It’s the economy stupid - (Part 2) hot money and deindustrialisation
Having discussed the issue of vilification of workers, let’s now explore some of the economic structural challenges. In response to the paternalistic criticism by the IMF and the credit rating agencies on how we are to best manage our economy some have correctly argued that South Africa’s growth path should be based on using the vast natural resources as the basis for the reindustrialisation. We further suggests that since the resources are often exported unprocessed, public and private investment should therefore be directed towards developing downstream productive capacity, which would beneficiate these raw materials. It is believed that such investments will lead to the development of thriving labour absorptive manufacturing sector. Some of the notable product value chains primed for investment include capital equipment manufacturing, jewellery manufacturing, and the manufacturing catalytic converters using the vast platinum reserves.
However, after countless years of persuasion, there has been very little evidence indicating any significant change in productive downstream activities in the South African economy. While intentions to develop productive forces in the secondary productive economy have been by the ANC government for years now, investment to commensurate this rhetoric has not been forthcoming.
Why has that been the case? While there may not be a single answer, let me venture to mention what I consider to most significant. It’s important to recognise that the margin on conducting a business at primary level of beneficiation is often higher than at the next level. An example would be that the profit on selling iron is often double that of selling steel sections. This would hardly be an incentive for an iron ore mining company, or its investors to move into the steel making business. Secondly, the scope of skill/knowledge, a key input in the development of the productive forces, which include those held by artisans, technologists and managers are often limited to primary economic activity. As such mining engineers may not feel confident to tackle secondary processing, and steel makers would find it extremely difficult to enter the motor car design and development arena. Lastly, and perhaps more importantly is that benefit derived by the national economy if an individual enterprise exports products – the contribution to economic growth and improvement of the balance of payments, accrues at national level. Balancing international trade is a zero sum game. Increasing exports, by restricting exports of finite unprocessed materials, by one country will directly and proportionally result in the decrease in another’s exports and in other instances placing at risk the availability of resources needed for their sovereign programs for their own development. And as a result any venture into forward integration, would result in such a venture being in direct competition of their present, mostly overseas, clients and trading partners.
As a result, South Africa’s growth path continues to be based on a large primitive industrial economy, based on cheap labour, cheap energy, and easily accessible mineral resources. The problem with this development path is that produce coming from this sector is commoditised. Firms operating in this sector of the economy become price takers from the market. The unfortunate part however is that the value of the produced commodities, gold or oranges, are delinked from the real cost of production. The value of these commodities are determined by speculative traders, who place bets on commodity prices which include everything from oil, platinum and even the food we are to consume. As a result, the vast majority of employers find themselves as being price takes with absolutely no leverage on the price to drive revenue and firms continuously and having to resort to squeezing out more and more output by reducing the unit cost production. In an unequal society like ours, where the cost of energy is steadily increasing, and where the easily accessible mineral reserves have long been depleted, this operating model is a recipe for disaster.
We still have an unsustainable colonial unsustainable economic landscape, characterised by high levels of activities in the primary sector, low activity in the productive secondary manufacturing sector, increasing in the non-productive tertiary sector. This tertiary non-productive sector is characterised by highly developed consumer retail and financial services sector. This has been has been the sector in ascendency. This is the sector which continues to grow.
The problem with this kind of growth path, characteristic of most developed economies, is that is it driven liquid capital flows. This phenomenon has been aggravated in recent times by the US Federal Reserve Bank quantitative easy program, which has American traders accessing cash cheaply, being directed to speculative non-productive assets across the world. This phenomenon results in the kind of growth driven by highly liquid speculative investment in the stock markets often in non-productive sectors of the economy. This has no direct impact on the labour and capital intestine sectors of the economy. It is for this reason why the All Share Index continues to reach record highs, in a stagnant economy. It’s a bubble, a deck of cards stacked on a flat table, with no foundation and waiting for a gust of wind before it collapses.
So, it seems like the problem is not the lack of capital to be invested, rather the misappropriation of its use. So if the value of these firms continues to appreciate, as reflected by their share prices and earnings. Could it be that simple? Where is this value being stored? What is to be done?
To be continued….
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