Tackling the crisis

2008-12-09 00:00

The worst financial crisis since the Great Depression of the thirties presents obvious dangers, but it also offers developing countries such as South Africa the opportunity not only to refashion their own economies but to create a new global financial system.

Just as the 1944 Bretton Woods Accord was the framework to rebuild war-devastated Europe, this is an opportunity to create a new system that can also boost African and developing countries which are disadvantaged by the current system. The global financial crisis underscores that the 1944 Bretton Woods Accord, which set up the institutions that oversee the world economy today, is simply outdated.

However, South Africa and developing countries must have clear ideas. Major companies have announced closures and job cuts because of the turmoil unleashed by the financial crisis, which sees bank lending freeze in a crisis of confidence over the United States mortgage debt. A KPMG survey last week showed that more than a third of South Africa’s top 120 companies, across the economy, are likely to retrench staff in the next six months. Current or looming recessions in industrial countries have reduced demand for South Africa’s minerals and exports.

The Group of 20 (G20) meeting, which included industrial and developing countries, discussed measures to deal with the crisis but fell far short. It did not even agree on the basics — such as co-ordinated stimulus spending across developing and developed countries — which is now needed. To effectively tackle the crisis, global co-ordination of macroeconomic policy across countries is crucial. Developing countries must have a greater say at the International Monetary Fund, World Bank, United Nations and other global bodies.

Pakistan was told by the IMF that it must adhere to crippling conditions if it wanted emergency money to bail it out of financial bankruptcy. Developing countries must push for emergency aid for poorer countries which does not involve the IMF’s inappropriate conditions. Furthermore, developing countries lack the freedom to come up with economic policies appropriate to their own circumstances — a handicap not restricting richer nations.

China, in contrast to Western governments which have used public money to bail out struggling banks, has unveiled a four trillion yuan ($586 billion) stimulus package to boost domestic economic growth slowed down by the global financial crisis. China’s stimulus package will be used on infrastructure development such as housing, expanding the country’s power-grid, railways, rural infrastructure, environmental protection and water provision.

France unveiled a two billion euro stimulus plan for its economy, which focused on boosting new investment in infrastructure, skills and technology transfer. Of course, countries such as South Africa don’t have the means to unveil such large rescue packages. Yet South Africa, with a smaller budget, can still be innovative. Any stimulus package by South Africa must consist of fiscal and monetary measures. South Africa already has a R400 billion infrastructure development going on. The downturn must be used to expand low-cost housing stock by employing the unskilled and unemployed on a mass scale in a combined public works and skills development programme. Tax breaks, for example, can be given to companies making new investments, creating jobs, using local products and generating new technology. By expanding the budget deficit by one percent over a restricted period, a stimulus package can be financed that combines measures to create jobs and boost investment and entrepreneurship, with income support to the most vulnerable.

Big black economic empowerment must be scrapped in its entirety or restricted to one person or BEE company per deal. Where BEE companies are supported, it must be on the basis that they venture into industries that will create new jobs, and transfer skills, develop new technology, and expand the local manufacturing industry. This is also the moment to come up with a plan to rid the country of its dependency on just exporting raw materials, such as platinum, so that the economy is not so dependent on vagaries of changes in world commodity prices.

Industrial policy must target employment creation, focusing on specific industries for growth. Strategic industries, such as agriculture, must be supported. But homeowners must also be protected, with the government and banks working out a way for homeowners in trouble to renegotiate home loan deals. This is the moment to introduce a basic income grant, by supporting poor families with children up to 18 years old who remain in school.

The financial crisis means that many skilled South Africans abroad may have more of an incentive to return home. It will make sense for the government to lure every skilled South African back, whatever their colour, and offer them positions in the failing public service, especially in the worst run ones, such as home affairs and local municipalities. This is a crisis, so there has to be more flexibility with inflation targeting: lifting the upper band by a percentage point and extending the period, say, by two years, to reach it, is surely not imprudent. But the Reserve Bank must also cut interest rates as part of the package to cushion the blow to the most vulnerable.

In these difficult times, government waste, corruption and inefficiencies will have to be dealt with head on. In South Africa the government, labour and business must work together to solve this crisis. Tackling the financial crisis could set the basis of a social pact between the government, business and organised labour, which is crucial to remake the economy.

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