South Africa’s banks derail transformation

OPINION: It is at both the national and household scales where a different society must be built, not so addicted to macro-economic financialisation, or to integration in the corrupt and dangerous global banking system, writes Patrick Bond.

‘Build back better’ is the mantra, but the dilemma is that in what has been the economy’s fastest-growing sector, finance, insurance and real estate, reform of what is a broken system appears impossible, given the prevailing power balance.

To be sure, reformers have risen to fight abuse, but in most cases they worked on small parts of the problem, and ran out of steam.

The first wave of opposition to banking sector power occurred in 1985 when racial apartheid’s laager economy was hit hard by international financial sanctions sparked by global activist solidarity with the African National Congress.

After PW Botha gave his ill-fated Rubicon Speech at Durban City Hall on August 15 that year, the world rose up and insisted that banks cut ties to South Africa. That, in turn, caused a massive financial crisis, default on the SA foreign debt, closure of the stock market and imposition of tough new exchange controls.

But it compelled white English-speaking capital to ditch its de facto alliance with the National Party, and that contributed mightily to apartheid’s fall.

But because financiers held so much power as the Soviet Union and world’s working classes were in retreat, Nelson Mandela felt compelled to support FW de Klerk’s strategy of shifting racial to class apartheid.

In 1993 that meant Mandela agreed to repay $25 billion in “Odious” apartheid debt (that should instead have been reneged upon as illegitimate as many other newly-liberated countries’ leaders have done), to take out an $850 million International Monetary Fund (IMF ) loan and to hard-wire property rights into the interim Constitution – all part of the transition-era’s adoption of neo-liberal policies.

That era began in 1988-89, when the SA Reserve Bank took IMF advice the after-inflation interest rate on mortgage bonds soared from -6% to +7%, the longest formal depression in South African history began (lasting until 1993).

Half a million workers were fired, and those black township homeowners who, from the mid-1980s received the first round of housing finance, found themselves unable to pay.

At least 40% of the first 250,000 housing borrowers soon fell into ‘impaired credit’ status, and many others discovered their houses were built poorly by fly-by-night construction firms.

So community activists in the civic movement began “bond boycotts” to force local and brief national negotiations. But they only succeeded in gaining minor payment delays and “right sizing” displacements to smaller houses.

The Red October campaign of the SA Communist Party was another effort to insist on broader reforms, including a Community Reinvestment Act. Aside from one unused law supporting community-based banking, the broad strategy failed because of lack of political will, both at Treasury led from 1996-2009 by Trevor Manuel, and at the Reserve Bank, led from 1989-99 by Chris Stals (a neo-liberal securocrat) and Tito Mboweni (1999-2009).

As a result, as explained by Rob Davies, the 2009-19 Minister of Trade and Industry: “The economy is characterized by extensive financialisation, but only a small percentage of investment is channeled to the productive sectors.”

Financial consultant Redge Nkosi complains that SA Reserve Bank policies, including “an open capital account, have led to rampant financialization of the economy, currency volatility and deindustrialization at a mass scale and left the economy macro-economically unstable.”

Research by Open University economist Susan Newman confirms, “There is an evident preference by firms for financial investments generating short-term returns.”

The worst reflection of this mismatch between speculative profits and human needs is the Johannesburg Stock Exchange, whose recovery from a low index level of 34,000 in April 2020 to 76,000 in recent days – 124% – is in stark contrast to the real productive economy , which has been in decline over the same period.

That leaves South Africa’s “Warren Buffett Indicator” measure of stock market valuation to GDP at over 400%, which is one of the highest in world history.

The same cancerous role of finance in the economy has been felt locally, and at least there, some prospects for reform were witnessed in the way social workers in the NGO Black Sash tackled Cash Paymaster Services.

The firm went bankrupt in 2020 but during the 2010s wreaked havoc on the poorest South Africans’ pocket books, as their business model – endorsed by the World Bank (a 22% owner) – relied on putting social grant recipients in unaffordable micro-finance debt .

A former Post Office Savings Bank CEO, Mark Barnes, complained about these 21st century mashonisas: “The life cycle of the legacy micro-lending loan books in various stages of decay litter the landscape of indebted South Africa. Right now, it’s the clever money, quite a bit from yield-seeking offshore funds, that is funding the informal sector, often under the guise of helping us. They aren’t – they’re pushing the price up and they’re not here to stay.”

The formal regulators at Treasury and the Reserve Bank were useless, as shown in the looting of the Venda Building Society by politicians and municipal officials. Indeed, the Treasury was strongly criticized in an October 2021 report by the Financial Action Task Force – associated with several global banking regulatory bodies – for being slackers when it came to money laundering and illicit financial flows.

Illustrating the sloth, in 2019 then Finance Minister Mboweni was confronted in parliament with evidence – including successful US prosecutions – that 30 banks were engaged in currency manipulation against the Rand. Even though it sparked a Competition Commission investigation, Mboweni told MPs, he did “not have any evidence that any bank has taken part in currency manipulation.”

Yet Standard Chartered and Citibank had already paid fines of R600 million and R70 million, respectively, for that very crime.

One finance industry reform that didn’t rely on asleep-at-the-wheel regulators occurred in 2016, with a court judgment prohibiting debit orders from being filed on a worker in a geographical jurisdiction far away.

What, then, would be a more transformative economic reform strategy, so as to ensure finance is more appropriately allocated than at present?:

• most importantly, reimpose exchange controls, lower interest rates, audit South Africa’s Odious Debt to root out corrupt lenders (like the World Bank’s Medupi loans that facilitated Hitachi bribery of the ruling party), and control illicit capital flows;

• adopt industrial policy aimed at import substitution, sectoral re-balancing, social needs, eco-sustainability;

• increase state social spending, paid for by higher corporate taxes, cross-subsidisation and more domestic borrowing (and loose-money ‘quantitative easing’, too, if necessary);

• reorient infrastructure to meet unmet basic needs, and expand/maintain/improve energy grid, sanitation, public transport, clinics, schools, recreational facilities, internet, etc;

•promote nouns, state-supported land reform; other

•adopt what are termed the ‘Million Climate Jobs’ campaign so as to generate mass employment for a genuinely green ‘Just Transition.’

It is at both the national and household scales where a different society must be built, not so addicted to macro-economic financialisation, or to integration in the corrupt and dangerous global banking system, or to micro-economic consumption of the luxury goods that set so many ordinary South Africans back so far, as credit’s contradictions came home to roost.

* Professor Patrick Bond teaches at the University of Johannesburg Department of Sociology and writes in his personal capacity.

** The views expressed here are not necessarily those of IOL and Independent Media.

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