Zwelinzima Vavi continues to bang on about the benefits of low interest rates. On BBC’s Hardtalk programme last week, Cosatu’s reinstated general secretary attacked government policy, particularly the Reserve Bank’s inflation targets.
“I don’t agree that a country with a 35 percent unemployment rate should preoccupy itself with an inflation targeting policy,” he said, urging instead targets for employment and reducing poverty and inequality.
If low interest rates were all that was required to reduce unemployment and poverty, would the world still suffer from these scourges? Wouldn’t governments wave the magic wand?
Low interest rates can provide a short-term stimulus at certain points in the economic cycle and a cushion in emergencies such as the global recession of 2008/09, which prompted co-ordinated rate cuts worldwide. However, South Africa’s problems are not cyclical but structural.
In other words, they are due to flaws in the structure of the economy that have been created over long periods of time.
The government’s short-termism and not interest rate policy should be the focus of Vavi’s wrath.
A major constraint on economic growth and job creation over the past few years has been the inability of state-owned electricity producer Eskom to provide enough power to meet the country’s needs. In a research note last week, Barclays economists Peter Worthington and Miyelani Maluleke traced the origins of the crisis at Eskom. They noted that data from the National Energy Regulator of SA illustrated the slow-brewing crisis.
“Capacity reserve margins, which were as high as 25 percent during 2002, had fallen to 16 percent by 2006 and had receded to under 10 percent by 2008. And in 2008, Eskom was not prepared as an institution to deal with these vulnerabilities.”
The rolling blackouts in January that year highlighted the lack of foresight and long-term planning on the part of the government, which had failed to invest in new capacity to meet the demands of a growing economy. Despite emergency measures implemented ever since, the problem is not receding. In some ways it is getting worse.
According to Worthington and Maluleke, “the first few months of 2014 have proven particularly challenging for the power utility. According to our calculations, based on regular system status updates released by Eskom, spare capacity margins fell to an average of 5.9 percent in February and still lower to just 5.8 percent from March 1 to 19. Notably, these period averages conceal days (and times) when the situation is especially tight. Even prior to the early March load shedding, Eskom had invoked its emergency protocols (which allow it to cut electricity supply to large industrial users by 10 percent) three times, after one similar emergency warning in November last year.”
And they commented: “Significantly, the buffer margin has fallen even as Eskom has ramped up the use of emergency generating capacity in the form of open-cycle gas turbines – basically diesel-fuelled generators which are meant to be used as a last resort in peak demand times.”
Another structural problem is due to union short-termism: focusing only on higher wages rather than skilling the workforce. According to Adrian Saville, Cannon Asset Management’s chief investment officer, real wages have grown 32.6 percent since 2000, while labour productivity has fallen 13.9 percent.
“Rising real wages are a great achievement for any country,” he said. “But if wage increases are not matched [or exceeded] by gains in productivity, competitiveness is in reverse.
“Essentially, South Africa’s labour force is 45 percent less competitive than it was 12 years ago, against a backdrop of increasing global labour competitiveness.”
Saville was commenting on the prevailing “conventional wisdom among labour and certain parts of government and industry who believe that a weak rand will reverse South Africa’s sagging industrial competitiveness, thereby lifting economic growth and redressing our unemployment problem. But since 2011, the rand has steadily weakened and where are the jobs?”
He said the weaker currency had pushed up imported inflation. “And this aggravates the cost of labour as wages rise to compensate for inflation which, in turn, makes employers less willing to hire new workers.”
The economy needs intelligent planning not a weak rand and low interest rates.