Economic balancing act

2009-03-30 00:00

The financial meltdown has provided a sobering lesson in the consequences of the sort of untrammeled free market economics made fashionable in the eighties by political leaders like Margaret Thatcher and Ronald Reagan. It has certainly given new heart to proponents of socialism, brought low by the collapse of the Soviet Union in 1989.

However, the fact that both neo-liberal economics and the more radical forms of socialism have failed should support the view that the best economic model is a subtle and carefully managed balance between the private and public sectors — in other words what is often referred to as a mixed economy.

It is the difficulty of achieving this balance between private and public sector involvement in the economy that should make us extremely cautious of proposals such as the one put forward at the recent Numsa conference to nationalise the Reserve Bank.

The Union’s reasoning, presumably, was that by not dropping the repo rate — the rate at which the central bank lends money to commercial banks — fast enough, the bank was contributing to the continuing loss of jobs, particularly in a sector like mining from which Numsa draws the vast bulk of its membership. However, rate cutting, the central bank’s main way of increasing the money supply, is an extremely blunt instrument. Wielded with too much vigour it can very easily lead to the horrors of hyper-inflation, which effectively means that what jobs there are available, are not worth having anyway.

If confirmation of this is needed, we need look no further than Zimbabwe where even the government’s draconian price controls and other attempts to manage the economy did nothing to halt the disastrous slide in the value of the currency. Ironically, now that the descent into an ever-deeper economic abyss has been halted, those citizens who depended on the black market for supplementing their worthless wages are currently confronted with the problem of trying to live on their now stable if low incomes.

South Africa has much to be thankful for in the prudent management of the economy by people like Trevor Manuel and Tito Mboweni and any changes should be done under the warning that a nation’s economy needs expert management.

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