ISSUES AT STAKE: To nationalise or not? That is the question
There has to be a trade-off at some point between inflation and employment. You can't fight inflation at all cost. In reality, 37% of people in South Africa are capable of working, but they are not, writes DR FUNOKWAKHE CEDRIC XULU
The absence of academic voices on the matter of nationalisation is cause for concern.
I am inundated with questions about my stance on this issue and feel obligated to explain my position.
As a disclaimer, I need to indicate the view I hold is not influenced by my political affiliation, but simply by economic logic.
As a point of departure, the two conflicting views of our political masters are neither here nor there. The fight among the two factions is simply symbolic.
The first view is that the SA Reserve Bank (SARB) must be nationalised.
The second view from the neo-liberal faction within the ruling party is that the role of the Reserve Bank is sacrosanct and should not be tampered with.
South Africa is among only six remaining countries whose reserve banks are still owned by private shareholders.
Reserve banks in well-developed countries such as America and Britain are owned by the state and have extended mandates.
But, could this be the only reason there is a call to nationalise? The real debate in my view should be about the expanded mandate of the SARB, and not about ownership.
The current mandate and its sole responsibility is to protect the value of the currency, and do so at all costs.
The problem with this mandate is that it comes at a cost of high unemployment and poverty.
This is not in the best interests of South Africa.
The strength of the rand as well as high interest rates are major contributors to unemployment and poverty.
It is common knowledge that reducing interest rates provides cheaper capital needed by local investors to create job opportunities.
When the cost of borrowing is high, currently standing at 11% prime, local investors are discouraged to borrow money to create employment opportunities.
The SARB refuses to accede to the demand of reducing interest rates. It refuses to accede to inflationary measures that will see devaluation, thus curbing the strength of the rand.
If we promote export with a strong currency, we are not going to win.
The government has identified agri-processing as a priority, for example, but while it is the right thing, it is not supported with proper monetary policy.
The 3-6% band of inflation may be a wrong target. Perhaps we need a stronger target. The country can afford a 12% inflation rate, as long as that is accompanied by job creation.
Devaluing the rand will result in a positive balance of payment, because the weaker the currency, the more we can export our goods and services to other countries.
The demand for our goods and services will be much higher, leading to an increase in our gross domestic product (GDP) and a positive balance of payment.
Also, by reducing interest rates, people who are heavily indebted will find it much easier to pay off their debts.
Simply put, the cheaper it is to borrow, the easier it becomes to invest internally.
South Africa’s current unemployment rate is at 37%, which can easily be reduced by encouraging both foreign direct investment and local investment. But you can’t attract internal investors if the costs of borrowing is this high.
When America went into quantitative easing by devaluing its currency and reducing interest rates, we still defended the rand at all costs. That is the debate. South Africans are at liberty to choose which side of the debate they support.
To buy it or nationalise it will just be symbolic. The key issue is whether we should tamper with its mandate. There is what we call in economics terms a ‘trade of theory of inflation’.
There has to be a trade-off at some point between inflation and employment.
You can’t fight inflation at all costs. In reality, 37% of people in South Africa are capable of working, but they are not.
If your mandate, for example, is to target employment and there is a space to reduce interest rates, you should do that.
There needs to be co-ordination between Treasury and the Reserve Bank so the understanding of the underlying economic drivers is the same between the two institutions.
Treasury can’t identify economic drivers which are different from those of the bank.
This is the debate I think we should be having. However, it is unfortunate that our political masters have taken a neo-liberal position that will still subject us to unemployment for the next five years.
Our current debt stands at 60% to the GDP. When we get to 80%, we will not have the opportunity to borrow money to spend on infrastructure.
* Dr Xulu has a PhD in development studies.
