Mohamed is the director of the Corporate Strategy and Industrial Development Research Programme in the School of Economic and Business Sciences at the University of the Witwatersrand – firstname.lastname@example.org
The year 2010 sped past at high speed. We have still not recovered from the global financial and economic crises and the sovereign debt crises may still lead us into the second dip of a global recession.
South Africa had a successful soccer World Cup and received global admiration for this achievement. Unfortunately, we were too quickly sobered by the extent of job losses during the crisis, which may continue into 2011. The number of jobs lost in the financial sector and the retrenchment of managers and executives by the banks raise concerns not only about unem- ployment but also about whether our banks will be increasing their lending next year. We continue to live in a world with huge economic problems and uncertainty. We enter the New Year with this uncertainty.
The world of economic uncertainty that we live in today is a result of global financialisation. The widespread liberalisation and integration of global financial markets have created much new volatility and uncertainty. The failure of the advanced industrial countries to adequately regulate their financial institutions and ensure coordination and regulation of global financial markets means that we live in fear of the next crisis.
The uncontrolled flows of financial capital across borders does not support investment but creates macroeconomic instability and uncertainty, which discourages investments. In fact, the countries that have liberalised their financial markets and integrated into global financial markets have had declining levels of investment. There has been a preference for short- term returns that have increased specula- tive activities in financial markets and redirected financial capital away from investment. As a result, the major concern today should not be consumer price inflation but asset price inflation.
Unfortunately, most economic policy- makers and mainstream economists are still fixated on consumer price inflation, while the major instability in our economies is caused by bubbles and crashes in asset prices owing an increase in speculation. The major threat to economic growth, investment and employment is not upward pres- sure on prices from increased wages and investment – it is the fact that finance capital is diverted towards debt-driven consumption and financial speculation supported by increased speculative cross-border financial capital flows, the increasing use of derivatives and growing markets for securitised debt. Therefore, our macroeconomic policies should shift from the current fixation on consumer price inflation to protecting our economy from unregulated capital movements and unregulated financial activities that cause cycles of bubbles and crashes in asset markets. We should get rid of inflation targeting and focus on regulating domestic financial activity and putting in place controls and regulations to manage our cross-border financial capital flows.
We need to ensure long-term stability to promote investment and employment creation. The current approach to finance does not support that stability; instead, it opens us up to contagion and instability. The performance of our economy is left to the whims of speculators in global financial markets. Domestic holders of wealth choose to move their capital into financial speculation rather than investment. As a result, we lose jobs and valuable skills instead of increasing them. The negative environment for investment and job creation has an impact on education and the level of investment that people are willing to make in education.
Global economic problems become an opportunity to further shed labour and to move towards the casualisation of existing workers. The declining prospects for employment has structural implications for the development of skills and education in a country.
We can respond to global economic uncertainty. The solution for South African economic growth, investment and employment is to put in place economic policies and controls that create increasing stability and certainty in the domestic economy and protect us from external volatility and uncertainty.
This solution does not mean autarky and totally cutting ourselves off from international financial markets. As we try to join the league of the Bric countries (Brazil, Russia, India and China), we can learn a lot from their economic policies and controls used to reduce the impact of global financial volatility, while benefiting from increased foreign direct investment and international trade.
We can also learn how to support growth in productive investment and employment and how to increase skills and education levels in our economy from them.