The Treasury seems
content to focus on fiscal stimulus to solve the problem of low growth and
unemployment. Many economists now accept that the stabilising potential of
activist discretionary fiscal policy is, at best, limited. Furthermore, there
has been a marked change of focus away from fiscal policy towards monetary
policy as the main tool of stabilisation policy. The empirical evidence also
indicates that in the short to medium term monetary policy has real positive effects.
Monetary Policy
For a number of
years, scant regard seems to have been paid to the potential for
monetary policy to affect the economy’s growth trajectory, and yet this is the
most potent policy instrument available to the government (and the South
African Reserve Bank (SARB)) to influence the growth rate and reduce unemployment.
The apparent failure to realise that it is the contractionary policies of the
SARB and the Treasury that pose the largest domestic risk to growth is puzzling
as there’s ample theoretical and empirical evidence to suggest this. It is also
unhelpful to talk about a ‘low-growth world’ as if this is a given, especially
when there are countries that are growing at rates higher than the world
average. Why should our growth aspirations be so low?
Typically, the
objectives of macroeconomic policy are the attainment of full employment (or
the reduction of unemployment levels), within an environment of low inflation,
high and sustained economic growth, and a ‘healthy’ balance of payments. The
emphasis on one or the other objective is a choice that is informed by a number
of factors. Some of these may be informed by ideology, others may be the result
of pressures external to the economy (especially for a relatively small, open
economy like South Africa which is dependent on external financial flows and trade).
All things being
equal, some of these objectives (at least in the short to medium term) may be
mutually exclusive. For instance, a low inflation (not factoring in
inflationary expectations), high interest rate environment may negatively
impact economic growth and employment levels. The opposite may also hold true. Policy
makers should choose not based on ideology but based on the objective
conditions they are confronted with and the outcomes they (or the citizens)
desire.
There’s general
consensus (and empirical evidence clearly upholds this) about the inverse
relationship between the level of the interest rate and the rate of economic
growth and the level of employment. Put simply, high interest rates lead to
lower levels of economic growth and therefore lower levels of employment (or
higher unemployment). High interest rates may attract speculative international
financial flows, but these are generally fleeting and mostly do not lead to
productive investments.
All things being
equal, the current inflation target (range), with the resultant relatively high
interest environment, is incompatible with the stated growth and employment
objectives. In other words, the current monetary policy stance of the SARB harms
the country’s growth prospects and is not supportive of the government’s stated
growth and employment objectives. This is not an ideological or contraire view. It is a view formed on
the basis of the objective conditions and international empirical evidence.
The Minister and
the SARB should dispassionately and non-ideologically take stock of the
situation and accept, as evidence seems to suggest, that they will not attain
their growth and employment targets with the current policy incompatibility.
Since the mandate of the SARB comes from government, more specifically the
Minister of Finance, it is inconsistent to persist with an inflation target (range)
that clearly is at odds with the growth target and the creation of employment. Either
(in the short term) change the mandate or raise the upper limit of the target
range. What compounds the situation is the observed unstated goal of the SARB
to target the median of the range. What is the point of the 6% upper limit if
the SARB conducts policy in such a way that the rate of inflation is generally
restricted from testing this upper limit?
I would argue that
unemployment is the most pressing
challenge of our time as most other economic, social and political challenges
flow from it. The reduction of unemployment,
and not a low rate of inflation, should be the key
objective of macroeconomic policy in the short to medium term. This would have
a positive impact on the budget deficit through reduced social spending while
revenue collections increase. This would allow the government space to increase
spending on growth enhancing items like education, even as the number of those
who cannot afford fees reduces (or they require a lower ‘subsidy’). In other
words, creating a ‘virtuous circle.’
Clearly, this
monetary policy has to be complemented by strategies implemented by government
and the private sector to ensure that growth is in sectors with the greatest
employment creation potential. In other words, avoid the curse of jobless
growth. Beneficiation of our minerals and expanding the manufacturing base is
another policy or plan that would make a positive impact on unemployment (and
other economic variables).
It is interesting
to note in passing that the (cost of living component of) wages demanded by
unions, particularly public sector unions, clearly indicate that their
inflationary expectations are high. This is puzzling, as the SARB has maintained
consistently low and relatively stable rates for a long time. The wage demands
by unions, in fact, are a manifestation of something else, namely the fact that
there is an imbalance of power among the state, labour and business. This is
exacerbated by a form of coercion around political support for the governing
party and factions in the ANC and government.
I may be accused
of advocating populist policies, but my answer to that (as I will show in the
next section) would be, ‘I am in good company.’ I should also add that as far
as markets and ratings agencies are concerned, as long as the policies are well
thought out and properly communicated, they are unlikely to result in sustained
negative sentiment.
International Experience: the US, UK, EU, Japan and
China
Central banks
ordinarily conduct monetary policy by buying and selling short-term debt
securities to target short-term nominal interest rates. These purchases and
sales of assets change both short-term interest rates and the monetary base
(the quantity of currency and bank reserves in the economy.) This conventional
monetary policy can potentially stimulate the economy through two types of
channels: asset price channels (including interest rates) and credit channels.
However, when
interest rates are at zero increasing the monetary base is not, by itself,
considered an effective stimulus. This is what the central banks of the United
States, the United Kingdom, the European Union and Japan were faced with when
they lowered their rates to zero to alleviate financial distress and stimulate
their economies.
Faced with this
scenario, the Fed, the Bank of England (BOE), the European Central Bank (ECB)
and the Bank of Japan (BOJ) turned to unconventional policies that often
dramatically increase their monetary bases. Some of these unconventional
policies involve direct lending to specific distressed short-term credit
markets, whereas others involve purchasing long-term assets that are intended to
reduce real, long-term interest rates. The BOJ has even resorted to negative interest rates!
The Fed, BOE and
ECB have steered their respective economies through these difficult times and
further showed that their decision-making is empirically based. For example, in
recent times whenever there has been an expectation that the Fed will raise
interest rates, it has not done so because the employment numbers have
indicated to them that the US economy is still fragile.
The People’s Bank
of China (PBOC) has shown similar responsiveness to shocks to the Chinese
economy, for instance when there was a stock market collapse and the slowing
down of the economy.
The purpose of this
section has been to show that other central banks have been prepared to lower
interest rates to zero and then to
further implement unconventional policies
in order to stimulate economic growth. (Employment growth acts as an
excellent proxy for this as it is among the first indicators of improving
business confidence.) This happened in an environment of scepticism about the
potential effectiveness of these policies, but they stayed the course and the
evidence suggests they were correct. Interestingly, with the exception of the
PBOC, these are central banks in ‘right wing’ economies, while the SARB and
Treasury in a ‘left wing’ environment are steadfastly implementing policies
that are anti-growth and anti-employment.
Foreign Direct Investment
Equally important
in a globalized economy is the attraction of FDI. This is important for all economies,
even the big ones like China or the US, but it is critical for smaller
economies like South Africa. The policy environment, therefore, has to be
supportive for the attraction and retention of FDI.
Policies that
should encourage FDI and other external flows seem to be inadequate or
contradictory (for instance the visa debacle). The other apparent shortcoming
relates to the nimbleness of decision-making and implementation, even when due
recognition has been made of policy shortcomings.
Further, policies
that militate against the attraction of FDI and other external flows should
surely be abandoned.
Budget allocations
There appears to
be too much emphasis on social spending like housing and grants. While these
are indeed necessary and commendable, they however do not contribute to
long-term economic growth. Funding allocations should instead be shifted
towards growth supporting activities like education and crime fighting. An
educated workforce improves business confidence and encourages investment by
business and attracts FDI. Equally, with education and better earnings people
can potentially provide housing for themselves, leaving the state to provide
only for the truly indigent. A lowering of the crime rate will also have
similar growth benefits, while also directly impacting the quality of life of
citizens.
Recapitalising
Eskom using proceeds from the sale of Vodacom shares was a smart decision. This
should be followed by a commitment to exit all private and state-owned
enterprises (SOE’s) that have no direct or indirect developmental role. While
it makes sense for the government to own SOE’s like Eskom, the SABC, NECSA,
etc. and provide budgetary allocations when necessary (although clearly these
SOE’s also need to be better managed) there is no need to continue holding
shares in Telkom in an environment where citizens mostly utilise communication tools
being provided by privately owned enterprises. In other words, the initial
justification of the developmental role of Telkom has been largely eroded. The
funds from a sale of Telkom shares could fund a number of positive initiatives,
for instance tertiary education and/or reducing the budget deficit. Equally,
there is no clear developmental justification for holding onto a 100% stake at
SAA and making budgetary allocations to it and/or providing guarantees on its
behalf.
“#FeesMustFall”
On the face of it,
the position taken by the Minister of Higher Education and Training that the
government will only support students from poor families and the so-called
“missing middle”, is the correct one. It is accompanied by the argument that
the government cannot afford to support students from “rich” families. On
closer scrutiny both arguments are false and shallow.
First, education
should be treated as a public good and an investment in the future of the
country (nation, economy). And as such, the state should be prepared to make
the funds available for this investment, which will pay for itself in future
through a society that creates employment, is employable, higher tax
collection, etc.
Second, we are
working towards creating a society for the future. Funding some students and
not others creates an unnecessary and unhealthy imbalance or discriminatory
scenario among students.
Third, at this
point funding is not really “free”, recipients are expected to repay NSFAS
funding when they start to work. Why then discriminate? All students, even the
“rich”, will be expected to repay the money.
Fourth, “rich” can
sometimes be a façade: many families who are rich on paper do not have the
actual cash flow (for whatever reason: high indebtedness, poor investment,
etc.) to pay for higher education. Their children then suffer unfairly for
their parents’ decisions.
Fifth, budget
allocations are a choice: we choose to spend money on a defence force (or
elements of it) that we do not need in peacetime. What are the external threats
that South Africa faces? An invasion from Swaziland? Sure, it makes sense to
protect our coastline and our ocean resources from possible illegal exploitation;
therefore, the navy makes sense. But Gripens? And a large standing army? Is it
for peacekeeping in Africa? What about the size of the Cabinet and Deputy
Ministers and their respective entourages? Or the funds spent bailing out SAA? The
point here is that money can be found, we just choose not to because we are
defending the wrong choices we have made in the past and consequently make new
ones. I should, in passing, make reference here to the fallacy of sunk costs.
Sixth, countries
with weaker economies than that of South Africa have been able to offer
financial support to all their students. They made that choice. There is no
reason we cannot.
During the struggle we had false pride, believing that we
were special, that after liberation we would not make the same mistakes that
other newly liberated countries had made. How wrong we were!
