huge increases in household debt and the increased investment and employment in the retail and wholesale services sector were due to the increased credit extension made possible by increased hot money flows into the economy.
One of the consequences of the process of global financialisation was that events in financial markets shaped developments in the real sector. The debt-driven, consumption-led economic growth in South Africa was driven by increased inflows of short-term capital. At the same time, the South African financial sector was emulating the behaviour of its US counterpart (which boosted leverage and loosened lending conditions) and increasingly securitising debt and extending more debt for mortgages, car finance and consumption. There was very rapid growth in derivatives markets. The large South African corporations had also become increasingly financialised and seemed to follow the global trend whereby increasing product market competition caused many corporations to earn a larger share of their revenues and profits from financial activities and speculating in financial assets. The South African Reserve Bank’s flow of funds data shows that the South African corporate sector was speculating in financial markets more than it was investing in fixed investment (see figure 11 below).
The broader context for these economic events in South Africa are the industrial structural weaknesses of the economy and massive changes in corporate structure that have occurred in the economy since the end of apartheid. The industrial structural weaknesses stemmed from the development of the economy around mining and minerals or the minerals and energy complex (MEC), as argued by Fine and Rustomjee 1996). Much of the change in corporate structure occurred because of the responses of big businesses to democracy. The global context of increasing financialisation of nonfinancial corporations led to a massive global corporate restructuring and increased concentration of the global economy, and this process influenced the change in South African corporate structure. The global process of concentration entrenched and deepened the existing global division of labour between the rich countries of the North and the developing countries of the South. In general, rich countries controlled global economic value chains and the design, engineering, branding and distribution of products while the developing countries were, in the main, involved in either assembly manufacturing or providing low cost agricultural or minerals inputs into the global value chains. The corporate restructuring in South Africa began a reversal of previous industrialisation, leaving the economy more concentrated and more dependent on the mining and minerals sectors. These developments had a significantly negative impact on workers in South Africa.
The short period of growth at around 5 per cent per annum from 2004 to 2007 blinded many South African economists and economic policy makers to the crisis that was unfolding. The current financial crisis provides an excuse for the poor performance and high job losses in the economy but on the whole, this short period of high growth from 2004 to 2007 left the economy poorer. The decisions to adopt neoliberal economic policies, particularly macroeconomic and financial policies, have had a hugely negative impact on South Africa by allowing short-term financial flows to create macroeconomic instability that destroys industry and jobs. They have directed the misallocation capital towards speculation and bubbles in financial and real estate markets, and away from long-term job-creating productive investment. The relatively little fixed investment that has occurred is largely in services sectors linked to increased speculation in financial and real estate markets and the growth in debt-driven consumption.
INDUSTRIAL STRUCTURAL WEAKNESSES AND CORPORATE RESTRUCTURING
South African economic development occurred around the mining and minerals sectors, and the state and mining industry supported growth of manufacturing sectors with strong links to the MEC, the formation of which, according to Fine and Rustomjee (1996), was a result of the political compromise between large English mining interests and the large Afrikaner business and political establishment. It was also shaped by the politics of oppression of black South Africans and the strict control over black workers.
Most manufacturing sectors with weaker connections to the MEC have remained weak and have not received strong state support and adequate investment from the large mining finance houses that had dominated the South African economy until the 1980s. With the exception of a few sectors, such as automobiles and components, manufacturing remains dominated by sectors with strong links to the MEC. These, with the exception of engineering and capital equipment, are capital- and energy-intensive process industries, such as electricity generation, minerals beneficiation (iron and steel, aluminum) and the Sasol oil from coal process and its chemicals byproducts. Downstream, value-added manufacturing sectors have not been adequately developed and manufacturing remains relatively undiversified. The structure of the economy underwent further change with the transition to democracy in South Africa and was shaped by changes in the global economy.
Many leaders of big business were uncomfortable with the democratic transition in South Africa,5 as the change in government was accompanied by massive restructuring of the South African corporate sector. I argue here that the transition to democracy is one reason for the corporate restructuring, the shape of which was influenced by important changes in the global economy. The 1990s saw the rise to prominence of institutional investors and the shareholder value movement.6 The growth to prominence of institutional investors and the shareholder value movement was part of the process of financialisation that had started in the 1970s. Crotty (2002) says that the rise of institutional investors in the US led to a situation where on average US stocks are held for just one year and, in addition, an increasing share of industrial company revenues is from financial nonproductive assets. The second change was the surge in merger and acquisition activity during the 1990s. There are a number of reasons for this global restructuring that concentrated global businesses and caused them to focus on core businesses. The prominence of institutional investors and the shareholder value movement was central to this restructuring because institutional investors demanded simpler structures. Much of the funds for the new global giants were sourced from institutional investors, who invested mostly in big companies that have familiar brands, large market share, high R&D (research and development) spending and focus on their core activities. Both these changes to the global economy had profound impacts on the structure of the South African corporate sector.
Since 1994 the South African corporate sector has engaged in the following activities:
conglomerate unbundling and restructuring;
consolidation within sectors by conglomerates as part of ensuring stronger focus and better strategic direction, which has also increased concentration;
internationalisation, mostly outward, by firms which moved their primary listing overseas, and foreign acquisitions by South African listed firms; and
black economic empowerment deals, first, through special purpose vehicles for financing and second, more recently, in areas where government policy has provided a specific impetus.
Figure 4: South African mergers and acquisitions (M&A) (Rbn, current prices)
Source: Ernst and Young M&A, 2010
Nolan (2003) points out that total global merger activity grew from over US$150 billion in 1992 to over US$2000 billion in 1998, when eight of the world’s ten largest mergers took place. By 2000 it had peaked at over $3.4 trillion. Large South African companies were caught up in this process of global restructuring, and the offshore listing of major South African corporations from 1997 can be seen within the context of this
