“A nation of highly indebted families” Trevor Manuel

This is an edited version of an address by the minister in the presidency Trevor Manuel to the 2011 Consumer Rights Forum. It was delivered on the 3rd of November 2011.

This conference affords all of us an opportunity to stand back from the nitty-gritty of consumer legislation and litigation, and try to reposition the debate.

Perhaps we need to ask what it is that we are looking for in life – each one of us as individual citizens and together as a nation. Our Constitution defines its purpose in the Preamble as, “Lay the foundations for a democratic and open society in which government is based on the will of the people and every citizen is equally protected by law; and improve the quality of life of all citizens and free the potential of each person.” So it is important to establish what happens in that “democratic and open society” and who “every citizen” is who is “equally protected by law”.

The economist, John Kenneth Galbraith, in The Good Society, as though in an address to this conference writes:  The sovereignty of the consumer is one of the most cherished ideas in orthodox economics; that this sovereignty has, in substantial degree been surrendered to those who serve it is the most resisted. Yet nothing is more apparent than modern advertising and merchandising effort.

So, we need to confirm that this behaviour is indeed common in a democratic and open society such as the one created by our Constitution. And, that in this open society, consumer goods and services are produced in a lavish fashion; that wants are created by the producers of these goods; that the consumer is sovereign but that the sovereignty is surrendered, from time to time. But, it is important that we understand that the “dispensing of the revenues” in a “socially acceptable and economically functional manner”, as Galbraith writes, is not pre-ordained. We live in a society where the producers of goods and services would want to maximise their returns, ignore the rights of the consumers of those goods and services and behave in a socially unacceptable manner that will leave consumers impoverished….unless the good in society (like those of you gathered here! ) invest in empowering consumers.

This is a fascinating debate – what are consumer rights? Are they the rights to exercise the freedom to choose? And if these are the rights of consumers, are there accompanying responsibilities? And do these responsibilities include those that may prevent the freedom of choice? Who exercises these responsibilities – is this actually the consumer sovereignty that has been surrendered?

It is important also that we pause to consider the economic consequences of consumer behaviour in South Africa. Three points are pertinent in this regard – firstly, let me state the obvious – we live in a highly unequal country; secondly, we are a country with a very low savings rate, and thirdly, we are a nation of highly indebted families.

If we examine these issues a bit more closely, we will appreciate that the levels of inequality drive a segment of society, not the very poor who are effectively excluded from financial contracting, but everybody above the very poorest to try and live beyond our means.

In respect of savings, the total saving ratio in our country is 16.1% of GDP, of which household savings contributes a mere 1.6%. For the economy to grow at levels close to 6% per annum, at which level we will create sufficient jobs for job seekers, we will need a savings ratio closer to 30% of GDP. Low savings acts as a brake on growth and jobs potential. There is also a telltale sign in the low household savings level because there is clearly no cushion to deal with emergencies, save to borrow – frequently at “emergency rates”.

Thirdly we are a nation of highly indebted families. The last release by the Reserve Bank indicates that household indebtedness is at 75.9% of disposable income. Of course, if we disaggregate this ratio, we will establish that the middle classes are in way above 100% – all of next year’s earnings are already spent! There is this staggering number of 18.84 million ‘credit active people’ in South Africa; this is a number substantially higher than the total number of formally employed people. Of these 18.84 million, a staggering 8.8 million (46.7%) have impaired credits. A large number of these people are now in debt counseling, and it appears that the bulk of people who find themselves in counseling are there as a consequence of consumption (as opposed to investment) spending.

The concern for the future is, of course, that whereas interest rates are at historic lows (the repo is at 5.5%) and so debt service costs are low, as interest rates rise, so increasing numbers of people are pushed over the brink. So, it is safe to infer that we live beyond our means – we spend money we have not earned yet, on goods we do not need. Either the marketing in South Africa is so powerful that we cannot help ourselves, or we try and “Keep up with the Kunenes”; or this is the consequence of what the Preamble to the Consumer Protection Act describes in the following terms, “The people of South Africa recognise that apartheid discriminatory laws of the past have burdened the nation with unacceptably high levels of poverty, illiteracy and other forms of social and economic inequality.” If the latter were the case, who would be the people worst affected? But, actually it is not the poorest South Africans who find themselves in the debt trap.

So, the interesting question of protection and rights appears to be whether both the protection and the right should not vest before the act of consumption?

Should the “surrender of (consumer) sovereignty” not occur before consumers, and the entire economy, find themselves deeply indebted?

Or, perhaps we should explore the psychology of why people consume as extensively as we do. What are we after? And why do the normal checks and balances that should sit deep inside our own psyche not help us to decide? You know, that basic question that ought to arise inside our heads, does not arise – ‘it would be nice to own, but I cannot afford this and everything else that I already have’, so we blame the sellers and the bank that lent us the money, but take ourselves out of the equation. Might it be that our best efforts happen too late, and that as a consequence, we actually do not afford “every citizen” (read that as debtor and creditor) the “equal protection of the law”?

I am posing the difficult question of whether there should be an obligation to limit the right to spend money that has not been earned.

Perhaps we are looking for solutions in the wrong places. About three years ago, President Sarkozy expressed a concern about the value of available statistical information to society. He then established a commission on the “Measurement of Economic Performance and Social Progress” which was chaired by Professor Joe Stiglitz, advised by another Nobel Laureate, Professor Amartya Sen and coordinated by Professor Jean Paul Fitoussi. They reported last year and their report is fascinating reading; it concludes that GDP measures economic output and tells us nothing about the wellbeing of citizens. Just before turning to their report, its relevance here is that it enquires into social progress – the question before us is whether the kinds of consumption we observe in South Africa is a measure of social progress. In other words, when we see the fancy cars, expensive designer label clothing, visit the extraordinarily opulent houses, or attend the over-the-top parties, weddings or funerals, whether we are participating in marking the social progress of those who did the spending, or as frequently is the case, the borrowing to do the spending, or whether this is an excursion into fantasy land?

The commission report attempts to define wellbeing and what should actually be measured. Their recommendations include the following:

1. When measuring material wellbeing, look at income and consumption rather than production.

2. Emphasise the household perspective – this would include in-kind services provided by government as well as taxes paid to government.

3. Consider income and consumption jointly with wealth;

4. Give more prominence to the distribution of income, consumption and wealth;

5. Broaden income measure to non-market activities, a feature which in South Africa will include how families and extended families function.

I want to repeat that the value of this report is that in trying to measure how we live, we must look past the material possessions to fully appreciate our well being. It will be necessary to explore these measures at a national, as well as at a family level.

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