Political Economy

Adapting to the post-financial crisis world now urgent

UNCTAD has important lessons for SA
UNCTAD.jpg

The world economy, as well as the models underpinning it, has fundamentally and permanently changed with the 2008 financial crisis. It has become desperately urgent for South Africa to come to grips with the new reality.

The old frames of reference are gone. Everyone, starting with government, but including free-market lobbyists and business interest groups, has to shed old dogmas and biases if the country is to survive the lingering aftershocks of what the United Nations Conference on Trade and Development (UNCTAD) now calls a ‘big crisis’.

On the domestic front the ongoing student protests and the rise of populist politics are among the symptoms of the extent to which South African society – still very much in transition since 1994 – is fast heading for a ‘big crisis’ of its own.

In a very comprehensive research report released earlier this month under the title Rethinking Development Strategies after the Financial Crisis UNCTAD writes: “The global financial crisis that erupted in 2008 marks the starting point for a comprehensive rethinking of economic theories and policies, particularly in the field of development strategies.”

Dealing with the new light that the crisis shed on the economic trends that led to it ­– including developments in various developing and transitional economies (read, South Africa) – it states the crisis “may be changing the economic framework in which developing countries formulate and implement their development policies; therefore, it is necessary to assess the extent to which these policies need to be reformulated.”

That this process has already started, is illustrated by a partnership between 9 African universities in a study to rethink how capitalism functions on the continent, reported on elsewhere.

Challenging conventional wisdoms

Challenging some conventional wisdoms shared by mainstream economic commentators, the UNCTAD report among other things, states:

  • The global financial crisis that erupted in 2008 and its long-standing effects have evidenced a number of fundamental flaws in the way in which the world economy has been functioning under a “finance driven globalization”;
  • It has evidenced the changing structure of the world economy, with a larger share in global output and trade for developing countries that should thus rely less on export-led growth oriented to developed countries’ markets and more on domestic and regional demand, based upon better income distribution;
  • Being a ‘big crisis’ – of the economic regime itself, from which it cannot recover without changing some of its fundamental aspects – market mechanisms and short-term adjustment measures (e.g. automatic stabilisers) cannot restart growth on a solid basis because they do not address the roots of the problem; and
  • “Rather than a temporary accident, this appears to be the crisis of a pattern of growth (a ‘big crisis’), whose main features are the dominance of de­regulated finance over the real economy, the mounting inequality in the distribution of income and wealth and the State’s lesser role in the economy, which have led to rising domestic and external imbalances that can no longer be sustained.”

The report goes on to state that “subsequent policies in developed economies that intended to handle the crisis have not addressed its roots. On the contrary, they have somewhat tended to reinforce some of its causes by accentuating income inequality, restricting government spending and generating new financial bubbles, while the announced re­regulation of the financial sector is lagging behind.”

That the new situation does not only pose serious dilemmas for developing countries like South Africa, is well illustrated by the fact that even the USA is presently faced with once again being on the precipice of default on its national debt.  

Lessons for South Africa

Those on the left-socialist side of the South African political spectrum would probably claim that these pronouncements by the UNCTAD panel is vindication for policies they have been advocating.

However, it does not stop there. The very clear message from the study is that narrow ideologically based policy responses ­– be it to leave everything to market forces or to full-on socialist state intervention – will not do in meeting the new challenges.

Advocating moving towards what it calls Developmental State Mark II, the report suggests a mixture of responses tailor-made for individual countries’ circumstances.

It, for instance, warns that “North­South free trade agreements should be considered with great caution for nations looking to expand or devise industrial development strategies. (They) … are also urged to develop new model treaties (as Brazil and South Africa are) that steer closer to the South-South model prioritizing development oriented trade and investment.”

Finally, under the heading “Alternatives for emerging market and developing countries,” the report states: “The path taken will need to cater to each country’s specific circumstances. Given that we live in one of the most open periods in global economic history, rather than searching for new barriers to deregulate, nations need to work to design the appropriate national policies to thrive in a globalizing world.”

If ever there was a need for what has become a regular feature of governance in South Africa – a ‘task team’ – to study the UNCTAD report and to advise government on economic policy, it is now. In the meantime South Africa is entering its own ‘big crisis’.

by Piet Coetzer

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