Throwing out lifelines

2009-02-10 00:00

WHILE in a free market economy government believes in letting business get on with it with minimal state interference, nowhere can a completely laissez faire attitude be adopted. At times, governments are forced to intervene, using their ability to set interest rates as their chief instrument. Thus in recent years, for instance, South African Reserve Bank Governor Tito Mboweni has introduced successive increases in the repo rate — which determines the prime interest rate charged by the banks — in order to check rampant inflation.

That particular dragon appears now to have been slain. The current danger is the global economic crisis which is taking the world into a recession which no one foresaw and the like of which has not been experienced since thethirties. While exchange control has to some extent shielded South Africa from the worst of it, South African consumers still need assistance and thus the repo rate has already been cut by a full one percent, while Mboweni has hinted that another cut might be in store even before the Reserve Bank’s next monetary committee meeting scheduled for mid-April.

But what if manipulating interest rates alone proves insufficient to treat the economic malaise? In Britain and the United States, rates are at historic lows, and yet the meltdown continues. Half-a-million Americans lost their jobs in December alone. In such circumstances, governments are resorting to the theory enunciated by the Cambridge economist John Maynard Keynes in the 1930s — that the thing to do is to spend their way out of trouble, even if they don’t have the money and they have to create huge deficits to get it. Future generations will have to pay, but if the money has been spent wisely, at least they will inherit an improved infrastructure. Thus, in the last days of his administration, former president George W. Bush pushed through an emergency package to rescue U.S. banks and car makers, while at the moment the U.S. Congress is dealing with an even bigger package proposed by President Barack Obama. Similar rescue action has had to be taken in Britain and in other European countries.

It is interesting to note that in his weekend news conference, President Kgalema

Motlanthe indicated that representatives of the government, business and labour are working on a similar rescue plan for South African businesses in trouble. Given this country’s already dire unemployment rate, just allowing companies to go to the wall is not a desirable option.

It will be interesting to see whether Finance Minister Trevor Manuel comes up with some more definite details in tomorrow’s budget.

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