In­fla­tion-tar­get­ing is good for all of us

Higher in­ter­est rates won’t cre­ate jobs

Weekend Argus (Sunday Edition) - - SPORT - Bonke Du­misa

THE PO­LIT­I­CAL and eco­nomic dis­course in South Africa over the past few weeks re­minds me of the first stanza of the poem Desider­ata, which goes as fol­lows: “Go placidly amid the noise and the haste, and re­mem­ber what peace there may be in si­lence. As far as pos­si­ble, with­out sur­ren­der, be on good terms with all per­sons, speak your truth qui­etly and clearly, and lis­ten to oth­ers, even to the dull and ig­no­rant; they too have their story.”

Many South Africans, in­clud­ing me, were not im­pressed by Pub­lic Pro­tec­tor Bu­sisiwe Mkhwe­bane’s med­dling in the Con­sti­tu­tion. She acted ul­tra vires, go­ing be­yond her con­sti­tu­tional and le­gal man­date and stray­ing into mat­ters that are out­side her do­main.

On Mon­day, Mkhwe­bane rec­om­mended that the gov­ern­ment amend the Con­sti­tu­tion in or­der to change the man­date of the South African Re­serve Bank (Sarb).

She was in the wrong legally and eco­nom­i­cally. It is there­fore not sur­pris­ing that both Absa and the Re­serve Bank have said they are go­ing to chal­lenge her re­port on the Bankorp bailout.

Her med­dling has even been strongly con­demned by the African Na­tional Congress, with the party’s trea­surer-gen­eral, Zweli Mkhize, stat­ing that the is­sues she raised in her re­port could, cor­rectly, have been placed on the agenda of the ANC’s forth­com­ing pol­icy con­fer­ence(s).

The Congress of South African Trade Unions was the only sig­nif­i­cant mem­ber of the Tri­par­tite Al­liance to come out strongly in favour of the Pub­lic Pro­tec­tor’s med­dling.

This ar­ti­cle is, how­ever, not about crit­i­cis­ing Mkhwe­bane. That as­pect would re­main a point, in le­gal speak, in lim­ine, where peo­ple chal­lenge a case purely on tech­ni­cal­i­ties rather than on the mer­its of the pro­nounce­ments them­selves.

Let me fo­cus on the mer­its of Mkhwe­bane’s pro­nounce­ments.

She says Par­lia­ment must amend leg­is­la­tion and the Con­sti­tu­tion in or­der to change the Sarb’s man­date from con­cen­trat­ing solely on mone­tary pol­icy.

As things now stand, the Re­serve Bank fo­cuses on the im­ple­men­ta­tion of mone­tary pol­icy and Na­tional Trea­sury fo­cuses on fis­cal pol­icy.

This is not just the out­come of his­tor­i­cal ar­range­ments, but is de­lib­er­ately in­tended to cre­ate a bal­ance in how the coun­try’s eco­nomic fun­da­men­tals are as­sessed.

The Pub­lic Pro­tec­tor be­lieves the Re­serve Bank must not fo­cus only on con­tain­ing in­fla­tion within a band of be­tween 3 per­cent and 6 per­cent, but it must also con­cen­trate on re­duc­ing the high rate of unem­ploy­ment.

De­creas­ing the rate of unem­ploy­ment – cur­rently 27.7 per­cent – is in­deed a noble goal, and all of us should do ev­ery­thing in our power to at­tain it. Tack­ling job­less­ness is even more im­por­tant when it is con­sid­ered that the of­fi­cial unem­ploy­ment rate ex­cludes “dis­cour­aged work-seek­ers”, which leads many peo­ple to as­sert, jus­ti­fi­ably, that the real rate of unem­ploy­ment is above 38 per­cent. I can boldly state that, in some ru­ral ar­eas, the real rate of unem­ploy­ment ex­ceeds 50 per­cent.

Un­for­tu­nately, noble in­ten­tions can­not be based on wrong as­sump­tions and/or wrong poli­cies. Mkhwe­bane’s pro­nounce­ments are based on the view held by Cosatu and other “left­ists”that, if the man­date of the Re­serve Bank was changed, it would stop fo­cus­ing on in­fla­tion-tar­get­ing and thus pre­sum­ably al­low the money sup­ply to in­crease. This po­lit­i­cally at­trac­tive the­ory, with­out nec­es­sar­ily tak­ing the real eco­nomic fun­da­men­tals into ac­count, is one of the rea­sons Zim­babwe is a failed state. Zim­babwe does not even have its own re­li­able cur­rency.

The Sarb fo­cuses on con­trol­ling the in­fla­tion rate to en­sure that peo­ple’s money has real value, giv­ing cit­i­zens the space to use their dis­pos­able in­comes ef­fec­tively.

Per­haps I should not as­sume that ev­ery­one knows what in­fla­tion means. Let me ex­plain for the ben­e­fit of those

If we al­lowed our in­fla­tion rate to rise to 24 per­cent, as hap­pened in the late 1990s, peo­ple’s buy­ing power would be sig­nif­i­cantly cur­tailed.

who may be un­sure. If the in­fla­tion rate is 6 per­cent, it means you need 6 per­cent more money to buy the same bas­ket of goods as you did last year.

If we al­lowed our in­fla­tion rate to rise to 24 per­cent or there­about, as hap­pened in the late 1990s, peo­ple’s buy­ing power would be sig­nif­i­cantly cur­tailed.

Do you re­mem­ber the num­ber of vi­o­lent strikes in those years, when em­ploy­ees de­manded ex­or­bi­tant salary in­creases of over 30 per­cent? That led to many busi­nesses re­trench­ing staff, and some were forced into liq­ui­da­tion.

The reality of mone­tary pol­icy and fis­cal pol­icy is that coun­tries must con­tin­u­ously en­gage in trade-offs be­tween aus­ter­ity and false pros­per­ity. There is no sta­tis­ti­cal ev­i­dence to sup­port the as­ser­tion that higher in­ter­est rates cre­ate more job op­por­tu­ni­ties.

In my ev­ery­day ca­pac­ity, I have ob­served how hundreds of thou­sands of con­sumers are forced to go to debt coun­sel­lors to ap­ply to have their credit agree­ments re-ar­ranged, be­cause they can­not cope with their debt-re­pay­ment obli­ga­tions. This is pre­cisely why the trade sec­tor fig­ures for the first quar­ter of this year showed a neg­a­tive growth rate of over 4.9 per­cent, which con­trib­uted sig­nif­i­cantly to the coun­try en­ter­ing a tech­ni­cal re­ces­sion.

And this is hap­pen­ing in an en­vi­ron­ment where the in­fla­tion rate is within the tar­get range of three to six per­cent and the repo rate is at 7 per­cent. Can you imag­ine how worse the sit­u­a­tion would be if in­ter­est rates were at 28 per­cent, as we ex­pe­ri­enced in the not-too-dis­tant past?

If you were se­ri­ously in­con­ve­nienced and ir­ri­tated by the re­cent taxi block­ades, which took place be­cause the in­dus­try was protest­ing against be­ing charged an in­ter­est rate of 28 per­cent, think where we would be if our mone­tary and fis­cal poli­cies did not pre­scribe max­i­mum in­ter­est rates. Pro­fes­sor Du­misa is an independent eco­nomic an­a­lyst and an ad­vo­cate of the High Court of South Africa.

Pub­lic Pro­tec­tor Ad­vo­cate Bu­sisiwe Mkhwe­bane briefs the me­dia.

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