Finance Minister Trevor Manuel wrote a very inter-esting article in Business Day on April 8, giving his views on bail-outs, titled ‘Singling out firms for help is unnecessary and unwise’.
The article is interesting in light of a widespread view in the African National Congress, which came through in the economic resolutions at its fifty-second national conference, in Polokwane, in December 2007, that the Minister of Finance and the National Treasury should not have ultimate veto over economic decisions. Manuel’s article is also interesting because it seems to challenge a document put out by the National Economic Develop- ment and Labour Council (Nedlac), called ‘Framework for South Africa’s response to the international economic crisis’. Nedlac is a forum where government, together with oganised business, organised labour and organised community groups, attempts to reach agreement on social and economic policies. The approach taken in the framework document is for timely and targeted responses to the economic crisis. The framework document calls for direct support to industry and vulnerable firms.
Manuel is correct to be wary of lobbying by specific businesses for bail-outs. Some firms will see the global crisis as an excuse to get State subsidies. Manuel is also correct in pointing out that many of the directed bail-outs to firms in other countries come with very strong government conditions, including replacing management, demanding deep restructuring, and the regulating and capping of executive pay. However, Manuel does not want government to play such a role in the economy. He seems to think that an economy with a competitive industry and a vigorous private sector is mutually exclusive from an eco-nomy with a strong and inter-ventionist State. The lessons of economic and industrial development of the now developed countries and successful late developing countries are that a vigorous and globally competitive private sector requires an activist State.
Unfortunately, Manuel seems to have been seduced by economic perspectives that call for less State intervention in the economy without looking at the actual state of the economy. Manuel says: “Asking for government assistance assumes that South African financial markets are broken – that they are not working as they should.” He insists that sound firms are getting finance. I challenge Manuel’s view that the South Africa fin-ancial markets are working as they should.
While they may not have been too severely affected by the financial crisis and financial contagion, we cannot deny that they were affected. Several South African banks have had to write down a not insignificant amount of assets. Further, the South African financial institutions started behaving like those of the US.
They increased their leverage and extended too much debt that supported excess consumption and real estate and financial asset bubbles. They rapidly increased use of financial instruments associated with the growth of shadow bank- ing. They have increased systemic risk in the South African eco-nomy and misallocated capital away from long-term productive investments.
The financial sector in South Africa has grown rapidly but overall investment levels have not. The South African financial markets have not been operating as they should for a long time and they have emulated the poor behaviour of their US counterparts that ultimately led to the global economic crisis.
Manuel asks why some firms should get support when others manage to use their creative and entrepreneurial skills to respond to the economic crisis. Manuel seems to assume that markets are fair and work when all global evidence tells us that markets do not work and require State regulation. Manuel, as Finance Minister, must take some responsibility for the current state of affairs. His macroeconomic choices allowed increased debt levels to lead to a consumption boom. Many of the firms that require bail-outs now benefited from, and invested in response to, the debt-driven consumption boom. They took on more debt and employed more people during the good times and now face huge losses and even bankruptcy as credit markets have tightened and demand has collapsed.
Further, Manuel has not supported industrial policy and he remains opposed to targeted industrial policy actions. His influence in government has contributed to a serious neglect of downstream, value-adding manufacturing. Manufacturing production has already declined too much. We risk losing a large chunk of our industrial capacity and, therefore, losing the potential for building competitive, job creating firms in the future, if we do not help these distressed firms now.