In 1981 I (co-) wrote a book called The Crisis in South Africa, which argued that the confluence of economic decline and political upheaval in SA since the mid-1970s had imposed the need for a change in the form of SA capitalism. But the attempt to transform placed capitalism itself (at least locally) in some jeopardy: its survival depended upon its deracialisation, but deracialising initiatives could possibly lead to anti capitalist revolution.
Of course, the latter conclusion turned out to be far too optimistic, or maybe far too pessimistic (please don't ask me to say which!). SA capitalism not only survived, but has positively flourished in its non racial guise.
Its success underlines, perhaps, capitalism's most significant characteristic, its plasticity - the ability to overcome both threats and dysfunctionality by re-shaping itself repeatedly. During the past 30 years this has been true on a global scale as much as in SA.
Underlying SA's crisis was a global economic crisis from 1974, characterised by stagflation in the Organisation for Economic Co-operation & Development economies from that date. The policy response - initially monetarism to lower inflation, later expansive deregulation - thoroughly re configured the global economic structure, the form of capitalism. Together with the diffusion of new technologies, deregulation enabled globalisation, the vast increase in the size and speed of cross-border flows of finance and capital, as well as of goods, services and labour.
Production and consumption are organised in a substantially different manner than during the 1950s and 1960s. Perhaps the most essential difference is the dominance of "production" itself by "finance" since the early 1980s, reflected in the overriding policy commitment to low inflation and fiscal rectitude, and in the mushrooming of financial instruments and markets on a scale far, far beyond any underlying physical assets and goods. Corporate capital-raising and value chains are routinely cross-border processes today.
The financial crisis of September 2008 signals the disintegration of the global growth model of the past 25 years - the "free-market model" to enthusiasts, "neo liberalism" to critics. Capitalism is in crisis again, facing not imminent collapse but yet another turning point.
Today's crisis is playing itself out in a different way to the previous one, when there was no sudden financial implosion followed by a collapse of demand for goods, but a slow decline of secular growth as productivity increases dissipated, followed by stagflation after the oil price hikes of 1973 and 1979.
As many commentators have pointed out, current events parallel those of the stock market crash in 1929 which precipitated the 1930s Depression. There are two challenges : first, to avoid a deep depression and its accompanying social costs, and second, to reform the institutional framework for economic activity so that a new growth round is possible.
To refresh my memory regarding the first issue, I took Charles Kindleberger's masterly The World in Depression 1929-1939 off my bookshelf. Kindleberger argues that the length, depth and breadth of the Depression was due to the absence of global economic leadership, which crucially required one country to carry a disproportionate share of the cost of stabilisation after the market crash, by absorbing imports to support global output, and maintaining counter cyclical international lending. The lead country must put global stability ahead of national interest in restoring its own growth.
In the 1930s, policy makers knew what was needed technically, but as ever, politics intervened. The UK was willing to resume its role as global leader, but was "too feeble" (Kindleberger's words), while the US had the resources but not (yet) the will. In mid-1933, a World Economic Conference was held in London, attended by leaders of the "G20" of the time (including Jan Smuts and the Soviet foreign minister). Roosevelt did not lead the US delegation (going on a sailing holiday instead!) but two weeks in, cabled his decision to focus on domestic concerns. By refusing to appreciate the dollar or export gold, he effectively scuppered the conference and any chance of international stabilisation. It took 11 years and a major war before global stabilisation rules were agreed at Bretton Woods, with the US accepting the obligations associated with the reserve currency.
Like the UK 75 years ago, the US is today probably willing to take the lead, but there is a question about its capabilities. It is running large fiscal and current account deficits which limit the capacity to absorb further imports. The dollar needs to depreciate to address these imbalances, rather than appreciate to support world growth, and it is hard to see the US financial system sustaining global lending right now.
The "leader-in-waiting" is, of course, China. It seems already willing to lead, indicated by its recently announced US$500bn fiscal injection, and its slow appreciation of the renminbi. Its still huge export surplus will sustain its international financial outflows for some time, but the real questions are whether its financial system can manage global responsibilities, and whether its political system can manage raising domestic consumption in the context of a recession. Right now neither the US nor China looks able to "manufacture consent" for global leadership. As a result, a depression may be avoidable only through the even tougher path of collective cost-sharing.
Any upside to this apparently bleak situation? First, both global negotiation and domestic action are starting early in the piece, and at least on the domestic side, there is a fast-growing consensus that fiscal policy needs to play a central part (thank you, Keynes).
More fundamentally, there is little chance today of global integration unravelling. The 1929 crash triggered an almost immediate rise in protectionism. But the "post-Fordist" growth model of the past two decades has created strong interdependencies. A substantial share of international trade is now in effect intra company. These may well shrink in size but it is hard to see them being entirely unwound and there being a return to onshore production.
In fact, the next growth phase is likely to produce the further diffusion of cross-border production processes. And as fiscal spending and public debt in many countries ratchet up in the next few years, governments will look for finance not only within their borders, but also beyond. So notwithstanding the international contagion manifested in the meltdown, the global capital supermarket probably won't disintegrate into national convenience stores.
Global integration is vital to keep governments talking their way towards solutions, rather than fighting. The economic realities of global linkages are a strong foundation for continued multilateralism. Capitalism's plasticity will come to the fore again and it will grope its way to a new set of institutions for growth. The new institutions are likely to involve a far higher level of international co-operation than previously. They will not emerge instantly, but they will emerge, probably after a large number of international meetings and conferences like the G20 meeting called by President George Bush on November 15 2008.
A shift to more active government spending programmes will fit comfortably with the dominant political agenda evolving in SA. But governments in "significant countries" like ours will also have to be active in increasingly serious and complex international negotiations and debates, in which the prospects for domestic growth and poverty reduction will largely be determined. Here the current political leadership of the ANC will probably be less at ease, and certainly will have less experience.
Here is an idea: prioritise the international dimensions of all components of economic policy - fiscal, exchange rate, financial system, trade & industry and labour - by moving them from their current departments into a "super ministry" of international economic relations. Put an experienced international economic negotiator in charge (there is one in the current cabinet), and give him highly competent staff who understand the issues both technically and politically. Then give him an aeroplane with a soft bed and a good cook, because he will be spending a lot of time in it over the next three or four years.
- Gelb is executive director of The Edge Institute in Johannesburg and visiting professor of economics at Wits University
