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On Thursday June 7, 2012, Numsa was honoured to host the South African Reserve Bank Governor Madam Gill Marcus at Numsa’s 25th Anniversary Gala Dinner, at the ICC in Durban. Ms Marcus gave a speech titled “Monetary Policy and Inflationary Challenges in the Face of the Global Economic Crisis”.
Our initial plan for the evening was that soon after she would have spoken, we would have allowed a semi-formal question and answer session, especially in the light of the widely publicised views of Numsa on the Reserve Bank itself and the current South African monetary policy and the horrible conditions of the working class.
As it turned out, we removed the question and answer session from our Gala Dinner Programme.
Today, we see that a number of print, audio and electronic media have carried bits and pieces of what she said at our gala dinner, largely against our stated policy positions on the Reserve Bank.
In the light of the great significance we attach to the views we hold on monetary policy and the place of the Reserve Bank itself in our country (we insist it must be nationalised!) we feel that it is important for us to stake very clearly where we stand, especially on the aspects of her speech which the media has carried, thus far.
In her address to the Numsa gala dinner governor Gill Marcus said:
“With respect to an employment target for monetary policy, while we would all like to see maximum employment creation, we do not believe that monetary policy is the appropriate tool to solve what is essentially a structural problem. Monetary policy can influence growth, and by extension jobs, over the cycle, but does not impact directly on long run potential growth.”
The governor then presents the normal caricature of our position on macro-policy: “What can monetary policy do? The primary mandate of central banks is the control of inflation. We have yet to hear a good argument for high inflation, and even moderate inflation, which often leads to high inflation, erodes the purchasing power of wage earners, and reduces the value of wealth and assets of those unable to protect themselves.”
She furthermore went on to say:
“The Numsa media release of 1 November 2010 relied selectively on the 2010 Unctad Trade and Development Report as intellectual support for its proposal for an employment target for monetary policy. However, the Unctad Report recognises the inflationary dangers of a “growth-oriented” monetary policy, and explicitly notes that an additional instrument will be necessary to control inflation. For Unctad the solution is very clear: to offset the inevitable inflationary pressures, an incomes policy is needed, because of the centrality of wages in the inflation process. To quote the report: “As labour costs are the most important determinant of the overall cost level… their importance in helping stabilise the inflation rate cannot be overemphasised (p. xi).
“The report suggests that wage growth should be aligned with average productivity growth and targeted inflation. For this reason, according to Unctad, a social compact is required, in line with what was proposed in the New Growth Path document.”
These comments by the governor are surprising because she is the one who selectively and incorrectly uses the Unctad Trade and Development Report (2010) to justify her inappropriate macroeconomic policy. The main contribution of the Unctad Report is to put on the table what it calls a wage-led growth path – a phrase that has remained a pariah among South African policymakers, but has been advocated for more than two decades by Numsa. The basic argument in the Unctad Report is that the days of export-led growth based on wage compression are over.
By implication, the days of keeping inflation low by suppressing wages are over. Countries must now rethink strategies to support economic growth and restructuring.
To quote the Unctad Report:
“Given the close links between employment, output and demand growth, a strategy of keeping wages low in order to generate higher capital income to motivate fixed investment or reduce product prices in order to gain a competitive edge can be self-defeating. This is because if wages grow at a slower rate than productivity, the supply potential may end up growing faster than domestic demand, thereby discouraging innovation and productive investment” (p. ix).
It is also surprising that the governor can read from the Unctad report support for her view that “the primary mandate of central banks is the control of inflation… The current policy is to control inflation through the interest rate mechanism”.
But who says the current policy is beyond critique? In fact, the governor draws her quotation from a section of the executive summary of the Unctad Report which is titled: “Controlling inflation more effectively through an incomes policy”, which makes a case precisely against the “interest rate mechanism” policy of the governor. We have long argued that combating inflation through interest rates is an inappropriate policy, the Unctad Report supports us.
Hence the report calls for an incomes policy as an instrument to control inflation, it criticises the governor’s interest rate policy. It also criticises the governor’s approach to “competitiveness” which is centred on cutting labour costs through real wage compression.
The governor chose to ignore the sentence that comes before the one about “an additional instrument to control inflation” in the Unctaf Report. Let us quote the relevant paragraph in full:
“By shifting the emphasis of monetary policy towards growth and employment creation, the scope for central banks to pursue the objective of maintaining price stability or low inflation will be reduced. Therefore an additional instrument will be necessary to control inflation. This can be provided by an incomes policy. Ssuch a policy can also prevent labour costs from rising faster than productivity and thus serve to control inflation” (p. xi).
It is therefore clear from the Unctad Report that monetary policy must “shift emphasis towards growth and employment creation”, in line with policy positions of the ANC-led Alliance, and reduce “the objective of maintaining price stability”.
This effectively and strategically means that price stability should not be the “primary mandate of central banks”, contrary to the governor’s selective quotations. Neither is this position expressly stated, nor even implied for that matter, in our 1996 Constitution. Price stability would be achieved through an incomes policy, while monetary policy maintains a low interest rate environment, avoids currency appreciation, and ensures that credit is allocated to support structural transformation of the economy.
Just how the governor can misread the Unctad Report and then claim that it supports her interest rate-based inflation targeting policy is mysterious.
What would incomes policy mean in the South African context?
It would mean that the labour share should be raised to some optimal point, where domestic demand and hence job creation would be maximised.
Macro-policy must at least reverse this regressive trend and must thus be actively deployed to drive a wage-led growth path. As the Unctad Report consistently warns, the trend of falling labour share implies a decrease in domestic demand and forces the economy to rely on export demand to drive growth and employment.
This strategy makes the economy vulnerable to foreign shocks.
This strategy is also self-defeating, since worsening income distribution generates indecent jobs, increases the working poor, undermines social inclusion and equity and limits possibilities to transform the structure of the economy.
In her speech, the governor claims:
“A more flexible monetary policy can be attained through a tighter fiscal policy stance, or through providing space through an incomes policy as suggested by Unctad. However, if wage settlements are well above inflation and productivity increases, and if fiscal policy is highly expansionary, the burden of controlling inflation falls solely on monetary policy.”
It is not clear what the governor means by “a more flexible monetary policy” and how exactly this translates into “a tighter fiscal policy stance”. Leaving this aside, the governor claims that controlling inflation falls solely on monetary policy because fiscal policy is highly expansionary and wage settlements are well above inflation and productivity increases.
But clearly this at once invalidates her mandate of monetary policy, because these conditions do not, and did not, obtain in South Africa.
Firstly, it is well known that labour costs have been inflating well below inflation and productivity growth particularly after 1994. That is why the labour share has been declining.
Secondly, it is also well known that fiscal policy has been restrictive to the point of generating primary surpluses in the context of high unemployment. Fiscal policy cannot be said to have been highly expansionary since 1994. These facts just show how inappropriate the current monetary policy framework is, even within the logic of the governor.
It is also surprising that the governor does not believe that monetary policy is the appropriate tool to solve what is essentially a structural problem of unemployment. However, it should be noted that structural unemployment in South Africa is very history-dependent. Cyclical unemployment quickly turns into structural unemployment, so that inflation control based on raising interest rates, generates what the governor thinks is short-term, or cyclical unemployment, but which in reality turns out to be long-term, structural unemployment.
To give a picture of the situation, more than 68 percent of the unemployed have not worked or have not had a job in the past five years. Suppose then that inflation is expected to breach its upper target of 6 percent. By increasing the interest rate, what the governor does is to increase unemployment in order to control inflation expectations within its target band. But once inflation expectations fall within the target band, the SARB decreases the interest rate. However this decrease in the interest rate does not translate into the re-establishment of the initial unemployment rate.
Instead, in a history-dependent unemployment situation like ours, the unemployment rate becomes structurally higher than before the interest rate increase.
We conclude by noting that, obviously, we do not believe that a communication strategy that caricatures our policy positions will assist in clearing the field for a sound and informed debate. At no stage did Numsa or Cosatu argue, as a matter of policy objective, that “we need high inflation”. That would be insane.
What Numsa has been consistently putting forward is the need to strike a balance that favours, dominantly, unemployment reduction over inflation control, and that the interest rate is a blunt and inappropriate instrument to control inflation. This would be in line with the Reserve Bank’s constitutional mandate of protecting the value of the South African currency in the interest of balanced and sustainable economic development (Constitution of South Africa, Act No 108 of 1996, Section 224 (1)).
With the current levels of mass poverty, dangerous and impossible levels of unemployment and extreme levels and forms of inequality, the SARB is now pursuing policies that are NOT promoting balanced and sustainable economic development with its pathological fixation on inflation targeting.
Our position is vindicated by the Unctad Report, which argues that elevated interest rates draw in hot money, appreciate the currency, decrease fixed capital investment, limit supply-capacity and thus reduce the capacity of the economy to absorb the growing labour force. We would welcome a progressive incomes policy that lifts the labour share to an optimal level.
But we also say that incomes policy alone may be insufficient to control inflation; it would be critical for the state to intervene and control the prices of essential items such as food and energy, thereby de-linking these prices from exchange rate movements and commodity market speculation. Such an intervention is crucial in order to limit precisely the so-called “exchange-rate-inflation spiral” that the Governor is talking about. .
We hope this puts perspective on our reference to the Unctad Report and clarifies why we are of the view that this report presents the type of fundamental macro-policy shift that South Africa needs.
In conclusion, Numsa is well aware of that the SARB was established by Section 9 of the Currency and Banking AC, 1920 (Act No 31 of 1920) and is governed by the South African Reserve Bank Act, 1989 (Act No 90 of 1989). Further, we know that post 1994 several amendments to the 1989 Act have been passed, in order to attempt to wrestle control and ownership of the Reserve Bank from its private sector moorings and transport it into a post 1994 democratic South Africa.
Numsa, however, insists that notwithstanding all the amendments and changes to the Reserve Bank, it is in the greater interest of South Africa to out rightly nationalise the bank, in order to secure full monetary sovereignty over it. In this regard, no amount of piecemeal reforms can transport the Reserve Bank neatly into the new post 1994 democratic dispensation, apart from the formal constitutional promulgation and location of the Reserve Bank as a state-owned bank.
We are fully aware of the implications and complexities which outright nationalisation of the Reserve Bank would entail. We, however, think that no price is too large to pay for democratic control of South African money and its value. It is to submit to the dictatorship of money and money mongers both locally and internationally, if we do not nationalise the Reserve Bank, as the situation is right now.
Numsa will soon confirm dates and times for further engagement on these and all other urgent and pertinent matters with the Governor and her officials, as already agreed upon by the two parties.