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WITH Bob Dylan having been awarded the 2016 Nobel Prize for literature, putting him in the illustrious company of inter alia winners of the Nobel equivalent in economics, I assume it is acceptable to quote him in a serious article such as this.
In the first verse of the classic Dylan song, The Times They Are A-Changin’, he sets the appropriate tone for the gist of what follows. To quote:
“Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone
And if your breath to you is worth savin’
Then you better start swimmin’ or you'll sink like a stone
For the times they are a-changin’.”
We have been living in epoch-changing times since the outbreak of the international financial crisis in 2007/2008, with this change continuing to take on new dimensions as time passes. So what exactly are the waters that are growing around us to which Bob Dylan refers?
And how will South Africa respond to this changing environment in which we find ourselves?
International politics
For some time now it has been fashionable to refer to the creation of a new multipolar world order in recognition of the growing global influence of China (and Asia more generally) as a result of its increasing economic power.
Furthermore, we are now faced with the prospective rehabilitation of Putin’s Russia and his/its status in the world, although it is incomprehensible why an emerging-market country that is not even in the top 10 in terms of its share (dominated by oil and gas) of global GDP, ranking behind inter alia India, Brazil and South Korea, should be allowed a dominant place on the global stage.
A much stronger case can be made for India to play an increasingly important role in the future world order.
The flip side of the coin is of course the decline (and even active withdrawal) of the West and the lessening of its influence, which has only begun and probably still has a long way to go.
The three bastions of Western power and influence (the USA, Europe and the UK) are all retreating for different reasons: the US is turning inward by choice, Europe is struggling to survive as a cohesive unit, and the UK has opted to diminish its standing in the world (although still clinging to grand illusions of its influence and power).
It has been declared that the days of promoting “regime change” (eg as in Iraq and Libya) are over, which is just as well given the unstable political vacuums created by past campaigns. The West’s promotion of liberal democratic values using its soft power is seemingly also being discarded in favour of the acceptance of other countries’ free choice of political systems - a typical postmodern view, although rather late in coming.
The result is the decline of global institutions (also in the economic sphere) that were designed, created and sustained primarily by the West, especially in the post-World War II period, based on Western values and principles. How global institutions will evolve in future remains uncertain, and whether we will indeed progress towards a harmonious multipolar world order only time will tell.
Some people are looking for a new global hegemon to replace the USA, with China appearing to be the only potentially viable candidate. Whether China is qualified for such a role is a moot point, as are its aspirations in assuming such a role.
National politics
Much is also changing at the level of national politics. Three forces come to mind, although they are intertwined and difficult to separate from one another.
Firstly, we are witnessing the rise of illiberal democracy and the legitimisation of dominant-/single-party politics. Populations/voters are seemingly prepared to accept authoritarianism and the absence of tolerance of opposition in return for results. They often share the ideals put forward by leaders and are prepared to turn a blind eye to the leaders’ personal agendas.
The second phenomenon is the commensurate rise of populist nationalism across the globe, even in unexpected places. Although the rise of nationalism appears to be largely culturally driven, with countries bent on protecting their own historic culture from foreign influence (hence the resistance to immigration), economic nationalism is also getting a look-in (e.g. “foreigners are taking our jobs”).
Populist movements are driven by a resistance to elites, who are seen to have created an order that benefits only themselves at the expense of everybody else. The views of “experts” (including economists!) who seem to arrogantly claim superiority for their knowledge and way of thinking are being rejected without much thought being given to what should replace them.
The third phenomenon is the rise of personalism in politics, with the political life of some nations being dominated by specifically strong individuals. Numerous examples from around the world come to mind: Putin (Russia), Erdogan (Turkey), Deterte (Philippines), Orbán (Hungary), and even Xi Jinping (China), who has amassed the most power in himself of any Chinese leader since Mao Tse-tung.
Some would include Donald Trump (USA), although he is constrained by more constitutional checks and balances than the other candidates.
The result is an increase in authoritarianism also in how the economy is run, including setting economic policy, with a hardening of the role of government in the economy, often using the state to serve the interests of the leader and his coterie of followers.
An important question that will need to be resolved in the coming years is whether illiberal democracy at the national level is reconcilable with a liberal international order.
Global political economy
It is tempting to conclude that the era of neoliberalism with its preference for free markets and the limitation of the role of government came to an end with the international financial crisis in 2007/08. After all, to many people the crisis demonstrated the failings of free-market economics, with the deregulation of the financial sector that started in the 1980s generally regarded as one of the chief causes of the near collapse of the financial system in the West.
Addressing the crisis and stabilising the financial system required government intervention on an unprecedented scale and was followed by a broad-based tightening of regulation, in particular in the banking sector.
However, the answer is not that simple. There is a strong body of thought in support of the view that reforming the banking sector did not go far enough and that the risk of an equally severe crisis in the future remains uncomfortably high. For many analysts the “too big to fail” problem has not been adequately addressed and the question of government bail-outs vs. the bailing in of shareholders and investors has not been resolved. The risk of a future crisis requiring another government bail-out therefore remains a real possibility.
The intention of the Trump administration to at least partially repeal the Dodd-Franks Act (the iconic regulatory response to the financial crisis) and the possibility of weaker regulation being used by the UK as a bargaining chip in its post-Brexit battle to protect the status of London as a global financial centre, in particular against its European rivals, also point in the opposite direction to the demise of the neoliberal order.
However, it is probably true that in the eyes of the majority of people globally the neoliberal order has indeed ended and that they are looking to government to play a stronger role in addressing the imbalances brought along by it. The Trump administration’s stand in favour of greater trade protectionism and an active industrial policy in any case casts doubt on whether it is ideologically committed to promoting the neoliberal cause.
The end of the neoliberal order goes hand in hand with the end of the trend towards the financialisation of the economy since the 1980s.
The resistance to the dominant role played by purely financial interests in economic decision-making (for example the accusation that financial interests are responsible for the shift to so-called short-termerism that has held back corporate investment and therefore growth and job creation) remains very real.
The view that the financial sector has grown too large relative to the rest of the economy (as demonstrated by the increase in its contribution to GDP and its share in corporate profits) and that it must be made to better serve the real economy has not been abandoned.
The resistance to financialisation forms the background to the criticism of free-market institutions such as (Western) credit rating agencies as playing too big a role in the allocation of capital globally, and specifically that they undermine the sovereignty of governments’ whose debt they rate.
The criticism generally does not take into account that credit rating agencies are businesses out to serve investors’ demand for information regarding the relative riskiness of different investment opportunities in response to the classic problem of asymmetric information. It also ignores that rating agencies seldom issue unsolicited ratings and that it is the issuers of debt that normally request a rating in order to get access to the available pool of investable capital.
It does not make sense to assume that new non-Western credit rating agencies would come to different conclusions (which would require a different methodology of assessing risk) in favour of the issuers of debt and that such ratings will be accepted by investors as valid (ignoring the long-standing problem of high barriers to entry in the credit ratings industry because of reputational requirements).
The bulk of the internationally available capital will after all remain of Western origin for a long time to come.
The second big question is how far globalisation will be pushed back by the Trump administration’s neo-mercantilist resistance to trade deficits and its antipathy towards multilateral trade agreements.
Its fixation with the reindustrialisation of America at a point in time when the contribution of manufacturing to economic activity is declining globally and the sector is undergoing a job-destroying flurry of technological change, is not well considered (although in this it is of course not alone). The question is whether this is a viable approach in view of the Fourth Industrial Revolution already being upon us.
How far the world will go down the protectionist route depends on the extent to which the rest of the world follows the US example. Early indications are that there is little enthusiasm for following Trump down the rabbit hole and the US may find it has shot itself in the foot by adopting an anti-globalisation stance. A drastic change in trade policy by the US will nevertheless be disruptive because it is the largest economy globally.
If the US desire to force US companies to withdraw from global supply chains were to succeed, they would be the losers in the global competitiveness race. What the US may gain in import replacement may well be exceeded by its losses on the export side. US multinationals may yet have to adjust their business models to escape the restrictions imposed by the Trump administration in order to best serve their non-US markets.
The third question is how the prevailing strong resistance to growing inequality in income and wealth will play out, especially as it relates to top incomes and executive pay. The difference between equality of opportunity and equality of outcomes has been blurred by the popular perception that the system has been unfairly rigged to benefit a select group of individuals (the 1%) who then furthermore neglect their obligations to society, for example by avoiding to pay their fair share of taxes.
Technological development and the different ways in which it has affected different groups of people has already played an important role in growing inequality and it will continue to do so. Automation will further increase the gap between the returns to capital and the returns to labour. However, the biggest rewards will go to the innovators and the entrepreneurs responsible for the commercial exploitation of new technologies.
It is difficult to see how the inequalities that result from the rewards of innovation and entrepreneurship (which have become more immediate and dramatic in the age of information technology advancement) can be softened while maintaining the dynamism of the system.
Societies face the challenge of compensating the losers from change (inevitably through some redistribution from the gainers) without distorting values and incentives unduly. This has inter alia caused the debate on the merits of a basic income grant, guaranteeing every person a minimum standard of living, as a possible solution to the problem to gain renewed traction.
South Africa’s response to a changing environment
Where does South Africa fit into this picture of a changing world order as described above?
Firstly, as far as South Africa’s international positioning is concerned, the anti-Western stance adopted by government will become less problematic because of the declining influence of the West. South Africa’s attraction to illiberal, authoritarian states (eg Russia) will likewise become less controversial.
Secondly, a shift to illiberal national politics will be tolerated more freely, with little need to fear international condemnation or interference. Because of the rise of personalism the African “Big Man” phenomenon in politics will not stand out as much as before, weakening the resistance to it.
Thirdly, a retraction in globalisation will be to South Africa’s disadvantage given its dependence on external sources of growth. Past periods of above-average domestic growth have generally been the result of some global windfall and to the extent that a turn to greater protectionism will result in lower global growth it will affect South Africa for the worse.
The flip side of enforced greater balance in international trade flows will be greater balance in international capital flows, which could put the financing of South Africa’s perennial current account deficit at risk.
The growing tide towards reindustrialisation, especially in the developed world, will furthermore bedevil South Africa’s own efforts in this regard. Export markets will not be that easy to find, while the domestic market will not deliver a high enough level of demand to achieve the economies of scale required for global competitiveness.
In particular, the Trump administration’s focus on bilateral trade deficits and its declared intention to scrutinise all trade agreements from the perspective of “America first” may still come to haunt South Africa. Although South Africa’s trade surplus with the USA amounted to only about $2bn in 2016, a substantial part of it comprised vehicle exports to the US (made possible by the Agoa treaty), one of Mr Trump’s pet hates.
On the other hand, there is a risk that an increase in protectionism globally could also encourage similar sentiments locally. If this were to come to pass, it would be a backward step that would add another handicap to enhancing the growth potential of the South African economy.
A final word
We should be careful not to be overconfident in our conclusions. We will do well to remember the American political analyst Francis Fukuyama who in 1992 declared the final triumph of liberal democracy and the market economy in his book, The End of History and the Last Man. What we are witnessing now is precisely the unravelling of Fukuyama’s thesis.
The final word therefore appropriately belongs to Bob Dylan:
“Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won't come again
And don't speak too soon
For the wheel's still in spin
And there's no tellin’ who that it's namin’
For the loser now will be later to win
Cause the times they are a-changin’.”
* Jac Laubscher is economic adviser for Sanlam Limited. Opinions expressed are his own.
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