Growth will not be created by nationalising the reserve bank
Union leader Irvin Jim argues (“Targeting inflation is not the route to growth”, June 22) that the Reserve Bank should be nationalised and that, to support wage-led growth, inflation should not be suppressed by keeping wages low, but the bank should implement an incomes policy (which suggests that labour’s share of national income should be increased).
It would be insane to have a policy objective of high inflation, said Jim, yet he believes the central bank’s “pathological fixation” on inflation targeting does not promote balanced and sustainable economic development.
Inflation has been lower, on average, under the inflation-targeting regime than under any other monetary policy regime. Wage increases are above inflation and not in line with labour productivity. Production and logistics are not necessarily efficient enough to take advantage of favourable international prices in, for instance, commodities.
The South African Constitution mandates the Reserve Bank “to maintain low inflation in the interest of balanced and sustainable economic growth in the republic”. The discussion tabled by the finance minister in February 2010 places the bank at the heart of financial stability. It ensures that financial institutions, markets and processes or regulations work. If the bank was to take as its task the creation of jobs and enhancement of economic development, it would have to change its form and become more like a developmental finance institution.
Let us consider Jim’s arguments. One can only nationalise an entity in the private sector. Despite having shareholders, the Reserve Bank is not in the private-sector space. It has its own legislation and is not governed by the Companies Act. The government appoints eight of the 15 board members; shareholders appoint the rest. The board is a governance board and does not direct policy. The shareholders (9% are foreign) can own only up to 10 000 shares, no more.
The bank does not maximise profit: dividends are capped at 10c a share. It does not influence policy. Ninety percent of the bank’s profit goes to government, the balance is kept in the reserve fund for monetary operations. So the only two ways to nationalise the bank would be to get rid of the shareholders or allow the government to appoint all 15 board members.
On wage-led growth, let us look at how businesses work. Somebody sets up an operation and assumes the risk of it failing. Wages are a cost. Businesses are set up to maximise profit and minimise cost, so the only way labour’s share of income can increase is through ownership of the business.
At this point, government policies should come into play. The people working for companies should be the first to benefit. Further job-creating activities, such as the government’s infrastructure drive, should be implemented urgently to deal with unemployment and supply-side blockages. Increasing wages without a commensurate increase in productivity and trade cannot be sustainable. Those higher wages would only be chasing fewer goods and services.
I agree with Jim that high inflation is madness. Whether inflation targeting or other monetary policy regimes are used, the ultimate objective when it comes to prices is to have stable, low inflation.
Jim’s final argument misses the key word in domestic inflation targeting – “flexible”. Flexibility guides low inflation “in the interest of balanced and sustainable economic growth” and means that the bank considers other economic issues too. After all, there are about 1450 standard economic indicators (excluding special-interest indicators) to consider when analysing the economy as a whole.
So where should growth come from? Well, how about realistic sources? We should distribute and use our land and its resources efficiently. We have to build a good stock of useful labour with proper education and we have to build capital stock. We have to teach our people how to be entrepreneurial.
These are issues that are often hard to deal with, but they will boost growth – unlike nominal pricing matters such as the exchange rate or interest rates, matters on which we like to waste our time.
Zeph Nhleko is an economist at the SA Reserve Bank, he writes in his personal capacity