Whose economy is it anyway?

Extreme levels of market and wealth concentration exist in the economy. Powerful corporations shape the economy and domestic and global financial corporations have a powerful influence, to the point of ordaining whether governments have credible economic policies.

Respected economist and deputy director for economics at the South African parliamentary budget office, Professor Seeraj Mohamed had the foregoing thoughts in mind as he presented his Summer School lecture, “The challenge of economic development during the financialised phase of capitalism” on Tuesday, 21 January at the University of Cape Town (UCT).

His focus, as he explained it, would be on financialisation and the challenge that it has caused for economic development, particularly seeing financialisation as underpinning neoliberal policies.

After a detailed history on the concept of neoliberalism and the phases it has gone through since the 1980s, Professor Mohamed brought the conversation to where it currently finds itself since the global financial crisis of 2008. “The current phase has been marked by increasingly overt collaboration between the state, private capital and finance to forego policies to renew and sustain accumulation, preceding but especially in response to the global financial crisis.”

“The South African economy has also become financialised. Not only the non-financial corporations but we’re seeing a larger role for finance in all aspects of our lives including us as individuals.”

“For example, it has given rise to what is termed the new, or revival of industrial policy, and it is reflected in the increasing role of private capital in social provision through access to state funding, as with public private partnerships,” he told the audience.

To articulate neoliberalism and financialisation, Mohamed drew from a chapter in a book he’s edited, titled The Evolving Structure of South Africa’s Economy where he marries neoliberalism as the financialised phase of capitalism and defined it as “The transformation of the role of the state in the provision of welfare, social security, industrial development, the (de)regulation of trade, labour and finance and the reorientation of both domestic macroeconomic policies and global financial architectures.”

In explaining financialisation, he leaned on a definition from Gerald Epstein: “Financialisation means increasing the role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.”

Herfindahl–Hirschman index

Bringing it home, Mohamed said, “The South African economy has also become financialised. Not only the non-financial corporations but we’re seeing a larger role for finance in all aspects of our lives including us as individuals. The South African economy we had at the end of apartheid was one based on mining and energy and exports of raw materials. What we also had in the 1980s is the growth of the financial sector and an increasing influence of institution investors and through their market power, they were able to promote the larger corporations. All these lead to an incredibly concentrated economy,” said Mohamed.

A 2018 South African Competition Commission working paper on concentration of economic sectors and based on the Herfindahl–Hirschman index model which generates a sector average based on several indicators, notes a value above 2 500 to be highly concentrated. The commission’s working paper, based on 10 sectors including financial services, transport and energy, revealed that at the time all sectors were above 2 500.

“Word from the Competition Commission is that it’s basically subsidiaries of groups that dominated the economy during apartheid. So, there’s been unbundling and restructuring of large corporations and now what we’re seeing those companies, and their subsidiaries still very much are involved in the concentrated economy.”

What happens in such a concentrated economy, which translates to a concentration of wealth? The answer, according to Mohamed is, “The decisions the leadership and management of these corporations make become increasingly financialised and operate in a world where the flow of capital is much easier and therefore, they are able to remove and extract their wealth from South Africa and take it anywhere else to get larger profits”.

Limited interest

“The pressure with financialisation is that the corporations do not make long-term commitments in terms of investments. Thinking therefore becomes short-term, and South Africa has been affected by that. And while corruption, state capture, a poor education system are part and parcel of the slow nature of South Africa’s economic growth, we should also look at the role of the financial sector, the concentration in the economy, the lack of competition and how corporations have chosen to invest.”

Where do we find ourselves today? Offering concluding remarks, Mohamed added: “Our financial sector has a limited interest in how much they want to reinvest in South Africa”.

“There’s been this process of financialisation, linked to neoliberalism, but there hasn’t been enough investment in infrastructure and education, but [we are] still following neoliberal prescripts of austerity, for instance. With the behaviour of the owners of the large corporations, including the institutional investments we put our money in (pension fund, for example) they’ve all brought us to this being the state and structure of the economy.”