Despite criticism of Gear, the strategy is on target and the country should tough it out, Maria Ramos tells Madeleine Wackernagel
DIRECTOR General of Finance Maria Ramos believes Gear is right on track. “Well she would, wouldn’t she,” was one cynical response, but to hear her tell it, the government’s growth, employment and redistribution strategy is working, albeit slowly.
“We are now at the toughest point. We’ve taken some of the pain but aren’t seeing any glorious numbers, so we’re not feeling very good about things. But we need to be patient. We’ve come a long way and we can’t just turn around and say, ok, after a year there’s still no miracle, so what else can we try?
“People are starting to take us seriously and believe in our commitment to Gear. That’s important – and the results are there, in greater foreign direct investment. Even portfolio investment is a sign of improving confidence in the economy.”
Business would like to Gear up; labour wants to Gear down, but Ramos insists the pace of implementation is right for South Africa now. “Gear is a very standard framework in other countries undergoing transition. But it is also not a magical solution. Other countries might implement at a more dramatic rate but in terms of the constraints facing this country, we believe we’re right on target.”
More important than the numbers are the trend lines. And they show that although this year was bound to be tough, “a year of consolidation”, Gear is working. “We’re starting to see some job creation, despite the first-quarter fall in gross domestic product (GDP) numbers. Manufacturing is quite robust and the export sector is expanding.
“Creating a labour-intensive, export-driven economy was not going to happen overnight, but the signs are good,” says Ramos.
To those critics of Gear who label it a neo-liberal, conservative growth agenda, Ramos ripostes: “Such criticism is quite misguided. It is nothing but a false promise to say we could spend our way to growth. Spend freely for two or three years and you end up with a terrible hangover for the following 10 years, and little to show for it.
“Of course we could have taken the easier, populist route and artificially stimulated the economy with deficit spending, but that doesn’t bring long-term growth and macro- economic stability. So we have to tough it out. Ours is a medium-term strategy – and the benefits don’t come in year one.”
Would a cut in interest rates not provide a welcome nudge to growth? “For Gear to work, we have to work together. That means the government has to make sure it keeps to its Budget deficit targets, while the central bank sticks to its path. That’s the whole point of having an independent central bank. The Reserve Bank’s policy is informed by inflation, which is still a very valid worry.”
South Africa has a legacy of double-digit inflation, which hits the poorest and those on fixed incomes hardest. So it is imperative that inflation not be allowed to run rampant. “The high inflation experienced for two decades entrenched apartheid inequalities,” says Ramos. And it will take more than a year in single digits to change that.
But, she says, “if we’re able to hold the line on the fiscal side and pressure on inflation starts abating, then it would be reasonable to expect a drop in rates. We expect some downward move in a little while.”
There is another concern: stimulating demand by dropping interest rates when the economy is already running at near to full capacity would lead to higher demand for imports and thus, a balance of payments crisis, historically,another of South Africa’s patterns. Such a demand-led boom is unsustainable and will not have created more jobs in the long term. So, timing is all important: “We can’t afford to artificially boost the economy without back-up from the export side. A balance of payments problem would only mean having to slow down the economy again, at great cost.”
Now that even the Reserve Bank has waded into the argument about South Africa’s unemployment problem, one school of thought believes a more relaxed monetary policy, with the potential risk of higher inflation, would be worth the trade-off with lower unemployment.
But, says Ramos, 20 years of high inflation didn’t have the desired effect on joblessness. And it’s not as if we live in a zero inflation environment now either. “We haven’t fully dealt with inflation properly,” says Ramos. “It is still significant. And down the line it will be much tougher to make the necessary adjustments; it’s a very short-term trade- off.”