South African Debates on a New Global Financial Architecture

Hein Marais

Summary

SA’s government and business reject the introduction of new capital controls at the national level. They support the gradual and eventually complete lifting of exchange controls.
Trade unions and the SA Communist Party believe government should apply new controls and halt the lifting of exchange controls.
All participants in the debate agree, however, on the need for a new international financial architecture that can restrict the negative effects of short-term capital flows.
At the heart of that view lies the concern that the instability associated with short-term capital flows threatens SA’s ability to achieve economic growth and reach its reconstruction and development goals.
The SA government supports and is actively involved in multilateral efforts to redesign the global financial architecture. This commitment is evident in its role in the G-22 group of countries and the Non-Aligned Movement, especially.

Nature of the South African Debate

A fitful and, in many respects, stunted debate has occurred in South Africa (SA) since mid-1998 on the merits and disadvantages of regulating and/or controlling capital flows to and from the country. It has featured in numerous newspaper and magazine articles, in radio talk-shows and current affairs programmes, television news programmes and in several speeches by government leaders and ministers.

The debate has been largely conjunctural, with its high-point occurring in the second-half of 1998, when the after-shocks of the Asian Crisis rocked the SA economy and triggered large capital outflows. In 1999, the debate has been low-key. There are no signs of marked shifts in the basic positions of the main participants.

Much of the debate has been waged in sweeping terms. Supporters of capital controls link their positions to critiques of economic liberalisation and (in the case of the Congress of South African Trade Unions, Cosatu, and the South African Communist Party) locate their criticism within an analysis of a global economic crisis that transcends the financial sphere. Despite a generalised approval for measures such as the Tobin Tax, they have not proposed specific steps based on an examination of their suitability and feasibility in SA. In summary, they are opposed to the further relaxation of capital controls by SA and have urged government to investigate and consider limiting new ways to limit short-term capital inflows.

Opponents of capital controls, meanwhile, dismiss the mere notion of controls being applied at the national level. Significantly, this position is shared by both government and business - although they arrive at these positions in different ways. However, they do support the enhanced regulation of capital flows and broadly share the view that this should occur within an improved international regulatory framework. They regard capital controls as anathema to the globalised dynamics of the world economy and as an anachronism which would seriously impede SA’s prospects of economic growth.

Both supporters and opponents of controls do, however, believe that reform of the international financial architecture is essential.

There is a shared concern about the negative effects of unfettered capital movements in and out of SA. Similarly, there is a general acceptance that it is easier to regulate capital inflows than outflows. There is also broad agreement about the need for an international, rules-based system which can protect individual countries against the negative effects of short-term flows. But this is shadowed by deep disagreements over whether such remedies alone are sufficient and whether additional measures are feasible or, indeed, desirable.

Positions of the Government

Officially, government supports greater regulation of short-term capital flows (within a new, co-ordinated international framework), but opposes the imposition of capital controls at the national level. Implicit in this position is a horizon of concern that extends beyond SA and includes not only Africa but the so-called South as well.

It remains committed to eventually lifting all exchange controls. At the same time, its concern about the instability engendered by short-term capital flows (dramatically illustrated in the massive outflows experienced in the 3rd quarter of 1998) has led it to support calls for the redesigning of the global financial architecture. This is in line with a 1998 internal ANC discussion document which urged developing countries to collectively influence international economic relations in order to "eliminate senseless beggaring by short-term capital flows".

It regards the liberalisation of capital controls as a necessary and inevitable condition for deeper integration into the global economy. This position is based squarely in SA’s perceived need for large, sustained FDI and for substantial short-term capital inflows (which can help stabilise the Balance of Payments, BoP). Yet, the instabilities associated with the latter require antidotes which SA itself is unable to administer.

This platform position must be seen in the following context. Like business, government regards sustained foreign direct investment (FDI) as a prerequisite for healthy economic growth. SA’s low savings rate and declining levels of domestic private investment bolster this view. Although distressed by the volatility of short-term capital flows, government also sees them as an aid to stabilising the capital account of the Balance of Payments (BoP). Government also believes that a positive correlation exists between short-term capital inflows and FDI.

Its commitment to lift exchange controls for residents (allowing large offshore investments by SA firms), meanwhile, stems from another line of reasoning: Government economic policy is to a large extent premised on large, sustained flows of FDI into the country. But foreign investors eyeing post-1994 opportunities have found an economy dominated by sprawling local corporations, leaving little space for bulky foreign entrants. By encouraging offshore investments, government hoped to create "space" in the economy for foreign investors (and black economic empowerment consortia), since firms shifting abroad are pressured into selling off non-core local operations in order to raise investment capital.

In summary, government’s commitment to continue removing capital controls and its opposition to introducing new (even short-term) controls is based to a considerable extent on the crucial linkage it sees between economic growth and both long- and short-term capital flows. It is adamant that the instabilities associated with the latter must be reduced, but believes that unilateral, national-level measures would discourage capital inflows (whether FDI or more speculative variants).

Thus, government stopped short of supporting proposals put forward by a Commonwealth expert group in mid-1998. While noting that macroeconomic stability constituted the best antidote to capital flight, the team’s report mooted the need to implement tax laws and currency restrictions to make short-term capital more "sticky". Significantly, the group placed the onus of regulation on the recipient country of inflows - a view which government rejects.

Chile not seen as an example to follow

Government also has dismissed the option of following Chile’s example, whereby investors have to deposit a percentage of their funds with the central bank and effectively pay a tax penalty if funds are withdrawn from the country.

Importantly, government supports "better regulation of financial markets" in the form of regulatory measures which have to be instituted at the global level as part of a rules-based system that governs capital flows. The finance ministry has come to call such measures "speed bumps" that can reduce volatility of international capital flows, while stressing "this is not the same as arcane exchange controls and the building of new barriers" because "the time for that is gone".. According to the finance department’s director-general, Maria Ramos:

Exactly what types of regulation it has in mind remains unevenly spelt out. The finance ministry has spoken of the need to compel financial institutions to report to regulators what speculative (or so-called "short") positions they have taken and what their capital risk is. It has suggested that the penalties for non-compliance be severe. In addition it wishes to see better enforcement of the capital requirements set by the International Bank of Settlements for market players and the strengthening of cross-border regulation and bank supervision at the international level.

It should be noted that these positions exist alongside an occasionally critical reading of the reign of the free market and its affects on developing countries. Commenting on the Asian Crisis, president Thabo Mbeki told the 1998 Non-Aligned Movement (NAM) summit in Durban that "the message that comes across is that ‘the market’ is a cannibal which feeds on its own offspring .... we are showered with accolades for cooperating in the effort to fatten ourselves for the kill."

The occasion at which those were aired was significant - not SA’s parliament but in a confab of leaders of the South. This underlines the extent to which Mr Mbeki and his government are convinced that individual countries’ economic and development prospects depend, ultimately, on collective efforts to render more favourable the terms on which developing countries are integrated into the global economy.

The Business-Community

Different branches of SA capital have slightly different approaches to economic liberalisation. Thus, manufacturers threatened by cheaper, competing imports tend to be less enthusiastic about the removal of tariff and other protective barriers. Financial institutions, meanwhile, show energetic support for the removal of all remaining capital controls; so do large corporations (including mining houses) eager to shift core operations abroad.

But circulating among business economists and commentators is a concern about the disruptive effects of short-term capital flows:
"Sudden outflows create market havoc, while big inflows push the value of the currency up, making exports less competitive. The inflows add to the money supply, creating the threat of inflation, which in turn puts pressure on the Reserve Bank to keep interest rates up. It’s a high price to pay if the capital is only temporary."

Despite its concerns, business remains unanimously opposed to the reimpositioning or tightening of capital controls. The main argument rests on the perceived centrality of large inflows of foreign investment for economic growth.
Yet, there are different opinions about how soon capital controls should be lifted entirely and where such moves should be placed in the sequence of liberalising adjustments.

Economists employed by investment brokers have argued that capital controls are neither necessary (because most of the capital which would flee has already left) or feasible (because SA needs foreign capital). Remaining controls should be relaxed as quickly as possible. Indeed, as the economy was being battered in the 2nd half of 1998, some business economists argued that an opportune time had arrive to lift all remaining exchange controls. (SA markets, they argued, had become so undervalued that the costs of such a move would be minimal.) Generally, financial institutions’ stance is captured in the following observation:

Another view holds that other structural and economic reforms (especially privatisation and "investor-friendly labour markets") must be implemented before the complete phasing out of capital controls occurs. If the sequencing is wrong, then capital would drain out.

Like government, business does support greater transparency and disclosure - particularly with respect to short-selling. Similarly, the task of better regulating financial markets is laid at the door of the industrialised countries. "It may be an emerging market problem, but indications are it needs a First World solution," is one business analyst’s view, while others have argued that the International Bank of Settlements should feature prominently in any regulatory measures.

Some specific recommendations have been made. Instead of individual countries trying to control capital inflows, measures have to be introduced at the source of those flows:

Perhaps surprisingly, some business commentators have mooted the possible utility of short-term, well-timed capital controls (to clamp down on a panic or buy time for a government to act). This view is weakly supported in the business community.

The Reserve Bank

The powerful role of the Reserve Bank (SA’s central bank) in manipulating real interest rates, means its actions on that front profoundly affect SA’s attractiveness for short-term capital flows - since high real interest rates can act as a magnet for such flows. The Bank’s attitude towards these flows is therefore important.

The Bank’s position closely mirrors that of business. It rejects new controls, but supports the creation of a regulatory framework which can enforce greater disclosure. It appears particularly concerned about hedge funds and believes the latter proposal would limit instabilities caused when those funds are caught with large short positions.

Cosatu and Left Wing Groups

As noted, the African National Congress’ (ANC) left-wing allies support enhanced international regulation. But they go further, arguing that greater regulation - and even the introduction of new controls - at the national level is essential and should not depend on or await adjustments to the international financial architecture. It appears that these actors regard such moves as part of an arsenal of "contra-cyclical measures" required to launch the SA economy along a more robust and sustained growth track. Government, in late 1998, agreed on the need to consider "contra-cyclical measures", but has a much more conservative understanding of what they should entail.

Cosatu’s 1997 September Commission proposed (among many other measures) increased regulation of the SA financial market and the maintenance of exchange controls. These recommendations were couched in an overall vision premised on the need to establish a vibrant mixed economy marked by greater state involvement on both the demand and supply sides.

Specific recommendations, however, are in short supply. Short of insisting that remaining exchange controls should not be removed, these participants in the debate generally have spoken approvingly of the utility of a Tobin Tax and of measures such as those adopted by Chile.

Noteworthy, however, is the fact that these organisations (along with some progressive economists) dispute SA’s putative dependency on FDI. They argue that sufficient investment resources exist in SA and that an investment drive by the state and private sector (along with the activation of other Keynesian levers by the state) can trigger sufficient domestic investment.

In addition, on the basis of cross-country evidence, they argue that FDI realistically can constitute only about one-sixth to one-fifth of the investment (25-30% of gross domestic product) SA needs in order to attain moderately high, sustained economic growth rates (5-6% of GDP per annum). Challenged in this manner is the commonly held belief that the fate of SA’s economy and its development efforts resides with foreign investors. An analytical chasm, in other words, separates these left-wing views from those of government and business - of which their respective stances on capital controls is one expression.

Stances towards Multilateral Revisions

There is no doubt that the SA government does and will continue actively to support the formulation and implementation of a new global financial architecture. Importantly, it does so with the support of both its left-wing allies and the SA business community. It repeatedly has made these commitments in public fora, has participated in the efforts of the G-22 countries to spearhead such a process, and has sought to convince the Organisation of African Unity and the Non-Aligned Movement (NAM) of the importance of such endeavours.

This commitment was most stridently expressed by Mr Mbeki in his opening speech to the 1998 NAM Summit. Coursing through that address was an awareness of the fact that the bulk of the South is not benefitting (sufficiently) from the surge in global trade and capital flows because the global economic system remains structured to the patent advantage of the industrialised countries. This, government insists, has to be rectified if the countries of the South are to successfully address their development needs and improve the living standards and prospects of their citizens.

A panel of economic experts was convened to analyse the current global economic order from the perspectives of the South and to develop integrated policy positions for the NAM. It is unclear what, if any, concrete progress has been made by the team.

SA has been prominent in the G-22 countries’ efforts in late 1998 to recommend to the IMF possible alterations to the global financial architecture. A task force of the G-22 countries drafted recommendations which were presented to the IMF's policy making interim committee.

The recommendations resembled those made by the SA finance ministry (in Section 3.1, above) and included calls for:

• Greater transparency in the public and private sectors;
• Strengthening of national financial systems and greater involvement of the private sector in crisis resolution;
• Adequate supervision of co-operative banking and financial systems. Rather than protecting individual banks from ill-judged lending, this is intended to protect individuals who have entrusted them with their deposits;
• The private sector must bear the consequences of its investment decisions and should not be afforded the guarantee of bail-outs by states and/or multilateral institutions;
• Supervision has to be transnational, with banks reporting their international positions to appropriate domestic regulators.

To the dismay of the SA government, however, these proposals received a frosty reception at the IMF annual meeting in late 1998, despite earlier indications from senior IMF officials that the institution could regard more kindly proposals to control or regulate capital flows. But it remains committed to pursue the necessary adjustments at the international level.

Reasons for South African Concern

SA’s concern rests, in the first instance, on the constraints which current patterns of globalisation place on its own efforts to alleviate poverty and reduce inequality. The punitive powers of market forces have been massively strengthened by various forms of liberalisation that have characterised globalisation over the past two decades. Thus, government believes its ability to select and implement social and economic policies which are tailored to SA’s developmental needs is drastically limited.
On the one hand, it feels compelled to align its own economic policies to the dominant orthodoxies in order to integrate SA more deeply into the global economy. The anticipated reward is higher levels of sustained economic growth which can serve as a necessary platform for its reconstruction and development goals. On the other, it is clearly anxious about the effects of such adjustments on the country’s economic stability and its ability to address its social priorities.

The dramatic reversal of capital flows in mid-1998 underscored this dilemma and drove home the grudging awareness that the fate of the SA economy (and, consequently, the country’s transformation) ultimately rests with forces that are largely impervious to SA’s influence.

The conundrum is deepened by the fact that SA already has travelled a considerable way down the path of economic liberalisation. Policy reversals - such as the re-imposition of capital controls - would, government believes, trigger punitive reactions from the markets. The scope for risk-taking and unilateral defensive actions at the national level therefore is seen to be limited.

In his political report to the ANC’s 1997 national conference, Nelson Mandela made repeated reference to globalisation, particularly to the integration of capital markets which "make it impossible .... to decide national economic policy without regard for the likely response of the markets". He and other ANC figures have spoken of the "loss of sovereignty" experienced by states in the current phase of capitalist globalisation.

Yet, the 1998 experience reminded also that even the finance ministry’s formula for a sturdy defence against external shocks (sound economic policies and institutions) was an inadequate buffer. As long as SA’s vulnerable status in the global economy is not addressed, the very fate of its transformation project could hang in the balance. Significantly, government regards this as a problem shared by the South in general. Hence, its commitment to assemble a common front of developing countries which, armed with realistic alternatives, could influence the redesign and management of the global financial architecture at multilateral, international levels.

Clearly, this does not imply a disengagement from the processes of globalisation. Instead, countries of the South have to become integrated into the global economy on a more equitable basis. SA’s lack of enthusiasm for unilateral, national-level measures to regulate capital flows therefore is located within such a "strategic" outlook. In government’s medium- to long-term view, the stakes are higher than any one developing country’s ability to defend itself against capricious capital movements.

Participation in International Debates

During 1999, the debate in SA has ebbed and official pronouncements on the issue have been sporadic. Thus, the Petersberger resolution has received little media coverage and scarcely featured in public debate.

The possible suitability of a Tobin Tax has been voiced in SA, particularly by the trade union movement and progressive economists. Perhaps surprisingly, even the country’s leading business periodical has acknowledged the possible advantages of such a move, although it has not endorsed it. But a serious examination of the feasibility of such a tax levy appears not to have been made yet by government.

SA continues to concentrate its efforts in raising the need for a redesigned global financial architecture in international fora and in actively participating in such endeavours within the ambit of the G-22 countries, the NAM and, to a lesser extent, the Organisation of African Unity

Hein Marais is a Johannesburg-based journalist and researcher specialising in political-economic and development issues.