Let us open the discussion rather than close the conversation
- Ayabonga Cawe
- 13 Jul 2017 11:19 (South Africa)
The furore around the Public Protector’s recommendation on the Reserve Bank’s mandate had her spokesperson, Cleopatra Mosana in a “tailspin”. She likened the suggestion to amend the Constitution in relation to the mandate of the Reserve Bank to a “typo”.
Mosana’s simplification of a costly and “binding” typo, is as unsettling as another phenomenon: alarmist market and media reaction to any debate about changes to the policy mandate of 370 Helen Joseph Street. As with all all storms in China teacups, it is inevitable that we run the risk of losing sight of the crux of the debate. When this happens the fourth estate, the markets and all affected parties salivate at the prospect of the Public Protector making an about-turn on her “recommendation”, or “binding” suggestion or typo if you like. What we miss, is the content of the recommendation; the questions it asks. Rather than interrogate the message, we attack the postman delivering it. As big a fan as I am of the entertainment value of roasts and dragging, the debate isn’t as analytically useful as that needed to respond to the deepening social and economic crisis our country finds itself in. A few typos, fumbled interviews and “unforeseen” currency losses later, relevant questions remain.
First, why is questioning the mandate of the Reserve Bank, akin to “mouthing off” the family’s dirty secrets at the long awaited mcimbi? The answer may lie in what one of the founders of the Rothschild banking dynasty said: “Give me control of a nation’s money supply, and I care not who makes its laws.” This debate is in essence about who should and must control the supply of money and the regulation of the banking sector. One can easily understand why such control is contested in an economy reliant on short term flows of capital into the country’s stock markets, banks and corporations to overcome balance of payment challenges.
The second part of the answer relates to the legal concerns around “amendments” to the Constitution. Constitutional amendments (as a result of the two-thirds required to make amendments), rather than being an aberration of constitutional supremacy, are an outcome and reflection of shifting political alliances, priorities and social dynamics. Amendments to the Constitution are not heresy. Those making arguments to amend it for whatever purpose (Reserve Bank mandate, land etc) are not “heretics” of the “Church of Reconciliation and Nation Building”, but do so out of a recognition that it is a living document subject to iteration in line with changing social conditions. It cannot be frozen in time.
Second, is the defence of the inflation target as the sole conduit towards the constitutionally envisioned ‘price stability’, justified? If so, what impact does inflation (and conversely the interest instrument used to keep it in check) have on growth?
Inflation targeting, which is used to keep the inflation within the 3-6% target band through the use of interest rates as an instrument, is not received with the wholesale consensus that some might suggest. Reserve Bank governor, Lesetja Kganyago held true to the popularly held belief that ideally, keeping inflation rates (at all times and under whatever conditions) low, is “supportive of growth”.
If we can keep inflation lower, anchoring inflation expectations, that should in turn generate a lower rate of interest to support the economy.
The statement above, at least the sequence of it, implies that inflation is the variable that drives the level of interest rates, which in turn determines the terms of payment for the vehicles we drive and homes we live in. So the governor acknowledges that a lower interest rate is “supportive” of the economy and its growth, yet what is unsaid in that sentence is that the Monetary Policy Committee, sets the repo rate in response to changed inflationary expectations and not the other way around. The movement of rates is a policy instrument used in response to inflationary expectations and not the outcome of keeping inflation in check. Additionally, there are issues that remain around how inflation (the “target variable”) is calculated. As Luke Jordan noted, the measurement of inflation targeting, although oft-cited as “pro-poor with a reminder of Zimbabwe in tow, is often in its detail rather indifferent to the poor”.
Within a rounding error, therefore, the inflation targeting framework cares as much about the “price” of domestic workers as it does about bread. While it is true that the “food” category overall counts for 15 points, much of that is spread across food categories that barely overlap with the consumption of the poor.
But what is actually being targeted? As the governor suggests, inflation targeting is about ‘anchoring’ expectations. These expectations of price increases, much like a self-fulfilling prophecy, will lead to higher prices which “can be anchored by strict inflation targeting” (by raising interest rates and curbing ‘consumption’). What happens when the economy isn’t growing? In that instance there is what is called stagflation (low growth and high inflation, or inflation beyond the targeted band). In such instances, inflation targeting may rein in consumption (due to tight interest rates), anchor expectations and stabilise inflation, but what does it do to growth? Two facts require mention here, which will explain some of the policy mandate proposals suggested below.
Low inflation (or the pursuit of that aim) or instances where inflation has been within the target band have not been associated with the targeted levels of output growth NOR do low interest rates translate to high levels of growth.
What these two facts indicate, as Fatima Vawda noted, is that the challenges of the South African economy are structural, rather than ones that can be overcome by changes in monetary policy alone.
“The economy has struggled to grow in a low interest rate environment and this speaks to the fact that it is more an issue of structural reform being needed in SA as opposed to low borrowing costs. Companies have not been investing and expanding in the low interest rate environment so the hurdle to growth has not been the cost of capital.”
What Vawda’s comments indicate, is that any debate on monetary policy mandate needs to happen in a holistic conversation or as part of a policy mix geared towards thorough-going structural reform. Such structural reform needs to touch on the real economy, value chains and ownership, supply-side challenges (education, infrastructure, energy etc) and the trade, monetary, industrial and fiscal policy required to achieve this. To ring-fence the Reserve Bank behind a narrow focus on targeting inflation may undermine such a holistic policy mix. How so? Take for example the challenge of a manufacturer (who can create jobs) who needs some form of concessionary credit policy on the part of the state, but that industrial policy intervention may be undermined by a flexible exchange rate that excessively fluctuates the value of the currency (affecting both machinery imports and final goods exports for the manufacturer). When interest rates are raised (as part of the inflation targeting framework), attracting short term capital flows, it may not only undermine the price competitiveness of South African exports, but also serve to choke the economy out of jobs, productivity and output gains. It’s about policy mandate (and alignment of this), rather than “ownership” as the ANC National Policy Conference debated last week.
The proposals over state ownership (with a slight caveat reinforcing the policy independence of the bank), serve two functions. Aside from upsetting the apple cart for the markets and investors, they also give some policy intent to the notion of radical economic transformation. In the age-old tradition of the ANC; walking right and talking left. So why did the bankers sell of the rand, enough to trigger a 2% decline in the rand over two days? The reason: the market simply believes that the ANC isn’t bluffing at all this time around.
The stakes in the battle for the ANC come December are that high. High enough to precipitate a shift to the left in ANC policy thinking, all in the name of retaining the crown jewels of the party machinery and some electoral ascendancy come 2019. Even ANC veteran, Ben Turok last week predicted that the ANC would “ease” monetary policy and the inflation target, which he feels has been strictly applied. This despite his caution that relaxation of the target, didn’t mean scrapping it altogether. In the New Agenda Journal published by the Institute for African Alternatives, he describes the lopsided economy’ that debates about policy instruments are intended to confront:
“South Africa has a grossly unequal and unstable capitalist system with persisting colonial-type race relations under a democratic political superstructure.”
It is towards a search for alternatives to a policy framework, which through its strict application, has made any stimulus difficult to pursue, that the discussion must move. There are alternatives, which can dismantle the structure mentioned above. These include the pursuit of relaxing the target (it’s about the ‘mandate’ not necessarily ‘ownership’), temporary exchange controls to manage ‘excessive’ fluctuations in the exchange rate, as part of an industrial, fiscal and trade policy targeted at boosting domestic demand, employment and export-focused and tradeable sectors. Of course with a focus on strengthening trade within the continent and the global south in light of a weak demand from traditional partners in Europe. In such a scenario, alignment within the economic cluster would ensure a co-ordinated recovery plan. Surely the debate must assess what implications, alternatives would have in the short, medium and long term, rather than scare-mongering about an apocalyptic “left” turn in the ANC anticipated by some in the markets.
It is clear from the current debates within the economics profession and scholarship, that inflation targeting equals growth, is an unbalanced identity (it doesn’t hold true in all scenarios). Nor does growth strictly imply some form of redistribution that can serve as a transitional stage towards a thorough-going economic transformation. None of these apply in all situations and spaces, for all time. Rather than play the (wo)man, we should play the ball. Put differently, let us open the discussion, rather than close the conversation, even if it is delivered by a messenger acting ultra vires. Typos or not. DM