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ECONOMY: Global Crisis Should Spell End of Laissez-Faire Doctrine

Miriam Mannak

CAPE TOWN, Oct 31 2008 (IPS) - The real question to ask about the global financial crisis is whether ‘‘it will go deep enough for the big economies to realise that the market should be controlled more. The philosophy of laissez-faire simply does not work’’.

Jorge Maia: "Global crisis will affect African commodity exporters" Credit:  Miriam Mannak/IPS

Jorge Maia: "Global crisis will affect African commodity exporters" Credit: Miriam Mannak/IPS

This is the viewpoint of Sampie Terreblanche, emeritus professor of Economics at South Africa’s University of Stellenbosch, speaking at a public debate on the crisis in Cape Town. The debate was organised by the Centre for Conflict Resolution, an organisation promoting conflict resolution in Africa through training and research.

Terreblanche, who is the author of ‘‘A History of Inequality in South Africa 1652-2002’’, regards the crisis as ‘‘very serious. There is no doubt that it will persist for the next couple of years.

‘‘As a result of laissez-faire, the inequality within countries and between the rich north and poor south has increased,’’ Terreblanche added. ‘‘The economy needs to be guided and not be left to its own devices.’’

According to the doctrine of laissez-faire, meaning ‘‘to leave alone’’ in French, an economy functions most ‘‘efficiently’’ without any interference of the government.

While there are concerns with regards to financial stability and inflation, it seems so far that African countries will weather the financial crisis better than others.

Africa is expecting an average growth rate of six percent in 2009. However, the turmoil will affect those countries that depend on the export of commodities and natural resources.

‘‘For the past years and up until recently, oil-producing countries like Nigeria and Angola have thrived due to the escalating oil prices,’’ Jorge Maia of the Industrial Development Cooperation (IDC) said at the debate on Oct 30.

This was ‘‘until recently’’ because of the significant drop in crude oil prices as a result of the global financial turmoil. The IDC is a South African state-owned development institution that finances businesses and aims to contribute to sustainable economic growth and economic empowerment.

Crude oil prices have plunged by 60 percent in the third quarter of 2008, from 147 dollars a barrel in July to around 60 dollars three months later.

‘‘Countries that rely on oil exports, such as Nigeria and Angola, are noticing the effects of this as this development means less income,’’ Maia continued.

With a production of 1.9 million barrels per day, Angola recently replaced Nigeria as Africa’s largest oil producer. Since 2006, Nigeria saw a 25 percent decline from a daily oil production of 2.5 million barrels. This weakening is, among other factors, a result of attacks from militants in the Niger Delta.

Maia told IPS that South Africa, the strongest economy on the African continent, depends heavily on the export of commodities and is therefore also taking strain as a result of the financial turmoil.

The main economic sector affected is the mining industry, which contributes six percent of South Africa’s annual gross domestic product (GDP). The most important export commodities are iron ore, coal, platinum and gold.

‘‘These four products make up 75 percent of South Africa’s mining export basket and the value of all but the first has gone down – platinum in particular,’’ said Maia.

Recent mining figures show that the platinum price dropped with 21 percent in the month of October 2008. Since March 2008, when platinum reached its record price of 2 308.80 dollars an ounce, the value of this precious metal has declined with 65 percent.

This poses a problem for South Africa which harbours 80 percent of global platinum reserves.

Maia emphasised that the financial crisis is not the sole cause behind the slowdown in South Africa’s mining industry. Mining companies had to cut their production as, during the first half of 2008, South Africa was hit by an electricity crisis. The country’s electricity producer ESKOM was no longer able to meet the national demand for power.

Apart from South Africa’s mining industry, the construction sector, manufacturing, and retail industry are also under pressure as a result of the global credit crisis. The currency has been hit as well.

‘‘The South African rand is very vulnerable at the moment. Besides the Icelandic kroner, it is the currency that has depreciated the sharpest since the credit crisis hit the world,’’ Maia pointed out.

All of this, combined with an increasing pessimism about the economy, may result in a deceleration of South Africa’s economic growth. An overall growth of 3.4 percent is expected for 2008, which earlier this year was anticipated to be around 5 percent.

In 2009, the growth for South Africa will be around 2.5 percent, Maia gauged. The slowdown in Africa’s biggest economy will have an impact on the rest of the continent. ‘‘When South Africa struggles, the rest of Africa struggles,’’ he explained.

Despite the severity of the turmoil, some countries might actually benefit from the declining commodity prices, Maia noted. ‘‘While exporting countries suffer, regions that rely on the import of natural resources such as oil benefit from these developments – simply because products such as oil have become cheaper.’’

Africa is also not doing badly compared to the North America and Europe. According to the International Monetary Fund’s Economic Outlook for 2009, the overall African economy is expected to grow with 6 percent the coming year.

‘‘The U.S. economy, on the other hand, barely comes below the zero percent mark.’’

Africa is faring better as it still benefits from investments from China. According to the World Bank, the amount of Chinese direct investment in Africa amounted to 1.18 billion dollars by mid-2006.

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