The most effective way to deal with poverty is employment creation. Fortunately, employment creation and the goal of creating decent work opportunities are key elements of government’s economic policies.
Employment creation was also a goal of previous economic policies. These policies, such as the Growth, Employment and Redistribution programme, failed to create jobs. The main reason these policies failed to create jobs was that the chosen macroeconomic and financial policy framework was not conducive to job creation.
Many people will attribute the failure to create employment in South Africa largely to microeconomic policies. They will argue that South African industries are uncompetitive and that labour is too unskilled. People will blame labour costs and inflexible labour markets. I insist that all these factors have to be considered in the context of the prevailing macroeconomic and financial policies. A future economic growth path should be one with an approach to macro- economic and financial policies focused on achieving full employment in South Africa.
The policy shift I speak of does not entail a switch from business-friendly to business- unfriendly economic policies. In fact, the current macroeconomic and financial policies have proved to be very unfriendly to a whole range of South African businesses. We have lived through a period of not only very high unemployment but also one of deindustrialisation. The macro- economic and financial policies that have become dominant developed during a period when finance grew and became more powerful and dominant around the globe. They are policies that favour finance, often at a cost to the rest of business.
Over the past few years, we have seen the contribution to gross domestic pro- duct from the financial sector in South Africa increase and that of manufacturing decrease. This trend has been present in many developed countries and is associated with a massive global imbalance. Countries such as the US and the UK have lost industry or shifted their industry to other coun- tries. The US developed a massive trade deficit with the rest of the world while its financial sector was globally dominant.
The deindustrialisation of the UK was accompanied by a perspective that held that building its financial services industry was enough. The global economic crisis has shown the huge error of these economic choices. South Africa followed the types of macro- economic and financial policies and attitudes to industry adopted and pro- moted by countries such as the US and the UK. These policies were friendly to finance but not friendly to business as a whole.
The consequence of following macro-economic policies that favoured finance was that economic growth and employment creation occurred on a crumbling industrial base. It was easy for government to ignore the crumbling industrial base because, for a relatively short period, the financial sector was able to support rising growth rates and even some employment growth.
This financial-sector-led growth occurred through increased speculation, which drove up the values of financial and real estate assets and increased levels of debt in society. This growth was not based on producing anything new and deepened the inequalities in society. The more affluent in society, including politicians and economic policymakers, got richer and consumed more because they saw the values of their pensions, stocks and houses grow and their overdrafts and credit card limits grew too. This type of economic growth does create some jobs, but many of these jobs will be lost when the financial sector cannot increase debt levels any more and financial and real estate asset prices cannot rise any more. In South Africa, we saw the largest job creation in the retail and wholesale ser-vices sector. We have already lost many of these jobs.
To support productive businesses, we will require different macroeoconomic and financial policies. A new growth path should favour productive businesses, where investment and employment lead to sustained wealth creation, over financial businesses. Finance will have to shrink back to being a sector that facilitates productive investment.