Watch out for more bad news on the economy

The last few weeks have seen a plethora of bad news relating to South Africa’s economy. The rand has been extremely volatile, gross domestic product (GDP) has dropped in the second quarter, and the JSE has been on a rollercoaster ride.

Things have, indeed, been falling apart.

In the face of this, the ruling class - big business and those that head the state - have been rallying to try to shield themselves from the fallout. The managers and large shareholders of mining and steel companies have announced that hundreds of thousands of jobs will be cut (not of course their own), adding to South Africa’s horrendous unemployment problem. The state too has weighed in. Without any sign of embarrassment, President Jacob Zuma has called on workers to be willing, in the context of the slowing economy and the recent turmoil, to ‘tighten their belts’ and to accept compromises in their wages.

These recent dramatic convulsions in the South African economy, and an accompanying attack on the working class (workers and the unemployed), are not however something new; they are built into the way capitalism stumbles along.

In fact, capitalism has been experiencing major problems since the 1970s. For four decades now productive sectors, such as manufacturing, have been experiencing lower and lower rates of profitability, and lower and lower levels of investment in real terms.

Even in China, which seemed exempt from this trend, manufacturing has been experiencing problems with over-production since 2007, and consequently profit margins have been falling. In fact, in 2007, the Chinese state intervened, spending $4 trillion to try to create demand for goods to prevent industrial collapse. This has now run out of steam and the crisis capitalism has been trying to pull itself out of since the 1970s has returned in full force; now China is at the centre of it and South Africa is caught in the wake.

At least 19 sectors in China have been hit by falling prices since 2013 due to over-production, including steel, clothing, and ship-building. This has led to falling prices n in these sectors and thousands of companies have gone bankrupt. The result has been falling commodity prices globally as demand from China – which accounted for 40% of growth globally since 2007 – has declined.

China is South Africa’s main export market, so it is not surprising that with Chinese demand falling, the local economy shrank 1.3% in the second quarter of 2015. It is also not surprising that Chinese companies are dumping steel in countries such as South Africa – thereby threatening local production – as due to overproduction Chinese companies are desperately looking to offload steel even if that means selling it at below cost elsewhere.

It is clear that problems that emerged in the productive sectors of the economy globally in the 1970s have not been overcome. There are tough times ahead.

The recent instability on the JSE and in the exchange rate of the rand are also symptoms of the way ruling classes around the world have tried to deal with the crisis that first surfaced in the 1970s and has now engulfed China too.

States have been intervening in very specific ways to try to create outlets for capital beyond manufacturing. One way states, including in South Africa, have done this has been through financial liberalisation.

States have assisted capital to create new areas of ‘investment’, such as floating currencies and encouraging the emergence of all sorts of financial ‘instruments’. Added to this, to boost stock markets, states - including in South Africa – have even made it legal for companies to buy back their own shares to push up prices.

In the 1980s and 1990s, some states, the Chinese state for instance, also established stock markets for the first time, encouraged the growth of private sectors and embarked on some privatisation, thus creating new outlets – even if unstable – for capitalists globally. In other words, many speculative bubbles have been created, with the help of states, since the 1970s.

South Africa has not been immune. The rand, for example, has become one of the most traded currencies in the world. On any given day, trade volumes (mostly speculation) on the rand have reached $ 60 billion – amounting to almost 20% of the country’s entire GDP.

Likewise, the JSE, South Africa’s bond markets and the real estate sectors have become sites for massive speculation. The South African state itself has come to rely on this speculation, and the inflows of “hot” money into the country, to cover its deficits, including its current account deficit. If this hot flow of speculative money into South Africa ceased, the country would be in very serious trouble – which is why the state and Reserve Bank work together to keep interest rates at high levels.

This massive growth in speculation has led to instability. Since financial liberalisation began in the 1970s, there have been over 100 different ‘financial crises’ in various parts of the world, as speculative bubbles have burst. The recent plunge of the Chinese stock markets, by 40% since June, is the latest in a long line.

Capitalism in crisis has become deeply unstable. But states have been used by the ruling classes to bail themselves out every time they have been hit by such instability. For example, since 2007, the US state has spent as much as $ 29 trillion bailing out financial corporations. The Chinese state also recently spent $ 230 billion trying to stabilise stock markets. And, if things get worse for the rand, the bond markets, the JSE, or the financial sector in South Africa, we can expect the local state too to step-in. It was no accident that African Bank was bailed out in 2014.

Of course, another way the ruling classes have tried to shield themselves from the fallout since the 1970s has been through attacks on the working class. Wages have been driven down and productivity up, there have been mass retrenchments and cuts in the social services won by the working class through past struggles). Every time a speculative bubble has burst since the 1970s, and the underlying capitalist crisis has returned in full force, the working class has been attacked. The recent threats of retrenchments in South Africa, and President Zuma’s call on the working class to be willing to make further sacrifices, are not new but simply true to form.

Since the 1970s, wages in many countries including South Africa have stagnated or dropped, if inflation is taken into account. In the US, for instance, wages as a share of GDP are at their lowest levels since the Great Depression; in China, wages are at their lowest levels in 40 years. Likewise, according to a study by Arden Finn of the University of Cape Town, 60% of black workers and 22% of white workers in South Africa now earn so little that their wages are not enough to pull them out of abject poverty.

The working class can ill afford the latest round of attacks. The newest attempts to make the working class in South Africa pay for the inherent instability of modern capitalism, propped up by states and driven almost solely by speculation, must be resisted tooth and nail. With things falling apart yet again it is time that the ruling class pays, for a change.

The author is the research and education officer for the International Labour Research Information Group. Views expressed are not necessarily GroundUp’s.