Economic populism not just for madmen
Former central bank governor now finance minister Tito Mboweni was in storytelling mood on Friday, speaking of how much he lost in the Steinhoff collapse and how he was “bullied” in an 8.30am call to accede to the presidential “request” that he take up his latest assignment.
It was vintage Mboweni, some said, and for young professionals in the audience it was a glimpse into the character of a man who until a few weeks ago they had known as Cassper Nyovest’s muse.
Central bank governor Lesetja Kganyago gave a speech scathing of populism and “failure to understand [macroeconomic] constraints”. The populist solution is to start spending, Kganyago observed, and “push demand in the economy without consideration of constraints”. These constraints, he suggested, are runaway inflation, balance of payments crises and “knowhow” issues.
Kganyago is correct that for societies in transition like ours, with deep structural concerns, the social fallout of runaway inflation and a balance of payments crisis can require decades or even centuries of reconstruction. But what he dismisses as “populism” has an intellectual history in economic literature, much like the “policy tripod” he suggests ought to be the only way. This reading of the literature and historical experience (especially in Latin America) requires engagement.
One doesn’t need to have written a PhD on Milton Friedman’s monetarism to understand that two sets of populists were the target of Kganyago’s critique. The first is certain “left voices” within the ANC, Kganyago’s former employer, and the alliance broadly, who have long called for a relaxation of the inflation target, nationalisation of the central bank and strong intervention in currency markets to “smooth” exchange rate fluctuations. The latter call will resonate with consumers desperate for reprieve from fuel price increases. The second is those in the EFF who have called for similar interventions.
That these “alternative” ideas receive political attention should be welcomed, as pluralistic approaches — rather than the “there is no alternative” approach — are what we need.
To be fair, Kganyago did suggest there are times when “policy stimulus is appropriate”, but only as a tool for smoothing output over the cycle. What this approach overlooks is that the challenges our domestic economy faces are more structural than cyclical. We are not in a period of stagnant growth because of the business cycle, but because the structure of past growth cycles and the accumulation path followed by our economy makes any future growth difficult to sustain in the absence of radical change to the underlying structure.
However, to suggest those who hold ideas to respond to these issues that don’t fit the monetarist playbook are, as Vishnu Padayachee observed, “macroeconomic populists and madmen” is alarmist and unfair.
There is a view that for a future sustainable economic path to materialise, we need to confront not only macroeconomic concerns (inflation, balance of payments and “learning”) but also micro-level constraints that increase transaction costs, squeeze disposable incomes and prevent economic actors from collectively creating value. These constraints include the spatial design of our country. As former statistician-general Pali Lehohla suggested last week, “poverty is a costly exercise”.
It is to these long-term challenges that political and policy responses must respond.
In this regard I agree with Lumkile Mondi, and the stimulus implied in his notion of a Keynesian Moment for Reconstruction, especially its emphasis on infrastructure spend. Moreover, it has to be the kind of infrastructure or “overhead capital”, as some economists have suggested, that confronts historical and social constraints. But to justify a rise in the debt-to-GDP ratio it must also be the kind of investment that crowds in investment and boosts incomes, production and employment.
This kind of exogenous injection has the potential to increase employment and demand in sectors such as construction, with high employment multipliers. According to the 2017 Budget Review, for every R1m injection into the construction sector there should be a R1.9m increase in national output, 3.4 unskilled or semi-skilled jobs, and 1.5 skilled jobs. Our challenge in the short term is to solve the unemployment challenge with the skills we have (or don’t have) while we build the ideal skill profile. Such targeted stimulus is important.
But, Kganyago is right about the burden of expectation we ought to place on the economic policy proposals of politicians. As elections loom, we ought to ask our politicians more difficult questions about what the “transmission mechanisms” of their decisions will be.