The Congress of South African Trade Unions (Cosatu) may have a measure of unlikely sympathy from Investec, one of the country’s champions of private capital, after the trade union federation called for Reserve Bank governor Tito Mboweni to be replaced.
While Investec has not gone so far as to call for a new governor to replace the economically conservative Mboweni, whose contract expires in August, this wealth manager has along with the left-leaning Cosatu again called for more relaxed monetary policy. Investec Private Client Securities chief strategist Brian Kantor repeated these views in Business Day (June 4), saying concerns that lower interest rates would be unduly inflationary were misplaced. Moreover, Kantor argued that the Reserve Bank should go further than simply dropping interest rates: it should pump cash into the banking system in a bid to get banks lending again. He also called for action to reverse recent rand strength, which has made exports uncompetitive.
Of course Investec does not acquire its views on interest rates and the currency from a socialist cell in one of its underground parking lots: just look at the luxury staff cars parked there every day.
It comes more from the Far Eastern growth model, where low borrowing costs and weak currencies have successfully been used to spur investment in export industries. According to Investec’s argument the ability for economic growth to accelerate beyond the speed limit imposed by the current model outweighs the downside of resultant higher inflation, a view Cosatu shares. However, Investec and Cosatu no doubt disagree vehemently on labour flexibility. Cheap labour also helped build the
Far East.
In his consensus-seeking State of the Nation address President Jacob Zuma said absolutely nothing about abandoning government’s inflation-fighting policy. Indeed Zuma said nothing contentious in his speech. Any statement by president on interest rate policy would have drawn criticism so he played it safe.
The UK and US have long abandoned conservative monetary and fiscal policy to fight the recession.
This ironically leaves the South African government as one of the most prominent administrations in the world to hang on to remnants of Thatcherism or Reaganomics over the recession. There is fairly broad agreement that the West acted correctly to keep the banking system intact but the jury is still out on the merit of all the extra cash pumped into the economies (we will know the answer in about five years). Back in
Pretoria, with Mboweni’s contract up and a confusing potpourri of cabinet ministers responsible for the economy, there is a perception that the contestation for economic policy is yet to be totally settled.
To date Zuma has continued to back the economic policies of former president Thabo Mbeki and indeed the ruling African National Congress criticised the trade union movement for protesting outside the Reserve Bank. But with Zuma in a powerful position now with high approval ratings among a diverse array of interest groups, he may now have the political space to reveal his intentions for economic policy. A scenario where the businesses continue to shed jobs will make it easier for him to be less conservative with monetary policy and the state coffers.
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20 Responses to “How long will SA Inc hold on to Reaganomics?”
Unlikely bedfellows, indeed. It’s hardly surprising that Kantor and the investment bankers want negative interest rates - extra bank profits is the only motive. However, it is rather ironic that the trade unions have been able to convince their members that negative real interest rates will help them. With the latest cut, the repo at 7.5% and deposit rates even less, and inflation still sticking at a painful 9%, there is no longer any incentive for anyone to save a cent and people are being paid to borrow. Workers on a fixed wage are hit the hardest by inflation. Few of them have any assets or foreign currency, the rand price of which will soar in response to cutting rates further. An inflationary surge will only benefit the wealthy and destroy the real value of the worker’s wages (Zim dollars anyone?). Unfortunately the trade union leaders are cynically aware that they can then negotiate double digit nominal wage increases which are completely worthless. I’m afraid this is a real case of people setting their own house on fire. One can only hope that the governor of the SARB is wise enough to protect people from themselves.
Nice post, but two points: considering the dire position of the Far Eastern economies now, one has to raise questions about the wisdom of export-driven growth in the absence of domestic demand.
And secondly, what would happen to our current account if the SARB relaxed monetary policy? The carry trade would disappear, leaving a yawning gap in the capital account, which would drive the currency down even further and push inflation through the roof. Then what happens to investment and growth?
Interesting….I wonder if SA bank executives will be prosecuted and jailed like they have in the US as well?
Anyway, seems like you and Kantor are priming the execs to get ready to receive some pretty hefty bonuses at the expense of SA taxpayers eh? Will anyone guarantee that massive injections of cash will get the banks to start lending again or do we just have to go on hope?
Something we desperately need is jobs, jobs and more jobs.
Cheaper money will help but there are many other government policies and actions that will be vastly more effective in making our economy competitive. Cheap money in a corrupt economy, one with violent crime and a workforce dying of AIDS is unlikely to stimulate either consumption or production.
The biggest problem with Reganomics is that it has worked. Clinton received a robust US economy and his great legacy is leaving the Americans a better one, possibly the strongest economy in the last 40 years. This was achieved through years of conservative economic policy. Then it got bushed…
This doesn’t mean Reganomics will work in the future though it may.
I believe the secret to a country’s economic success lies in:-
- A safe and honest business environment
- Availability of a productive workforce (education, health, work ethic)
- Little petty government intervention. This includes BEE and other brakes on initiative
- A class of society able to think creatively and strategy
- General infrastructure (preferably not supplies by government, think Eskom and Telkom)
- Availability of money to fund economic development.
-
Note, money is sixth on my list and if we don’t get the first five right, why bother with item number six????
It is clear that our interest rates are too high & lending criteria far to onerous. If it means that inflation must come down before interest rates can be lowered any further, then we have to look at proactively forcing inflation down. This may not be easy or happen overnight, but happen it must. We can start by boycotting products that are rising above the current infaltion rate & encourage the purchase of those that are not infaltionary. Govt. should introduce measures to eliminate price collusion between duopolies & oligopolies etc..& I agree that SARB should raise its inflation target range.
Cheap labour in the manufacturing sector didn’t HELP build China’s economy.
It BUILT the Chinese economy, full stop.
If you want the SA economy to follow the Chinese manufacturing success story AND to create millions of jobs, then labour wages must come down. Drastically. To the level of China and India.
Cosatu must be allowed to benchmark SA wages against those paid in the First World. South Africa is only a struggling Third World nation and it needs to pay wages concomitantly.Labour IS just a commodity and in SA it is in radical oversupply. Basic economics says that when anything is in oversupply, the price has to fall to a point of equilibrium.
We are trapped in a conundrum by our interest and debt-based monetary system. If we lower interest rates ,we lower the cost of capital,stimulate demand and spur economic growth.We may increase growth in exports through a weaker rand by lowering interst rates. However we run the risk of importing inflation from exogenous sources like rising crude oil prices caused by an underlying global oil depletion rate of 4% per annum (peak oil).Rising oil prices will in itself hamper growth. This is the crux of the problem.Exponential growth has reached its limits on a finite planet-period.We cannot resolve our financial crisis by throwing more debt (more bank)lending at it because this is what caused it in the first place.
What we do need is monetary reform entailing an end to fractional reserve banking,introduction of universal basic income and social credit. We need a paradigm shift and achievement of a steady-stae economy based on recycling of resources, renewable energy and achievable only through the equitable distribution of interest-free,debt-free money.
See www.richardcook.com , www.webofdebt.com , www.sane.org.za
john bond - excellent summation.
“Availability .. productive workforce (education, health, work ethic)”
TO:
COSATU as they are in charge of government and state policy.
You do not know definition of “Work Ethic” as you force an increase to the the cost of a Diminishing Return on Labour/Manpower. Its well known in Economics.
Pay too much for labour contribution to cost. C O P.
There are hardworking, people who need to be noticed and recompensed for their “work ethic.”
Down turn in demand - Poverty increased.
spread the wealth and jobs available to more people.
Prevent massive starvation.
i.e each employee works less hours
those hours given to those who will lose
It will be called exploitation as workers take home less wages.
Except that MORE workers take home less wages.
C O P remains the same -
Production actually increases - (cheaper product)
Spread the economic hardship, as opposed to some living comfortably while others starve.
It was done in 1931 depression - to lessen job losses.
There were soup kitchens to stave off starvation to unemployed and larger families.
Trade Unions need to back off, people need to be “humane” and care about others !
Work ethics in action
and me abducted overnight - to a dark, dank cell to be silenced finally.
Old, female, paleface on June 6th, 2009 at 12:21 pm
OOPS !
those hours given to those who will lose their jobs due to less demand.
More teachers, nurses and doctors if there are any ?
Classes too big, wards too big and too many patients.
It would seem as if we need a complete rethink as to how SA is governed. Skills are our foundation to wealth.
COSATU ! Anyone home ?
Old, female, paleface on June 6th, 2009 at 12:27 pm
yeah, i’m completely not understanding why manuel et cie want to hold to 1980s fiscal policies when 1930s policies are more in order [and remember, the new deal almost failed because roosevelt wanted to balance the budget in 1935/6].
and, for dave harris/phillipa lipinsky — it’s 15 years since “democracy” and you are saying that there is no qualified black person for finance minister?
[and to be honest, someone should *really* point this out to those raking zille over the coals. zille would do right to point this out herself; it’s a shame that the da are collectively too polite to go for the jugular in the way that the anc’s lackeys are.]
reaganomics didn’t entirely work, actually. it wiped out union protections — american workers, it must be said get zero guaranteed leave in a calendar year — and in most service jobs, it’s not even offered in the first year. this is bad, from a quality of life point of view. a domestic worker in south africa gets more leave than nearly 40 percent of americans in the work force. lolwut?
most union protections are good — but it’s the bad ones which get all the press. union protections are why europeans work less hours but are “more/almost as productive” than americans.
god, i’m agreeing with jon “darkies are always wrong” low. clearly there is a major disturbance in the force.
to piggyback from what jon said — you’re not entirely right or wrong. as the original poster mentioned, cosatu are actually right about a few things, but they’re right for the wrong reasons. they’re right about the effects of higher interest rates on the workers, but real problem with the high interest rates is that it stifles entrepreneurship [i know about this bit, personally] and makes large-scale employers more indebted — many of the world cup stadia cost overruns are *directly* related to interest rate hikes.
[the government should have issued guaranteed bonds to pay for the stadia to be protected against this rather than pay for them out of their general budget. it would have saved a ton of money.]
yaj: peak oil is less of an issue regarding south african inflation than the wto — imports and domestically produced goods must be competitively priced. this includes food, and that’s where south africans [hell, almost all africans] are being soaked. if zimbabwe worked and angola and mozambique weren’t riddled with land mines, south africa would actually be able to stop importing as much food as it does from “overseas”. food prices would fall like a stone as a result. however, the reality being what it is, south africans get to suffer.
it’s far easier to blame oil prices when the case is really something less tangible.
I agree. Lets take the the rand, a single rand (R1). If the rate of circulation of R1 is 14 times per annum, then the government has through VAT taken R2 out of the economy.
For every R1 that the government takes out, a conservative 10c is put back into the economy. The other R1.90 is wasted, that is spent, and there is nothing of value shown for it.
Not only must interest rates be dropped, but also uneconomic taxes.
Do you know what the trouble is with you… (and me!)
The problem is, you (and I) keep saying “déjà vu” and “I’ve seen it before” and “remember Mozambique/Argentina/Zimbabwe (delete those not applicable)” .
We suffer from an ailment called by many names like reactionary, or conservative, or old fashioned. The real dilemma is when things do not work, we ask why and then try to remember the lesson.
South Africans don’t want to hear criticism, regardless of how misguided their ideas may be. It’s much more fun being creative and to hell with the outcome.
The Eastern growth was based ENTIRELY on cheap labour, something which South Africa can not stomach. Note: the oversupply of unemployed people willing to provide labour for what little money they could get in an unregulated labour market led to low production costs and the potential to milk export markets, which in turn grew the economy and provided the cheap labourers with better opportunities.
In other words, with South Africa’s labour laws we will never be in a position to produce significantly cheaper products than elsewhere, so we will have limited export opportunities. Currency fluctuations only help in the very short term, since forex valuation of a currency will be reflected shortly in the domestic valuation - ie inflation and higher production costs.
Secondly, an export economy requires buyers. China had the benefit of a robust US market, with americans spending far beyond their means. In the current global economy, everyone is being very careful with their money, and will continue to do so for several years still. It would not surprise me to see global economic stagnation for the next four to five years.
Devaluing the currency is equivalent to putting lipstick on a corpse - it may look nice for a while, but it’s just as dead and will start stinking in short order.
By the way, Mr. Robbins, it surprises me that you haven’t adopted a nom de plume, given that there is another, highly successful (and successfully high), writer by that name…
Look, it’s a moot point. The West is not producing 1930s economics — it’s stealing from the poor and giving to the rich (note how unemployment is soaring over there while the stock market is rising and the fat-cats in banks and big factories are doing very nicely). That’s definitely not what South Africa needs.
The problem is that a massive expansion in labour-intensive public works, along the lines of the CCC in the New Deal, would be extremely expensive. It could probably be organised by raising taxes, but that would entail changing the whole government model — they’d have to reintroduce exchange controls to prevent capital flight. That might easily lead to a withdrawal of foreign investment, which could cause huge problems for the current acount deficit which is funded by foreign investment.
We’re in something of a cleft stick, I fear, unless we take really dramatic measures which I’m sure Zuma is unprepared to take.
Workers need a living wage. Given our history flexible labour laws could mean exploitation. Unfortunately with the advent of globalisation businesses have becom less loyal and less patriotic, what guarantees do we have that they will invest the profits they make out of cheap labour into our economy and create more jobs. In a country where the costs of the main cost drivers of the budgets of the poor such as food, transport are astronomical and actually the main drivers of inflation we cannot talk about lowering of wages. Let us work on lowering the cost of living for the working poor, I am sure the Far Eastern model also ensured that cost of living was low and that quality education and health was made available for free.
The average inflation rate during the last 13 years of apartheid rule was 12.5% pa. The average inflation rate during ANC rule (the last 11 years with Mboweni at the SARB) is 6.7% pa. Congratulations Tito Mboweni! That is the good news. The bad news is that 61.8% of the real value of Retained Earnings in all companies and 61.8% of the real value of Shareholders´ Equity in all companies with no variable real value non-monetary items to revalue since April 1994 have unknowingly been destroyed by SA accountants implementing the very destructive stable measuring unit assumption as part of the real vlaue destroying traditional Historical Cost Accounting model. When our accountants choose, in terms of the IASB´s Framework, Par. 104 (a), to measure financial capital maintenance in units of constant purchasing power, which is compliant with IFRS, they will maintain instead of unknowingly destroy about R200 billion in real value in the SA real economy annually for an unlimited period of time - ceteris paribus. The lower Mboweni can bring inflation the less real value our accountants will unknowingly destroy while they still implement the very destructive stable measuring unit assumption whereunder they assume there is no such thing as inflation as far as the valuation of constant items is concerned. http://realvalueaccounting.blogspot.com
It is sad that the ANC fell for the neoliberal movement (the MDC is neoliberal too), instead of holding true to the principles of the Freedom Charter.
With so many people living in poverty, they should be pursuing economic policies that raise incomes, not raise exports and ‘investor confidence’ at all costs. Job creation and raising incomes - through investment in agriculture and infrastructure, protecting manufacturing, and guaranteeing a minimum wage.
The way to do that is to treat the extractive industries as the special economic sector that it is, and which should be heavily taxed if it is in private hands and if not, nationalized outright.
Many of the successful Asian economies have most of their economy run by parastatals, so it can be done (although I am not even suggesting going that far, for South Africa). The difference in development is because they never allowed their economies to be run by the IMF and World Bank.
So I say - heavliy tax the mines or nationalize them, and use money from that sector to invest in infrastructure, agriculture and manufacturing.
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Tom Robbins is a freelance writer concentrating on economics, business and politics. Robbins was previously a senior financial journalist at Independent Newspapers’ Business Report, focusing on the performance of the retail sector (though his intimate knowledge of the features of beauty products is strictly recreational). In his past he has immersed himself in most genres of journalism, including travel writing that wouldn’t fit in a tour operator’s brochure. Robbins has a growing interest in food writing, though Nigella Lawson makes him ill.
The recent appointment of KwaZulu-Natal Premier Zweli Mkhize -- a key supporter of President Jacob Zuma -- as chancellor of the University of KwaZulu-...
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Unlikely bedfellows, indeed. It’s hardly surprising that Kantor and the investment bankers want negative interest rates - extra bank profits is the only motive. However, it is rather ironic that the trade unions have been able to convince their members that negative real interest rates will help them. With the latest cut, the repo at 7.5% and deposit rates even less, and inflation still sticking at a painful 9%, there is no longer any incentive for anyone to save a cent and people are being paid to borrow. Workers on a fixed wage are hit the hardest by inflation. Few of them have any assets or foreign currency, the rand price of which will soar in response to cutting rates further. An inflationary surge will only benefit the wealthy and destroy the real value of the worker’s wages (Zim dollars anyone?). Unfortunately the trade union leaders are cynically aware that they can then negotiate double digit nominal wage increases which are completely worthless. I’m afraid this is a real case of people setting their own house on fire. One can only hope that the governor of the SARB is wise enough to protect people from themselves.
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