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Inequality and industry

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Inequality and industry

3rd September 2010

By: Seeraj Mohamed

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South Africa ranks among the top most unequal societies in the world. We know that our colonial and apartheid past of racial oppression and exploitation has much to do with our current inequality. However, we have to consider our recent history to fully understand why inequality has increased in our society.

My view is that the policy choice to have liberalised trade and financial flows to South Africa made a huge difference to our economy. People will not develop skills unless they expect improvements in the job market. Firms will not invest unless they expect adequate demand for their goods and services from domestic customers or from exports. The trade and financial regimes chosen by government did not result in South African industry becoming more competitive and being able to source investment capital more easily. The regimes chosen led to declining competitiveness and investment in South Africa’s industrial base. As a result, demand for skilled labour and skills development was neglected. Rising inequality is due to the deindustrialisation we have experienced.

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Exposure to increased international competi- tion did not increase the competitiveness of South African industry. The conventional view is that exposure to the chill winds of global competition kills off the inefficient and leaves an economy with the most competitive and innovative firms.

Unfortunately, the truth is very different. The nature of globalisation and increased integration of global trade markets was one linked to increased concentration in global markets. The past two decades of globalisation were marked by the high level of corporate restructuring and global mergers and acquisitions that left most global markets dominated by very few large transnational corporations. The oligopolistic nature of many of these markets means that efficiency is not always the outcome of competitive processes.

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Mergers and acquisitions, in most cases, do not increase the efficiency of the new companies formed; instead, they support the market domi- nance of these firms. The dominant firms end up controlling technology, but the new firms are not always the most innovative. Instead, they buy up the innovators. South Africa’s integration into global markets occurred through large corporations, mostly in the mining and financial sectors which listed offshore, and through subsidiaries of foreign firms in the country functioning as assemblers within a larger global value chain. This integration into increasingly concentrated global markets did not support a growing domestic industry.

The increased integration of South Africa into global financial markets led to increasing amounts of destabilising short-term capital flows into the country. The effect of these flows were to increase the volatility of the rand and to overvalue the rand for most of the past decade and a half. Further, the capital flows had an impact on other macroeconomic variables, such as inflation and interest rates. The volatility and uncertainty associa- ted with these flows and their impact on these macro- economic variables caused uncertainty in industry and lowered investment and demand for labour. There was a shift towards increased casuali- sation of labour and outsourcing. These trends did not support employment growth or skills development.

The global context has also been that of increasing inequality. Many countries, such as the US and the UK, suffered deindustrialisation and declining skills of their workforce. Labour relations in these countries shifted from being cooperative to conflictual after the 1970s. There was increased casualisation and reduced benefits and wages. Employers’ moti- vation to provide training and employees’ motivation to be trained declined. As a result, the productivity of firms declined. It seems most South African businesses emulated the practices of businesses in the UK and the US and their economic policies had a huge impact on our policymakers. Therefore, our problems seem to have occurred because we copied the wrong countries – in addition to our own legacy problems, our inability to increase trade competitiveness and the destabilisation of open capital markets.

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