I got a call from a senior ANC policy maker after I was quoted in the Mail & Guardian calling for an ‘Investment CODESA’. He asked me to write a briefing note on the idea for discussion. This is what I wrote. Needless to say he did not find it very useful.
Rationale for an Investment CODESA
In 2009 the global economy contracted for the first time since WWII. This moment effectively marked the end of the post-WWII long-term development cycle. The first half of this 60 year cycle was characterised by a commitment to inclusive, equalising growth with a strong welfarist component – it was a post-fascist and eventually post-colonial moment of liberation. This growth period was driven by productive capital and ended with the stagflation crisis of the 1970s.
2007 was the 25th anniversary of the first structural adjustment programme. This formed the cornerstone of a less equalising period of rapid economic growth driven primarily by finance capital (wealth creation through capital gains), the liberalisation of global markets and the emerging information technologies.
The modalities and dimensions of the next long-term development cycle remain unclear, and will probably remain so for some time as we muddle through double dip recessionary conditions and sluggish global growth. The pro-cyclical hoarding of cash rather than risking investments during these uncertain times will be an inevitable part of this interregnum. This is compounded by the fact that the financialisation of economies resulted in the pursuit of short-term capital gains rather than dividends over the long-term – a phenomenon reinforced by the increasing importance of quarterly reporting. Unfortunately, the financial structure and routines of many financial institutions and corporates has been seriously distorted by this perspective. Reversing this will entail coordinated global action along the lines proposed by Joseph Stiglitz when I proposed a new financial architecture for the world. Gordon Brown argued in Newsweek in May 2011 that the big decisions are not being made which means the next financial crisis will make the 2007-2009 crisis look mild by comparison.
The comparable period to the present was between 1929 and 1945 during which there were extra-ordinary Keynesian interventions, unprecedented global coordination and a world war. The resultant shift from speculative to productive investments in the ‘real economy’ made possible the post-WWII ‘golden age’.
Major growth surges tend to result from investments that cluster around a core set of technologies. The result is the well-known S-curve that reflects the rise of core set of technologies during a period of installation, a crisis caused by over-investment, followed by a deployment period.
The next long-term development cycle will more than likely cluster around the application of two sets of technologies. The first and most mature of the two are the information and communications technologies (ICTs) that are now penetrating an increasingly wide range of economic activities. Branching out from their core application sets within the financial sector, ICTs are moving rapidly into fields as diverse as health care, social mobilisation, smart grids for managing urban infrastructures and the digitization of manufacturing. The second cluster involves the less mature but nevertheless rapidly evolving ‘green technologies’ that are responding to rising resource prices. Reversing the 100 year trend of declining real prices, since 2002 resource prices (including food prices) have steadily been rising with no evidence that this will change within the next two decades or more. This trajectory makes it possible to invest in technologies that may have higher up front capital costs but these are more than compensated for by lower operating costs over the life cycle of the product. This not only applies to obvious applications such as solar hot water heaters and public transportation, but also recycling of solid waste, low-carbon building materials, localised food production, biotechnology and water recycling. The inter-penetration of ICT and ‘green tech’ is emerging as the core of the next growth surge. Germany’s decision to reduce dependence on nuclear power and increase dependence on renewable energy clearly builds on the fact that this is the only sector that has significantly created new jobs over the past decade in this country. China has built the largest solar energy industry – a feat achieved in just over ten years, but dependent on German technology license agreements.
South Africa’s economic growth since 1994 has been driven by debt-financed consumption and the sale of primary resources which, in turn, benefitted enormously from a commodity boom driven by large resource-hungry developing countries like China and India, and more recently Brazil. Manufacturing sectors that were linked to the mineral-energy complex grew slightly, but manufacturing sectors that were not either stagnated or declined. This is problematic because it is quite often the non-MEC related sectors that have the best internal multipliers and which depend heavily on knowledge inputs, innovation and entrepreneurship.
Like elsewhere in the world, South African financial institutions and corporations are sitting on mounds of unspent cash. While there are obvious local determinants of market uncertainty (such as the threat of nationalisation, increasingly aggressive action against anti-competitive behaviour and energy shortages), the South African condition is part of a larger global malaise. The result is the failure to deploy investment resources to boost job-creating growth.
At the same time, a very optimistic demand forecast (based on unexamined confidential information provided by ESKOM) for future energy demand has resulted in a decision to invest R1 trillion to build the 3rd and 4th largest coal-fired power stations in the world, with much of this in dollar-denominated loans. This decision effectively determines our macro-economic policy options for the next two decades. Besides the problem that this demand forecast is based on confidential information, the more serious problem is that price elasticity has been ignored. In other words, as prices go up, efficiencies start to kick in that will affect demand. Are we once again investing in more energy production capacity than we will need? Furthermore, what are the implications of crowding out green technologies while many others in the world are doing the opposite?
Like previous financial crises that have taken place during the mid-point of an S-curve, this financial crisis will only get resolved when ways are found to replace the short-term horizons of financial capital and with the long-term perspective of productive capital. No major growth period has taken place after a financial crisis without interventions aimed at achieving this critical transition. This is not just about punitive measures to discipline financial capital, but also incentives to create space for innovation-driven manufacturers who need access to productive capital interested more in dividends over the long-term than capital gains over the short-term. This should be focus of an Investment CODESA. What do manufacturers need to reduce their risks? What does productive capital to redirect investments into the ‘real economy’? What needs to be done to reduce the dominance of speculative financial capital?