Engineering News
by Seeraj Mohamed
There is a massive myth that current macroeconomic policies have created economic stability in South Africa. This myth has been perpetrated by government and supported by bank economists. It has been swallowed hook, line and sinker by the media. Of course, no one really defines what they mean when they say economic stability. It usually means that inflation has been kept low.
The general meaning is supposed to infer that the economic environment is one where there is positive growth and business will keep investing and creating new jobs. However, since the term ‘economic stability’ is never defined, it allows users of the term to claim stability and infer that there is an economic environment conducive to investment and employment creation.
They are very wrong when they say there has been economic stability. The South African economy has not had adequate investment levels and employment creation has been very poor, indeed. More importantly, the type of economic growth over the past few years has been the wrong kind of economic growth. It was debt- driven, consumption-led economic growth. It hurt the economy and left the country poorer. Even if there had not been a global financial crisis and an economic meltdown, the South African economy would have performed poorly this year.
The growth over the period 2003 to 2007 was not sustainable.
Unsustainable economic growth, which is underpinned by increased debt levels and bubbles in real estate and financial asset markets, is not a feature of a stable economy. It is a feature of an economy that is prone to booms and bubbles.
Further, we have an economy where the financial sector has been growing and drawing in a larger share of national income but not supporting productive investment. The financial sector has promoted increased speculation. Further, we have deregulated flows of capital into and out of the country. The freer movement of capital into and out of the country has further increased economic instability.
Large inflows, such as those experienced during the late 1990s and from 2004 to 2006, are often hugely destabilising for an economy. Large capital inflows increase the amount of credit available in an economy. In South Africa, this increased access to credit led to more consumption and financial speculation. From 2002 to 2006, it led to some of the largest increases in house prices in the world.
The State was forced to introduce the National Credit Act because the banks were seen to be acting irresponsibly. Like their counterparts in the US, the South African banks were changing their core business. Their role as institutions that advance loans and take risks associated with those loans changed to that of earning fees on loans.
They earned fees by originating loans and earned fees on selling loans in secondary markets. They became less interested in assessing the risks on those loans because they sold them to third parties and did not have to worry about the risks associated with the loans.
Today, we have an unstable situation, where families are losing their homes and cars. They are defaulting on credit card payments. The jobs created in auto manufacturing, construction and retailing are being lost. The impact of these economic problems is rippling through the economy.
At the same time, deregulation of exchange controls has made the South African economy more vulnerable to contagion from financial crises elsewhere. Unfortunately, government has not considered the seriousness of the global financial crisis and has not acted to protect our economy from the crisis. While other countries have admitted that their economic policies have been inadequate, South African policymakers continue to spread the myth that the economy is stable.
http://www.engineeringnews.co.za/article/the-myth-of-economic-stability-2009-06-26