Late last week I switched on to a BBC television programme de- voted to money and financial matters. On this occasion the subject was a debate about an address given earlier by Eddie George, governor of the Bank of England.
I got ready to be thoroughly bored; it wasn’t long, however, before I found myself thoroughly absorbed – not least because of the import this debate held for anyone doing business in South Africa.
George had just announced in the course of a major policy speech that although he fully expected Britain to move into a short-lived recession, he would not be able to offer any respite from high real interest rates.
He remains concerned, he said, about the latent threat posed by inflation (though the usually authoritative Economist argues that deflation is now public enemy number one).
Although he is fully aware, he said, of the problems high interest rates and a strong currency pose for exports, he couldn’t offer even a smidgeon of short-term hope. United Kingdom inflation is currently at 2,4% and the prime lending rate in that country is 6,5%.
The BBC debate took place in Birmingham, the heartland of Britain’s manufacturing industry, and those involved included a smattering of academics and, more notably, some very down-to-earth industrialists. Once the platitudes had been dispensed with, blunt talking followed.
Every day, said one manufacturer who is also a senior member of the Confederation of British Industry, British exporters are involved in what is a highly charged race with determined competitors from around the world.
The stakes, he said, are high – nothing less than the continuation of current British primacy as a manufacturing exporter of the first rank.
But the failure of the governor to ameliorate high levels of real interest meant that he had effectively added a pail of sand to the load carried by every British entrant. It would not be possible for the UK manufacturing industry to continue competing realistically in markets still reeling from the impact of last year’s meltdown.
The contrast with South Africa couldn’t be more sharply delineated. A visiting – and highly successful – Philadelphia manufacturer flatly told a small audience in Johannesburg recently that he couldn’t operate under South Africa’s interest rate regime.
It is impossible – or so he claims – to conduct a business successfully under conditions such as those applying in this country. (United States inflation in December was 1,6% and prime is 7,5%.)
Overall then, the real rate of interest in the US, Britain and the Euro 11 varies between 6% and 3,7%. In South Africa it is closer to 13%. Our inflation is presently at about 9% while prime lending has just fallen to 20%. In theory, the difference – the real lending rate – is 11%.
The problem of course is that one shouldn’t apply the current rate of inflation – it is much better to use the forecast rate. This causes difficulty because almost no one can agree on what to expect and because the rate can be inferred in different ways.
It is possible, however, to argue that South Africa’s inflation a year out could be as low as 4%. That’s what happens if the mortgage rate (which is falling) is included. If, however, only the core inflation rate is applied, there is general consensus it will be about 7% in a year’s time.
That brings South Africa’s real rate of interest to about 13%, one of the highest in the world (Brazil excepted, although not many investors are sticking money into Brazil right now).
And the fact is that this country has experienced such high interest rates for so long that they have become endemic, a part of the problem rather than part of the solution.
I have long argued that we simply cannot afford such a long-term systematic attack on the national fabric, that continual high real rates of interest carry much of the burden for a prolonged throttling of economic activity.
Something had to give, I warned long ago. Well, it has. The numbers of job- less swell daily; the crime rate has gone ballistic.
I will be told, of course, that we need high rates of interest to continue encouraging foreign investment, and that inflows of capital are vital if the currency is to remain reasonably stable.
I do not dispute any of this – but I do argue for a more reasonable approach, for a lessening of the rigidity being employed.
If we are to resume growth, we need nominal interest rates of about 12% a year. Even that by (realistic) world standards is high. If we want the crime rate to decline, the very best way is to create more jobs, not by exacting ever more ferocious punishments.
I hope no one now sees fit to accuse me of having gone soft. I haven’t. But I do recognise that a radical change in economic policy is overdue if South Africa is to enjoy the 6% a year growth rate economists tell us we must have for a decade if we are to avert rampant poverty and terminal decline.