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Azar Jammine: Trump victory’s critical message for SA, especially business.

Inequality has become a key area of friction around the world. Azar Jammine believes Donald Trump’s shock Presidential victory is mainly a result of tapping into this rich voting seam – a fact that should be getting alarm bells ringing in South African boardrooms.

He reckons that over the past three decades, SA business has continued pretty much as it did during the Apartheid Era, happily reaping profits while remaining isolated from an obviously dysfunctional political economy. As a result, SA’s income inequality, already at dangerous levels, has grown even worse. Jammine says the US result should serve as an urgently cheeping canary in SA’s coal mine. But will it? – Alec Hogg      

By Azar Jammine*

For a number of years now we have been commenting on the manner in which a number of insufficiently recognised factors inherent in the way in which capitalistic economic policies are being executed, has been leading to an inadvertent increase in inequality.

Specifically, ongoing loose monetary policy has helped to boost financial asset prices, but has not had a commensurate benefit for the working class in terms of job creation and higher incomes. Those owning financial assets have benefited at the expense of the masses.

Secondly, the nature of corporate governance has been such as to contribute towards a rise in remuneration of corporate executives and public sector managers out of proportion to the increases in remuneration of the ordinary working class.

We had warned that such inequalities would lead to growing social disruption, not only in South Africa, both internationally. To a large extent, the Brexit vote in the UK represented one such revolt against the perceived enrichment of the capitalist class in the UK.

Now we see similarly in the US, the election of Donald Trump as President for the next four years at least, signifying rebellion against the existing status quo capitalist structures which his electoral rival Hillary Clinton was perceived to personify.

Many businesspersons will find it difficult to understand how someone making such radical proposals as Trump could garner the support of the majority of the US electorate.

Also read: Worldview: Making sense of shock Trump victory – “voting cattle” era over

The fact is that working-class states in the US, especially in the Midwest, swung their vote dramatically since the last election four years ago towards someone who is perceived as “populist”.

This raises the spectre of the dawn of a “new world order” in which the so-called neoliberalist policies of advanced economies and major institutions come to be transformed in such a way as to allow for greater recognition of the working classes relative to the managerial classes.

The irony of this is the fact that US economic policies under President Obama have in many ways expounded on ideals which would normally be construed as socialist-oriented, including attempts at rejigging the health care system in the world’s largest economy.

Unfortunately, Hillary Clinton was not perceived to be as aligned to socialist ideals as many ordinary Americans would have liked to see.

Included in their desire was the growing protection of jobs for Americans and not to earmark of these for immigrants. This was a similar sentiment to that which inspired Brexit in the UK.

South African business needs to be aware of growing social antagonism towards it

South Africa should take note of these trends because they are ever present in our own society, as evidenced most recently in the #FeesMustFall protests.

Ratings agencies keep emphasising the need for the country’s growth rate to improve in order for tax revenues to be raised in such a way as to facilitate a reduction in budget deficits and in this way to constrain the rise in the public debt. However, for such growth to be enhanced on a sustainable basis there needs to be greater consensus with regard to the direction of economic policy.

Unfortunately, the ideological divide between those favouring market-oriented solutions and those favouring interventionist solutions is acute. The US presidential election outcome represents a manifestation of a similar divide even in the US.

Finance Minister Pravin Gordhan, with his “Team South Africa”, incorporating 81 CEOs as well as government officials and trade union leaders, have been working towards trying to bring disparate ideologies together to work on appropriate structural reforms needed to improve sustainable growth. One can commend the effort as being a start to such a process.

However, one fears that progress thus far has been relatively limited, raising the concern that social and political disruption from populist forces might come to overtake sincere efforts at resolving the direction of economic policy.

First and foremost, corporate South Africa needs to find a way of resolving the remuneration divide more equitably than is currently the case. The fact remains that the gap between the managerial class and the working class has expanded by huge multiples in the past 30 years, highlighting the fact that there is a fault line in the determination of such rewards.

Economic implications of the Trump victory

It is arguably early days still to be dogmatic about the implications for the US and global economies of a Trump presidency.

To neoliberal thinking, the prospect of trade barriers and protectionist policies takes one back to pre- globalisation days in the first half of the 20th century. Such concepts have come to be vilified as being inimical to improved economic growth.

In South Africa specifically, the fear is that protectionist tendencies espoused by Trump could contribute towards the abolition of the Africa Growth and Opportunities (Preferential Trade) Agreement with African countries from which South Africa benefits.

On the other hand, in his speech after the announcement of the presidential electoral outcome, Trump went out of his way to assure the world that he would cooperate with other countries if they cooperated with the US, whatever that might mean.

He also went out of his way to emphasise that he intended spending heavily on infrastructural renewal in his own country. The problem with such a pledge relates to where the money going to come from?

US public debt is already three times what it was three decades ago at around 100% of GDP. The capacity to borrow more to fund such expenditure in such circumstances is limited. Yet Trump espouses reducing taxes to promote economic growth.

Are we about to witness a revival of Reaganomics which sees huge fiscal expenditure, but the cost of which would be a sharp increase in interest rates? If so, this could have fairly dramatic and disruptive effects on financial markets and the global economy at large.

The current wave of unprecedented loose monetary policy would have to be unwound and the impact could be very uncomfortable.

Seesaw implications for the rand

We have warned about interpreting the initial response on financial markets to the US presidential outcome as defining the permanent direction in which markets would continue moving. We suggested that the initial reaction to a Trump victory might be negative just as the reaction to a Clinton victory might prove positive.

This is because a Trump victory would raise uncertainty about US economic policy going forward and protectionist tendencies were not viewed very positively.

On the other hand, we also suggested that such negative reaction might come to be reversed in the event that the negative implications for US and global growth came to be seen to favour interest rates remaining lower for longer to counter the reduction in growth that might be anticipated. Just such a seesaw response was evident following the unexpected announcement of the Brexit vote.

On the other hand, if indeed Trump intends to embark upon massive infrastructural spending and at the same time goes about reducing taxes, the ensuing surge in interest rates in the US could cause a substantial swing in sentiment back to the Dollar and away from emerging market currencies

Also read: Trump victory: What it means for South Africa – highlights

At this stage, it is difficult to be dogmatic about which scenario will pan out until such time as Trump becomes more explicit with his economic policies.

Nonetheless, from a longer-term point of view, one frets that the disruption which might be caused in the world economy in the wake of a move to a new “world economic order” implicit in a Trump Administration, might come to be quite negative for sustainable growth and for financial markets more generally.

South Africa’s only saving grace in such an environment would probably be that precious metals could do well in the same way as they have done today and furthermore, the Rand would weaken anew in this way insulating the real economy from the full effects of softer global economic conditions.

  • Azar Jammine is the chief economist of Econometrix
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.

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