Red Alert: Financial sector in need of radical overhaul to improve the economy

THE SACP's 2014 Red October Campaign focuses attention on the financial sector. One of its main aims is to break the investment strike capital has embarked on.

South Africa's primary challenge is indisputably its massive unemployment rate. There is plenty of work to be done to develop the country and to meet its people's needs. But capital still tends to sit on huge piles of cash or uses it speculatively rather than investing in the productive economy.

There is a strong tendency in the media and parts of the business community to blame the post-apartheid government for the country's poor economic performance. There has recently been another spate of attacks, especially by financial sector economists, who blame government for low investment in the economy. They argue that the causes are policy uncertainty, poor planning, and a lack of capacity and skills in government. In addition, they blame labour legislation and labour action.

As far as policy uncertainty is concerned, we should point out that democratic South Africa's macroeconomic policy has always been friendly to capital, whether during the time of the Growth, Employment and Redistribution programme or the National Development Plan.

There have periodically been vigorous debates inside the ANC and the DA, with many critical analyses of the government's macroeconomic and other policies, including dissatisfaction by the ANC's allies. When such discussions take place, many media commentators cry policy uncertainty, even though robust debates about economic policy are common in most countries.

South Africa has medium-term planning and the government has been deliberate about creating an environment friendly for investors. South African labour markets are not inflexible but they do provide workers with certain rights. Trade unions do assert their power, as do employers, and relations between labour and business may become worryingly tense. However, the country has developed institutional mechanisms to manage these tensions.

As far as capacity in government is concerned, one cannot say the situation is ideal, but it is matched by inept business practices in areas such as managing labour relations and a failure to seek out export markets.

We must also take into account the serious economic conditions in South Africa and globally - largely created by the financial sector - that have negatively affected economic performance. It is high time that the financial sector owned up to the role that it has played in creating uncertainty and instability in the South African economy - and, indeed, in the world economy.

One suspects that their blame game is a tactic to divert attention from their own culpability. The behaviour of the large financial institutions in the period leading to the most recent global financial crisis caused huge suffering.

The role that big finance continues to play in the global and domestic economy has not changed fundamentally since the crisis. In fact, finance capital has become more predatory. We believe that the actions of financial institutions play a much larger role in holding back investment than do the government and labour.

It is worth examining the negative role that the financial sector plays in restricting the government's ability to support long-term productive investments and employment creation. South African banks and other financial institutions emulate the behaviour of those on Wall Street and in the City of London.

In the pre-2008 period, they worked to loosen financial regulations and take advantage of the deregulated financial environment. They worked to loosen credit standards, increase leverage and flood markets with liquidity. The outcome was asset bubbles in property and financial markets.

Possibly the main reason that South Africa avoided the worst of the financial crisis was that the government resisted many of the demands to deregulate finance and abolish exchange controls. Arguably, though, this only postponed the pain that we now face. In any case, the damage done by financial speculation to the real economies in developed countries has had a serious, negative impact on the country's trade.

In recent years, South African households have been encouraged to go into debt to buy houses, cars and other consumer goods and to max out their credit cards.

The Department of Trade and Industry also found out that in a small area like Marikana there were 12 mashonisas preying on mineworkers. One of the results of this is the current weak demand from deeply indebted consumers - and suffering for those who are over their heads in debt.

During the wild time leading up to the financial crisis, the financial sector put huge pressure on executives of non-financial companies to increase short-term profits. Pressure from financiers pushed firms to outsource and move production offshore.

All this pressure for short-term returns eroded the productive base of non-financial firms. The short-termism meant that firms spent less time on increasing innovation, productivity and job creation and instead drove up their profits through speculative activity. This is demonstrated by the fact that, by 2007, South African non-financial corporations' financial assets were 250 percent the size of their fixed assets. The credit extended to the South African private sector grew by 22 percent from 2000 to 2008 but private fixed investment grew by only 4 percent.

This diversion of credit towards non-productive speculative activities cannot be blamed on government. The financial sector's action that drove bubbles in financial asset prices and their pressure on non-financial corporations to keep producing short-term high returns were to blame.

The kind of economic growth South Africa experienced before the global financial crisis was not sustainable and the financial sector knew this. It knew that it was causing South Africans to become more indebted and it knew that the bursting of the financial asset and house price bubble would cause pain.

However, the mind-set in finance was as expressed by former Citigroup chief executive Chuck Prince, who famously stated in 2007: "As long as the music is playing, you've got to get up and dance". These are people who were prepared to take entire economies to ruin because they wanted higher returns that boosted their personal fortunes. And they were not only Americans, but also South African. Now they attempt to shift the blame onto the government and the working class.

The government should actively seek to regulate the financial sector to the benefit of the real economy - and especially to ensure that it stimulates rather than inhibits job creation.

Most importantly, the country needs a radical transformation and re-orientation of its financial sector if we are to realise the objectives of a second phase of our transition, especially to ensure that our savings are invested in a job-creating manner.

This article by SACP General Secretary Blade Nzimande was first published in Business Report, on October 16 2014. It subsequently appeared in Umsebenzi Online, the online journal of the SACP.

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