last year is seriously affecting the economies of both developed and developing countries. The current acute manifestations of crisis began in Asia towards the end of 1997, spreading with remarkable speed to Russia, Eastern Europe and Latin America. The crisis now engulfs almost all "developing countries" and so-called "emerging markets".

Among the most immediate features of this crisis are:

• A contraction in export markets, especially in South East Asia; * Massive capital outflows from "emerging markets"; * Deepening economic recession with huge exchange rate and asset price declines, which have destroyed more than $1,5 trillion of financial wealth in the East Asian economies alone.

  Behind these economic statistics lie social crises of enormous dimensions. In Latin America, and especially in East Asia and Russia, unemployment, underemployment and poverty are rising. According to UNCTAD calculations "the proportion of the Indonesian population living on incomes below the poverty line in 1998 is expected to be at least 50% greater than in 1996". For the people of Russia, living just a decade or two ago in a super-power, the standard of living is now approaching African levels.

  South Africa's economy is integrally linked into the global economy and we have not been left unscathed. Sudden outflows of short term foreign capital earlier this year created a situation in which our currency underwent a sharp devaluation (of around 29%). Interest rates have shot up, and growth forecasts have had to be drastically revised downwards.

  These are some of the basic facts upon which there is general agreement. However, if we are to deal as effectively as possible with the crisis, it is important to move beyond the symptoms, and seek to understand its underlying nature.

The present crisis is, in fact, a global capitalist crisis, rooted in a classical crisis of over-accumulation and declining profitability. Declining profitability has been a general feature of the most developed economies over the last 25 years. It is precisely declining profitability in the most advanced economies that has spurred the last quarter of a century of intensified globalisation. These trends have resulted in the greatly increased dominance (and exponential growth in the sheer quantity) of speculative finance capital, ranging uncontrolled over the globe in pursuit of higher returns.

It is, therefore, not a temporary problem (although its present acute manifestations might be overcome for a while in the medium term);

• It is also, therefore, not an unprecedented reality for capitalism. The economic recession and crisis of the 1930s had many similar structural features. There are also, of course, new features in the present crisis - including the much greater volumes of speculative capital involved and the sheer speed of capital flows, due in part to information technology. There is also considerably more global inter-dependence.

• Although they now carry less conviction, there were until a month or two ago, attempts to portray the current crisis in a limited light - as an "Asian contagion", a "Russian melt-down", or an "emerging markets" problem. While the crisis is being felt more acutely in some regions, it is an international crisis systemic to the global capitalist system, and not the result of some peculiar local features ("Asian croneyism". "Russian lack of will", etc)

• It is also not merely a financial markets crisis, although its most obvious manifestations are in the financial sector.

The melt-down of capitalism?

The fact that we are faced with a global, systemic capitalist crisis should not lead us to conclude that capitalism is about to wither away. There have been several preceding globalised capitalist crises this century, in each case the capitalist system has (at huge cost in terms of the mass destruction of capital resources and resulting mass human misery) been able to surpass its crises, at least for a time. There is nothing to suggest that the present crisis is paving the way for some global leap into socialism. We should not sit around passively expecting the present crisis to deliver a new utopia out of the ruins of economic collapse. Indeed, previous globalised capitalist crises have been associated with some positive but also many negative phenomena (including the emergence of fascism in the 1930s).

Nevertheless, the present crisis creates both the possibility (and the necessity) for the progressive movement in South Africa to question what was until the most recent period the unquestioned economic global paradigm. We have, in an engagement with many other international forces, to find our own solutions to this crisis.

The crisis of a paradigm

As the depth and relative durability of the crisis have become apparent, the dominant economic paradigm (the neo-liberal "Washington Consensus") has fallen into increasing disrepute. Perhaps the core feature of this paradigm was its belief that globalisation had ensured that capitalist economies had, more or less, surpassed boom and bust cycles - a vista of endless economic growth lay before us. In 1970 US Nobel prize winners, Solow and Samuelson were proclaiming that "the old notion of the business cycle is not very interesting any more". Top Kennedy/Johnson adviser Okun proclaimed in the same year that recessions "were now preventable, like airplane crashes". The OECD in 1974 envisaged uninterrupted economic growth that might "quadruple between now and the end of the century". This optimism was reaffirmed with great triumphalism in the 1990s. In 1993, for example, the World Bank argued "individual developing countries, particularly smaller economies currently contemplating an export-led expansion, could safely assume that demand for their products is infinitely elastic." (1993)

The dominant assumption in the 1990s has been that alignment with globalisation would guarantee economies more or less uninterrupted growth. The paradigm of an endlessly expanding global freeway, in which, to benefit, individual (and particularly developing) economies simply had to take the standard macro-economic on-ramp (liberalisation, privatisation, deregulation, flexibility and a 3 percent budget deficit) is now in crisis.

Will the left end up managing the capitalist crisis?

In the last few years, along with the ANC's electoral victory in 1994, there have been a series of left or centre-left electoral victories, including in many of the advanced economies (Italy, France, UK, Germany, Sweden). In our own country we quickly realised that we had inherited a society and economy in crisis. In our case this has included many serious economic structural problems related to the particular capitalist growth path in South Africa.

The prospect in our own society and in many others in the coming years is that, once more as before in this century, the left/centre-left will be confronted with the task of managing a capitalist crisis. We cannot decline this responsibility. But in taking it on, we do need to consistently pose the difficult question. How do we introduce transformative elements that seek to counter the systemic logic and momentum of a global capitalism? Can we introduce anti-bodies to resist and surpass a system that periodically results in the mass destruction of resources, that continuously reproduces huge inequalities between north and south (and within the north), that is increasingly volatile and unstable, and that has no clear strategies for sustainable development?

What, if anything, can be done? There are many levels at which we must begin to respond to the crisis. Among the most important are:

International engagement

• The struggle to introduce a much more effective international regulatory system for speculative financial flows. Important efforts have already been undertaken in this respect by our comrades in government. There is clearly a growing international consensus that something has to be done in this regard. However, we need also to understand that some of the major economies are less affected by the present crisis, and see in it an opportunity to deepen their own dominance at the expense of rivals (eg. the US over Japan), and at the expense of the South in general. We should, therefore, not harbour exaggerated expectations in this regard.

• Joint action with other developing economies, which may provide more immediate results. In particular we need to engage with some of the more significant economies of the South (eg. Brazil, India, China, etc). Can we forge a Brasilia-Pretoria-Delhi-Beijing Consensus in the absence of any Washington Consensus?

• Continuously enhancing a southern African and African perspective.

  Building a more effective macro-economic consensus within the alliance

  As an alliance we have got stuck somewhat in our GEAR debate over the last two years (much to delight of the media and our political opponents). There are several reasons why we can now, collectively, surpass this situation of blockage:

• The paradigm crisis of the "Washington Consensus", noted above, presents us all with some space to look afresh, and to look creatively and constructively, at macro-economic policy. Of course, we should not exaggerate the degree to which there is a global tolerance (especially in the financial markets) for macro-economic innovation, but the myth of a "one size fits all" macro policy has been punctured.

• The serious downturn, and danger of recession, in our own economy creates space to argue for certain contra-cyclical measures to be applied (if only as interim measures);

• With the last few months of international crisis, it has become increasingly clear that many of GEAR's targets would have to be revised. The NEC, and government, have now officially announced that some GEAR targets will be revised, while maintaining overall policy consistency.

• Very important progress in the preparations for the Jobs Summit. The Jobs Summit may well produce significant national consensus agreements on a wide range of "real" economy policies. This will create a situation in which we will be more able to align (and argue for the alignment of) macro-economic policy with industrial policy.

  It is not going to be helpful, now, as an Alliance to manoeuvre ourselves once more into a raging public debate in which we argue whether GEAR has been (or should be) abandoned or not. Much more important is the imperative of working together to consolidate, in an ongoing way, effective macro-economic policy. This in itself will involve debate and some difference, but it needs to be well managed within the Alliance. Above all, we need to root ourselves in major areas on which we can agree. These include:

• The apartheid economy we have inherited requires major structural changes (many of these changes have already begun to be implemented). An effective macro-economic policy needs to support such structural transformation. However, what we now all appreciate better is that these structural reforms cannot just be designed to "modernise" (to align with global "norms") an out-of-date apartheid economy. Clearly, in transforming the skewed apartheid economic legacy, we have also to carry through structural transformations that enable our own economy to survive and surpass, as best as possible, the uneven and crisis-ridden character of the global economy. Structural reforms are not just about "catching up", or alignment with a now non-existent Washington consensus ;

• The need for fiscal discipline (we are all committed to the responsible use of public funds); sustainability; and relative predictability (insofar as we are able to ensure such predictability);

• Macro-economic policy (as GEAR itself affirmed) must be aligned with our reconstruction and development objectives. More substance should be provided by the Jobs Summit to concrete programmes with which such alignment should take place;

• The need to investigate and implement contra-cyclical measures as noted above. (We may disagree as to whether these are short-term to avert recession, or of a more enduring developmental nature.)

• Wherever there is some relaxation on existing GEAR targets, this relaxation should not be simply because we have been "forced backwards". Whatever resources are released as a result of macro-economic relaxation, these must be directed strategically to growth, development and sustainable transformation.

  We do not underestimate the possibility of persisting areas of difference within our Alliance on macro-economic policy, however all of the above provide sufficient space for a much more effective intra-Alliance consensus.

  Some specific areas of fiscal and monetary policy that can be taken forward There are also a number of more specific areas where there is space to explore alternatives, new measures, and/or adjustments in fiscal and monetary policy. Many of these will emerge more substantially from the Jobs Summit report. Such areas include:

• A fresh look at the funding of the Civil Service Pension Fund. Over the past year the debate within the Alliance has tended to polarise around a "fully-funded" versus a "pay-as-you-go" approach. Are the options that polarised? Do we need to advance rapidly and inexorably to the fully-funded option, or can we sustain the funding at its present partially funded levels? An alliance mandated technical team could help us all to understand the pros and cons of different options.

• We need also, as an Alliance, to have a more nuanced understanding of the key challenges in terms of Tax policy. Is the priority to move towards greater progressivity, or are present policies basically sound with the priority being on more effective collection? How will the economic downturn impact on revenue? Again, as an Alliance we will benefit from a better shared understanding of the relative pros and cons of different options. We need to find ways of ensuring the necessary technical work is done that will make a more informed intra-Alliance discussion possible.

• In the context of the Jobs Summit important progress seems to have been made around Tariff policies. There is an emerging consensus for greater flexibility, and for the approach to tariffs to be informed by sector specific, and even time specific considerations. As an Alliance we need to empower ourselves to better impact on the processes that will emerge, in this regard, from the Jobs Summit.

• As was mentioned above, there are now good reasons to argue for basic contra-cyclical measures to be taken. Concretely, such contra-cyclical measures could include less rigidity on inflation, and less anxiety about defending the value of the rand - and therefore the prospect of easing pressure on interest rates. We are talking about relative shifts, not a demagogic indifference to any level of inflation, or any value of the rand. Such shifts may well require political pressure for, and a public debate on, the need for Reserve Bank policies to be strategically aligned with overall government development perspectives, while allowing for Reserve Bank operational independence

A "Post-GEAR" consensus?

At the ANC's NEC of last weekend, the notion of an Alliance "post-GEAR" consensus was mentioned in passing. Those who have been opposing GEAR in the Alliance will probably find the concept appealing. Those who have been defending GEAR would probably prefer to speak about an emerging consensus around an "adjusted GEAR" in which its core structural transformation logic remains intact.

We can certainly engage polemically with each other along these lines. Much more important, in the face of a global economic crisis and in the face of very serious structural problems in our own economy, is the ongoing Alliance development of an effective, sustainable and relatively flexible macro-economic policy framework. We have tried to argue here that, for many reasons, this is more possible than before.