Financialization: A solution to South Africa’s Economic crisis?


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Financialization, like neoliberalism and globalization, has become a popular buzzword in the social sciences, trying to describe, in some manner, phenomena linked with the expansion of finance in contemporary capitalism (Ioannou and Wojcik, 2019). A fundamental driver of inclusive and long-term structural transformation is sustained investment in productive capacity and fixed-capital formation. South Africa has a poor track record of sustaining domestic-productive investments, both historically and in comparison, to other middle-income countries. This failure has coexisted with the creation of a stock market with the world's second-highest capitalization over the gross domestic product (GDP) (a record held since 2013, and second only to Hong Kong), as well as high levels of profitability across a variety of economic sectors. This indicates that, regardless of the deepening of financial markets and continually high earnings, there has been increases in capital flight (Andreoni et al., 2021).


Since the democratic dispensation of 1994, the expansion of the South African economy has been heavily reliant on mineral resource exports. Mining activities as the main drivers of economic growth has been extensively reliant on capital from abroad. In recent years, mining and manufacturing have become less important. The mining GDP growth rate fell from 5.3 percent in 2010 to -11.2 percent in 2020 (MCSA, 2022). As evidenced by its sophisticated or advanced financial markets, which include Bond and Stock Markets, South Africa is a highly financialized economy on the African continent. However, as a result of a low and sluggish economic growth rate, low-interest rates, a weak currency, and institutional and structural issues, South Africa began to lose its appeal as a viable investment destination for bonds, equities, and foreign direct investment.


As a result, some international rating agencies have downgraded SA to a lower investment grade, making the country a riskier investment destination. Foreign capital dominates capital formation in South Africa, which should be recognized by policymakers. This capital is put into household loans, private-sector capital, and government-owned businesses. Capital from abroad is returned to various countries and never re-invested during periods of increased economic and financial vulnerability, such as the current situation in South Africa. As a result, the government has fewer options for funding its budget deficit. The budget deficit has been growing over time, with public debt covering the shortfall. The country is nearly reaching an acceptable threshold point of 77 percent public debt to GDP ratio by 68.83 percent in 2021 (World Bank, 2010). The debt to GDP ratio is expected to rise to an estimated 82.99 percent in 2026. However, many economically stable countries recommend a maximum tolerable debt level of 60 percent. This implies that South Africa's ability to borrow money from financial markets is declining.


After 1994, financial markets provided low-cost borrowing for at least 20 years. Direct loans from multilateral banks such as the World Bank and others are now the alternative way for the government to finance its deficit. Because of the high-interest rates and currency risks, this finance comes at a significant price. If the economy does not generate a high level of GDP, future generations will be forced to absorb the high costs through higher taxes. In recent years, the financialization of the South African economy has been questioned. Activities such as state capture, escalating corruption, and excessive spending have all contributed to this. As a result, President Cyril Ramaphosa made fighting corruption one of his top priorities when he assumed office. Another important presidential goal is to attract foreign investment, but with a better understanding of the long-term consequences of foreign capital formation.


It is therefore important to note that financialization is beneficial, but only if capital formation occurs within the country; financialization that occurs outside the country is not beneficial. If capital formation comes from within the country, it can help South Africa in the long run.


Domestic capital formation should be robust in South Africa, as it represents a percentage of savings and investment that will be re-invested in the economy. Then SA will be on the correct path for long-term economic growth, which will boost domestic demand while also increasing productivity and competitiveness. As a result, the country must boost internal investment, make local production more competitive, and enhance exports. The willingness of domestic leadership, both public and private, may make this achievable. The SA leadership must seize control of the economy and be a government of the people, by the people, and for the people.




References

1. Ioannou, S. and Wójcik, D., 2019. On financialization and its future. Environment and Planning A: economy and Space, 51(1), pp.263-271.

2. Bell, J., Goga, S., Mondliwa, P. and Roberts, S., 2018. Structural transformation in South Africa: Moving towards a smart, open economy for all.

3. Mineral Council South Africa, 2020.file:///C:/Users/a5hlp8/Desktop/minerals-council-facts-and-figures-2020-booklet.pdf

4. World Bank, 2010. https://documents1.worldbank.org/curated/en/509771468337915456/pdf/WPS5391.pdf





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