The Minister of Finance, Pravin Gordhan tabled his first Medium Term Budget Policy Statement (MTBPS) in Parliament on Tuesday this week. He said, "for the first time since 1994, we are in recession. The volume of production in the South African economy declined by two percent in the first half of this year."
On 21 October last year, I tabled my last MTBPS, just five weeks after the collapse of Lehman Brothers and when, already, the ravages to the financial sector were in evidence in many parts of the world. I could then pronounce, "We can say to our people: Liduduma lidlule! The thunder will pass. We can say to our people: our finances are in order, our banks are sound, our investment plans are in place, our course is firmly directed at our long-term growth and development challenges, and we will ride out this storm, whatever it takes".
Looking back, it appears that we were rather too confident. But then, we were watching the impact on the financial sector very, very closely. Such action was probably not altogether unreasonable; it was the financial sector that was staring into the abyss in the developed world. In the past twelve months, we have learnt so much about the extent of interconnectedness of the global economy and about the speed of transmission arising from regulatory failure in the United States of America (USA).
But perhaps more importantly, we were all struck by the extent of the asymmetry of the impact. In all of the emerging market economies the financial sector held up remarkably well the lessons were learnt a decade ago and the clean-ups happened then. In the South, it was the productive sector that took the biggest knock as the markets for exports collapsed as a consequence of the seizure of financial markets. These features will be in evidence for some time yet, and it is fundamentally important that we take time to understand these trends in globalisation.
We have to pause to remind ourselves that twenty years ago, the Berlin Wall still existed and we were living in the dying days of the Cold War. What ensued was a unipolar world with the rhythm provided by the mantra of a faith in almost infallible markets. The G7 was the co-ordinating centre for these ideas. A decade later, in the wake of repeated financial crises in the developing world, the G20 was established to assist emerging markets and to ward off the repetitive risk of contagion.
The criteria for inclusion were premised on the extent to which countries were systemically significant to the global financial sector. It was tolerated by some as a backwater pastime where Finance Ministers and Central Bank Governors from these countries could meet annually in some exotic venue; the G20 lacked the glamour of the G7, no Heads of State or Foreign Ministers and certainly no communiqué filled with deliverables at the conclusion of the meeting. It is evident that the students learnt the lessons about supervision and regulation much better than the teachers.
The first hint of a change came at the time of the Annual Meetings of the IMF and World Bank in Washington in October last year when President George W Bush popped in for a brief chat with the Ministers and Governors. By November 2008, the first Summit of G20 leaders was convened in Washington and now, after two further summits, the G20 has formally replaced the G7 as the centre of global decision-making.
All of these shifts have been fairly rapid. They confirm that the G20 offers a better basis for discussion there is better symmetry between the industrialised and developing worlds; but perhaps more importantly, the grouping is also more representative of diverse approaches to governance. It is quite impossible to appreciate the future of geopolitical trends without understanding the evolution and potential of the G20.
Let me digress, for a moment, and draw a few threads from the complex negotiations in the Doha Development Round of the World Trade Organisation. We all live in hope and regularly recite the mantra, "We will work for a speedy conclusion to the Doha Round." But as we know, that the lack of progress is worrisome. Perhaps the progress is so slow because firstly, the World Trade Organisation (WTO) negotiations have witnessed an even more pronounced shift in the balance of power by the time of the Doha meeting; the major players were not the industrialised world. The other G20 was the first shift, but within it stood three giants, each demanding their own action, Brazil demanded agricultural market access, India was pushing for an early deal on services and China wanted unfettered market access for manufactured goods. The old powerhouses of the North were left floundering, trying to push for a rules-based system, whilst seeking to hold on to their positions of protective privilege. The balance had tipped.
Perhaps the big tragedy that the WTO negotiations exposed was that Africa was, in spite of valiant efforts, quite divided as Europe and the USA were able to play countries off against each other by the lure of privileged access.
But such a static view of economic developments in Africa is quite incorrect. In its African Regional Economic Outlook published in April 2008, the IMF wrote,
"The region's prospects continue to be promising, but global developments pose increased risk to the outlook. Growth in Sub-Saharan Africa should again average 6½% in 2008, with oil exporters leading the way; meanwhile growth in oil importers is expected to taper off, though only modestly. Risks in 2008 are tilted to the downside, but the region is better placed today to withstand a worsening of the global environment."
As you can well imagine, the REO for 2009 reported quite differently. This year it said,
"The global financial crisis has worsened significantly the economic outlook for Sub-Saharan Africa. Demand for African exports and commodity export prices have fallen, and remittance flows may be weakening."
These shifts across the continent must also be properly understood. The 6½% prospect of 2008 was the culmination of many years of ongoing structural economic reforms. But the fruits dissipated as a consequence of the co-ordinated global recession and the efforts towards larger sub-regional integrated markets have stumbled. This fact reinstates the central challenge of regional economic integration in geographic parts across the continent. Failing this, survival will again see countries being picked off. Without bringing Africa back more strongly, efforts to rebuilding the global economy will be weakened.
Enter China.
As Fareed Zakaria recently wrote, "one country has not just survived but thrived: China. The Chinese economy will grow at 8,5 percent this year, exports have rebounded to where they were in early 2008, foreign-exchange reserves have hit an all-time high of $2,3 trillion, and Beijing's stimulus package has launched the next great phase of infrastructure building in the country."
The big advantage that Africa enjoys relative to China is that African commodity producers sit upstream from China's strong manufacturing sector, with domestic demand in China taking off as a result of their stimulus package; many African countries are well positioned to return to higher growth. Martyn Davies of the Stellenbosch University's Centre for Chinese studies recently spoke on this trend and pronounced that all African economies bar South Africa will grow this year because of Chinese demand for raw materials.
China now accounts for 58% of African exports. Africa exports one million barrels of oil to China per day, accounting for 25% of China's energy supplies. There are at present between 700 and 800 sizeable Chinese firms in Africa. In contrast though, there are some 2 500 Chinese firms in Singapore. The context of this is important, 800 Chinese firms in 54 countries is hardly the neo-colonial bogey that it is often made out to be.
In contrast to Russia and China, India's foray into Africa is largely a-political, coming on the back of tremendous economic growth in India and the emergence of a huge entrepreneurial middle class keen on expanding globally. India's push into Africa is also driven largely by the need to secure reliable access to energy reserves in order to fuel its nascent growth as strategic alliances with its energy producing neighbour states have, over the course of the past five years, become increasingly untenable. But the development of Sino-African economic ties is not a stand alone. It is important to recognise that all of the BRIC countries (Brazil, Russia, India, and China) are sharpening their relations with Africa.
India-Africa trade has increased by a massive 1000% over the course of the past decade, driven in large part by India's emerging multinationals such as Tata, Ranbaxy, Mahindra and Mahindra, Reliance and Mittal Steel (ArcelorMittal). In attempting to tie up energy assets in Africa, Indian firms have met with direct competition from China, thereby driving up the bargaining power of the African state in question. Indian firms do not have the same level of access to cheap financing as their Chinese counterparts and are therefore being forced to prioritise the stimulation of key sectors throughout Africa in order to secure the desired contracts.
India's skilled labour force and its strong domestic market make it an ideal trading partner for Africa, with relations bolstered by the large Indian diaspora living in Southern and Eastern Africa. Africa also enjoys a favourable balance of trade with India. In 2006 India imported US$ 12,6 billion worth of goods from Africa, exporting US$ 9,5 billion. In South Africa, one of India's largest trading partners in Africa, 35 Indian firms have invested US$ 150 million since the end of apartheid with a further US$ 500 million planned.
There is no doubt that India views Africa as a major economic and diplomatic priority, not only to secure energy assets but to grow key sectors in Africa in order to boost bilateral trade. For India, the more advanced African economies are the greater the bilateral trade prospects. Africa's growth is very much in India's best interests. To return to the issue of the BRIC. I am not sure whether the drafters of the 2003 Goldman Sachs report "Dreaming with BRICs: The Path to 2050" were aware of the amount of energy they have unleashed. The most-recurring theme in debates on geopolitics now is whether the BRIC, and in particular China, with its $2,3 trillion of reserves will take the opportunity to topple the declining hegemony. Can BRIC provide an immediate and effective leadership in global financial and trade governance, and push through the much-needed institutional reforms?
The joint communiqué issued at the June 2009 BRIC Summit at Yekatarinberg in Russia has added to the confusion, as there was no clear indication of any intent to assume that leadership now. Perhaps this is the smartest posture yet, ensuring that everybody is kept guessing. Part of the answer ought to arise from an analysis of what lies ahead. In the short term, all eyes will turn to Copenhagen as leaders convene to hammer out a deal on climate change.
It is important to recognise that the BRIC, along with a consolidated African position, will seek to demand deep cuts in emission from the old powers, and an opportunity to have access to the technologies necessary for mitigation and adaptation without making a binding commitment on emissions reductions themselves. This stage will certainly be important for evaluating the extent to which the shift in balance is both incremental and continuous.
In the medium term, the issues will shift to the changes necessary in economic management in the wake of the global recession. A number of key thinkers around the world have started very pertinent initiatives. In a recent book entitled Animal Spirits, two Nobel Economics laureates George Akerlof and Robert Schiller pose the issues thus:
The story of the "invisible hand" and its consequences gives surprisingly detailed prescriptions regarding the role of government, even pertaining to questions of great specificity. But now people are asking these questions anew. Here is a small sampling: How can we allow people of varying abilities and financial sophistication to express their preferences for investments without making them vulnerable to salespeople selling "snake oil"? How can we allow people to take account of their deep intuition about investing opportunities without inviting speculative bubbles and bursts? How can we decide who should be "bailed out" and when? How shall we handle cases of individuals and institutions who have been victimised and wronged? What should be the capitalisation of banks? What should be the nature and magnitudes of fiscal and monetary stimuli? Does it really matter if fiscal and monetary responses are early or late? Should they be concentrated or drawn out? What should be the design of deposit insurance? When, for example, should there be least-cost resolution of banks? When should all the depositors be paid off? What regulation should there be for hedge funds? For investment banks? For bank holding companies? How should bankruptcy law be changed to take account of systemic risk? The old answers to these questions seem not to be working. Everywhere that economists and their ilk mingle we see them reaching for new answers.
Anthony Giddens recently argued that the politics of climate change is likely to result in a return to state planning, failing which no action on emission reduction will be possible. Mervyn King, Governor of the Bank of England, has articulated the need to separate the casino-style investment banking from the service-oriented retail banking. George Soros has recently motivated stronger regulation of the financial sector. The outrage against the callous decision on bankers' bonuses by large corporations that just a year ago stood on the edge of the precipice is almost universal.
The G20 Leaders meeting held recently in Pittsburgh accepted the need to accelerate the reform of the Bretton Woods institutions in order to better co-ordinate global macroeconomic policy and strengthen multilateralism.
In a way, not dissimilar to the events of the "nines", the collapse of the Berlin Wall and the effective termination of the Cold War in 1989; the birth of the G20 in 1999; we must accept that similar shifts have taken place in 2009.Included in this is an entirely new presence of the G20 and, within it, the BRIC as a new power centre.
The largest clamour is for greater equity between countries and people. In particular, the clamour is for equity between the financial and the productive economies; or more precisely, to rejoin these parts of the economy. The seismic shift will come when we can reconstruct investment finance at the service of productive enterprise. This is the challenge of 2009 the beginnings of the shift are there. As it takes root incrementally, we will realise that the change will be very, very significant and the shift in sovereign power will only be one identifiable part of the whole.
Thank you.
Issued by: The Presidency
29 October 2009
Source: The Presidency (http://www.thepresidency.gov.za)
