The annual conference of the Association of Black Securities and Investment Professionals played host to some of South Africa’s most prominent and influential financial professionals. The overarching theme examined how the financial services sector — the backbone of the South African economy — can influence economic growth, equality and transformation. Kick-starting the conversation was Lesetja Kganyago, governor of the South African Reserve Bank, who examined the impact of populist politics on economic growth and financial inclusion.
“Populism wins supporters because it speaks to ordinary people about real problems that leaders rarely confront,” says Kganyago. “However, it ends up hurting the people it was meant to help, because populist governments are weak on economics.”
Populism rises in countries that have high levels of inequality. A deep dissatisfaction with the status quo — too much unemployment, inequality and poverty — ignites the rise of the populist politician. Their path to power is categorised by the hitting of nerves in speeches and the promises of resolution in economics. However, the populist solution to economic inequality is to start spending and to push as much demand as possible into the economy, regardless of the constraints. The argument is that more spending will ignite wealth and growth. People will be better off as it encourages more supply and creates more jobs and more investment.
“The populist government spends money as much as possible, borrowing from pension funds and the central bank and taking from the foreign reserves of the country,” says Kganyago. “It works! The immediate consequence of this policy is an economic boom. Those who detract from populism and declare it a disaster look foolish. There’s growth, wage increases and employment. But it doesn’t last. Time and time again this boom goes bust and results in inflation, collapsed growth and failure.”
In many instances, there are cases of inflation exceeding several thousand percent a year — countries such as Peru and Zimbabwe being recent cases in point. It is a toxin that permeates every aspect of economy and country as it disrupts savings, shifts down longer-term credit markets and interferes with daily business. What starts as a bump in growth ends in a depression and a rise in poverty.
“As long as there are foreign exchange reserves left or people willing to lend dollars, the boom can go on, but as soon as financing dries up there is only one lender left who will take the country’s call — the International Monetary Fund,” says Kganyago. “They aren’t interested in financing unsustainable programmes and the populist is now forced to accept the programme that it originally dismissed. The one where they touted the rhetoric of ‘our country is rich, so if the people are poor it is because someone else has hoarded these riches.’”
This rhetoric is what spurs much of the populist growth as it resonates with the disaffected. Populism says: our country is rich in natural resources and we are poor because someone else has taken the wealth, let us redistribute this wealth to the people. The populist promotes the idea that their country needs no other country to thrive. It has its own natural resources — why would it need to rely on those from other countries? The reality is that this is also the policy that lands the populist regime in macroeconomic trouble. The wealth that they have taken and redistributed doesn’t cover their extra spending and kills off both production and investment.
“What few populist regimes realise is that redistributing wealth doesn’t mean that it can be rebuilt once it is gone,” adds Kganyago. “The wealth of a country doesn’t lie in its soul, but in the minds of its people. If the state declares war on market mechanisms and condemns rich people it breaks down the machine that generates wealth, kills off investment and scares skilled people away. There are countries with limited natural resources that are prosperous and countries with significant natural resources that are poor. There is more to wealth than winning the commodities lottery.”
The populist does not what to hear how a resource like oil is difficult to extract and requires both skill and infrastructure. They are not interested in the hard work of development and the patient progress of growing incomes year-on-year until the country is developed. This reality doesn’t work when the sales pitch says that the country is already rich and someone else is stealing the wealth.
“Unfortunately, people fall for get rich schemes all the time and countries can fall for them too,” says Kganyago. “There is abundant evidence that the economic strategy of populism leaves people worse off than before and yet the same ideas show up time and again. However, some countries have constructed defences against these errors, building constraints into their policy frameworks and ensuring that their microeconomics have brakes and airbags, not just accelerators.”
As South Africa sits within the risk framework for the rise of the populist leader and already bears the brunt of much of the issues highlighted in Kganyago’s analysis, it is worth paying attention to how the country can shift from poverty to growth.
Kganyago presented four clear principles that are designed to confront populist economic policies and highlight the gaps in long-term growth and development. The first is that rich countries do not make rich people — if the development strategy returns the wealth of the country to the people it won’t work, as lasting wealth is citizen knowhow. The second is to ensure that there are serious answers to questions around macroeconomic constraints and plans for inflation. South Africa has recently developed a stimulus and recover package that answers these questions to ensure sustainable growth. The third is to be aware that redressing the acute challenges of inequality, poverty and unemployment should not see the government gamble with macroeconomic stability. The system has to be managed with extra care to ensure it doesn’t implode.
“Finally, don’t ignore the populist complaint,” concludes Kganyago. “The populist is a very good benchmark of social frustration and can detect where society hurts the most. They aren’t very good economists so their ideas routinely end in disaster, but that doesn’t mean they are foolish.”