A slow dawn of realisation is setting in among sensible elites: that the world economy isn’t going to recover according to any prior experience, that financial markets are rigged to transfer from the 99% to the 1%, and that ecological barriers are emerging fast on the horizon.

Take it from the man nicknamed ‘Dr Doom’ because of his prescient warnings about the financial meltdown of 2008, Nouriel Roubini. In August the Wall Street Journal asked the New York University business professor, ‘What can government and what can businesses do to get the economy going again or is it just sit and wait and gut it out?’
‘Businesses are not doing anything,’ replied Roubini: ‘They claim they’re doing cutbacks because there’s excess capacity and not adding workers because there’s not enough final demand, but there’s a paradox, a Catch-22. If you’re not hiring workers, there’s not enough labour income, enough consumer confidence, enough consumption, not enough final demand.’

According to Roubini, ‘In the last two or three years, we’ve actually had a worsening because we’ve had a massive redistribution of income from labor to capital, from wages to profits, and the inequality of income has increased. And the marginal propensity to spend of a household is greater than the marginal propensity of a firm because they have a greater propensity to save, that is firms compared to households. So the redistribution of income and wealth makes the problem of inadequate aggregate demand even worse.’ Add to this that the supposed prosperity of the middle class was ultimately a fiction based on consumer debt.

South Africa is a case in point, as debt-to-income rates soared over the last five years, and ‘impaired credit’ status rose from 37% of all borrowers in 2007 to nearly half this year (an additional 2.3 million). What with worsening inequality since the end of apartheid, extremely militant labour and community battles against capital and state, and more than a million jobs lost since 2009, the country is frontline in the world-class struggle.

Some of this struggle is displaced, for example into currency markets, where the 2008–10 rand slide from R6 to the US$ to R8/$ marked the sixth such crash since 1994, the most volatile of any major country. Hot money is only kept in the country thanks to the world’s second highest interest rate, trailing only Greece. At the same time came an unprecedented hike in foreign debt: from $80 billion in mid-2010 to $104 billion nine months later.

That debt partly goes to pay outflows of profits and dividends by a few large companies that disinvested just over a decade ago, pushing South Africa’s current account deficit to levels among the world’s highest. As Moeletsi Mbeki explained in September, ‘Big companies taking their capital out of South Africa are a bigger threat to economic freedom than ANC Youth League president Julius Malema.’

In 1995 these firms lobbied hard for the abolition of the Financial Rand (finrand) dual exchange rate and then for permission to relocate financial headquarters from Johannesburg and Cape Town. Mbeki complained that there was never ‘an explanation for why companies like Anglo American and Old Mutual had been allowed to list in London. On what basis did they allow them to go, to move their primary listing from South Africa to London? Why did they approve it? What did they get out of it?’ Add to the list DeBeers, SABMiller, Mondi, Investec, Liberty Life and BHP Billiton (formerly Gencor).

But while some elites – like Mbeki and Roubini – get it, those commanding Pretoria’s Treasury and Washington financial agencies obviously don’t. The September 2011 International Monetary Fund ‘Article IV Consultation’ with Finance Minister Pravin Gordhan was aimed at the gradual imposition of austerity, because ‘Discussions centred on the timing and strength of the required exit from supportive policies,’ which translates into cutting the budget deficit. ‘Staff recommended stronger fiscal consolidation beyond the current fiscal year than currently being considered.’ Orthodox ideology typically blames workers and the IMF was true to form, advocating ‘policies to moderate real wage growth.’

As for capital flight to London, New York and Melbourne, IMF staff are not perturbed: ‘Relatively low public and external debts, mainly denominated in domestic currency, and adequate international reserve coverage offset risks from currency overvaluation and current account deficits funded by portfolio flows.’ But in reality, the increase in foreign reserves from $40 billion to $50 billion in 2010–11 offset only half the rise in foreign debt over the same period.

What does the IMF know about debt crises, anyhow? Orthodox thinking left the institution utterly unprepared in 2008 for the world’s worst financial crisis since 1929, so its lackadaisical attitude should ring alarm bells in Pretoria. The IMF praised the Reserve Bank’s ‘prudent’ policies ‘together with a flexible exchange rate’, which allegedly ‘helped dampen the adverse effects of those global cycles’. (Huh? Replace ‘dampen’ with ‘amplify’ for accuracy’s sake.)

The diabolical implications of IMF logic are now clear: when it comes to the exchange controls we need to address Moeletsi Mbeki’s concerns. For if you suggest merely a ‘small tax on inflows to try to curtail inflows or at least change their composition’, IMF staff point out ‘significant drawbacks’: ‘it likely would raise the government’s financing costs. Second, even if this were to help engender nominal rand depreciation, absent wage restraint, it is unlikely this would enhance competitiveness.’

The rebuttal is easy: put exchange controls on outflows of capital, to address capital flight, and then systematically lower interest rates and manage the appropriate decline in the rand’s value, to the point where workers can return to at least the wage/profit share they had won by the end of apartheid: 54/46, compared to just 43/57 today.

In his Wall Street Journal interview Roubini reminded us, ‘Karl Marx had it right. At some point, capitalism can destroy itself. You cannot keep on shifting income from labor to capital without having an excess capacity and a lack of aggregate demand. That’s what has happened. We thought that markets worked. They’re not working.’

At the University of KwaZulu-Natal–hosted People’s Space during the first week of December, a series of Rosa Luxemburg Foundation–sponsored teach-ins will make the links between dysfunctional financial markets and the carbon trading strategies that the UN Conference of the Parties 17 believes can address the crisis. In many ways South Africa’s experience confirms that the old ways of Washington have reached a dead end, and the challenge for progressives is to make the demand for genuine alternatives.

Patrick Bond directs the University of KwaZulu-Natal Centre for Civil Society in Durban. His two most recent books are Politics of Climate Justice and Durban’s Climate Gamble.