Neoliberalism’s social and economic crisis

by Seeraj Mohamed | Amandla! Issue No.66 | October 2019

The social fabric in communities across South Africa is unravelling. Twenty-five years after the first democratic elections, the symptoms of this crisis are everywhere. They appear in the form of violence against women and all kinds of abuse, gangsterism, drugs, increasing suicide rates and continuous community protests. These socio-economic problems have an outsized impact on the poor and vulnerable in our already highly unequal society.

Central to these problems is the extraordinary level of unemployment in South Africa. It is a crisis of calamitous scale that has been allowed to continue and worsen year after year. To make matters worse, we live in a country where wage increases have not been keeping up with inflation and much employment is precarious. Meanwhile share prices soar to record highs and the rich are bombarded with marketing materials to invest abroad. Inequality is destructively large. It is a crisis that starkly illustrates the economic and power disparities between detached political and business elites and the distressed poor majority in South Africa.

Business and governments disastrous collaboration

The factors affecting this national social and economic crisis have deep roots in the legacy of colonialism and apartheid. They have also found renewed vitality over the past quarter of a century in the lost opportunities to rebuild the economy for all South Africans. Some of the difficulties for the South African economy have related to changes and troubles in the global economy. But many of the problems we face are related to how the government has envisaged the economic problems, and the limitations they have placed upon themselves in framing economic policies.

In fact, there were two factors that left the South African economy more vulnerable not only to turmoil in global trade and financial markets but also to capital flight, illicit financial flows and all manner of what is too politely termed “base erosion and profit shifting”:  big business, most with deep roots in the apartheid and colonial past, was eager to integrate into the global economy, and the government was eager to accommodate them. The microeconomic and macroeconomic policy responses by government have been inadequate for addressing the socio-economic crisis in the country. These policies seem to have been developed not to address poverty, inequality, and unemployment but to feed the seemingly unquenchable requirements of financial rentiers and financialised big businesses.

The inherited socio-economic problems and structural weaknesses of the South African economy were entrenched and exacerbated when the new, post-apartheid government adopted a neoliberal approach to economic policy. In addition, the post-apartheid government developed a fairly cosy relationship with big businesses and allowed the largest corporations to restructure and move offshore after the transition to democracy. Much of this freedom given to big business was justified by arguments that it was a necessary signal to future foreign investors: South Africa does not constrain local big business, so it will not constrain foreign investors.

SA adopted neoliberalism

In essence, the South African government adopted the neoliberal ideology and views of mainstream economists during the early 1990s. This was based on the “monetarism” of conservative economists such as Milton Friedman. “Rational expectations theory” was added to those ideas later. This approach argued that governments would not be able to address low economic growth and increasing unemployment through fiscal and monetary policy interventions.

In Friedman’s view, attempting to increase economic growth or create more jobs would be ineffective. This was true whether the method was monetary policy, such as cutting interest rates, or fiscal policy, such as increasing government expenditure or cutting taxes. He said that government macroeconomic interventions may lead to improvement in the short-run, but that the growth rate or employment level would quickly return back to a lower level. The ultimate outcome of government intervention would be a higher rate of inflation. The proponents of rational expectations theory argued that government’s macroeconomic interventions would be anticipated by agents in the markets. These agents would preemptively act on these expectations and so render government’s measures futile.

These were the predominant views in most central banks and governments from the 1980s until the global financial crisis of 2008. Fiscal policy was generally not to be used; monetary policy should be focused on keeping inflation low.

Neoliberalism killed macro-economic intervention

As a result, many governments and central banks essentially removed macroeconomic interventions from their toolbox of support for economic development, growth and employment. They included the post-apartheid South African government and the South African Reserve Bank.

The main goal of macroeconomic policy that had guided developed and developing countries through post-war reconstruction, development and industrialisation was the pursuit of full employment. Neoliberal economists replaced that with the pursuit of low inflation. It also became part of their definition of macroeconomic stability.

Governments that adopted this neoliberal approach were left with only microeconomic and sectoral interventions to improve the economy. However, the experience of almost every country that has ever developed or rebuilt their economies highlights the importance of accommodative fiscal and monetary policies. The role of the state is to support the provision of basic services, education and healthcare and to build and maintain infrastructure, while financing and supporting the growth of private businesses. The correct use of macroeconomic policies are essential for successful microeconomic interventions, such as industrial policy or competition regulations. On the other hand, the adoption of neoliberal policies negatively affects macroeconomic stability because deregulated financial institutions and global financial flows increase uncertainty for investors and employers. These investors and employers keep their assets liquid and speculate in financial markets instead of investing in productive enterprises.

Damaging effects of financialisation

The South African government adopted this approach in a country and world rendered unstable by financial instability. There was furious globalisation, with liberalisation of tariffs and deregulation of cross-border financial flows. The deregulation of financial markets led to huge increases in financial liquidity in the developed economies and some developing countries.

This led to a huge increase in short-term speculative, “hot” money flows around the world. It also led to the opportunity for big businesses, particularly those in extractive sectors, to move their money abroad (often into tax havens).

This uncontrolled movement of hot money proved to be incredibly damaging to both developed and developing economies. There were several financial crises in the 1980s and the 1990s linked to bubbles and crashes associated with hot money flows into and abruptly out of countries. It also led to huge power of institutional investors, including pension, hedge and private equity funds. They controlled large amounts of capital and were thus able to influence the behavior of large corporations and governments. Increasing shareholder value became not only the rallying cry of financial rentiers but also the ideology of corporate governance. The executives managing large, global non-financial corporations were forced to restructure and pursue high, short-term returns or face the wrath of the “shareholder value” movement.

Impact on the South African economy

There was a large growth in the financial sector. This was accompanied by growth in financialisation of the economy, including large non-financial corporations. The policy approach by government avoided an active developmental role for government. So government was absent from financing, managing and coordinating economic development that supported economic restructuring and transformation towards increasing downstream, value-added manufactured and productive services in South Africa. The lack of coordination by government and the outward orientation of big business meant that the future of business development and ultimately the economic growth path was left to the shareholder value movement. Their short-term interest was the extraction of value from the economy.

This led to job losses in manufacturing as well as deindustrialisation. So the increased size of finance was accompanied by increased dependence on a declining mining industry.

This growth path also occurred because of the role played by finance and increasing levels of debt-driven consumption and speculation in real estate and financial asset markets. There were many factors:

• The failure of government to adequately influence the allocation of investment finance in the economy
• The short-termism of the financial sector
• Financialised big businesses
• The logic of growing debt linked to short-term hot money flows

All of these meant that finance was allocated to short-term financial activities rather than long-term productive, employment-creating investments.

There are long-term, negative ideological and cultural consequences of financialisation. One of them is that government, business and the mainstream media have strongly instilled the idea that South Africa can only implement policies that are acceptable to global and domestic financial rentiers and credit ratings agencies. The heightened sensitivity to the demands, and often the sentiment, of people operating in financial markets is a huge mistake. It works against pro-poor and inclusive, transformative economic growth and restructuring. Therefore, financialisation continues to affect all aspect of our lives and remains a major contributor to rising unemployment, increasing inequality and the on-going erosion of our social fabric.

Seeraj Mohamed is an economist with a focus on macroeconomics, finance and development. This article is written in his personal capacity and does not reflect the views of his employer or organisations he is affiliated with.