Targeting inflation is not the path to growth

On June 7, the National Union of Metalworkers (Numsa) was honoured to host Reserve Bank governor Gill Marcus at its 25th anniversary gala dinner in Durban. She spoke on monetary policy and inflation in the face of the global economic crisis.

In her speech she said: “With respect to an employment target for monetary policy … we do not believe that monetary policy is the appropriate tool to solve what is essentially a structural problem. Monetary policy can influence growth and, by extension, employment over the cycle, but does not impact directly on long-run potential growth.” She insisted that “the primary mandate of central banks is the control of inflation”.

It is known that Numsa and Marcus disagree on this issue. We attach great significance to our views on monetary policy and the place of the Reserve Bank. We insist that the latter be nationalised and feel it is important to state our position clearly.

Marcus quoted the report of the 2010 United Nations Conference on Trade and Development. We also referred to it in our statement of November 1 2010 as support for our advocacy of an employment target for monetary policy. We believe she quoted it selectively to justify her inappropriate macroeconomic policy.

The main contribution of the report is to put on the table what it calls a “wage-led growth path”. Numsa has advocated for this for more than two decades. The basic argument in the report is that the days of export-led growth based on wage compression are over. 

Interest-rate mechanism
It means the days of keeping inflation low by suppressing wages are also over. Countries must now adjust their strategies to support economic growth and restructuring on the basis of raising domestic demand. 

Marcus quoted a section of the summary of the report on “controlling inflation more effectively through an incomes policy”, which, in fact, makes precisely the opposite case to the “interest-rate mechanism” policy of the bank.

We have long argued that combating inflation through interest rates is an inappropriate policy.

The report concurs. It says monetary policy must “shift emphasis towards growth and employment creation” and away from “the objective of maintaining price stability”. This is in line with the policy positions of the ANC-led alliance.

Price stability should not be the “primary mandate of central banks”. It can be achieved through an incomes policy. Monetary policy can also ensure credit to support the structural transformation of the economy. 

We need high inflation
What does an incomes policy mean for South Africa? It means that the share of labour should be raised to some optimal point at which domestic demand and thus job creation would be maximised.

That the share of labour will have to be raised is clear from the historical evolution of this variable: in 1995 the employees’ share of national income was 55.8%, but by 2011 it was down to 50.1%. Macro policy must at least reverse this regressive trend. It must be actively deployed to drive a wage-led growth path.
More than 68% of the unemployed have not worked or have not had a job in the past five years. Suppose that inflation hits its upper target of 6%. By increasing the interest rate to bring inflation down, the Reserve Bank increases unemployment. Once inflation expectations fall within the target band, the bank decreases the interest rate. But this decrease does not translate into the re-establishment of the initial unemployment rate. Instead, the unemployment rate becomes structurally higher than before the rate increase. 

Contary to some reports, at no stage did Numsa or trade federation Cosatu argue that, as a policy objective, “we need high inflation”. It would be insane.

What we have put forward is the need to strike a balance that favours unemployment reduction over inflation control and that the interest rate is a blunt instrument to control inflation. This would be in line with the Reserve Bank’s constitutional mandate “of protecting the value of the South African currency in the interest of balanced and sustainable economic development” (section 224 in the Constitution).

Pathological fixation on inflation
With current levels of mass poverty, dangerous and impossible levels of unemployment and extreme forms of inequality, the bank’s pathological fixation on inflation targeting does not promote “balanced and sustainable economic development”. Rather, it has taken an ideological position in favour of money capitalism at the expense of labour and employment.
Several attempts have been made since 1994 to wrest the Reserve Bank from its private-sector moorings and transport it into a democratic South Africa.

Numsa insists that it is in the interest of South Africa to nationalise the bank outright and secure full monetary sovereignty over it. We are aware of the serious implications of this, but we feel no price is too high to pay for democratic control of South African money and its value.

Not to nationalise the bank is to submit to the dictatorship of money and money mongers, both locally and internationally.

Irvin Jim is the general secretary of Numsa. This is an edited version of Numsa’s response to reports on its engagement with Marcus

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