Download 32 Macroeconomic policy in SA since 1994 (2015)

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Document related concepts

Recession wikipedia, lookup

Business cycle wikipedia, lookup

Monetary policy wikipedia, lookup

Fear of floating wikipedia, lookup

Fiscal multiplier wikipedia, lookup

Economic growth wikipedia, lookup

Interest rate wikipedia, lookup

Transformation in economics wikipedia, lookup

Transcript
Macroeconomic policy in South Africa since 1994
By Kenneth Creamer*
“When my information changes, I alter my conclusions. What do you
do, sir?”
– John Maynard Keynes, explaining some of his policy changes
during the Great Depression
“In Summer’s view, with which I concur, governments need to assume
greater responsibility for risk-bearing, long-term planning and
investment… without overloading future taxpayers with inordinate
debt burdens.”
– J Bradford DeLong in his opinion piece titled “An even more dismal
science” published by Project Syndicate in April 2015
Introduction
In reviewing macroeconomic policy in South Africa over the twenty-one years
from 1994 to 2015, it is instructive to analyse the evolution of the conduct of
fiscal and monetary and exchange rate policies over the period.
An analysis of these key policy instruments provides insights into how
government has responded to changing local and global economic conditions
and gives an indication of how South Africa’s post-apartheid government has
sought to intervene in re-shaping the economy’s overall trajectory, towards a
more inclusive path of growth and development, capable of expanding
opportunities for all people in South Africa.

* University of the Witwatersrand, School of Economic and Business Sciences
1
Fiscal policy
Reprioritisation and reconstruction
Fiscal policy, more particularly a reconstructive fiscal policy, is South Africa’s
most important instrument for macro economic management and for social and
economic transformation.
A major long-term fiscal goal has been the
reprioritisation of expenditures away from race-based access to public services,
which were mainly reserved for the minority white population under apartheid,
towards more racially equitable pattern of expenditure. Related to this has been
a strong emphasis on the need to improve the quality of spending and service
delivery.
Such a major fiscal restructuring exercise is heavily impacted upon by domestic
and international economic conditions, such as, fluctuations in economic growth
and in global commodity prices. Therefore, it is useful to analyse in some detail
how changing economic conditions have impacted on post-apartheid South
Africa’s fiscal policy stance over the years from 1994 to 2015.
Since the advent of democracy in South Africa, fiscal policy has undergone a
number of identifiable phases. The evolution of fiscal policy is driven by a
combination of subjective and objective factors. International economic
conditions interact strongly with local growth conditions and such interactions
establish an objective situation, which frequently is in flux and is difficult to read,
in the context of which subjective policy choices must be made.
Fiscal policy is government’s most consequential tool. In addition to countercyclical demand management, aimed at stabilising demand and output when the
economy is being driven by the volatile forces of the business cycle, the country’s
fiscal stance has a role in addressing inequities in income, in resourcing the
redistribution of assets and in eliminating unequal access to basic services. The
fiscal policy stance also impacts on infrastructure expansion and maintenance,
which in turn assists in shaping the supply-side potential of the economy.
2
In order to maintain its potency, fiscal policy must avoid inappropriately rising
national debt and must be conscious of issues of inter-generational equity.
Future generations will benefit greatly from resources well mobilised into
programmes that enhance equity and growth. On the other hand, like current
day Greeks, future generations will suffer greatly if they inherit fruitless debt and
the related burden of debt repayment.
Three phases of fiscal policy
In what can be characterized as the first phase of democratic South Africa’s fiscal
policy, after inheriting a parlous fiscal situation from the apartheid regime, in the
period from 1994 to the early 2000’s, government prioritized fiscal stabilization
and put in place policies to reduce South Africa’s fiscal deficit. This was achieved
mainly through controlling government expenditure, as over the period
government expenditure was reduced from around 28% of GDP to around 24%
of GDP (Fig.1)
In the second phase, in the early to mid-2000’s, fueled by a relatively rapid
economic growth and a global commodity boom, the budget balance improved
sharply, moving into a fiscal surplus position in 2006 and 2007, when tax
revenues exceeded expenditure. In this phase, both government expenditure and
revenue rose as a percentage of GDP, with revenue growing more rapidly than
expenditure. Tax revenues grew from around 22% of GDP in 2003 to just under
26% of GDP in 2008 (Fig.1).
The third phase began with the global financial crisis of 2008-09 and the Great
Recession that followed in its wake and continued until 2014-15 when the
emphasis begun to fall on the need for fiscal consolidation. During this third
phase, South Africa’s fiscal policy played a strongly counter-cyclical role, with the
budget deficit rising sharply as growth faltered, tax revenues fell and
expenditure continued to rise (Fig.1).
Such countercyclical policy, with
significantly increased budget deficits each year, played a role in mitigating the
contraction, which the recession had visited upon growth and employment in
South Africa. For example, the number of people in employment was reduced by
3
nearly 1 million people between 2008 and 2010, with employment levels
recovering back to the 2008 levels of around 14,5 million people only in 201213.1
Fig. 1 Expenditure, revenue and deficit trends 1990 2014
0
16
-2
14
-4
12
-6
10
-8
Defict/Surplus (% of
GDP) RHS
Revenue (% of GDP)
LHS
Expenditure (% of
GDP) LHS
2014
18
2012
2
2010
20
2008
4
2006
22
2004
6
2002
24
2000
8
1998
26
1996
10
1994
28
1992
12
1990
30
Source: SARB
As of 2014-15, government has begun signaling a new phase of fiscal
consolidation. The primary reason for this change in fiscal stance is that the
economy is experiencing persistently low levels of economic growth. Lower than
expected economic growth has a number of serious negative consequences for
fiscal policy. It puts downward pressure on tax revenues, it pro-longs and
deepens budget deficits, raises the quantum of related borrowing and pushes up
1
According to a report by Statistics South Africa, titled Labour market dynamics in South
Africa, 2014, between 2008 and 2014, the number of employed persons increased from
14,6 million to 15,1 million; however, the number of unemployed persons increased
from 4,3 million to 5,1 million, resulting in an increase in the unemployment rate from
22,5% in 2008 to 25,1% in 2014. In addition, the absorption rate in 2014 at 42,8% was
still 3,1 percentage points below the peak reached in 2008.
4
the country’s national debt. If the fall in tax revenues coincides with rising
expenditure, which has been the case, then the situation is exacerbated.
Growth falling below projections
A clear indication that economic growth in South Africa has since 2008-09 been
performing worse than expected, is given by the fact that in every budget
presented by government from 2008 to 2015 the projected GDP growth rate has
turned out to be an over-estimation, when compared to the growth rate that
actually has occurred.
A typical example of this tendency to over-estimate growth occurred along with
the announcement of the 2012 budget, in which government projected that the
GDP would grow by 2,7% in 2012, 3,6% in 2013 and 4,2% in 2014, whereas the
actual GDP growth rates for those years turned out to be 2,2%, 2,2% and 1,5%
respectively. As per Fig.2, is clear that the fiscal authorities have displayed a
tendency to over-estimate future economic growth over the past ten years.
Fig. 2 SA GDP Actual Growth v Budget Projections
6
Actual GDP Growth
5
GDP growth rate (%)
4
3
2
1
Projection 2006-08
Projection 2007-09
Projection 2008-10
Projection 2009-11
Projection 2010-12
Projection 2011-13
Projection 2012-14
0
-1
-2
Projection 2013-15
Projection 2014-16
Projection 2015-17
Source: SARB and National Treasury Budget Reviews
5
The failure to accurately predict future economic growth rates, or more
accurately the tendency to consistently overestimate future economic growth
rates, impacts negatively on the budgeting process. It feeds into a tendency of
rising indebtedness, in that the overestimation of future growth rates results in
an overestimation of future revenues and an underestimation of future deficit
size and borrowing requirements.
Overly optimistic forecasting also creates an unreliable basis for planning future
expenditure. This is a current major weakness in South Africa’s budgeting
process and steps should be taken to remove the tendency towards such biases
and gaming opportunities.
The budget deficit can be decomposed into two components – a structural
component and a cyclical component. The cyclical component is driven by the
business cycle. The structural component reveals what size the budget deficit
would be if the economy was operating at full potential, being neither in a boom
phase or in a recession.
In many countries, as economic growth quickens, tax revenues rise and
expenditures fall leading to a cyclically-driven reduction in the size of the budget
deficit. In South Africa, such a cyclical pattern occurs mainly due to the fact that
tax revenues and growth are positively related. South African expenditures are
less cyclical as social security payments, like old aged pensions and child
maintenance payments, are not highly correlated with economic growth, as are
unemployment benefits in certain other countries.
The structural component of the fiscal stance is that part which remains, once
the cyclical component has been accounted for. As such, the structural deficit, or
structural surplus, offers a clearer indication of government’s discretionary fiscal
stance than the actual budget balance. If the economy is at its potential output,
and is neither heating up nor cooling down, then there is no cyclical effect on the
budget deficit, tax revenues are neither elevated nor contracted by the cycle, and
the actual deficit is equal to the structural deficit.
6
Fig.3 shows an estimate of the structural primary balance for South Africa for the
period from 2000 to 2014 using a methodology whereby non-interest
expenditure is subtracted from tax revenues that have been cyclically adjusted.2
What is clearly revealed by this estimate is the fact that, during the period from
2009 to 2014, South Africa has consistently begun to run a primary structural
deficit. Increasing expenditure has resulted in spending levels in excess, not only
of actual revenues, but also of trend (or structural) revenues. As a result, the
increased primary deficit has been driven by an increased structural component
rather than a cyclical component. 3
Fig. 3 Structural and cyclical components of primary deficit
28
26
9
Structural component
(% of GDP) RHS
6
Cyclical component (%
of GDP) RHS
3
Trend Revenue (% of
GDP) LHS
0
Actual Revenue (% of
GDP) LHS
-3
Non-interest
expenditure (% of
GDP) LHS
24
22
20
18
16
14
12
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
10
Source: SARB and own calculations
A typical Keynesian argument in favour of counter-cyclical fiscal policy advances
the view that an increased budget deficit during times of reduced growth and
2
The cyclical adjustment of tax revenue has been calculated using a Hodrick-Prescott
filter with a smoothing factor appropriate for annual data.
3 The primary budget balance is calculated by subtracting non-interest expenditure from
tax revenue. A primary deficit occurs when non-interest expenditure is greater than tax
revenue and a primary surplus occurs when tax revenue is greater than non-interest
expenditure. A structural primary budget balance is calculated by removing the cyclical
component from the actual primary budget balance.
7
falling aggregate demand allows government to stimulate demand, encourage
growth and thereby preserve investment and employment during a down-turn.
The Keynesian argument is premised on the fact that it is the cyclical component
of the budget deficit that should increase during a down turn in the economic
cycle.
In Keynesian-terms, it is not a desirable situation for the structural component of
the budget deficit to be rising as sharply as it has been in South Africa in recent
years, as it implies that even if the economy were to no longer be in low growth
conditions, there would continue to be a sizeable, structural primary budget
deficit.
From a debt management perspective, such a primary deficit can be acceptable if
the rate of economic growth is higher than the rate of interest payments on
government debt. But, if the rate of economic growth remains relatively weak
then a structural primary deficit should be replaced by a structural primary
surplus in order to avoid ever-rising national debt.
Despite low interest rate levels, South Africa, since the Great Recession, has
become stuck in the doldrums of a pro-longed period of low economic growth. If
low growth is the new normal, then South Africa will have to make adjustments
to its fiscal policy in order to avoid rising indebtedness. It is this insight which
has motivated South Africa’s recent commitment to fiscal consolidation,
including marginally increased tax rates for higher income earners and plans to a
slow down real government expenditure growth, as announced in the 2015-16
Budget.
National Debt, economic growth and the fiscal stance
Fig 4 indicates the impact which low economic growth has on the projected level
of the national debt between 2015 and 2025.4 In the initial high growth and low
The underlying drivers of national debt as outlined in Fig.4 are expressed in the
following identity Δb = d + (r – Δy)b, where d is the size of the primary structural budget
4
8
growth scenarios, with no fiscal consolidation, the primary budget deficit is
assumed to equal 2% of GDP and a real interest rate of 2% is assumed. In the low
growth scenario, with a real GDP growth rate of 1.5%, the national debt rises to
60,3% of GDP by 2025. In the high growth scenario, with a real GDP growth rate
of 4,5%, national debt rises to 51,3% of GDP by 2025.
The national debt projections improve dramatically if it is assumed that the
country’s fiscal position is successfully consolidated and that the primary deficit
is reduced from 2% to zero, that is, where non-interest expenditure is fully
funded by tax revenues. In such circumstances, under the low growth scenario
(1,5% GDP growth) national debt would rise only marginally, from the 2014
actual level of 47,1% of GDP, to 48,3% of GDP by 2025. Under the high growth
scenario (4,5% GDP growth), fiscal consolidation would see national debt fall to
41,6% of GDP by 2025.
Fig. 4 Impact of growth on SA’s national debt projections
65
Actual national debt (%
of GDP)
60
55
"Low growth Scenario
with 2% primary defict
(%of GDP)"
50
45
40
"High growth scenario
with 2% primary deficit
(% of GDP)"
35
30
Low growth scenario
with primary balance (%
of GDP)
25
20
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
15
High growth scenario
with primary balance (%
of GDP)
Source: SARB and own calculations
balance as a percentage of GDP, r is the real interest rate, Δy is the GDP growth rate and
b is the debt to GDP ratio.
9
The move towards a new phase of fiscal consolidation in South Africa is not only
driven by concern over rising debt projections per se, as the level of the
country’s projected debt to GDP ratio is not particularly high as compared to
other country’s. Of concern is the fact that the trajectory of South Africa’s
national debt is rising more sharply than for most other countries, which if not
turned around bodes poorly for the future.
As per Fig. 5, it can be seen that South Africa’s national debt as a percentage of
GDP has been rising much more sharply than that of other BRICS countries,
comprising Brazil, Russia, India, China and South Africa. In fact, the national
debts levels of India and Brazil have been falling over the period.
A consequence of South Africa’s rising debt levels is that each year increasing
amounts of government spending has to be allocated to repay interest on
government debt. Interest repayments have begun crowding out expenditure on
other items as they rose nominally from around R56-billion in 2009 to just over
R110-billion in 2014, or from 8,1% to 10% of all government spending.
Fig. 5 Comparative national debt positions for BRICS countries
90
80
China's debt (% of
GDP)
70
60
Brazil's debt (% of
GDP)
50
40
South Africa's debt (%
of GDP)
30
India's debt (% of
GDP)
20
10
2000…
2001…
2002…
2003…
2004…
2005…
2006…
2007…
2008…
2009…
2010…
2011…
2012…
2013…
2014…
0
Russia's debt (% of
GDP)
Source: IMF World Economic Outlook
10
South Africa’s fiscal response to the Great Recession was strongly countercyclical, it being assumed that when the recession passed and growth returned
to the economy, the intervention would automatically recede as tax revenues
rose and deficits fell. But, as growth has underperformed, South Africa’ planned
cyclical deficit has morphed into a substantial structural budget deficit.
Accordingly, if structural corrections are not made to government spending and
taxation patterns, the rising trajectory of the national debt will increasingly
emerge as a constraint.
Practical grounds for fiscal consolidation
The ideal scenario for South Africa’s fiscal policy would be an increase in the
economic growth rate combined with a consolidation, which reigns in the budget
deficit. Such a scenario has echoes of the wider global debates on the merits and
demerits of fiscal austerity.
Critics of fiscal consolidation argue that contained expenditure growth and
increased tax revenues are bad for growth.
Such actions reduce aggregate
demand in the economy and thereby crimp investment and employment creation.
On the other hand, proponents of fiscal consolidation contend that the risks
associated with rising debt levels impact negatively on growth and investment.
They also argue that the state’s potential to shape the process of economic
transformation and development will be fundamentally weakened if the
government finds itself in a position where debt rises and more and more
resources have to be allocated to interest payments.
In the South African case, the drive towards fiscal consolidation appears to be
driven by pragmatic rather than ideological concerns.
The chief practical
concern has been the limits that have been imposed on the stated policy of
counter-cyclical fiscal interventions, by what appears to be a structural shift
towards lower growth levels. Globally, economists have posited that the world
economy may have entered a new phase of low growth or what has been termed
11
a period of “secular stagnation”, due a range of factors including rising inequality
and demographic factors, such as, population ageing.5
In addition to the low-growth global context, South Africa has experienced
internal constraints on growth, including insufficient electricity generation
capacity and related power disruptions, as well as, prolonged strike actions in
mining, manufacturing and postal services. These internal and external factors
have combined to limit economic growth performance in the period since 2009.
It is not possible to know with any degree of certainty whether South Africa’s
recent low growth performance should be regarded as the ‘new normal’, or
whether growth will in future tick up again as other factors come into play, such
as, an upswing in global commodity prices6 or the successful implementation of
the country’s National Development Plan.
It is such uncertainty about South Africa’ future growth path, which makes it
incumbent on government to consolidate its fiscal position and take steps to
reduce the country’s structural deficit. It would not be prudent to continue to
run fiscal policy on the mere hope that growth will be higher in the future. It is
better to consolidate with the knowledge that the fiscal stance can be altered
again in future if and when higher levels of growth are sustainably achieved.
Clearly, such an approach is not necessarily based on an ideological commitment
to austerity or small government, rather it is a prudent and pragmatic
adjustment necessary to preserving the country’s long-run fiscal potential. As
See for example, “Secular Stagnation: Facts Causes and Cures”, edited by Coen Teulings
and Richard Baldwin, published by CEPR Press (2014) and Larry Summers, “U.S.
Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”,
Business Economics 49(2) (2014)
6 Arguments which posit “secular stagnation” as being the new normal seem to be
expressed with the same conviction and appeal to empirical certitude as an earlier
generation of diametrically opposed arguments about the “commodity super-cycle”,
which prognosticated a long-term future of rising commodity prices as resource-scarce
countries, like China, urbanised and industrialised and, as a result, accelerated their
demand for scarce mineral resources. History teaches that the future is in fact uncertain,
even though theories about what the future holds do not seem to be.
5
12
such, it is an approach that can be fully reconciled with the broader vision of the
need to build an effective developmental state in South Africa.
Challenges associated with consolidation
That is not to say that a new phase of fiscal consolidation will not present
difficulties and challenges. It will limit the resources available for infrastructure
expansion, for welfare and for the remuneration of government employees. A
key risk is that during fiscal consolidation, employment costs will crowd-out
social programmes and the plans for infrastructure investment that are socrucial to transforming the supply-side potential of the South African economy.
This problem was clearly identified in the 2015 Budget in which government
committed to plans to improving the quality and composition of expenditure.
The 2015 Budget envisaged that for the period from 2014/15 to 2017/18 capital
should be the fastest-growing item of non-interest spending over the medium
term (with planned growth of 8,9% a year in nominal terms). It also envisaged
that employee compensation would grow at 6,6% a year and expenditure on
goods and services would grow at 5,1% a year. The need for consolidation is
clearly indicated by the fact that interest payments were projected to grow at
9,4% a year over the same period.
The litmus test will be whether government is able to meet these ambitious
plans to improve the composition of fiscal expenditures.
While wage
negotiations always present serious challenges and contradictions, given that an
essential component to all the programmes of the developmental state is a
capable, motivated and service-oriented cadre of public sector employees,
government has shown some determination to contain spending on
remuneration as evidenced by the fact that between 2009 and 2014, government
employee headcount growth fell to 1.3 per cent per year. In 2014 government
announced a freeze on personnel headcounts for 2015/16 and 2016/17, with
any additional personnel to be paid for from existing allocations.7
7
South Africa’s Budget Review 2015, National Treasury, p.32-33
13
Promoting investment
A key economic intervention of the developmental state in South Africa has been
via significantly expanded public-sector-led investment. This is regarded as the
key intervention stimulating inclusive employment-creating economic growth.
The basic vision being that state borrowing, and borrowing by state owned
companies sometimes backed by government guarantees, would be used to fund
investment in infrastructure and people, which in turn would ‘crowd-in’ further
investment, simulating growth, increasing tax revenues and thereby avoiding
rising debt.
As per Fig.6, it can be seen that investment by state owned companies, such as
Eskom and Transnet, rose sharply from 2009 onwards. Investment by general
government rose, but not as sharply as the rise in investment by public
corporations. Over the longer term, and in line with government’s National
Development Plan, it is envisaged that up to 2023 public infrastructure projects
valued at R3.6-trillion will be undertaken.8
There is a risk that fiscal consolidation could impact negatively on such plans.
On the other hand, successful fiscal consolidation has the potential to contain, or
even reduce, the cost of borrowing for state owned companies, as the cost of
such borrowing is usually linked to the credit ratings which rating agencies
stipulate for South Africa as a whole and for certain specific state owned
companies.9 It is likely that a successful fiscal consolidation phase will halt the
phase of credit rating downgrades that South Africa has recently been
experiencing, and possibly even reverse course allowing for positive re-ratings in
According to South Africa’s Budget Review 2013, of the R3,6-trillion, electricity
projects make up 55,7%, transport 22,9%, liquid fuels 6,8%, water 3,6%, education
3,6%, health 3,2%, human settlement 3,2% and telecommunications 1% (p.97).
9 Government has supported public sector infrastructure investment by state owned
companies, such as, through a R60-billion loan to Eskom in 2011 which in 2015 was
converted into equity, and also in the form of guarantees. These guarantees, regarded as
contingent liabilities by the state, are substantial being reported in the 2015 Budget as
being valued at R461,1-billion in 2014/15. According to the 2015 Budget, guarantees
were in place for the following state owned companies and development finance
institutions: Eskom, Sanral, Denel, DBSA, IDC, Trans-Caledon Tunnel Authority, SAA,
Transnet, Land and Agricultural Bank, South African Post Office and SA Express Airways.
8
14
future.
Such re-rating would lower the cost of borrowing and potentially
stimulate increased investment in the economy more widely.
Fig. 6 Significant increase in investment by public corporations
450.0
80
400.0
70
350.0
60
300.0
250.0
50
200.0
40
150.0
30
100.0
20
50.0
10
State owned companies
investment (LHS 2000
=100)
Private sector
investment (LHS 2000
=100)
Total Investment (RHS
as % of GDP)
2000/01
2001/01
2002/01
2003/01
2004/01
2005/01
2006/01
2007/01
2008/01
2009/01
2010/01
2011/01
2012/01
2013/01
2014/01
0.0
General government
investment (LHS 2000
=100)
Source: SARB
It is important to bear in mind that despite the significant increase in investment
by state owned companies in recent years, private sector investment in 2014
remained the largest contributor to overall investment. For example, private
sector investment accounted for 63,5% of all investment in the economy in 2014,
down from 70,7% in the year 2000. The state-led public investment programme
provides a strong stimulus to growth and employment, but it is not of sufficient
magnitude to uplift the whole economy.
In order for to achieve the National Development Plan’s goal of lifting overall
investment from the current level of around 20% of GDP to 30% of GDP, it will
be necessary that public-sector investment should serve as a catalyst to facilitate
or ‘crowd-in’ private sector investment.
The National Development Plan’s
investment target cannot be met by public sector investment operating on its
own.
15
Social protection
Another possible risk posed by fiscal consolidation is that it could reverse gains
that have been made in reducing poverty in South Africa. Significant increases in
public expenditure on social security, education, health, electricity and sanitation
services have been shown to have reduced multidimensional poverty in the
country. According to one study, in 1993, 37% of South Africa’s population could
be defined as falling under a multidimensional poverty line. By 2010, the
proportion of people living below the same multi-dimensional poverty line had
fallen to 8% once expanded access to social security, education, health,
electricity and sanitation services had been taken into account.10
Testament to the poverty-alleviating power of public service provision, the same
study showed that using a money-only metric, one which does not take into
account the effects of increased access to public services, those living below the
poverty line had only decreased from 37% in 1993 to 28% in 2010.
A 2015 World Bank report broadly supports the finding that South Africa’s fiscal
policy has been effective in reducing poverty and income inequality. The report
calculates that, although South Africa remains one of the world’s most unequal
societies, as result of the country’s fiscal system: 3,6 million people in 2010 were
lifted above the poverty line of living on less than USD2,50 per day (PPP
adjusted). Fiscal transfers also reduce inequality to a point where the incomes of
the richest decile were reduced from being over 1000 times higher than those in
the poorest decile to where they were 66 times higher. The Gini coefficient fell
from 0,77 before taxes and social spending were taken into account, to 0,659
after such transfers were taken into account.11
Finn, A., Leibbrandt, M. and Woolard, I., “The significant decline in poverty in its many
dimensions since 1993”, published by Econ 3x3, (2013)
11 The World Bank report indicates that the Gini coefficient declines further, to 0,59
(indicating greater equality), if the monetised value of health and education spending is
included. The inclusion of such expenditures is controversial, though, as such inclusion
would imply that increasing expenditure on such items as teachers’ and health workers’
salaries would, by definition, play a role in reducing income inequality, even in
circumstances where such expenditure may not, in fact, serve to reduce income
inequality.
10
16
Interestingly, the World Bank report notes that an indicator of the progressive
and redistributive role of South Africa’s fiscal system has been the fact that only
the top three deciles of South Africa’s income distribution “pay more in taxes
than the receive in transfers” (p.35). By implication, the poorest seven deciles in
South Africa all receive benefits and services from government, which are valued
in excess of the amount that they contribute in taxes.
While there is no doubt that there is significant room for improvement in the
quality of government spending and in the outcomes which government
programmes could achieve, the redistributive role of South Africa’s democratic
state has been material. In this manner the state has played a key role in
improving social cohesion and improving the standard of living for many, but not
all, in South Africa. Fiscally-driven redistribution has provided a key foundation
stone for the nascent formation of a non-racial, non-sexist, democratic state in
South Africa.
Despite the broadly re-distributive incidence of South Africa’s taxation and
expenditure programmes, the country’s history of racial conquest, exclusion and
discrimination manifests in extraordinarily high levels of income and wealth
inequality and many continue to be excluded form the structures of the formal
economy. The official unemployment remains persistently high at around 25%.
The expanded definition of unemployment, which includes disillusioned work
seekers, measures unemployment at around 35%, with the highest prevalence of
unemployment being among young people between the age of 15 and 24 years.
Redistributive fiscal programmes have a key role in alleviating poverty, but fiscal
programmes should also be reconstructive. Government resources should be
effectively applied to programmes that play a role in changing the structure of
opportunity in the South African economy and the economy’s supply-side
potential. Government programmes should be assessed on how they impact on
capital formation, labour enhancement and productivity and technology
17
improvements - factors that impact positively on the long-run growth potential
of the South African economy and on the degree of inclusivity of such growth.
During a period of fiscal consolidation, emphasis is required on the need to
minimise the negative impact which such a consolidation can have on social
protection.
A recent paper by the International Labour Organisation (ILO)
argues in favour of a range of strategies, some of which have been undertaken in
South Africa, such as, the issuing of municipal bonds to fund basic infrastructure
projects, and some of which could be appropriate for South Africa, including, the
reallocation of public expenditures; increasing tax revenues; expanding social
security coverage and eliminating illicit financial flows.12
Political challenge of consolidation
If fiscal consolidation is properly implemented, then reduced wastage and
corruption will lead to the kind of increased efficiencies, which will limit the
negative impact that the fiscal consolidation’s reduced expenditure and
increased tax rates will have on the wider economy. This is the cross-roads that
South African fiscal policy currently faces, choosing the correct path is of
tremendous importance.
It is the resourcing of the welfare-enhancing, redistributive and reconstructive
elements of fiscal policy that will be put under pressure by the process of fiscal
consolidation.
Fiscal consolidation will put pressure on South Africa’s
programme of poverty alleviation and will limit the resources available for the
kind of infrastructure expansion and maintenance that have been a key driver of
investment in recent years.
Such pressure may result in political problems for a government that has failed
to successfully face many of its challenges in service delivery and in building
effective administrative capabilities and good governance structures. If these
“Fiscal Space for Social Protection: Options to expand social investments in 187
countries”, Extension of Social Security Working Paper No. 48, published by
International Labour Organisation (ILO) Social Protection Department (2015)
12
18
pressures and contradictions prove to be overwhelming and the path of fiscal
consolidation is not followed, this could lead to serious financial problems
entailing even more politically, socially and economically costly adjustments in
future.
Monetary and exchange rate policy
The inflation-targeting framework
In 1999 South Africa announced the adoption of an inflation-targeting
framework to guide the conduct of its monetary policy. This decision was
against the backdrop of the emerging market contagion that followed the socalled Asian crisis of 1997-98, which had lead to a loss of confidence in emerging
market economies and related sharp currency depreciations in these economies.
In the heat of the crisis and its aftermath, the South African Reserve Bank (SARB)
burnt its fingers in an ultimately ineffective attempt to prop-up the value of the
Rand by purchasing Rands with about USD25-billion worth of forward borrowed
funds. At the same time, the SARB also increased the interest rate sharply, to
over 20 percent, in order to promote capital inflows with the ultimate objective
of strengthening the rapidly depreciating Rand (See Fig.7). At the time the SARB
followed an eclectic monetary policy mandate, pursuing a range of goals
including low inflation, economic growth, targeting the growth in monetary
aggregates and intervening in the currency market.
Against this background, inflation targeting provided an alternative framework,
focused primarily on achieving a publicised inflation target and which explicitly
excluded interventions to target a particular value of the Rand. In the flexible
variation of the framework which was implemented in South Africa, inflation
targeting had some forbearance for inflation temporarily above target, for
example, as a result of oil price shocks, but sought to focus inflation expectations
in the medium- to long term on a credible, low inflation objective.
19
Advocates of the inflation-targeting framework argue that the policy effectively
facilitates the kind of low-inflation macro-stability, which leads to low shortterm and long-term interest rates, and which encourages the investment
required to stimulate growth and employment creation. Critics of the inflation
targeting argue that the framework’s narrow focus on low inflation is not
appropriate, particularly given South Africa’s high unemployment rate. They
argue that the framework will result in unnecessarily high interest rates and will
lead to low levels of economic growth.
Fig. 7 Interest rates and inflation
25
20
Real short-run interest
rate (%)
15
Nominal short-run
interest rate (%)
10
CPI inflation rate (%)
5
Oct-13
Mar-12
Jan-09
Aug-10
Jun-07
Nov-05
Sep-02
Apr-04
Feb-01
Jul-99
Dec-97
May-96
Oct-94
Mar-93
Jan-90
Aug-91
0
-5
Source: SARB and own calculations
Empirically, there is not much support for the case made by critics of inflation
targeting. The data presented in Table 1, which compares data for the period
before the introduction of inflation-targeting (1990 to 1999) with data for the
period after the introduction of inflation targeting (2000 to 2014), shows that
the introduction of inflation targeting was associated with lower average
inflation of 5,9% as compared to an average inflation rate of 9,9% prior to
inflation targeting; with a higher average GDP growth rate of 3,2% as compared
20
to 1,4%; and with lower average real short-run interest rates down to 2,1%
from 4,5%. Inflation targeting is also associated with reduced inflation, interest
rate and growth volatility as measured by the reduced standard deviations of the
time series data from the relevant means, during the inflation targeting period,
as compared to the pre-inflation targeting period.
Table 1 Comparison of pre- and post- inflation targeting economic indicators
Mean (%)
Inflation
Pre-inflation targeting period 1990-99
Inflation targeting period 2000-14
GDP growth
Pre-inflation targeting period 1990-99
Inflation targeting period 2000-14
Real Short-run interest rates
Pre-inflation targeting period 1990-99
Inflation targeting period 2000-14
Standard
Deviation
9.9
5.9
3.3
2.3
1.4
3.2
2.0
1.7
4.5
2.1
3.4
2.4
Source: SARB and own calculations
As per Fig.8, it can be seen that the inflation-targeting framework heralded in a
period of sharply reduced long-run interest rates. Such lower long-run rates are
a key factor in reducing borrowing costs and promoting new investments.
Although non-interest rate factors have also proven to be important in shaping
investment decisions.
Non-interest factors include the economic growth rate, the existence of
appropriate infrastructure and logistical systems, as well as the general level of
business confidence. Furthermore, the retention of high cash holdings by South
African companies, which enables companies to fund investments, not by
borrowing but from their retained earnings, may also have contributed to a
reduced interest rate sensitivity of investment decisions.
21
Fig. 8 Long-run interest rates
20
18
16
14
Govt 0-3 year bonds
12
Govt 3-5 year bonds
10
Govt 5-10 year bonds
8
Govt 10+ year bonds
6
1990/01
1991/05
1992/09
1994/01
1995/05
1996/09
1998/01
1999/05
2000/09
2002/01
2003/05
2004/09
2006/01
2007/05
2008/09
2010/01
2011/05
2012/09
2014/01
4
Source: SARB
The fact that the introduction of inflation targeting in South Africa coincided with
what has been termed the Great Moderation, a worldwide period of low inflation
and reduced business cycle volatility, would have contributed as much as
inflation targeting itself to the country’s reduced inflation and interest rate levels.
On the other hand, the Great Recession following the crisis of 2008-09 would
have impacted in the opposite direction, leading to reduced GDP growth rates
during the inflation-targeting period. Despite, these external factors, it can be
quite strongly asserted that there is little empirical support for the argument
that inflation targeting resulted in elevated interest rates and low economic
growth, the data paints quite a different picture.
South Africa’s unemployment rate has remained stubbornly high throughout the
inflation-targeting period, see Fig.913, but it would be misplaced to blame
13
A correlation exists between an increased growth rate and decreased unemployment
rates, for example in the growth period from 2003 to 2007, the unemployment rate fell
by close to 5 percentage points.
22
inflation targeting for persistent unemployment. Monetary policy is chiefly an
instrument capable of bringing price stability and managing short-run demand.
Fig. 9 Unemployment rate and GDP growth rate
30
15
28
13
26
11
24
9
22
7
20
5
18
3
16
14
1
12
-1
10
-3
Official unemployment
rate LHS
Real GDP growth rate
RHS
Source: SARB
To the extent that lower inflation, and lower interest rates, facilitate increased
investment, monetary policy can assist in fostering long-run growth and
employment.
It is widely accepted, though, that any attempt to boost the
economy with ongoing monetary expansion will serve only to fuel inflation and,
beyond a short-run stimulus, will not assist in promoting economic growth and
employment creation in a sustainable manner. In fact, at some point, attempts at
sustained monetary stimulus will become counter-productive, risking high levels
of inflation that are detrimental to economic growth, or even hyper-inflation.
Exchange rate volatility
A more pertinent critique of South Africa’s monetary policy framework has been
that it leaves the country vulnerable to the vagaries of currency volatility. In
particular, the argument has been made by South African exporters that there is
a contradiction between government’s stated commitment to export promotion
and the tendency for prolonged periods of Rand strength and Rand volatility.
23
In terms of the well-known ‘open economy trilemma’, only two, of three,
beneficial policies can be pursued simultaneously. Under the inflation targeting
framework, the two favoured policy objectives are free capital flows and
monetary policy independence. As a result the SARB’s freedom to target a more
competitive value for the Rand has been limited.
More recently, the strict interpretation of the trade-off implied by the ‘open
economy trilemma’ has been tempered somewhat.
IMF researchers have
suggested that, with careful application, two targets can be pursued using two
separate instruments. Firstly, the interest rate can be used as the instrument
aimed at achieving low inflation, which is regarded as the primary target.
Secondly, sterilised foreign exchange market interventions can be used as an
instrument to ameliorate volatile currency movements, but such amelioration of
currency movements must be clearly understood to be a secondary target.14
In terms of the approach outlined by the IMF researchers, if the Rand appreciates
and the authorities regard it as misaligned, then they can intervene in the foreign
exchange market by buying foreign reserves. The buying of foreign reserves will
increase the supply of Rands and weaken the currency. As a result of the
increased supply of Rands there is a risk of increased inflation, so the foreign
exchange market intervention must be sterilised by selling bonds and thus
decreasing the money supply. The limitation being that if inflation persists, and
it is the primary target, then interest rates may have to rise in order to reduce
future inflation, even though raising the interest rate is likely to have the effect of
strengthening the Rand.
If, on the other hand, the Rand depreciates too sharply and the authorities wish
to attempt to strengthen the Rand, they will intervene in the foreign exchange
market by buying Rands with the foreign reserves which they hold. Clearly, this
Ostry, J.D., Ghosh, A.R., and Chamon, M., “Two targets, two instruments: monetary and
exchange rate policies in emerging market economies”, IMF Staff Discussion Note,
February 29, SDN/12/01
14
24
strategy is limited by the finite quantity of foreign reserve holdings which the
authorities possess.
This points to a fundamental asymmetry that exists in polices aimed at targeting
the exchange rate.
As Guzman et al have argued, “…there is an inherent
asymmetry in the fact that emerging countries’ central banks issue their
domestic currency but not dollars (or euros). Since the demand for the domestic
currency increases during booms, reserve accumulation is one way of supplying
the additional money; beyond the point that central banks view it as appropriate,
they can also sterilize the reserve accumulation. In contrast, the degrees of
freedom that they have when foreign reserves dwindle are more limited, and the
reduction in reserves may itself generate strong adverse speculative pressures,
rising risk premiums and capital flight. So, given the asymmetries emerging and
developing countries face, the asymmetrical management of foreign exchange
reserves is a rational response of authorities.” (p.18)15
A letter written by the then Minister of Finance to the SARB Governor in 2009 in
which the government’s mandate to the SARB was clarified to explicitly include
to objective of balanced and sustainable economic growth, and thus made the
inflation targeting framework more flexible and open to the secondary objective
of influencing the level of the exchange rate.
During periods when the Rand strengthened sharply, such as, by 7,8% in 2009
and by 12,3% in 2010, as per Fig.10, the SARB begun to responded with an active
policy of building up South Africa’s holdings of foreign exchange reserves in
order to maneuver against what was perceived as excessive Rand strength,
which would have the effect of reducing the competitiveness of South Africa’s
exports and putting pressure on local industry as imports became relatively
cheaper.
15
Guzman, M., Ocampo, J.A. and Stiglitz, J.E., “Exchange rate policies for economic
development”, a paper written at the request of the South African Government (2014)
25
Fig. 10 Real effective exchange rate of the Rand
120
80
70
100
60
50
80
40
60
Real effective exchange
rate of the Rand (RHS %
change)
30
20
40
10
Real effective exchange
rate of the Rand (LHS
Index 2010 = 100)
0
20
-10
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
-20
1990
0
Source: SARB
Certain other approaches to targeting the exchange rate have been mooted. For
example, some have argued that volatile short-run inflows and outflows of
capital have the potential to be highly disruptive, distort the economy towards
debt, consumption and financialisation and lead to periods of excessive currency
strength.
One policy prescription of this approach is that short-term financial flows, or socalled ‘hot-money’ flows, should be more highly regulated, through interventions
such the levying of small taxes on capital flows, the so-called Tobin tax, or
through stipulated minimum time-limits for investments which aim to prevent
rapid flow reversals.
Along these lines Ocampo has argued that “every developing country that is
subject to large swings in pro-cyclical capital flows must have the policy space to
use capital account regulations as countercyclical tools that would serve as a first
26
best policy response to eliminate the source of disturbance resulting from
externally-driven capital flows”.16
The theoretical arguments regarding the pro-cyclical distortions of unfettered
capital flows are attractive, but in practice the structural characteristics of the
South African economy, with its persistent current account deficit and capital
account surplus (See Fig. 11), mean that limitations on capital inflows are likely
to have serious negative consequences and would come with significant
adjustment costs.
Fig. 11 South Africa’s Balance of Payments
6
4
2
0
-2
Current account balance
(% of GDP)
Capital account balance
(% of GDP
-4
-6
-8
Source: SARB
The imposition of restrictions on capital inflows would almost certainly result in
a sharp depreciation of the Rand and would raise the specter of a balance of
payments constraint on economic growth – as South Africa’s exports do not earn
sufficient foreign currency to pay for imports and growth would have to be
slowed in order to reduce the demand for imports (a situation not altogether
Presentation by Jose Antonio Ocampo on “Capital flows and macro-prudential
regulation” (Financialisation Conference hosted in Pretoria in October 2013), available
at http://www.economic.gov.za/communications/publications/524-financialisationconference-reports
16
27
dissimilar the position that the apartheid state found itself in during the 1980’s,
when financial sanctions were intensified).
Capital scarcity and exchange rate pressures would also likely lead to sharp
interest rates hikes, which would further raise the cost of investment and
suppress growth and employment in the economy. A significant slow-down in
capital inflows would also probably be disruptive to the financing of South
Africa’s current phase of infrastructure expansion, in key cross-cutting network
sectors, such as, energy and transport infrastructure, and this too would have
wider negative consequences for economic growth and employment.
On the balance of evidence, it would appear that the benefits of unregulated
capital inflows outweigh the costs, and that both the benefits and the costs are
fairly substantial. On the benefits side, continuing access to foreign financial
flows assists in freeing South Africa from a balance of payments constraint and
contributes a steady flow of foreign savings which means that interest rates are
lower than the would be if only the domestic pool of savings was available.
Allowing capital inflows may also enable South Africa to position itself as a
financial centre for African infrastructure development – serving to intermediate
capital inflows into finance for infrastructure investment in Africa. Such potential
may be reinforced by initiatives such as the BRICS bank, which is in the process
of being established, as a geo-political, financial intervention by China, Russia,
India, China and South Africa.
On the costs side, allowing unregulated capital inflows will lead to increasing
levels of foreign ownership of South African assets, which in turn will lead to
future dividend outflows. A further problem is that such inflows can distort the
economy towards consumption and financialisation and away from production
and industrialisation.
Unregulated capital inflows are also associated with
higher levels of exchange rate volatility and potential currency misalignment,
which can put pressure on export industries if the Rand over-appreciates.
28
Lastly, the adjustment costs, if South Africa were to attempt to change policy and
begin to regulate capital inflows costs, would be significant, probably including a
sharp currency depreciation and higher interest rates.
Macro-prudential regulation
Another line of critique against the inflation-targeting framework is that under
the framework the monetary authorities fail to properly monitor and act against
the development of non-inflation macroeconomic instabilities, such as, asset
price bubbles and over-leveraging in the financial system.
A flaw with the inflation targeting framework, revealed very clearly by the 200809 financial crisis, is that it is possible that during periods of inflation
moderation the seeds of macroeconomic instability will be sown. This
phenomenon, described in Minskian terms as the ‘paradox of credibility’, arises
when there is a general economy-wide perception of reduced risk, inducing
economic actors to behave in such a way as to make the system riskier.
Led by the Bank for International Settlements (BIS), central banks are
responding to this weakness in erstwhile orthodox monetary policy by taking on
new responsibilities and developing new instruments which will assist them in
the task of macro-prudential management.
A particular focus is on housing prices, as in certain economies, like the United
States and the United Kingdom where home ownership is very widespread, a
financial cycle can be discerned whereby housing prices bubbles have led procyclically to crises in the banking sector.17
In line with this, the SARB has begun to place more emphasis on the need for
improved macro-prudential surveillance and regulation.
In addition to
monitoring the compliance of South African banks with minimum capital
requirements, such as, those outlined in the Basel II and Basel III accords, the
See Drehmann, M., Borio, C. and Tsatsaronis, K, “Characterising the financial cycle:
Don’t lose sight of the medium term!” BIS Working Paper, 380 (2012)
17
29
SARB has sought to involve itself in interventions aimed, not just at achieving its
inflation target, but also those aimed at trying to avoid the build up of potentially
dangerous imbalances in the financial sector.
An example of the types of interventions that the SARB will undertake, if it
detects an emerging bubble in housing prices, would be to decrease the
permissible loan to value ratio for those borrowing money to fund house
purchases, say from 100% to 80%. This will mean that home buyers will need to
pay a 20% deposit, which will have an effect in subduing house prices and in
decreasing household leverage ratios. Another instrument in this regard is the
setting of credit standards, such as those which stipulate the maximum
percentage of monthly income that can be used to fund monthly bond
repayments.
Current monetary policy challenges
In the current phase, South Africa continues with interest rates that are low by
historical standard. This is in line with the global situation, as since the 2008-09
Great Recession most countries have experienced historically low interest rates
for a pro-longed period of time, and Japan for even longer, see Fig.12.
In fact, with nominal interest rates being at, or very close to, the zero lowerbound, countries such as the United States, Japan and the United Kingdom, and
the Euro-zone countries have adopted unconventional monetary stances, such as
the massive purchase of bonds and other financial assets in secondary markets,
in a process known as quantitative easing (QE), with the aim of lowering longerrun interest rates (as short-term nominal rates can go no lower then zero).18
Some countries such as Sweden have in fact even begun experimenting with negative
nominal interest rates. For example, if the nominal interest rate offered on deposits is 1% and the rate of inflation is -2% (that is, there is deflation), then after one year a R100
rand deposit would be stated as being valued at R99 in nominal terms, but would be
worth R101,02 in real terms. In other words, in the context of deflation, negative
nominal interest rates, translate into positive real interest rates.
18
30
Fig. 12 Comparative 90-day short-run T-Bill rates
45
40
35
30
United States
25
United Kingdom
20
Brazil
15
South Africa
10
Japan
5
5/1/14
4/1/13
3/1/12
2/1/11
1/1/10
12/1/08
11/1/07
10/1/06
9/1/05
8/1/04
7/1/03
6/1/02
5/1/01
4/1/00
3/1/99
2/1/98
-5
1/1/97
0
Source: IMF International Financial Statistics
An important objective of such unconventional approaches is to use lower longterm rates to try and stimulate investment and other elements of demand and
thereby also introduce a degree of inflation expectations back into economies
that are flirting with deflation.
Deflation is regarded as a significant macroeconomic threat.
Falling prices
would have the effect of subduing and delaying consumption and investment
demand. Deflation would also put the financial system at risk, as debt and debt
repayments are typically fixed in nominal terms, so these repayments would rise
in real terms, as prices and wages fell, leading to the likelihood of widespread
default and financial distress, particularly for the banks.
It is much anticipated that monetary policy will ‘normalise’ at some stage in the
future and that the current global period of historically low interest rates will
come to an end, but there is a high degree of uncertainty as to the likely timing of
such an eventuality. It is also possible that ‘normalisation’ will not occur in a
31
simultaneous and coordinated manner and that, for example, the United States
will begin rising interest rates before the Euro-zone.
South Africa is highly linked into the global interest rates cycle. When the United
States indicated that it would begin tapering-back on its QE in 2013, this resulted
in a flow-back to the of United States of QE-generated liquidity, which had sought
returns worldwide and which was then attracted back to the United States by the
prospect of future interest rate increases.
South Africa, along with other developing countries, experienced significant
exchange rate weakening. Due to currency deprecations and related inflationary
pressures, these countries also had to face the related possibility of their own
interest rate hikes, even if demand in their domestic economies remained weak.
At the G20 Summit in St Petersburg in 2013 South Africa raised a concern that
developed-world economic policy makers should take greater cognizance of the
effects of their macroeconomic policies on the economic situation in developing
countries.
South Africa warned the G20 Summit of “increased turbulence in
global financial markets, which has been brought about by speculation that the
US Federal Reserve will soon cut back on the $85 billion it has been pumping
into the financial markets every month. Emerging economies like South Africa
have benefitted from the actions of the Federal Reserve, as foreign investors
have bought huge amounts of South African government bonds at fairly low
yields and equities. Therefore, the prospect that the Federal Reserve will cut off
these flows of funds has resulted in emerging market currency volatility, which
has been yet another reminder of the risks and the potentially destabilising and
negative effects that policies and shocks in major economies can have on other
countries and regions.”19
Statement by the South African Presidency, President Zuma at G20 Summit in Russia,
2 September 2013. Accessed 9 January 2014, http://www.thepresidency.gov.za/
pebble.asp?relid=16023&t=79
19
32
Rey (2013) has empirically challenged the characterisation offered by the ‘open
economy tri-lemma’ and has suggested that the true open-economy
characterisation faced by countries is a ‘dilemma’, that is, a choice of either free
capital flows or monetary policy independence, regardless of whether the
exchange rate is fixed or floating.
Rey argues that due to the existence of a global financial cycle, where asset prices
in emerging markets and developed economies move together, countries like
South Africa, which allow relatively free movement of foreign capital in and out
of the country, are tightly bound to the global interest rate cycle and do not enjoy
a significant degree of monetary policy independence, despite having a freefloating exchange rate.
All these factors indicate that South Africa is likely in the not too distant future to
enter an upward phase in its interest rate cycle.
Despite the fact that the
country is planning to enter a phase of fiscal consolidation, which will have a
disinflationary effect, it is likely that international factors, rather than domestic
factors, will serve as the main prompt to pushing up interest rates. This process
will be re-enforced if the raising of interest rates in the United States, and other
relevant countries, leads to an outflow, or reduced inflow, of capital resulting in
Rand weakness and imported inflation pressures.
The main domestic driver of inflation will be on-going sharp increases in
electricity prices, which are required in order to fund expanded power
generation infrastructure. It is unlikely, though, that the SARB would take action
as a result of the first-round effects of rising electricity prices. Analogously, to oil
price shocks experienced by South Africa in the past, the SARB is likely to focus
on containing second-round inflationary effects resulting from the electricity
price increases.
In other words, it is understood that no amount of interest rate increases will
impact directly on the electricity price, but if South African consumers respond
to the rising electricity price by seeking higher wages and adjust their overall
33
spending upwards, then it is the inflationary effects of such developments that
monetary policy is better equipped to deal with.
Given South Africa’s low growth prospects and the effect of likely external and
internal drivers of inflation, South Africa may begin to be faced with a ‘stagflation’
scenario, where inflation rises above its target, but where growth remains low or
below potential. Such a scenario will present a dilemma for South African policy
makers, as the SARB will be mandated to contain inflation by raising interest
rates, despite the fact that rising interest rates will impact negatively on shortrun growth prospects.
The problem is best resolved by separating short-run and long-run effects. In
the short-run, high interest rates will impact negatively on growth and demand,
but in the long-run it is to be expected that the maintenance of low inflation will
contribute positively to the investment climate and that this will foster higher
levels of growth.
The alternative approach of allowing inflation to rise significantly, and so avoid
interest rate increases in the short-term, is less attractive, as in order to avoid
the growth-inhibiting effects of ever-rising prices, inflation will, at a later stage,
need to be brought under control. This will result in larger future increases in
interest rates and the even higher costs to output and employment associated
with such disinflationary interventions.
Conclusion
In order to overcome South Africa’s history of injustice and racialised economic
exclusion, structural transform of the economy is required. If this project is to be
successful it is important to understand that in addition to South Africa’s specific
historical factors, there are forces at play in a wide range of modern economies,
including in South Africa, which are serving to increase inequality both of income
and of the ownership of assets.
34
Some, such as Piketty (2013), have ascribed rising inequality to the fact that the
long-term dynamics of the capitalist system are such that the return on assets
held by the by the wealthy (r) is greater than the rate of economic growth (g).
Others, such as Brynjolfsson and McAfee (2011), have argued that the recent
ongoing wave of technological change is tantamount to a Great Restructuring in
which the acceleration of technology has negative consequences for wages and
jobs and that, while digital progress grows the overall size of the economy, it
does this while leaving the majority of people in a poorer position. In the South
African context, Burger (2015) has suggested that labour’s falling share of
income is due to financialisation and aggressive returns-oriented investment
strategies that have resulted in greater investment in capital-augmenting laboursaving technologies.
In addition to the kind of external and internal shocks to which macroeconomic
policy needs to respond in order to achieve its various objectives, a unified
theory of transformation will also need to take account of underlying forces,
which are leading to growing inequality in so many parts of the world. All of
these factors have to be taken into account in determining how best South Africa
can advance a programme of economic transformation capable of widening
access to economic opportunity and redistributing access to wealth and assets.
Redistributive supply-side restructuring must include sustained levels of
investment in expanded and deracialised social and economic infrastructure. Key
programmes in this regard include the transformation of the country’s education
and training system to ensure access to knowledge and skills for South Africans
from all walks of life; the transformation of patterns of human settlement to
ensure expanded access to safe, serviced and well-located homes; effective social
and health protections and equitable and sustainable programmes of land
reform.
Such reconstructive interventions will require resourcing from the
fiscus and will need to be driven by a capable state-machinery.
35
An important proviso being that all such interventions must necessarily be
growth enhancing, as there is a correlation between economic growth and
reduced unemployment. Any so-called transformation programmes that prove
not to be growth enhancing are likely to be counterproductive, leading to a
worsening of unemployment and increased poverty and exclusion in South
Africa.
Similarly, with regard to infrastructure programmes, systematic
assessments should be made to ensure a positive return on such investments. 20
The key contribution of macro economic policy to South Africa’s overall
programme of social and economic transformation is to ensure that, over a
sustained period, the state has sufficient resources to advance its reconstructive
mandate, in this regard it is also crucially important to avoid a situation of everrising national debt. At the same time, ongoing macroeconomic management of
the economy is required to maintain economic stability in the face of, sometimes
wholly-unanticipated, internal and external shocks.
South Africa would best be served by a macroeconomic policy configured in such
a way that fiscal policy is enabled to play a leading role in reconstructing,
upgrading and equitably expanding the country’s public services and related
social and economic infrastructure, with monetary and exchange rate policies
playing a supportive and stabilising role.
One recommendation is that the National Planning Commission should be mandated
to assess the impact on economic growth of all proposed government programmes,
weighed against other stated developmental objectives, and should be empowered to
recommend against programmes that have the potential to unduly damage South
Africa’s growth prospects. For example, such a system would have presumably provided
an overall governance procedure, which would have assisted in avoiding the antigrowth impact resulting from the recently introduced heavy-handed stipulations for
tourist travel documentation.
20
36
References
Bradford DeLong, J., “An even more dismal science” published by Project
Syndicate in April 2015
Brynjolfsson, E. and McAfee, A. “The race against the machine”, Lexington, Digital
Frontier Press (2011)
Burger, P., “Wages, Productivity and Labour’s Declining Income Share in PostApartheid South Africa”, South African Journal of Economics (2015)
Borio, C., “On time, stocks and flows: understanding the global macroeconomic
challenges”, Bank for International Settlements, lecture at the Munich Seminar
series, (October 2012)
Drehmann, M., Borio, C. and Tsatsaronis, K, “Characterising the financial cycle:
Don’t lose sight of the medium term!”, BIS Working Paper, 380 (2012)
Finn, A., Leibbrandt, M. and Woolard, I., “The significant decline in poverty in its
many dimensions since 1993”, published by Econ 3x3 (2013)
Guzman, M., Ocampo, J.A. and Stiglitz, J.E., “Exchange rate policies for economic
development”, a paper written at the request of the South African Government
(2014)
Hausmann, R. Final Recommendations of the International Panel on Asgisa, Centre
for International Development (CID) Working Paper No 161 (2008)
Inchauste, G., Lustig, N., Maboshe, M., Purfield, C., and Woolard, I.. “The
distributional impact of Fiscal Policy in South Africa”, World Bank, Policy
Research Working Paper 7194 (2015)
Labour market dynamics in South Africa, 2014, Statistics South Africa
Obstfeld, M., Shambaugh J.C. and Taylor A.M., ‘The Trilemma in History:
Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility”, The
Review of Economics and Statistics, Vol. 87, No. 3, Pages 423–438 (2005)
Ocampo, J. A., “Capital flows and macro-prudential regulation”, Presentation to
Financialisation Conference hosted in Pretoria (October 2013)
Oritz, I., Cummins, M. and Karunanethy, K., “Fiscal Space for Social Protection:
Options to expand social investments in 187 countries”, Extension of Social
Security Working Paper No. 48, published by International Labour Organisation
(ILO) Social Protection Department (2015)
Ostry, J.D., Ghosh, A.R., and Chamon, M., “Two targets, two instruments:
monetary and exchange rate policies in emerging market economies”, IMF Staff
Discussion Note, February 29, SDN/12/01 (2012)
37
Piketty, T., “Capital in the twenty-first century”, Belknap-Harvard (2013)
Rey, H., “Dilemma not trilemma: The global financial cycle and monetary policy
independence”. Paper presented at Kansas Federal Reserve Bank Policy
Symposium at Jackson hole, USA (2013)
South African Presidency, President Zuma Address at G20 Summit in Russia, 2
September 2013. Accessed 9 January 2014, http://www.thepresidency.gov.za/
pebble.asp?relid=16023&t=79
South Africa’s Budget Review 2005, National Treasury
South Africa’s Budget Review 2006, National Treasury
South Africa’s Budget Review 2007, National Treasury
South Africa’s Budget Review 2008, National Treasury
South Africa’s Budget Review 2009, National Treasury
South Africa’s Budget Review 2010, National Treasury
South Africa’s Budget Review 2011, National Treasury
South Africa’s Budget Review 2012, National Treasury
South Africa’s Budget Review 2013, National Treasury
South Africa’s Budget Review 2014, National Treasury
South Africa’s Budget Review 2015, National Treasury
Summers, L., “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the
Zero Lower Bound”, Business Economics, 49(2) (2014)
Teulings, C. and Baldwin, R. “Secular Stagnation: Facts Causes and Cures”,
published by CEPR Press (2014)
38