Opinionista Saul Musker 10 June 2019

View from afar: the Reserve Bank mandate and South Africa’s growth paradox

The abrupt announcement by ANC Secretary-General Ace Magashule last week that the party had decided to expand the mandate of the Reserve Bank provoked a sharp and immediate rebuke from the Finance Minister and Reserve Bank Governor, followed shortly by a statement from the President. The reaction of the markets to these contradictory messages illustrates the paradox that South Africa faces as it seeks to escape a cycle of low growth and rising unemployment.

The immediate alarm that followed Ace Magashule’s press conference on Monday last week when he said that the ANC had decided to expand the mandate of the Reserve Bank was at least somewhat exaggerated. After all, while the Secretary-General no doubt occupies a powerful position within the party’s structures, he is not the one to make these decisions: we have in Tito Mboweni a capable and astute Minister of Finance, and in Lesetja Kganyago a central bank governor who is the envy of many advanced economies.

For now, a team of level-headed and knowledgeable officials holds the levers of fiscal and monetary policy. Magashule can vent all he wants, but he can’t change the interest rates, and he certainly can’t change the Constitution.

Nonetheless, statements like that issued after the National Executive Committee’s lekgotla are bound to send investors into a panic and induce a chilling effect in the markets. Most foreign investors, in particular, are not close followers of South African politics, and they do not make decisions based on the nuances of internal party manoeuvring or the complex balance of power in government.

Instead, they act based on the loudest signals – and to the cautious investor, this was a signal that the future independence of the Reserve Bank is not assured.

Of course, it is hardly worth repeating why any threat to the Bank’s independence is a danger to the economy, or why quantitative easing (or “quantity easing”, as the prototypically absurd ANC statement called it) is a bad idea for South Africa.

Quantitative easing, as Kganyago explained, is only a viable monetary intervention in the context of actual or imminent deflation, where an injection of liquidity into the economy is necessary because standard measures like lowering interest rates are no longer effective. In this scenario, injecting money into the economy by increasing the reserves of banks will facilitate higher investment, increase spending, and force inflation back up.

In any other context, however, where inflation is already positive, the same measures will drive inflation even higher (and possibly out of control), propelling the economy into a crisis and harming the interests of consumers – with the worst effects on the poor.

This is why Magashule, who does not even know the correct term, should not be in charge of our monetary policy.

But last week’s events reflect a much larger problem. The fact that bad ideas (like trying to force economic growth by printing money) enjoy support within the ruling party scares investors, and perpetuates a cycle of low growth and high unemployment.

At the same time, the reason whythese bad ideas continue to enjoy support, and indeed are gaining traction, is rising popular frustration with low growth and high unemployment.

This is the essential paradox that South Africa faces as we try to revitalise the economy. In order to suppress destructive populist economic policies, we must rapidly achieve higher and more inclusive economic growth, substantially alleviate poverty, and reduce inequality. To do so, given the open structure of our economy, we must secure greater foreign and domestic investment in productive sectors. But the spectre of populist interventions, even if it remains on the periphery and out of government, holds back the very investment that could catalyse growth and restore faith in our economic model.

How can we escape this chicken-and-egg dilemma?

There is no easy solution, but one thing is clear: it will require interventions both to reaffirm our commitment to economic stability and openness, and to unleash domestic investment in the economy. Populists like Magashule cannot be allowed to contradict stated government policy without censure, but we also cannot stand around and wait for investors to decide that the time is right.

Careful measures do exist to unlock investment through government, while protecting private assets and upholding the rule of law.

For a start, government can redirect funds in the existing budget allocation to institutions like the Industrial Development Corporation and the Development Bank of South Africa, which remain undercapitalised relative to their peers in other emerging economies.

Moreover, it is time to consider innovative policies to mobilise domestic investment that have been tried in other market-friendly countries to spur national growth. These include the mandatory pension model used by Chile from the 1980s, in which a small percentage of earnings were invested profitably through private institutions calledAdministradora de Fondos de Pensiones (AFPs), and the similar model developed by Singapore through its Central Provident Fund, which uses mandatory savings to fund investments in housing and other public goods.

No single intervention will provide a panacea for the current cycle of low growth. But to escape the paradox in which we now find ourselves, we will need to attack from both sides: to discipline rogue elements of the ANC, and to mobilise domestic investment so that populist economic policies do not continue to gain favour.

If we do not act now, we will perpetuate a negative feedback loop which may, one day, suck us all in. DM

 

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In other news...

South Africa is in a very real battle. A political fight where terms such as truth and democracy can seem more of a suggestion as opposed to a necessity.

On one side of the battle are those openly willing to undermine the sovereignty of a democratic society, completely disregarding the weight and power of the oaths declared when they took office. If their mission was to decrease society’s trust in government - mission accomplished.

And on the other side are those who believe in the ethos of a country whose constitution was once declared the most progressive in the world. The hope that truth, justice and accountability in politics, business and society is not simply fairy tale dust sprinkled in great electoral speeches; but rather a cause that needs to be intentionally acted upon every day.

However, it would be an offensive oversight not to acknowledge that right there on the front lines, alongside whistleblowers and civil society, stand the journalists. Armed with only their determination to inform society and defend the truth, caught in the crossfire of shots fired from both sides.

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