Aladdin’s lamp could solve some things for Trevor Manuel, but economics being what it is, more problems would arise, writes Madeleine Wackernagel
Forget the whiskey (in this case, a bottle of Klipdrift would be first choice), socks and ties. What Minister of Finance Trevor Manuel would like in his Christmas stocking is a well-oiled, working economy.
Imagine if he were given the proverbial three wishes — although in reality we need more like three hundred. But it would be a start.
How would he choose between full employment, floods of foreign investment, no El Ni=F1o and plenty of rain (but not too much either), a booming gold price, low inflation, soaring tax revenues, a balanced Budget, cancelling the public debt, higher social spending, electricity and houses for all? Tough call indeed.
But the genie is out of the bottle and growing impatient. He’s a busy lad, with plenty of other fantasies to fulfil.
So Trevor considers his options … jobs for all, definitely a must. Just imagine, all that lovely lolly boosting the revenue side of the accounts, keeping the tax-man very happy. Not to mention the political kudos. The Budget deficit would soon be wiped out, no more worries. Then there’s the crime factor — without unemployment, there’d be no excuse for redistributing income unlawfully.
But hang on a minute, there is a downside. Remember first-year economics: the trade-off between inflation and unemployment. One goes up, the other goes down, according to the Phillips Curve. Granted, the theory has been revised and refuted many times since the late 1950s when AW Phillips first saw the connection. But, you never know.
On the other hand … the United States is doing pretty well, no overheating even though unemployment is at its lowest in decades. But the canny yet cautious Federal Reserve Board is already hinting at an interest-rate rise — just in case. Britain is experiencing a similar problem, which has seen the Bank of England raising rates with disconcerting — for consumers, at least — regularity since it won its independence.
Full employment presents other problems: capacity, for one. All that money chasing goods is bound to lead to a shortfall, hence prices rise. And what if the supply of inputs can’t keep up with the demand for the final product? Once again, up goes the price.
In the first of many balancing acts, Manuel nonetheless goes for full employment. Inflation is a small price to pay (the Reserve Bank governor would definitely disagree) to solve this country’s biggest problem.
Best of all, he’s got two wishes left. For a split second he thinks of all the goodies he would like for himself. Having sorted out the unemployment crisis, doesn’t he deserve a little reward?
But no, the country comes first. So what’s it to be? Forget gold: even if the price did rebound, it would be temporary. The world’s central banks have too much of the yellow metal sitting in their vaults, gathering dust. The weather? The threat of El Ni=F1o is receding and with it the potential to do serious economic damage. No point in wasting a precious wish on that either.
What about foreign investment? With crime now a distant, albeit unpleasant memory, wouldn’t the world’s multinationals be clamouring to beat down our doors without any further ado? Actually, no. Even with a 35% unemployment rate, labour was stroppy, unproductive and expensive. Now that everyone’s got a job, the likelihood is that wages will spiral out of control, strikes will become more frequent and productivity levels will decline even further.
Manuel realises with dismay that wish-fulfilment is not all it’s cracked up to be. What if he asked for full employment and low inflation? That would solve everything and he’d still have one wish left.
Not quite. Even genies can’t re-invent the wheel. If there were a magical way to solve the world’s economic problems, surely we would have found it by now.
So he compromises: low inflation with some unemployment. But we’re still not out of the woods entirely. Countries don’t operate in isolation. Look at the US: the recent downgrading of growth projections for next year is not of its own making. On the other side of the world, an asset bubble bursts and everybody feels the effects.
Thus, even if our exports are booming, growth is soaring and inflation is under control, the markets for those products may not be available. Back to square one. The genie, very sensibly, retires gracefully back into the bottle.
Economics is not called an inexact science for nothing. Just think back to January 1997 when most pundits were looking forward to strong international growth, low worldwide inflation — indeed, some were worried about the threat of deflationary forces being unleashed in the not-too-distant future — and good employment prospects. All positive for the South African economy.
But by the end of the first quarter, the numbers were being rapidly reassessed. From a growth rate of 3,4% in the last quarter of 1996, the South African economy contracted by an annualised 1,1% in the first three months of 1997. Inflation was firmly set on a downward path, but suddenly, so was gross domestic product.
Instead of a “soft landing”, some economists began mentioning the dreaded R-word. Spending was knocked sideways as consumers suffered the double whammy of high real interest rates and slower real income growth; gold was weakening and investment was tailing off. By the third quarter, nobody was serious about 2,5% growth for the year any longer; 2% was expected at best. And by the downright pessimistic — 1,5%.
But nobody could have foreseen the Asian currency crisis, or the slump in the gold price. Problem is, this economy is less well buffered from shocks than others; being an emerging market doesn’t help. Investors bailed out in their thousands, seeking safer havens for their capital.
Thanks to globalisation, the effects of the Asian fallout are being felt worldwide and the International Monetary Fund has already scaled down its projections for global growth from 4,3% to 3,5% for 1998.
So serious are the potential ramifications that the US Federal Reserve Board has put aside its inflation fears and deferred a rise in interest rates for the foreseeable future.
Europe is a different matter, with high unemployment, feeble growth and burgeoning Budget deficits, although Britain is booming, relatively.
The greatest problem is Japan but the latest package of measures to stimulate the economy should keep recession at bay.
South Africa will not escape the battering. As the Asian economies slow down, commodity prices will be hit as demand falls. Asia will naturally seek to export its way out of the crisis; lower prices will dent our market share. A double whammy of greater competition and falling prices, just as South Africa’s export market was picking up. Lower world growth will exacerbate the trend.
On the plus side, Africa is still an exciting and fairly untapped market for local producers. Indeed, exports to the rest of the continent almost doubled from $2-billion in 1993 to $3,7-billion in 1996.
But knowing our high propensity to import, the overall effect could well be negative. Should the deficit start getting out of control again, chances are that the Reserve Bank will raise interest rates — definitely not the preferred option. So much for the promised — or at least hoped-for — cuts next year.
Then again, should the consumer prove, once and for all, that he or she can be responsible spenders and preferably, savers, the governor may take pity on us and drop rates as a reward. Credit growth has slowed down considerably this year, which bodes well for monetary discipline.
What all this means for growth, employment and inflation in the year ahead is still unclear. Of course, the genie may offer a few hints, but for ordinary mortals even an educated guess is likely to be way off-beam. There are simply too many variables.
What is pretty certain, in an uncertain world, is that 1998 will not be much better than 1997. For any creditable upturn we will have to wait until 1999.
If Manuel still wants to make a wish, perhaps he should speed up the process, and fast-forward us into the 21st century. Things can only get better.