Inflation nutters’ view of the world

The government’s paranoid, hysterical and nit-picking response to the recent United Nations Development Programme South Africa Human Development Report 2003 has shown that it does not have a single coherent proposal on what should be done to significantly increase the country’s miserable rate of economic growth.

There is nothing in the government’s current policies that explains how the country will ever reach the elusive 6% rate of economic growth.

Hardly three weeks after the inauguration of President Thabo Mbeki, the government has reneged on a critical pillar of its proposed contract with the people, an election promise to spend R100-billion to upgrade transport infrastructure. The government has slashed half of the programme — a plan to upgrade rail infrastructure and rolling stock — by two-thirds, from R45-billion to R14-billion, because the Treasury refused to provide the guarantees for Transnet.

The government’s response is puzzling because there is nothing new in the report. The United Nations Development Programme (UNDP) report in 2000 had reached similar conclusions.

My favourite quote from the 2000 report was from James K Galbraith, who said: ‘Where are the continuing success stories of liberalisation, privatisation, deregulation, sound money and balanced budgets? Where are the emerging markets that have emerged, the developing countries that have developed, the transition economies that have truly completed a successful and happy transition? Look closely. Look hard. They do not exist.”

The road to perdition is for the country to continue on its current economic growth path. Gross domestic product (GDP) per capita increased by 0,67% a year between 1995 and 2001, according to the UNDP. At this rate it will take more than 100 years to double per capita GDP. Other countries do it in 10 years and less. The UNDP makes a number of recommendations on how to get the country out of virtual stagnation, which should be taken seriously.

Firstly, it says that the government must borrow more money and increase the deficit to GDP ratio to 5%. I would add that there is no reason why the ratio cannot be increased to 10% for a while, if this is done within the context of a coherent growth strategy that ring-fences the money in a separate capital budget for infrastructure and taps into the resources of the financial sector and parastatals.

In the same way that the right wing can argue, quite convincingly, that tax cuts financed by debt eventually pay for themselves by boosting growth and, therefore, tax revenues, the same line of reasoning could be used to argue that targeted investments by the public sector would have a bigger impact. The multiplier effect of the government spending on infrastructure is two and a half times that of income tax cuts, according to the Treasury.

But the UNDP is wrong when it calls for tax breaks, along the lines of the Brenthurst Initiative, for companies that make a contribution to development. The government must prevent open-ended leakages from the fiscus and retain the option to increase taxes. If sequenced correctly, modest tax increases can redistribute incomes and opportunities, claw back revenue for further targeted investments, reinforce the drive for economic growth and crowd-in private sector investment.

The UNDP is right when it calls for the government to dump the inflation-targeting framework and introduce economic growth targets. The Reserve Bank’s punitive, usurous interest rates — there was an average real lending rate of nearly 11% between 1995 and 2002 — are suicidal and have few precedents anywhere in the world. With a real lending rate of up to 11% and a real economic growth rate of under 3%, very few projects are viable. No wonder corporate black economic empowerment deal-making has not succeeded in non-traded sectors.

The sky-high interest rates, which are wrongly increased each time there is an exogenous shock, contribute towards the volatility of the exchange rate, and therefore output, by attracting speculative flows of hot money from abroad. With exports now a larger proportion of GDP because of the country’s industrial policies that prioritised capital-intensive exports over expansion of the domestic economy, the volatile swings in the exchange rate have a greater impact on output.

High interest rates also increase the level of government debt. A significant drop in interest rates to a level that is marginally higher than the inflation rate, as is the case in most countries, would reduce interest on government debt. It will make investment projects more viable, kick-start a boom in low-cost housing, and take the speculative froth out of the currency market. The best way to reduce government debt as a proportion of GDP is to grow the denominator, the bottom part of the equation. With higher levels of economic growth the debt problem would vanish into thin air.

The government should review its strategy of outsourcing monetary policy to un-elected bureaucrats and change the mandate of the Reserve Bank to include maximising economic growth and job creation. After all, as Mervyn King, governor of the Bank of England, once said, people who believe that the only role of a central bank is to reduce prices are inflation nutters. There are no central bankers in the world who are inflation nutters, he said in 1997.

The government should respond to the UNDP’s recommendations by telling the country what alternative policies it has that can increase the rate of economic growth to above 6%. It should explain how it will raise more funds for development and grow the economy when it has constrained itself — without anyone putting a gun to its head — with a 3% budget deficit ceiling, a 25% tax to GDP ratio and the only central bank on the planet that subscribes to the inflation nutters’ view of the world.

Duma Gqubule is a freelance journalist and consultant

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Duma Gqubule
Duma Gqubule is founding director at the Centre for Economic Development and Transformation

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