CONTENTS
Speculators
wreak havoc
by Claire Horton
Monetary policy and the role of the Reserve Bank and the commercial
banks
in the South African economy have recently been the subject of intense
debate.
This follows a dramatic hike in interest rates. The real (after
taking
inflation into account) interest rate now stands at more than 12%.
GEAR
projected a rate of 4%. This means that GEAR has failed to meet
yet another
target.
Analysts blame what they call the 'Asian contagion' for the rise
in
interest rates. Emerging market economies all over the world - including
South Africa (1996 and 1998), Mexico (1994), Brazil (1995), Eastern
Europe
(early 1997), South East Asia (late 1997 and 1998) and Russia (1998)
- have
been hit by economic crises.
Speculation
Financial speculation is the main reason for these crises. Speculators
are
after the highest, short-term returns they can get on the international
money markets.
It is far more profitable for them to put their money into investment
portfolios - shares, hedge markets and bonds - than it is to invest
in
productive capital (factories). They put money into a country and
take it
out as soon as they have made an acceptable profit. Using information
technology, they are able to shift billions of dollars from one
country to
another in a matter of seconds.
The emerging market economies are held to ransom. They are continuously
hit
by waves of capital flowing in and out. Their economies do not benefit
from
these capital flows, as they are rarely converted into investment
that
creates jobs. In South Africa, foreign direct investment made up
only 0,6%
of gross domestic investment in 1996. This means that the bulk of
foreign
investment is portfolio investment.
Controls
In the past, exchange controls were used to control the inflow
and outflow
of money in a country. Over the past few years, many emerging market
economies have done away with such controls. South Africa abolished
its
dual exchange rate system at the end of 1995.
This effectively removed exchange controls over foreign money. There
has
also been a gradual doing away with the restrictions on South African
citizens.
During the first four months of 1998, South Africa experienced a
foreign
inflow of R16-billion.
While the outflow dropped in May and June, amounting to R7-billion,
this
led to a shortage of foreign exchange. This shortage caused a sharp
drop in
the value of the Rand.
In an attempt to attract new investors and to protect the value
of existing
investment, the Reserve Bank increased interest rates.
Consequences
High interest rates have very detrimental effects on an economy.
The very
wealthy and some retired people, who have savings, may benefit.
As the
interest rate on borrowings increases, so, generally, does the rate
paid on
savings.
These people are, however, a very small proportion of our population.
Homeowners (especially in the low-cost housing market), small businesses
and individuals and companies which are 'on the edge' are affected
very
negatively.
While big business can use its power to negotiate lower interest
rates with
the banks, smaller enterprises have to pay the going rate. This
not only
prevents new businesses from starting up, but it also increases
the number
of bankruptcies, leading to job losses.
Higher interest rates also cause larger companies to put off investing
in
new plant or factories. This places limits on job creation.
Most companies have loans, on which they have to pay monthly instalments.
When interest rates go up, they try to cut costs by, for example,
adopting
more capital-intensive production methods.
A recent NALEDI study shows that larger companies consider interest
rates,
economic growth and the overall stability of the economy the most
important
factors influencing investment decisions.
Action
South Africa is part of a group of 22 countries which recently
held talks
to discuss ways of slowing down the movement of capital between
countries.
One such measure is the 'Tobin' tax, which would require capitalists
who
move money from one country to another to pay a special tax to the
government involved.
Another option is that investors would have to leave their money
in a
country for a period of time before moving on again.
On the home front, the government could consider differential interest
rates. Labour intensive industries which create jobs could be offered
lower
rates. The Reserve Bank could also lower overall interest rates.
While this would lead to higher inflation, it would boost job creation.
With official unemployment in South Africa currently running at
29%, this
option should be given serious consideration.
Claire Horton is a NALEDI researcher, who specialises in economic
policy
and labour market issues.
Economic policy
The current impasse over economic policy may have serious and
lasting
consequences.
GEAR has failed to reach the targets it set itself. Formal sector
employment is declining, economic growth has slowed sharply, the
Rand is
falling and real interest rates are three times the level predicted
by
GEAR. The failure of this neo-liberal economic strategy is underlined,
ironically, by a 'business confidence index' which stands at a three
year
low.
Despite GEAR's failure, government has harshly attacked critics
of the
strategy. Behind this reaction lies a number of factors. These include
the
political careers already invested in GEAR, sensitivities relating
to the
forthcoming election and, of course, the fact that economic transformation
is indeed a complex and difficult task. It is precisely because
this is the
case that economic policy needs to be subjected to open to constructive
debate.
In this issue of the Policy Bulletin, several aspects of economic
policy
are discussed. The global 'financial crisis' requires that we build
international solidarity amongst the working people who face the
consequences of failed policies. It is clear that the financial
liberalisation measures taken by our government have backfired on
us and
increased our vulnerability. The 'debt trap' government finds itself
in is
linked to global pressure on our transformation process. A closer
look
shows that alternative strategies do exist.
Ravi Naidoo
Director, NALEDI
Unions set investment strategy
by Ravi Naidoo
"We need to wrest control away from where we have lost it",
said a speaker
at COSATU's recent Central Committee (CC) meeting.
The speaker was referring to union investment companies. Developing
policy
for these companies was one of the more controversial issues to
be
discussed by the inaugural CC (an annual congress focussing on
socio-economic issues).
Unions began investment initiatives in 1992. They did not, however,
set
appropriate policies and safeguards in place. This created opportunities
for the self-enrichment of certain individuals, including some now
former
unionists.
This policy vacuum also undermined the strategic value of union
investments. The last straw was the inevitable conflict of interests,
and
even inter-union competition caused by laissez faire investment
activities.
Council
Noting these problems, the CC agreed to set up a Trade Union
Investment
Council at federation level. This will put mechanisms in place to
guide the
investment activities of COSATU and its affiliates. The ultimate
aim is one
investment company for the entire federation.
Guidelines
It was also agreed that all union investment policies should
be aligned
with union policies. COSATU was mandated to draw up a clear set
of
guidelines for investment companies. The broad principles set by
the CC
include:
* worker control
* socially valuable investment
* transparency
* accountability.
These guidelines, and the investment companies' adherence to them,
will be
reviewed by COSATU constitutional structures.
While these are positive steps, a lot remains to be done. COSATU
will have
to develop the guidelines in appropriate detail.
This will require a balance between policies which are so broad
that they
endorse any behaviour, and ones which are overly restrictive.
The guidelines need to be developed as soon as possible. Vested
interests,
which are profiting from the lack of coherent, appropriate policy,
will
lobby against such changes or seek to delay them.
The unions also need to seek out 'socially valuable investment'
that will
also provide decent returns. This means changing current investment
patterns.
Investment companies can no longer argue that social value only
concerns
the use of profits. A 'litmus test' to ascertain what comprises
socially
valuable investment will, however, need to be developed.
The CC has certainly taken some steps forward. There can be no doubt,
however, that union investment policy will remain a controversial
issue in
the years to come.
An alternative public debt strategy
by Ravi Naidoo and Claire Horton
Public debt, the constraints which it places on South Africa
and options for dealing with the issue, have become strategic national
questions.
Conservative politicians and economists say that South Africa's
R338-billion debt, and the R43-billion interest which must be paid
on this
debt, prohibits any increase in government spending. We are told,
moreover,
that it is the debt burden which leads to the need for public sector
'belt-tightening' and a bigger role for the private sector.
While the conservative chorus continues to chime, progressive voices
are
now entering the debate and presenting alternative scenarios.
Who owes whom?
Most Third World countries are heavily indebted to foreign lenders.
Ninety
five percent of South Africa's debt is, however, domestic. What
is even
more unusual is the fact that the largest portion of this debt is
held
within government itself.
The Government Employees Pension Fund (GEPF) is responsible for
about 44%
of public debt. The GEPF, which provides pensions for public servants,
built up a huge shortfall during the 'golden handshake' years of
the
National Party.
In the old days, it was mainly white civil servants who benefited.
The new
government has improved benefits to black workers. The problem lies,
however, in the way the government is trying to finance these benefits.
Government has adopted a 'full-funded' approach. This requires that
money
be pumped into the Fund to cover existing - and all future - pensions.
To
make sure that the GEPF can meet all future obligations, the government
has
stuffed billions of rands of government bonds into the Fund. These
bonds
are interest-bearing assets for the GEPF, but interest-inflicting
public
debt for the government and taxpayers.
Excess contribution
Current government payments towards the GEPF exceed the entire
national
budget deficit.
As chart one shows, government pays contributions (as the employer)
to the
Fund of R9-billion a year. On top of this, it pays about R18-billion
in
interest on the government bonds. Total government contributions
thus
amount to R27-billion. The budget deficit currently stands at
R23,7-billion.
Public sector employees contribute about R4-billion. The excess
contribution is in the region of R18-billion. This amounts to 76%
of the
budget deficit.
Alternatives
It is unusual for a country to finance public servants' pensions
in this
way. Most governments use a 'pay as you go' (PAYG) approach. This
means
that they pay pensions as they become due. For South Africa, this
would
mean that an extra R18-billion could be released every year for
strategic
investment and economic development.
Changing from a 'fully-funded' system to a PAYG would also mean
that a
large part of South Africa's public debt could be removed from the
books.
To guard against fluctuations in payments, government could maintain
a
modest reserve. This would amount to a partial PAYG arrangement.
Chart two shows the extent to which public debt and the budget deficit
could be reduced if this approach was adopted.
If government pre-funds only 20% of future pensions, it would reduce
the
current public debt by R120-billion. The deficit would fall by 66%.
The main issue then would be finding appropriate ways of using the
released
funds to promote economic development and growth. This would, in
turn,
contribute to the government's ability to pay for future pensions.
Opportunity
It is clear that not everyone in government is comfortable with
this way of
doing things. After all, the spectre of a large public debt can
be
effectively used to push through strategic restructuring. The so-called
'debt burden' allows for a re-conceptualisation of the role of government,
with the private sector being given a larger part in former public
sector
functions.
There are those in government who claim that changing to a PAYG
system will
require a cancellation of government bonds, a venture they claim
is made
'impossible' by financial market reaction.
Cancelling GEPF bonds should, however, have no direct effect on
the
financial markets, because government holds the bonds - nothing
is being
bought or sold. It is also possible that, rather than canceling
the bonds,
government could reduce its contributions to the Fund, allowing
it to run
down to a lower funded level.
Government has the rare opportunity to reduce public debt and release
funds
for development. Will it take this route, or pursue its current
failed
agenda?
Chart one Payments into the GEPF
Government contributions as employer R9 billion
Government payments on bonds R18 billion
Public servants? contributions R4 billion
Total GEPF income R31 billion
Less: benefit payments R13 billion
Excess payment to fund R18 billion
Chart two Options for PAYG
Pre-funded level Public debt reduction % Deficit reduction
for future pensions
0% (full PAYG) R150 billion 76%
10% funded R135 billion 66%
20% funded R120 billion 57%
40% funded R90 billion 38%
60% funded R60 billion 18%
Gender and poverty
by James Heintz and Liesl Orr
Modern capitalist economies are structured on gender inequality.
They could
not function unless women performed vast amounts of unpaid labour
-
childcare, house work, informal services and caring for the sick
and
elderly.
In addition, women are denied access to financial resources, they
are often
limited to low-paying and insecure jobs and they face higher rates
of
unemployment than men.
Because of their position within the economy, women and female-headed
households face a substantially higher risk of poverty.
Economic inequality
Poverty rates in South Africa are extremely high. They tend
to be highest
in rural areas, in provinces which incorporate one or more of the
former
'homelands' and in areas which were underdeveloped under apartheid.
In most of South Africa's provinces, 50% or more of the population
is
classified as poor. African, female-headed, non-urban households
are most
likely to fall within this bracket, as the following statistics
show:
* Irrespective of race, 26% of female headed households are in the
bottom
* income quintile, as compared to 13% of male-headed households;
* Twenty seven percent of male-headed households are in the top
income
* quintile, compared with 11% of female-headed households;
* Thirty seven percent of African, non-urban, female-headed households
fall
* within the poorest 20% of the population, while less than 1% of
white,
* urban, male-headed households fall within the same category;
* Three in every ten (31%) of African, female-headed, and one in
every five
* (19%) of African, male-headed households are in the bottom income
category.
* Fewer than one in every one hundred (less than 0,5%) white, male-headed
* households are in this category;
* At the upper end of the scale, almost three-quarters (73%) of
white,
* male-headed households are in the top income category, as opposed
to
* approximately one in 18 (6%) of African, female-headed households.
Costs
Women are not only responsible for unpaid, reproductive labour.
They also
bear the costs of raising children and delivering caring services.
These
costs - of food, housing, education, clothing etc - increase over
time.
Combined with the economic marginalisation they already suffer,
this can
push women and children into poverty. This is particularly crucial
in South
Africa, where an estimated 26% of households are headed by single
women.
Orthodox and mainstream policy analysis tends to ignore the role
of the
household and subsistence activities. Economics is still seen as
the
science of formal sector activities. These have traditionally been
men's
occupations.
Economics contains strong gender biases. It is time we explicitly
recognise
these biases and construct an alternative framework for understanding
the
relationships between economics, gender and poverty.
James Heintz was, until recently, a senior researcher, Economics,
at
NALEDI. Liesl Orr is the Co-ordinator of the Women and Work project
at
NALEDI.
Crisis and Resistance
by Rob Rees
NEO-LIBERAL 'SOLUTIONS' are attacking workers all over the world.
Is it
possible to build a powerful international resistance?
In South East Asia, the 'financial' crisis continues. Its impact
is of
serious concern in the major financial centres of the world, as
well as to
workers, who pay the price through mass unemployment and poverty.
International finance institutions and Western governments, who
once
praised and supported the Asian 'tigers', now blame its financial
system,
bad loans, nepotism and crony capitalism for the crisis. The solution,
they
claim, is more free market, and less government intervention.
Some analysts say that the real roots of the crisis lie in over
production
- producing too many goods without sufficient demand. William Greider
writes that: "Thailand is a classic example of how financial markets
can
get ahead of reality and destabilise the real economy of producers
and
consumers. Bankers and investors are so busy lending and investing
and
bidding up prices that they don't see that the new factories they
are
financing may not be able to sell their output."
Some of the goods which have been over produced are cars, chemicals
and
semi-conductors.
Greider claims that the overcapacity problem is driven by globalisation
itself, as it interacts with technological innovations. The fierce
cost-price competition leads companies to take measures like cutting
labour
costs, modernising production and trading jobs to gain access to
'hot'
markets. This both erodes the world consumption base and creates
excess
output. As established companies struggle with these imbalances,
new
competitors enter the market. South Korea intends to be a major
player in
autos and semi-conductors. So, too, do China, and India.
Speculation
Speculation happens when profits generated through producing
goods and
services cannot find further profitable investment in production.
The money
is then put into speculative, short-term investments.
At the moment, this kind of investment makes up 95% of total international
financial transactions. This compares to only 5% in 1970. The rapid
movement of money in and out of countries by speculators trigger,
rather
than cause, crises. While controls over short-term capital movements
are
necessary, they will not solve the crises.
Workers pay
Workers and the poor pay the consequences. Unemployment rises.
Employers
demand greater labour flexibility. Governments increase the price
of basic
necessities and interest rates. Labour and popular movements are
suppressed.
In February the newly-elected South Korean government reintroduced
laws
successfully blocked by the Korean Confederation of Trade Unions
(KCTU)
before the crisis. The laws allow for mass dismissals and the use
of labour
brokers. In this country, tens of thousands of workers lose their
jobs
daily. Forty five percent of the labour force is already in non-full-time
jobs. Many workers are not receiving their full wages.
The KCTU has demanded the scrapping of the laws, the introduction
of a
40-hour week and the expansion of social welfare. It has also demanded
that
the IMF, which is bailing out governments in the region on condition
that
they adhere to certain conditions, withdraw its demand for labour
market
flexibility.
The federation has backed these demands with action, including a
two-day
general strike in May and July. The brutal government crackdown
on the July
action has led to plans for further general strikes.
Solidarity
The KCTU's demands are similar to those of COSATU. Both organisations
are
struggling against the consequences of neo-liberal polices. Is it
possible
to unite these struggles?
COSATU has the authority and stature to promote such unity. By linking
struggles, the working class in each country not only promotes its
own
demands, but extends solidarity to workers in other countries.
The unsettled nature of the current crisis makes worker internationalism
and solidarity all the more important, as ever greater numbers of
workers
suffer its pain and attempt to build national resistance.
Rob Rees is a researcher at NALEDI in the area of union organisation
NALEDI research report
This research round-up lists recent NALEDI research and highlights
forthcoming work
Poverty
Almost
46% of South Africans live in poverty. This legacy shows no signs
of
fading. To address the situation, we need to understand the relationship
between economics, poverty and socio-economic rights.
NALEDI recently completed a report entitled Poverty and Economics
in South
Africa. The report was part of the Poverty Hearings, which were
initiated
by the South African NGO Coalition, the Commission for Gender Equality
and
the Human Rights Commission.
The report looks at property and asset ownership, wages and salaries,
household and subsistence activities, income-transfers and self-employment.
It critically assesses the theory underpinning different economic
approaches to poverty, and begins to develop an alternative vision.
One of
its key recommendations is a programme of asset redistribution,
which is
supported by a growing body of international and domestic evidence.
Working hours
Working time is a long-standing area of struggle for the labour
movement.
The Freedom Charter demands a 40-hour week. The new dispensation
provides
an historic opportunity to advance this demand.
The NALEDI Hours of Work Project has produced four reports which
look at
the possibility of implementing a 40-hour week in South Africa.
They focus
on the mining, retail, long distance trucking and metal sectors.
The research looks at current working time arrangements and examines
their
relationship to production. It explores the effect a change in working
hours will have on each sector.
A particular focus is whether reduced hours will increase employment
opportunities and the effect on wage levels.
Labour standards
South African companies which are relocating to other parts
of southern
Africa often cite high labour costs as the reason. Is this true?
A recent NALEDI report entitled Labour Standards in southern Africa
looks
at why South African companies move to other SADC countries. The
research
also examines the effect of regional integration on both the quantity
and
quality of jobs.
The process of regionalisation in southern Africa is gaining momentum,
making this report especially relevant.
Labour demand
South Africa is suffering from an unemployment crisis. What
determines the
demand for labour?
The NALEDI report on Labour Demand and Job Creation in South Africa
uses
case studies and econometric analysis to examine structural unemployment
and the employment behaviour of large firms.
It finds that the most important factors influencing investment
are
interest rates, economic growth and overall stability of the economy.
Lower wages will not lead to more job-creating investment. Profit
share is
identified as an important factor for investment.
The report provides a basis for informed policy development towards
job
creation.
The Jobs Summit will benefit from such research. In particular,
it could
save the Summit from lapsing into the intellectually discredited
'wages are
too high' debate.
NALEDI undertakes labour and economic research. Its main focus is
policy
research which will build the capacity of the labour movement to
engage
effectively with the challenges of our new society. NALEDI is an
initiative
of COSATU, but is controlled by an independent board.
NALEDI's main focus areas are labour markets, economic, trade and
industrial policy, union organisation and women and work. Our activities
include the production of research reports and policy memos, facilitating
workshops and training and library facilities and resources.
Contact NALEDI at:
6th floor COSATU House, 1 Leyds Street,
Braamfontein, Johannesburg. PO Box
5665 Johannesburg 2000
Tel: (011) 403-2122 Fax: (011) 403-1948
email: naledi@naledi.org.za
NALEDI
undertakes labour and economic research. Its main focus is policy
research which will build the capacity of the labour movement to
engage effectively with the challenges of our new society.NALEDI
is an initiative of COSATU, but is controlled by an independent
board.
NALEDI's main focus areas are labour markets, economic, trade and
industrial policy, union organisation and women and work. Our activities
include the production of research reports and policy memos, facilitating
workshops and training and library facilities and resources.
Contact NALEDI at:
6th floor COSATU House, 1 Leyds Street,
Braamfontein, Johannesburg. PO Box 5665
Johannesburg 2000
Tel: (011) 403-2122
Fax: (011) 403-1948
email: naledi@naledi.org.za
website:http://www.naledi.org.za
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