Despite its depth, sophistication and size, South Africa's financial sector is “non-developmental” in its outcomes and “crowds out” investment into manufacturing, agriculture and mining, a new piece of academic research argues. It adds that urgent policy interventions are needed to ensure that money aggregated by the sector is channelled back into these job-generating productive sectors.
In a paper, entitled 'Finance, Financialisation and Accumulation', Dr Samantha Ashman and Dr Susan Newman argue that there has been rapid and disproportionate growth in South Africa’s financial sector, which currently represents about 20% of gross domestic product (GDP).
Their empirical analysis, which is based primarily on South African Reserve Bank data, asserts that “financialisation of nonfinancial corporations” has directly reduced the amount of funds available for “real investment”. In other words, instead of investing in new plant, equipment and people, companies have invested in high-return intangible assets, such as fixed-interest securities, shares, bank deposits and bonds.
“Fixed capital investments remain low and, while they are higher than during the period from 1985 to 1993, they are lower than levels of capital investment in the period from 1970 and 1974,” the authors argue.
Presenting their findings at a gathering organised by the Department of Trade and Industry (DTI), the authors urged government to consider a “joined up” approach to monetary, fiscal and industrial policy formulation and implementation that supported and encouraged investment into fixed capital rather than financial assets.
The material increase in investments into financial assets by nonfinancial corporations has served to entrench South Africa's structural unemployment problem and has been reinforced by policies aimed at liberalising the country’s trade and capital accounts and allowing South African companies to pursue off-shore listings.
South Africa has also sustained relatively high interest rates by international standards, which together with external factors, has also served to strengthen the rand, which had undermined the competitiveness of the productive sectors.
In its latest Staff Report for the 2012 Article IV consultation with South Africa, the International Monetary Fund (IMF) noted that the degree of rand overvaluation had moderated in 2012, with the unit having depreciated 7% in real effective terms by April. Nevertheless the IMF estimated that the rand was overvalued in real effective terms by between 5% and 15% in March 2012.
The DTI’s Nimrod Zalk says the paper indicates that there is a need to “go back to basics” with regards to the role that the financial sector plays in the economy. He argues that its role should be to aggregate savings and allocate these efficiently to productive investments.
Government is keen to see fixed investment levels increased well beyond the historical levels of around 15%, to above 25% – a level seen as critical to spurring higher, labour-absorbing growth rates.
Meanwhile, the newly released National Development Plan 2030 views infrastructure developments as key to lifting investment in agriculture, manufacturing and mining, but warns that lifting fixed investment to 30% of GDP will be a gradual process. It adds, though, that it will be critical for public infrastructure to be sustained at 10% of GDP and for this to be financed through tariffs, public-private partnerships, taxes and loans.