Aida 204 Hale ………
THE impact the European Monetary Union is having on the SA gold price - and EMU's chances of self-destructing, to our advantage - were dealt with by David Hale, a former White House advisor and currently an advisor to the Pentagon, when speaking in Johannesburg recently. He was addressing an investment conference on "The Challenges Facing South Africa," dealing primarily with the massive changes in global markets in the post-Cold War era.
But, for us, perhaps his most important immediate message, the one most worthy of study by Mr Sam Shilowa and his fellow destructionists in COSATU, glued down as they still are in the delusions of 1960s-style European socialism, was:
"Both the Government and the trade union movement have to put greater emphasis than they have so far done on maximising growth through introducing greater flexibility in the labour market. Such policies will obviously be difficult to accept as a result of SA's long history of imitating European style labour market institutions, but there is no alternative to securing the country's long-term economic and political stability.
"SA must now imitate America's success at achieving full employment through steady growth of employment by small and medium-sized enterprise. It cannot continue to borrow from the corporatist labour market traditions of Western Europe. Indeed, unemployment rates are now so high in France and Germany that it is doubtful if Europe can persist for much longer with policies which promise job security and income guarantees at the expense of employment creation.
"In the US, the private sector has created 28 million jobs for a labour force of 134 million people since 1980. In Europe total employment growth since 1980 has been only 14 million jobs for a labour force of 194 million."
Getting into the main body of his speech, he continued: "The SA experience is so unique in the modern world that all the rules of political economy have to be modified somewhat for the extraordinary circumstances. But while adjustments are necessary there is no way of avoiding the core challenges that will determine SA's economic and political future. The country is operating in the most competitive global economy to exist since the dawn of the industrial revolution 200 years ago.
"If the country is to attract more investment and boost its growth rate, it has to pursue policies which enhance the stock market's size and liquidity through privatisation of state enterprises, promote a higher level of domestic private savings and produce a more flexible decentralised labour market which encourages employment growth by increasing the ability of firms to link pay and productivity.
"SA needs such policies not only to attract foreign investment. She needs them to create a safe and secure democratic society in which the people of SA can take advantage of the great opportunities created by the sweeping away of the restrictive economic and political ideologies that shaped her recent history.
"Although SA is by far the greatest economic power on the African continent, she is only a peripheral country in the global economic system. What has made SA's economy distinctive and interesting to international investors in the past is the large size of her natural resource endowment.
"Because of this SA has developed a unique hybrid economy with highly developed infrastructure, a large pool of well educated middle class people and sophisticated capital markets against a backdrop of ethnically driven inequality in wealth and income distribution.
"The great challenge now confronting SA is to develop effective niches for a resource-rich country with a large endowment of unskilled labour in a global economic order which is vastly more competitive than any she has experienced since the founding of Union itself.
"The post-Cold War global market economy has more than 5 billion people, compared to barely one billion ten years ago. There is far more mobility of capital in the new global economic order than has existed at any time since WW1. Ten years ago, the major channels for global capital flows were bank lending, foreign direct investment and official aid.
"Today, these capital inflows are increasingly occurring in the bond and equity markets, plus the rapid expansion of new savings intermediaries such as pension funds and mutual funds. SA is unique among developing countries in having a large pension fund sector. The success of Singapore and Malaysia in using pension funds to provide economic development is now encouraging Hong Kong and Thailand to move in a similar direction.
"The World Bank has just produced a major study on the introduction of pension funds in China. As a result of the spread of pension funds to the developing world, there could be more than one billion shareholders in the world financial system by the year 2000, compared to 100 million when the Cold War ended.
"The post-Cold War international order is encouraging world trade to expand at a rate three times as high as the growth rate of the old industrial nations. It is not surprising that the countries of East Asia have so far been the most successful in the new world order. Despite varying degrees of state influence over investment decision-making, they have pursued outward looking trade policies and thus linked their resource allocation to global price signals.
"Government intervention has been prescriptive rather than proscriptive. Their strong links with multinational corporations have helped enhance their accessibility to both modern technology and world markets. Because of its historical links with the British Empire, SA had long enjoyed a high level of integration with the world economy.
"SA is better positioned than most countries to attract portfolio investment because her stock market capitalisation is equal to 210% of GDP despite the fact that the telecommunications and utility sectors are still state-owned. The problem in SA is that the market is dominated by a cross-shareholding system which constrains liquidity.
"The gold price is a dilemma. Over the year the price has slumped despite steadily growing demand in East Asia and stagnant world output. The market has turned negative because of concern that the European central banks will reduce their gold holdings in the run up to the European Monetary Union. Ironically, the movement towards EMU has had a depressing effect on the two great hard assets of the 1970s and 1980s: gold and the D-mark. European central banks own almost 45% of the world's official gold stocks.
"Despite the great political commitment to EMU by Chancellor Kohl and President Chirac, it is far from certain that EMU will actually happen. The European Union is suffering high unemployment because of rigid labour markets, burdensome levels of taxation and a general lack of microeconomic flexibility which raises questions about Europe as an optimal currency area.
"As a result, it is not difficult to construct scenarios in which the EMU is postponed for several years or self-destructs because of rising unemployment in the early years of the next century. In either case, the gold price could rally sharply because of reduced investor apprehension about European central banks selling their gold holdings.
"The outlook for G-7 liquidity conditions and global economic growth during the late 1990s should auger well for SA's economy. The level of industrial commodity prices should appreciate at least modestly while gold could benefit from any suspension of the moves towards EMU. As the next global business cycle will encompass almost all mankind for the first time since 1914 it also is reasonable to argue that commodity prices are more likely to surprise on the upside than the downside."
Interesting to get the views of a New World Order
enthusiast. His main message is that the "New SA" has
to survive and compete in an increasingly open and competitive
world market. There are some signs, as yet muted, that some of
our politicians are beginning to understand this fact. Also some
of our business people and even, albeit a few, of our media people
as well. Unfortunately, he does not take into account the Mandela
government's increasing shift to a one-party state and command
economy. He also ignores the impact on the economy of the growing
loss of skills and expertise, plus that of AIDS, TB and the other
great plagues over the next five to ten years. Still, his message
on the whole is optimistic. We could do with that these days.