Finance, Financialisation Finance, Financialisation and the Crisisand the Crisis

Sam AshmanSam Ashman[presented @ ATN12, Accra, August’09][presented @ ATN12, Accra, August’09]

Corporate Strategy and Industrial Corporate Strategy and Industrial Development Research ProgrammeDevelopment Research Programme

University of the WitwatersrandUniversity of the Witwatersrand

Overview of PresentationOverview of Presentation

Crisis: re-cap on some of the themes Crisis: re-cap on some of the themes covered yesterday covered yesterday

Financialisation and the relationship Financialisation and the relationship between neoliberalism and financialisationbetween neoliberalism and financialisation

Experience of South AfricaExperience of South Africa Financialisation needs to be set in context Financialisation needs to be set in context

of a particular structure of productionof a particular structure of production Financialisation in SA helped to produce Financialisation in SA helped to produce

jobless growth and widening inequalityjobless growth and widening inequality Conclusions and alternativesConclusions and alternatives

Deep Structural CrisisDeep Structural Crisis

Triggered in the financial sectorTriggered in the financial sector Sub-prime crisisSub-prime crisis→→fear of toxic debtfear of toxic debt→ →

credit crunchcredit crunch→→slashing of output, slashing of output, redundancies, collapse in demandredundancies, collapse in demand

Spread to real economy, deepest crisis Spread to real economy, deepest crisis since the 1930ssince the 1930s

Bailouts, discussion of return to New DealBailouts, discussion of return to New Deal Ideological crisis in developed economiesIdeological crisis in developed economies Debate over the role of the StateDebate over the role of the State

Financialisation and Neo-liberalism Financialisation and Neo-liberalism

Volatility of short term financial flows Volatility of short term financial flows increase vulnerability to crisisincrease vulnerability to crisis

Part of bigger picture of de-regulation as Part of bigger picture of de-regulation as neoliberalism seeks to increase neoliberalism seeks to increase profitability, attack labourprofitability, attack labour

Entails capital restructuring nationally and Entails capital restructuring nationally and internationallyinternationally

Developed States act as agents not Developed States act as agents not victims of corporate globalisationvictims of corporate globalisation

Inflation targeting; freedom for finance Inflation targeting; freedom for finance

Financialisation and Neo-liberalismFinancialisation and Neo-liberalism

Autonomy of financeAutonomy of finance Proliferation of financial actors and marketsProliferation of financial actors and markets Penetration of finance into greater areas of Penetration of finance into greater areas of

economic and social reproduction – health, economic and social reproduction – health, education, energy, telecommunications, education, energy, telecommunications, transport, pensions, housingtransport, pensions, housing

Corporations funding investment from retained Corporations funding investment from retained earnings and private markets, less dependent on earnings and private markets, less dependent on banksbanks

Banks seek alternative sources of profitsBanks seek alternative sources of profits Qualification: companies act as financial actors in Qualification: companies act as financial actors in

their own righttheir own right

South African contextSouth African context

Effect of financialisation needs to be set in Effect of financialisation needs to be set in the context of particular structure of the context of particular structure of productionproduction

‘‘Minerals Energy Complex’ (Fine and Minerals Energy Complex’ (Fine and Rustomjee 1996)Rustomjee 1996)

Dominance of mining and cluster of Dominance of mining and cluster of industries around itindustries around it

Developed financial sectorDeveloped financial sector Lack of diversification into other sectorsLack of diversification into other sectors High dependence on mineral exportsHigh dependence on mineral exports

Effect of financialisation Effect of financialisation - outflows- outflows

Post 1994 orthodox programme of ‘liberalisation Post 1994 orthodox programme of ‘liberalisation from within’from within’

Progressive reduction of financial and trade Progressive reduction of financial and trade regulationregulation

Managed programme of capital flight – in return Managed programme of capital flight – in return for concessions on BEE?for concessions on BEE?

Rose from 5.4% of GDP 1980-1993 to 9.2% of Rose from 5.4% of GDP 1980-1993 to 9.2% of GDP 1994 to 2000GDP 1994 to 2000

Major companies re-listed on London stock Major companies re-listed on London stock exchangeexchange

Loss of political-economic power post apartheidLoss of political-economic power post apartheid Opportunities to be gained internationally Opportunities to be gained internationally

Effect of financialisation Effect of financialisation -inflows-inflows

Increase in short term inflowsIncrease in short term inflows Growth of speculation and consumer debtGrowth of speculation and consumer debt Similarities with the US model of debt Similarities with the US model of debt

driven consumptiondriven consumption Second Houses – property bubbleSecond Houses – property bubble 22ndnd/3/3rdrd cars – imported, boosts GDP growth cars – imported, boosts GDP growth Growth in Credit Card DebtGrowth in Credit Card Debt Jobless growthJobless growth Growth in financial services – security Growth in financial services – security

guardsguards

The 10 sectors receiving most The 10 sectors receiving most investment in 2008investment in 2008

Source: SASSID 2009Source: SASSID 2009

General government services

20%

Business services14%

Finance and insurance

13%

Communication10%

Transport and storage

10%

Wholesale and retail trade10%

Electricity, gas and steam

9%

Other mining 8%

Agriculture, forestry and fishing

3%

Coal mining3%

2008 Top 10 Sectors by Investment (as a % of the total investment)

Change in capital stock across Change in capital stock across economic sectors 2000-2008economic sectors 2000-2008

Source: SASSID 2009Source: SASSID 2009Change in capital stock from 2000 to 2008 for all economics sectors

-40000

-20000

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20000

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Credit Extension and Investment as Credit Extension and Investment as Percentages of GDP 1990-2008Percentages of GDP 1990-2008

Source: SARB 2008Source: SARB 2008Credit extension and investment as percentages of GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

per

cen

tag

e o

f G

DP

Total fixed capital formationPrivate business enterprises: Fixed capital formationTotal domestic credit extensionTotal credit extended to domestic private sector

Private Sector Credit Extension by Private Sector Credit Extension by all Monetary Institutions 1990-2008all Monetary Institutions 1990-2008

Investments

Bills discounted

Installment-sale credit

Leasing finance

Mortgage advances

Other loans and advances

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

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20

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20

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Private Sector Credit Extension by all Monetary Institutions

Other loans and advances

Mortgage advances

Leasing finance

Installment-sale credit

Bills discounted

Investments

Main sources and uses of capital in Main sources and uses of capital in business enterprises 1992-2007business enterprises 1992-2007

Source: SARB 2008Source: SARB 2008

-50000

0

50000

100000

150000

200000

250000

300000

350000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources and uses of capital in coporate business enterprises

Net savings

Gross capital formation

Net acquisition of financial assets

Net capital formation (gross capital formation - deprecaiation)

Effect of the CrisisEffect of the Crisis

Job losses and short time in mining and Job losses and short time in mining and mineral products as consequence of falling mineral products as consequence of falling global demandglobal demand

Manufacturing output fallen by 25% in the Manufacturing output fallen by 25% in the last yearlast year

Tighter global and domestic credit marketsTighter global and domestic credit markets SA banks reduced debt post sub-prime SA banks reduced debt post sub-prime

crashcrash 6,000 car repossessions a month, house 6,000 car repossessions a month, house

foreclosures and business bankruptciesforeclosures and business bankruptcies

Conclusions - AlternativesConclusions - Alternatives Renew debate about state intervention Renew debate about state intervention

and state’s role in developmentand state’s role in development Capital controls – reduce capital flight; Capital controls – reduce capital flight;

affect structure of bank liabilities and affect structure of bank liabilities and therefore lendingtherefore lending

Stronger role for state directed Stronger role for state directed development finance and Development development finance and Development Finance InstitutionsFinance Institutions

Co-ordination of policy - Industrial Policy, Co-ordination of policy - Industrial Policy, Trade PolicyTrade Policy

Finance for investment in what is socially Finance for investment in what is socially usefuluseful