False hopes: here comes Cassandra.

Author:Hydeman, Giles
Position:THIS MONTH'S PRIZE LETTER - Letter to the editor
 
FREE EXCERPT

I recently came across this fascinating argument in a document posted anonymously on the internet. I thought your readers would be interested in reading it--and for the sake of brevity I have edited it a little.

Essentially, it is an argument countering the claim that the recent take-over of Absa by Barclays somehow signals an economic renaissance for Africa in general and South Africa in particular.

It reads:

 "You would think, from the celebrations around Barclays buying a majority shareholding in Absa that this will have a major beneficial effect on our economic lives: more employment, less poverty, spreading prosperity perhaps? Sorry: here comes Cassandra. "This is what happens. Some individuals who own Absa shares will sell them to Barclays shareholders. They will have 'earned' a big profit. Maybe South Africa's tax man will gain a small proportion but the foreign exchange Barclays brings in will come to rest in the Reserve Bank: we ordinary folks will see none of it. "That is it--full and final benefits to us. Employment will, if anything, drop. It usually does following a merger, because the point of a merger is to cut costs and swell returns to shareholders. The banks' return on equity--already standing at just under 25% for Absa and nearly 19% for Barclays--will increase. The value of their combined assets will be somewhere around R6.25 trillion and probably rising, otherwise what is the point? "But what about the symbolic and pioneering effect--the suggestion that Barclays will be followed by other foreign direct investors? The 'floodgates' of FDI will be opened by this deal? There are a number of problems with this scenario. First, this is not 'direct' investment--it is 'portfolio' investment. The former is usually conceived as employing people or building things on the ground. This will amount only to a change of ownership of shares. "Second, we do not need foreign investment if we take into account the billions now held in the financial sector awaiting profitable outlets. Why should foreigners create productive capacity and employ people in South Africa if our own institutions think it is not worth it? And why are we giving tax breaks to foreign investors--let alone portfolio investors--when our own capital is kept out of circulation by our own institutions? Also, just where is the
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