SA needs a dose of sovereign money
OVER the past few weeks the nation has been bombarded by waves of conflicting messages from a range of supposedly informed quarters: political and economic.
Ordinary folk would be forgiven for drowning in despair as to which way to swim for possible safety.
Compounding the situation have been utterances from politicians that neither inspire hope nor engender respect as societal leaders.
What is clear though is that the ruling party, as with society at large, is divided. More frustrating however is that there are no statements of assurances as to how the economy can get out of its current quagmire.
The little hope many had in economists has evaporated as their policy suggestions and recommendations to the government for the past 23 years sang from the same hymn book, and religiously implemented by the government, have yielded little or no visible change in the fortunes of the majority.
A new Minister of Finance Malusi Gigaba, appointed after a controversial cabinet reshuffle, must be having an extraordinary baptism of economic fire.
On the one hand is an expectation by the masses of what is termed radical economic transformation, however it is defined, along with advice from his academic special advisor – of wholesale nationalisation of key levers of the economy.
Even here, there is no practical unanimity among the masses as to the genuineness of a sudden call of action by the president, if not for his own narrow interests.
And on the other is an economic establishment’s total pressure on the government to toe the orthodox economic line so well enjoyed and benefited by both foreign and domestic neoliberals since 1994.
Whichever way Gigaba heads folks, he is damned! It is perhaps here that I summon the non-partisan hand of pragmatism!
The history of economic development and prosperity, from both north and south, is clear for those who wish to tap into it and use applicable lessons and contexts. It is neither one that is left or right but one of pragmatism. But what would be deemed pragmatic in the case of South Africa? Isn’t pragmatism also in the eyes of the beholder, until the fruits of pragmatism have been proven nationally beneficial?
But before we look at what pragmatic steps the new minister can take, let’s first peer into how and why we have embraced economic failure.
Colonial and apartheid legacies are palpable wherever you go. The main economic policies sought to address these legacies, and which underpin growth and development stand, on the intellectual foundations of today’s dominant neo-classical school, embodied in what is commonly known as the Washington Consensus, whose edifice undoubtedly collapsed.
Even before its collapse, it produced little in the form of success. Not least to accept its failure than its maestro, Alan Greenspan, the longest serving governor of the US Reserve Bank. This central bank, like most, including the SA Reserve Bank continues to use models whose relevance has been called into question, including by the recently retired governor of the Reserve Bank of the UK Lord Mervyn King.
It is no surprise therefore that a series of what is termed unconventional monetary policies have been used to lift, shield and sustain broken western economies including many developing ones affected by the crisis. Curiously however, this government has not copied the remedies employed in the western and other developing economies to cure its own dying economy.
It would be very doubtful if those who instructed us to copy their defunct models in the first place did not instruct us not to copy their remedies. So much for national sovereignty.
South Africa is not only deaf and self-immunised to any new policy suggestion but dangerously inflexible in its application of its existing policies, even in the face of a collapsing economy.
Pragmatism does not appear to feature.What’s more, the nation, and mostly economists don’t seem to realise that our political economy is designed to create poverty, inequality and many other developmental challenges.
They continue to support a system that is inherently at tension with the need to clear the legacies of apartheid and colonisation.
What would be considered pragmatic for the minister to consider doing? As for historical evidence, the use of sovereign money to pay for national development imperatives like social and economic infrastructure is well documented.
All major economies have used sovereign money, called “Quantitative Easing” to not only bail out fraudulent banks, but enliven moribund economies.
The economy requires an urgent dose of sovereign money.
Sovereign money is not tax money, it is money created by state and injected into the productive sectors of the economy. This would be the first bold and radical move by the new minister to transform an economy that may otherwise take another decade to wake up from its neo-liberal induced slumber.
China, UK, Brazil, EU, Taiwan, US and many other nations have deployed such money in support of their ailing economies.
As the first round of sovereign money works its way into the economy, the minister would be advised to quickly look at the current debt management approach.
Instead of using the current debt instruments as advised by the World Bank/IMF and Bank of International Settlements that only seek to widen the deficit and increase debt, an approach that simulates domestic demand and thus grow the economy be adopted.
Funding in the form of non-tradable debt, besides meeting the IMF criteria, would also reduce the cost of borrowing, inject the needed vibrancy to the economy and would be available without rating from the rating agencies and thus also not affected by the potential further downgrades.
The current mark to market tradeable instruments is non developmental.
Our current currency volatility has much to do with our wide-open capital account.
The idea of an open economy is born of the notion that foreign capital is crucial for investment and therefore growth.
Evidence shows the opposite. Nations that have rapidly grown have depended less and not more on foreign capital. While at the IMF, the recently departed governor of the Reserve Bank of India, Professor Rajan was able to show exactly this point. It seems South Africa, even in the face of empirical research, is unable to accept and apply such evidence, but rather stick to failed IMF prescriptions, irrespective of the havoc hot money movements cause to our currency and the economy.
Gigaba would also be advised to create a series of central and regional state banks that can support industry and individuals.
Instead of nationalising banks, nationalising money enables the democratisation of money via the route of state banks.
The operational model of the current state banks would have to change. And so would be changes that would reorient the reserve bank mandate to include the promotion of employment, besides price stability.
Successful nations have historically used and appropriately structured their banking system to support growth development. Our system is plainly incapable.
South Africa would be well on its way out of the current neo-liberal stupor to a vibrant, sustainable and diversified economy that creates jobs and lifts people out of poverty and inequality.