Ebrahim Patel, the minister of economic development, finally showed his hand on Tuesday this week, briefing reporters on his new Âeconomic masterplan.
As he was speaking, Ireland was nationalising the last bank the government does not own, depositors were withdrawing money in droves and European markets were in a tailspin, fearing that the Irish contagion was spreading across the eurozone to Portugal and Spain.
Note that the Irish are borrowing from the eurozone and International Monetary Fund to bail out their banks, in the process pushing their budget deficit from a robust 12% of GDP to an eye-popping 32% and confining their citizenry to perhaps a generation of sacrifice to get the economy back to where it was before the crisis.
Economist Nouriel Roubini, dubbed Dr Doom and recognised as one of the few analysts who predicted the 2008 global financial collapse, warned this week that not only do other European governments face financial collapse as the debt crisis spreads but the super-sovereigns, the eurozone and the International Monetary Fund (IMF), are potentially at risk too. “Who is going to back-stop the central banks? Mars?” he asked.
He singled out Spain as a particular challenge. Although we became used to the idea of too-big-to-fail during the maelstrom of the meltdown, Spain appears to be both too big to fail and too big to bail out.
While significant countries within Europe are fixated on staying solvent in the spreading crisis, back home the ruling party has been putting energy into managing a spat between it and its youth league over how nationalisation as an economic option will be investigated.
Nationalisation
Investors overseas are so skittish that they are causing runs on banks, but back home the African National Congress (ANC) moderates are fighting rearguard action to keep nationalisation off the agenda. This is the world of Zuma muddlenomics where you try to keep everyone in the same tent, no matter how conflicted they are.
Nationalisation does not feature in Patel’s plan, although it calls for a much stronger role for the state in the economy.
One of the results of the eurozone crisis has been that a wall of money has been flowing from developed to developing markets as investors chase higher returns in higher-growth markets. Patel’s plan wants to combat the stronger rand, which has resulted from these flows, by investing into infrastructure development in Africa.
But Gill Marcus, the Reserve Bank governor, has warned that the buying of foreign currency to weaken the rand comes at a cost, as you end up picking up the difference between inflation in the offshore country and back home. This amounted to a R1-billion loss for the Reserve Bank last year.
Investec’s Annabel Bishop for one is no fan of this intervention. She says that, as jobs are lost and companies close, the tax base, which is tiny, shrinks. “For this reason monies need to be spent on fostering growth in South Africa.”
Good for the goose, good for the gander?
Patel’s plan does have a feeling of austerity about it, with people earning R20Â 000 and above a month will be asked to accept inflation-linked increases and those earning more than R550Â 000 a year will have their salaries and bonuses capped. Note that the envisaged system will be voluntary.
It would have helped then, if we were to follow our leaders on this, that they would have released the plan before announcing a 5% increase for Cabinet ministers. Patel, as a Cabinet minister, gets R1,5-million a year. Now he will get 5% more this year than last, but wants those who earn the same amount of money to have their increases capped at 0%.
Note that the only people who are allowed more than inflation-linked increases, besides Cabinet members, are people who earn less than R20Â 000 a month.
The idea is that lower wage and salary increases for non-Cabinet members will result in lower inflation, giving the Reserve Bank scope to lower interest rates, which will make the rand more competitive.
The government now has two plans. One is called the budget and is run by Pravin Gordhan, the finance minister. It plans to spend R6-billion over the next few years on a youth subsidy to ease young people into the jobs market. The other is Patel’s plan and it is silent on this intervention. It is understood that Patel and his supporters think that it would be better to have a subsidy for low-income workers because they don’t want to see older workers being replaced by younger ones.
It is normally the president’s job to find a middle way between conflicting positions, but a hallmark of Zuma muddlenomics is that you try to sustain directly conflicting positions. So two plans are better than one in this thinking and you muddle on.
Development bonds
Another feature of Patel’s version of the government’s plan is the idea of requiring pension funds to put some of their money into investments which they would not normally make. The tension appears to arise from the fact that treasury does not like using taxpayers’ money to subsidise projects that more interventionist members of the government favour as a way of growing the economy and jobs.
To be fair to Patel, he envisages establishing a development bond that would aim to attract investment by offering returns that are attractive to investors. It would be better, of course, just to set up the bond and hawk it to potential investors, including the pension funds, without waving the big stick of mandated investments. One comment that reached me was that it was like running water in a bath tub when we were about to be hit by a tsunami.
There may a big storm out there, but news of the melee has yet to reach the world of muddlenomics.