SAFTU statement on President Cyril Ramaphosa’s second Investment Conference

The South African Federation of Trade Unions (SAFTU) deems the second Investment Council as a pure jamboree designed to pull wool over the eyes of South Africans and international visitors. It is a façade that seeks to deliberate obfuscate the facts. Once again it raises false hopes that steps are being taken to address the very low investment levels by both the private sector and the public sector in the economy.

Currently investment levels of the investment is around 18% of GDP: way too low to drive growth and economic activity. During the 1970s, in contrast, the rate was 26-32% of GDP.

South African gross capital formation as a share of GDP, 1969-2018

Source: World Bank, https://data.worldbank.org/indicator/NE.GDI.TOTL.ZS?locations=ZA

If local capitalists don’t invest, why would international corporations? Ramaphosa brags that he made a great start attracting Foreign Direct Investment (FDI) last year. But look more closely at the UN Conference on Trade and Development’s World Investment Report 2019 explanation:

FDI flows to South Africamore than doubled to $5.3 billion in 2018, contributing to progress in the Government’s campaign to attract $100 billion of FDI by 2023. The surge in inflows was largely due to intracompany loans…

But the problem here is simple: because of South Africa’s very high interest rates – even higher now than Venezuela’s – it is profitable for multinational corporations to just make credit available to local branch plant borrowers who don’t even need to use it. They simply repay the head office, and shift profits out of the country in an artificial way, a kind of Illicit Financial Flow that is actually ‘licit’ and even celebrated by an uncritical government and journalists.

The problem with UNCTAD’s analysis of South Africa – “(t)he surge in inflows was largely due to intracompany loans” – is that today, we are on the verge of a foreign debt crisis because of a sustained current account deficit (due to the profit, dividend and interest outflows from SA, in spite of a trade surplus). Our foreign debt rose from $25 billion in 1994 to $180 billion today, about 50% of GDP. We don’t need more fake FDI in this form.

South Africa’s total foreign debt (millions of US$)

In fact, even the IMF has just discovered that around 40% of new ‘FDI’ is actually ‘phantom.’

SAFTU calls on the both government and private sector to do the right thing and act decisively before the South African economy reaches the point of no return. The following should be the basis of a new investment drive:

1. Austerity measures (cutting of expenditure) will not help our economy to grow. You cannot cut public expenditure and reduce levels of investment and then hope that will lead to growth. South Africa needs a real stimulus package of R500 billion to kick start the economy. The American government needed a $750 billion fiscal stimulus to respond to the 2008-09 crisis. South Africa is doing the opposite, yet facing our worst-ever poverty, unemployment and inequality. Government’s own investment is dropping fast, due to Treasury’s extreme cuts in provincial and municipal budgets last week. This must be reversed if there is going to be any hope for this economy.
2. Government must stop leakages and massive fraud linked to its procurement budget. Treasury officials estimate that between 30-40% of government’s procurement budget is lost to tender fraud and outsourcing. That is a staggering R300 billion that could be spent strategically and make a massive difference.

• Government must study and implement recommendations of the research that was funded by the Department of Trade and Industry and conducted by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development. Economists there established that there has been increased corporate concentration that has led to anticompetitive behaviour. More importantly they found that the cash reserves in the JSE’s largest 50 companies had increased from R242bn to R1.4-trillion between 2005 and 2016. Government must aggressively tax all companies that are hoarding this investable cash.
• Design policy that would incentivise firms to invest domestically.

1. Government must take practical steps to implement Judge Dennis Davis’ recommendations. Capacity must be built within the Receiver of Revenue to put an end to tax dodging schemes, mispricing and illicit cash outflows that see the economy losing R150 billion to R370 billion annually. Requiring firms to leave these profits inside South Africa, through tighter exchange controls, would immediately improve the disastrous 18% investment level in the economy.
2. Macroeconomic policies pursued since the unilateral introduction of GEAR are wrong. No country ever developed by adopting an inflation target as low as the 3 to 6% range (as mandated within the European Union), by removing exchange controls, and by allowing billions to leave through tax dodging schemes including mis- invoicing., transfer pricing and illicit cash outflows. No economy dropped corporate taxes by half – from 56% in 1994 to 28% today – at the time when it needed resources to develop.
3. SAFTU calls on the government to change a monetary policy that has choked the economy. This will include scrapping of the inflation targeting policy of 3-6% and reduce interest rates decisively – we call for a 3% fall – while implementing the ANC’s most recent national conference resolutions to nationalise the Reserve Bank and change its mandate so that it focuses on growth, jobs, poverty and fighting inequalities. This will lead to cheaper borrowing, and bolster the household and SMMEs expenditure. Which country allows a situation where the monied can just put their money in the financial markets and earn a profit of between 3-4% in real terms?
4. SAFTU insists on reversal of corporate tax cuts, setting them back to where they in 1994 which is 56%. This will release resources we so desperate need to rebuild our industrial base.
5. Government still pursues the objective of keeping the debt/GDP at low levels. Yet the debt to GDP ratio is inappropriate as a measure of our ability to solve problems with state programmes. South African debt is not out of control, and no country facing this magnitude of underdevelopment ever embarked on a programme to keep debt to GDP ratio at the current levels. In order to achieve this objective of meeting artificially-low debt/GDP levels, the government is reducing expenditure by R21 billion in 2020/21 and 28,5 billion in 2021/22 mostly falling on goods and services. But if instead, Treasury considered a full accounting of the public sector ‘balance sheet’ to include our state’s mineral wealth, then as the International Monetary Fund admitted in last year’s Fiscal Review, South Africa is the 6^th most wealthy major state in the world. It should be our wealth, not our income, that helps Treasury expand expenditure, and those who promote fear of a credit ratings downgrade should take a deep breath and contemplate South Africa’s wealth.

SAFTU remains locked out of NEDLAC as the parties who form part of the sweetheart arrangement are hell bent on excluding critical voices of society who they perceive to be too independent, too militant and radical.