The Reserve Bank’s push for overambitious inflation targets is a deeply flawed policy at the heart of South Africa’s modest growth and chronic joblessness.
Even if inflation dropped to zero and stayed there, the primary toxin — uncertainty — would remain. The economy’s fundamental structure ensures volatility and uncertainty. Policymakers should accept this and move on.
China’s unemployment challenges rival those of South Africa, but it has turned its massive pool of jobless into an asset by leveraging their potential through foreign direct investment (FDI). This has been made possible by maintaining a consistently undervalued currency.
By contrast, South Africa has a strong volatile currency and negligible FDI; and views the unemployed as a liability.
China’s growth is now constrained by inflationary pressures after a decade of nearly 10% annual growth which has, remarkably, left at least one Chinese province short of low-skilled labour.
To rein in inflation, growth may have to fall to the high end of South Africa’s growth range, times two.
There is a perception in South Africa that low inflation means stability. This is nonsense.
The country is at or near the top of the global league tables in unemployment, HIV/Aids and rape. Without substantial progress on such core issues, consumer sentiment will at best put a brave face on a fundamentally unstable situation.
Ignoring social issues and focusing on structural economics also paints an unstable picture.
Recent quarters have amply dem-onstrated that reducing inflation does not substantially reduce uncertainty and lead to higher investment and employment — even when the economy is vibrant.
In the short term, consumer and business confidence have responded well to lower interest rates on the back of lower inflation and a strong rand. However, the better forward gauge of the long-term potential to attract and reward capital is FDI, which remains dismal.
Barclays’s bid for Absa is a rare exception, but is far less beneficial than investment in a plant or new business.
Investors do not buy into the local illusion that a strong rand and low inflation mean stability. They see neither stability nor prospects for high growth and place long-term investment elsewhere. In important ways, the country is more stable than international news coverage and general perceptions would suggest.
But as long as South Africa remains satisfied with the meagre dent in unemployment, coupled with the continued enrichment of the “haves”, the core problems and international perceptions will fester.
Consider a currency trader’s perspective. The rand is a free-floating currency of a modest-sized economy that exports and imports large amounts of commodities and goods not denominated in rands. This virtually ensures volatility.
Currency traders also like speculating in rands because the pool traded is small enough to push around the currency’s value. This attraction often leads speculators to generate still greater volatility.
The rand recently vacillated by upwards of 10% in a month when domestic inflation was quite subdued. There cannot be better proof that constraining inflation does not ensure stability.
The Reserve Bank has won its battle but we are no closer to winning the war. Where is the pay-off in job creation? What happens when the currency and inflation pendulums swing back the other way?
Low inflation may help improve debt rating, but how helpful is this when the country’s borrowings and FDI are minimal?
China’s growth is spurred through exports, but this creates jobs that turn the unemployed into increasingly active consumers of local products.
To the degree that South Africa’s chronically unemployed can be transformed into robust consumers, the gross domestic product (GDP) mix will be less exposed to currency swings.
The advantages of this have been amply demonstrated in the United States, where the currency has been trounced and the economy continues to expand at a pace, as domestic production and consumption account for the vast bulk of GDP.
The diversification of South Africa’s economy is happening slowly because the economy’s underlying growth rate is constrained by excessively conservative policies.
South Africa follows the controversial “Washington Consensus” more closely than most developed or developing economies.
These policy guidelines were evolved by University of Chicago economists trying to rectify perennial irresponsible Latin American economic policies in the 1970s and 1980s. Are they relevant here? No.
The African National Congress inherited policies that by comparison with Latin American counterparts were pillars of monetary and fiscal rectitude — in part because of being shunned by international banks responding to apartheid. More significantly, the Nationalists had little concern for the unemployed masses.
Only through policies that promote broad economic growth and generate large numbers of jobs will South Africa achieve greater economic stability.
The policymakers should compare the pedestrian benefits of their ambitious inflation goals to those of other nations, where inflation control has not become a fetish.
Shawn Hagedorn is an independent economic analyst