Hoarding cash, uncertainty and the nationalisation debate

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response to M&G

I was emailed by a journalist from the Mail and Guardian with great questions about why corporates are not spending their surplus cash. Below are her questions and my answers. At this stage, note sure if she is going to use these answers.

Dear Prof Swilling
I am a journalist contacting you on behalf of the Mail & Guardian newspaper. I am doing a story for our business section examining the amount of money that South African corporates are sitting on at present (research indicating that corporate savings are in the order of 18% of GDP at present), and the implications this has for economic growth and job creation. My editor Kevin Davie suggested I contact you.

I understand that you are overseas at present but I wonder if you could comment on the questions below or be able to suggest someone I could talk to on the matter. Any assistance you could give me would be greatly appreciated. My deadline is Wednesday 4pm.

1. In line with reports that large corporations such as Apple, in the US, are sitting on vast sums of cash South African corporates appear to be saving rather than spending. While global circumstances and policy uncertainty on issues such as nationalisation may explain corporates unwillingness to spend money in SA to expand businesses, what other explanations do you think there may be for this trend?

MS: I don’t think the nationalisation debate is the cause – policy uncertainty and hoarding of cash instead of investing preceeded the nationalisation debate, and is in actual fact much more deeply rooted in the global financial and economic crisis. 2009 was the first year since WWII that the global economy actually contracted. This moment marked the end of the era of global financialisation, i.e. a 25 year period characterised by the rapid rise to dominance of the financial sectors in developed economies as the primary drivers of GDP growth coupled to the relocation of manufacturing to lower-wage industrialising regions. The collapse of Lehman Brothers in October 2008 was the most decisive moment in the collapse of system that made it possible to make quick and high profits by investing in paper rather than in the ‘real economy’. As influential figures like Gordon Brown and Joseph Stiglitz have argued forcefully since 2008/9 the global financial system has to be fundamentally transformed in order to bring the financial sector under control again. Or put differently, finance capital needs to be disciplined so that investments in the real economy can once again be seen as profitable. This means making a transition from the a global casino economy driven by the pursuit of capital gains to a global economy driven by patient capital that is satisfied with dividends earned from long-term investments in the real economy. The Stiglitz Report even suggested moving off the dollar by creating a new global currency that will allow governments sitting on huge cash reserves to tide them over currency volatilities created by speculators to release these reserves. This, however, would not be enough to unlock the cash reserves held be corporates globally and in SA – for this to happen monetary, fiscal and industrial policies will all have to be aligned to stimulate the rebuilding of manufacturing (the core of the real economy) and the dismantling of incentives to debt-finance consumption-led growth.  Unfortunately, the last 25 years has resulted in an addiction to easy profits derived from investments in paper and an aversion to higher risk messy investments in the complexities of real production.

2. The debate regarding state led economic growth has heated up with the advent of the New Growth Path. The private sector has argued, however that it should lead economic growth and job creation, while the state should merely facilitate this by creating a business friendly environment. What do you make of the  argument however that it would appear that corporates are hoarding money rather than investing in capital projects and creating much needed jobs – belying the rhetoric of a commitment to lead economic growth?

MS: Corporates say they support growth and job creation but there is very little evidence that they have an appetite for risk and long-term returns which is what is necessary to create jobs. They blame the nationalisation debate and the NGP for creating policy uncertainty, but there is little evidence that major investors are looking at investments that can break the stranglehold of the mineral-energy complex. Since 1994 the non-financial sectors that have growm are related to mining and energy production. The non-financial non-minerals/energy sectors have stagnated or declined. But these are exactly the sectors that are less capital intensive, more job creating, more dependent on innovation and better suited to patient capital looking for returns from dividends. Recent work done for the Gauteng Government’s Department of Economic Development by Wits shows that the multiplier effectis of lighter industries in Gauteng are higher than the traditional capital intensive heavy industires, i.e. they create more jobs per rand. They are, of course, less energy and resource intensive, which means they are more sustainable. The surplus cash should be going into these investments. And the way to do it? Active facilitation by government to create innovation-driven strategy engagements between investors, research organisations (like Universities) and government – we have a very limited tradition of integrating knowledge and innovation into investment strategies and development policy, but we also have a weak venture capital market which means there is less high risk money around. BEE has worsened this situation by creating geared funds.

2. In the case of the US, the profits of large companies have come had huge cost to taxpayers, as the treasury has gone to enormous lengths to borrow money, then stimulate consumer spending. Is there not an argument for increasing taxes on the super rich, including large corporates, sitting on such large sums of money – particularly in SA where the state could use the money to further its endeavors at stimulating economic growth?

MS: Absolutely! As an HSBC banker told Richard Quest on CNN recently, it is the poor who spend to create consumer demand, not the rich. The US has funded growth by keeping relative wages low and massively increasing debt made possible in part by Chinese investments of their trade surpluses in US treasury bonds. The debt crisis marks the end of this road, made worse by Chinese decisions to gradually diversify their investments into Europe’s sovereign debt, rural infrastructure and the green economy. The growth of the right means returning to the policies that got the US into this mess in the first place. SA, however, is different. Our debt levels are not nearly as high, but we have financed consumer spending by increasing household debt since 1994 – this being politically motivated by the need to expand the black middle class. I am not sure taxation instruments will be effective in unlocking the cash reserves in the corporates – I think a grand investment deal has to be struck. What we need is not another jobs summit, but an ‘Investment Codesa’ supported by structured processes of engagement that puts creativity and innovation the centre of a new generation of industrial strategy units that include Universities, business, labour and government. Only when you have the people who manage the funds sitting around the table with entrepreneurs who need funds for real world production, and with researchers/knowledge workers who can be mobilised to generate the innovations entrepreneurs need to build viable businesses – only then will we hit the sweet spot. Now we have investors addicted to short-term capital gains who make decisions driven by logarithms, entrepreneurs who define risk has avoiding innovation, researchers who throw balls in the air hoping something catches them, and trade unions who moan that jobs are being destroyed. This is not the way to build a thriving dynamic job-creating wage-led growing economy – it is a recipe for stagnation and eventually collapse.

Many thanks and regards

Lynley Donnelly
Mail & Guardian Newspaper
+27 (0)21 425 9028