Howard Barrell : OVER A BARREL
Why believe economists or economic explanations? For economics takes creativity, greed, mood swings and fortune- telling, and pretends to combine them into a science. If, in this world, some things do indeed cause other things to happen, it is unusually difficult to say in the case of economics what caused this or that to occur.
There are probably as many explanations for the economic crisis of the past two years in Asia and the emerging markets as there are investors who lost fortunes and workers who lost jobs. Similarly, there may be at least as many explanations as there are South Africans with political axes to grind for the extent to which this country has been affected by the crisis. Deciding between these explanations is our right and folly.
One of the more plausible views is that South Africa has been less adversely affected by the crisis than most emerging markets. Moreover, the set of conservative economic policies followed by Minister of Finance Trevor Manuel – with crucial political support from Deputy President Thabo Mbeki – has been mainly responsible for shielding South Africa from the worst effects of crisis.
These policies have involved choices that have gone to the heart of some of the major international political-economic debates of recent years. One has centred on the limits of politics. The government appears to have accepted that the world is going through a period in which financial markets, rather than governments, lead. Few, if any, governments have the strength to dictate policies which the markets do not favour. If a government insists on such policies, it is likely to incur economic costs it did not seek – such as a currency collapse – which will make it nigh impossible to take forward its objectives. Zimbabwe may be an example of this.
Indeed, we could say that the basics of South African economic policy over the past five years have been designed to telegraph to people the world over who have money and want to make more of it: “You can believe what we say and trust us.”
In South African, this confidence-building in the investor community has meant accepting the “Washington consensus” – the body of conventional opinion held in the World Bank and International Monetary Fund (IMF). That consensus holds that, among other things, low inflation and small budget deficits are good things. This has meant that Manuel and his team have avoided the main Keynesian remedy for our low rate of economic growth and job creation. That is, trying to stimulate the economy through higher government spending financed by borrowing, entailing a bigger budget deficit.
Manuel’s and Mbeki’s refusal to budge on this has prompted howls of protest from the left in the African National Congress, South African Communist Party, Congress of South African Trade Unions and elsewhere. Some in these bodies have argued it is possible to solve South Africa’s unemployment problem by government spending and borrowing. But they have been less forthcoming on how this could be done without causing still more serious economic problems. Merely printing more money, for example, would likely drive inflation to dangerous levels, necessitating still higher interest rates, so further curbing growth. And borrowing money would prove prohibitively expensive as suspicious lenders would insist on charging an interest rate considerably above an international standard such as the London interbank rate. So much of the left has resorted to claims that the Washington consensus is dead and, hence, that South Africa can afford to disregard it.
This is doubtful. In 1994 this government took over an economy that had been mismanaged for years. Among other things, its predecessor was borrowing recklessly. This borrowing had put the budget deficit near 10% of gross domestic product in 1994 – unsustainable and unacceptable in the international economic climate of the time.
The main task that faced Manuel and his immediate predecessors after 1994 was to stabilise the economy. They knew then – as they do now – that the goodwill of the World Bank and IMF depended primarily on the same thing that will determine investors’ decisions to put or keep money in South Africa: the government’s success in achieving a low budget deficit, low inflation and related measures of stability. On this, the jury is still out.
The countries that can now afford to disregard the Washington consensus’s usual call for low inflation and small budget deficits include some of those worst affected by the Asian crisis. Thailand is one. Indeed, the World Bank and IMF are currently urging some Asian governments to run bigger budget deficits, to cut interest rates and to tolerate higher rates of inflation. Why? Partly because demand for goods and services has fallen so sharply that there is a real risk of deflation and economic collapse both within these countries and in Asia, which some fear could lead to world depression.
A second reason the World Bank and IMF are prescribing a different medicine for some of the sick Asian tigers is the two institutions’ revised understanding of what caused the economic crisis in the region. The new understanding is that what happened was not caused by bad macroeconomic management – most of the Asian economies affected were well managed at that level. Instead, it was a crisis of the corporate and banking systems.
This version is: foreign banks and investors, convinced by talk of an economic miracle, piled into Asia with more fervour than good judgment. Simultaneously, Asian businessmen saw and grabbed opportunities to get rich quick and borrowed heavily. For the resultant growth to be sustainable, the region needed a mature, well-supervised banking and financial sector. Instead, its financial system was immature and badly supervised. When it became apparent how heavily Asian corporations were in debt, there was a run on national currencies, interest rates were raised in response, and this made it yet more difficult to repay debt. The result was crisis.
International investors are still wary of emerging markets – including virtuous ones like South Africa. This is no surprise. If you had invested money on the stock exchanges of the world’s 10 leading emerging markets in 1991 and sold up in 1998, you would have received little or no return on your investment.
This wariness will persist. In our case it is likely to continue even for a year or two after the South African economy has achieved its main macroeconomic targets under the growth employment and redistribution strategy. These include: inflation under 8% a year; a real bank rate of 3% and a budget deficit under 3% of gross domestic product. Do we have the discipline to hold out that long?