In the wake of toxic ‘cap­ture’ pol­i­tics, the Pub­lic Pro­tec­tor’s re­port fur­ther sup­presses eco­nomic de­bate

CityPress - - Business - DEWALD VAN RENS­BURG dewald.vrens­burg@city­press.co.za

Crit­ics of the in­fla­tion tar­get­ing man­date set by the SA Re­serve Bank have never ar­gued that in­fla­tion is harm­ful or pos­i­tive. How­ever, the finer points of the long-stand­ing ar­gu­ment are now get­ting lost in the af­ter­math of Pub­lic Pro­tec­tor Bu­sisiwe Mkhwe­bane’s at­tempt to change the cen­tral bank’s man­date. Re­serve Bank gover­nor Le­setja Kganyago has since taken sev­eral jabs at peo­ple whom he ac­cuses of pro­mot­ing “mone­tary pop­ulism”.

Ad­dress­ing an au­di­ence at a func­tion on the day that Mkhwe­bane’s re­port was re­leased, he said: “Through his­tory, some coun­tries have tried to deny these truths, pre­tend­ing that high in­fla­tion some­how begets sus­tain­able growth.”

And last week, in a note is­sued by the cen­tral bank di­rect­ing peo­ple to “base the mone­tary pol­icy dis­cus­sion on facts”, Kganyago char­ac­terised his op­po­nents in a sim­i­lar way .

“It would ap­pear from the present dis­cus­sion that some pro­po­nents of a new ap­proach to mone­tary pol­icy favour higher in­fla­tion,” he wrote.

The prob­lem with that is that no one has ac­tu­ally ever said that in­fla­tion it­self does any good.

Trade fed­er­a­tion Cosatu, a long-stand­ing en­emy of strict in­fla­tion tar­get­ing, has al­ways ar­gued for a mixed man­date like that of the Fed­eral Re­serve, which in­cor­po­rates an em­ploy­ment tar­get along­side an in­fla­tion tar­get.

This is par for the course, said Neva Makgetla, a se­nior econ­o­mist at the not-for-profit re­search firm Trade and In­dus­trial Pol­icy Strate­gies.

“Peo­ple who want a very tight mone­tary pol­icy tend to car­i­ca­ture their op­po­nents as not car­ing about in­fla­tion at all,” she told City Press.

Fol­low­ing Mkhwe­bane’s re­port, Neil Cole­man, Cosatu’s strat­egy co­or­di­na­tor, wrote a sum­mary of the long stand­off ex­ist­ing within the govern­ing al­liance around mone­tary pol­icy.

These de­bates have “un­for­tu­nately been tainted by the poi­soned po­lit­i­cal cli­mate ... mak­ing it ex­tremely dif­fi­cult for a ra­tio­nal pol­icy dis­cus­sion to un­fold”, he said.

Even econ­o­mists who op­pose the cen­tral bank’s in­fla­tion tar­get­ing mis­sion have re­coiled from Mkhwe­bane’s re­port.

Last week, 78 aca­demics and econ­o­mists, many of whom are against in­fla­tion tar­get­ing, signed an open let­ter slam­ming Mkhwe­bane’s “un­in­formed and rash state­ments”.

In­stead of be­ing a “well-in­ten­tioned, even if plainly wrong, in­ter­ven­tion”, they cite the “very, very high” like­li­hood that it is a con­scious at­tempt to un­der­mine the Re­serve Bank’s gov­er­nance.


Stephanie Seguino, pro­fes­sor of eco­nom­ics at the Uni­ver­sity of Ver­mont in the US, has writ­ten crit­i­cally about South Africa’s in­fla­tion tar­get­ing regime.

“The goal of macro pol­icy should be to raise liv­ing stan­dards and to pro­mote em­ploy­ment growth. Con­trol­ling in­fla­tion is a means to that end, not the end it­self,” she told City Press.

“The range of 3% to 5% is too low. Re­search shows that in­fla­tion rates be­low 15% to 18% do not have a neg­a­tive ef­fect on growth. Some of the most rapidly grow­ing economies – such as South Korea and China, and more re­cently, Ethiopia – had in­fla­tion rates above 10%.”


“Part of the prob­lem is that in­fla­tion fell world­wide in the late 1990s, for rea­sons no one has quite clar­i­fied,” said Makgetla.

One the­ory is that the global flood of low-cost Chi­nese prod­ucts “ef­fec­tively re­flected the in­clu­sion of large amounts of cheap labour in global mar­kets” and drove down prices for all sorts of things.

Glob­ally, this has led to a com­plete re­def­i­ni­tion of what con­sti­tutes “high” in­fla­tion, said Makgetla.

“Back in the 1990s, a 10% in­fla­tion rate was quite com­mon and not seen as hy­per­in­fla­tion. In any case, in­fla­tion be­low 20% is not hy­per­in­fla­tion by his­tor­i­cal mea­sures. But most econ­o­mists would pre­fer to stay well be­low 10% as the max­i­mum.

“The ques­tion is not what the ceil­ing should be – it is how we should bal­ance is­sues around growth ver­sus in­fla­tion,” she added.


De­fend­ers of the in­fla­tion tar­get­ing regime point out that South Africa’s un­em­ploy­ment is struc­tural and largely im­per­vi­ous to mone­tary pol­icy.

Annabel Bishop, chief econ­o­mist at Investec, es­ti­mates this struc­tural el­e­ment at 22 per­cent­age points of the 27.7% of­fi­cial un­em­ploy­ment rate.

“This means that even if we cut in­ter­est rates sub­stan­tially ... these in­ter­est rate cuts would not re­duce un­em­ploy­ment to be­low 22%,” she wrote af­ter the re­lease of Mkhwe­bane’s re­port.

“The cur­rent broad aca­demic con­sen­sus is that the South African un­em­ploy­ment rate is in­elas­tic and not responsive to changes in the in­ter­est rate,” said Cobus Ver­meulen, an econ­o­mist at the Uni­ver­sity of SA.

Ver­meulen re­cently pub­lished a pa­per at­tempt­ing to mea­sure the ap­pli­ca­bil­ity of the so-called Phillips curve to South Africa’s econ­omy.

This is a propo­si­tion, dat­ing from a 1958 es­say by econ­o­mist Al­ban Wil­liam Phillips, that there is his­tor­i­cally a pos­i­tive re­la­tion­ship be­tween in­fla­tion and em­ploy­ment.

“Cur­rent data – glob­ally as well as in South Africa – does not sup­port the re­la­tion­ship any­more,” Ver­meulen told City Press.


The coun­ter­ar­gu­ment is that in­fla­tion it­self also has a spe­cific struc­tural make-up in coun­tries such as South Africa that mil­i­tates against in­fla­tion tar­get­ing.

“In­fla­tion tar­get­ing causes in­fla­tion to fall by rais­ing in­ter­est rates,” said Seguino.

“It acts on the de­mand side of the econ­omy, whereas in many devel­op­ing coun­tries, in­clud­ing South Africa, in­fla­tion is a sup­ply side phe­nom­e­non. If the prob­lem is on the sup­ply side, tight­en­ing the money sup­ply in no way ad­dresses the root causes of in­fla­tion.

“The pol­icy tool is the wrong one for the prob­lem at hand ... it sim­ply raises the cost of credit and hurts em­ploy­ment.

“This has a neg­a­tive ef­fect on work­ers and their abil­ity to in­vest in their chil­dren, with long-run­ning neg­a­tive ef­fects.

“There are other tools at the cen­tral bank’s dis­posal, if it chose to use them – such as cap­i­tal con­trols and as­set-based re­serve re­quire­ments – to in­cen­tivise credit to sec­tors of the econ­omy where there are sup­ply bot­tle­necks that con­trib­ute to in­fla­tion,” said Seguino.

Makgetla agreed that mone­tary stim­u­lus could not over­come struc­tural un­em­ploy­ment di­rectly.

“That said, the kinds of pro­grammes needed to ad­dress struc­tural job­less­ness ... won’t work if the whole econ­omy is slow­ing.”

South Africa had seen fis­cal and mone­tary pol­icy tight­ened along­side slow growth, she noted.

“No one can de­fend that as op­ti­mal, even if they think it is un­avoid­able. For me, the ques­tion is how to come up with more in­no­va­tive ap­proaches to both,” con­cluded Makgetla.


ALL THAT GLITTERS Vis­i­tors look at items on dis­play dur­ing the open­ing of an ex­hi­bi­tion on Tues­day en­ti­tled An­cient Gold and Sil­ver Trea­sure from Ro­ma­nia at the Deri Mu­seum in De­bre­cen, 221km east of Bu­dapest, Hun­gary. The guest ex­hi­bi­tion, which in­cludes more than 1 000 pieces of gold and sil­ver, will run un­til Oc­to­ber 15

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