#Macro-economic #policy and other #budgetary issues

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!

Easy

If it was easy, everybody would be doing it.

If it was easy, would it really be worth it?

(The power of) social media

(The power of) social media for governments, corporates, politicians, etc. is not about its utility as a messenger. It is about engagement, fighting for the hearts and minds, trying to influence the narrative.

Using social media merely to issue media statements is so pathetic. After all, the traditional route still works just fine. Media outlets will publish the statement.

The problem or challenge occurs afterwards, when commentators start analysing it, pulling it apart, and creating (their own) narrative. By the time you get involved with a complaint about being misunderstood or misrepresented, or with a denial or clarification, it is too late.

Take the initiative, go out on a limb and try to influence or control the narrative. After all, this is what politics or marketing is all about. You may not always succeed, but people, especially your sympathetic supporters, will appreciate the effort.

Lessons from car guards

Four lessons from observing car guards...

Lesson one: car guards always make sure they are noticed by parkers parking their cars. This is not very different from sales and marketing and advertising.

Lesson two: car guards always make sure they are noticed by parkers preparing to leave. This is all about collections.

Lesson three: showing up daily. Car guards know if you don't show up, there is no sale and no cash.

Lesson four: despite the annoyance and occasional abuse from parkers, they never give up.

Entrepreneurs can learn valuable lessons from observing car guards.

Consistency

The mother of success is #consistency. When you find or learn the tools and methods that work and you apply them consistently, success is likely to result.

Variety is good, talent helps, brilliance makes a difference, but consistent application, consistently showing up, that is the key.

The #golfer who consistently practices his swing, his putting. The #tennis player who hits balls for hours, everyday. The #Iranian #football team returning to practice late into the night after their world cup qualifier against #China. The long distance runner who piles on the milage on a regularly, hardening the muscles, toughening the mind, creating muscle memory. These are the people who create the possibility and potential of success.

Focusing on the right number

The news of the South African GDP growth rate of 3.3% Q on Q is quite encouraging. This, however, is not the whole story. Perhaps not even the main story. What has happened to the employment number?

Employment creation is the key. And we know that South Africa's economy is plagued by 'jobless' growth. It is the number the SARB should also be using to base its interest rate decision on. It is a number that creates multiplier benefits across socio political and economic impacts. If this number has increased too (or conversely, unemployment has fallen), then rejoicing would be truly justified.

Misdirection - the West has won

The takeover of our economic policies is now complete.

Misdirection is the main weapon of the magician. "Focus over there while I perform a sleight of hand and produce a rabbit out of the hat here". This, unfortunately, seems to be what has happened to the whole nation of South Africa. Or to be more precise, to the governing party, the government, the media, commentators and the intelligentsia. Surprisingly, or perhaps not so surprisingly, the "communists" have also been taken in.

I refer here to the collective sigh of relief that took place nationally when Standard & Poor's left South Africa's credit rating unchanged after there had been fear that there would be a downgrade. The ANC and the government pulled out all the stops to avoid this and have seemingly succeeded. There is a threat, however, that a downgrade is still possible at the next review later in the year. The expectation, therefore, is that everything is going to focus on avoiding this. Any action that deviates from this will be seen as betrayal, akin to high treason.

Thus, has begun a never ending series of relays aimed at avoiding a downgrade, with no regard to the long-term policy direction and targets of the governing party and the needs of the people.

It began with AGOA. The government had taken a stance in the interest of South Africa, but the US flexed its muscle and enlisted the media and the opposition. Government resistance immediately crumbled for fear of being accused of destroying the economy.

In light of all this, what happened to BRICS and the new direction of looking East? BRICS was meant as a kind of showing the middle finger to the Bretton Woods institutions and their economic and political order. It appears BRICS has been rendered impotent even before it can have an impact. With the exception of India, all the BRICS economies are experiencing shocks of varying degrees. Recession and impeachment in Brazil, sanctions and economic contraction in Russia, an economic slowdown and a desire to be liked and accepted by the West in China, and a South Africa who's economy is in the doldrums and plagued by a series of political and economic missteps.

From here on it is hard to imagine South Africa adopting any truly independent economic and political path.