Constitution cannot be so prescriptive

2017-06-21 12:07

"The Constitution of the country cannot be so prescriptive about economic policy because the state has already gone much too far to interfere in a market-oriented economy with various laws that disturb the free operation of market forces and price formation," said Fanie Brink, an independent agricultural economist.

He says that although he agrees that the Public Protector cannot make recommendations about the amendments to the constitution to change the role of the Reserve Bank, the bigger problem is actually the fact that the constitution is prescriptive about the implementation of monetary policy. It does not belong in the constitution of the country.

The Reserve Bank Act in terms of which the Bank was established and its primary mandate to stabilise prices is already a totally wrong interference in the free market forces of the economy. In any case, the Bank's interest rate policy does not play such an important role in the economy as the Bank and most economists in the country believe.

"Prices have an extremely important function to always restore the equilibrium between the supply and demand in the economy and must be allowed to send signals to producers and consumers about the imbalances in the market."

The general assumption that an increase in interest rates can reduce consumer spending is simply an imagery flight as consumers reduce their spending because of the price increases that cause a higher inflation rate and not because of higher interest rates itself. Interest rates can also not have an effect on international prices such as crude oil and food prices. It can neither have any effect on the local administrative prices such as the prices of electricity and fuel which are regulated by the government or even on the consumption of these commodities. Consumers are very often blamed for price increases that they are not responsible for but which increase the consumer price index and gives the Bank reasons for increasing interest rates.

The impact that monetary policy really can have on the exchange rate is minimal because there are many other factors such as political statements, international developments and the country's investment confidence and economic growth that can also have an effect on the exchange rate. This means that the effect of interest rates alone cannot be excluded or determined apart from these other factors that can influence the exchange rate and can therefore provide no evidence to substantiate this claim.

The same goes for the effect of monetary policy on economic growth, which is in fact very limited. "Growth is driven by the profit motive and profits are created, firstly, through the changes in the relationship between the prices of all the inputs used in the economy and the prices of all outputs delivered, and secondly, the efficiency with which the inputs can be transformed into outputs and which can primarily be increased through the application of the best available and new technological developments."

Brink says the Bank's primary objective to stabilise prices is the single biggest delusion in total economic science and the Bank's mandate to stabilise prices as well as its inflation targets should therefore be abolished. Interest rate levels must be determined in a free capital futures market. The Reserve Bank is in any case nothing less than a capital control board which tries to control both the price (interest) of capital and the money supply. Something that the free operation of market forces will not tolerate over the long term as it will eventually restores the balance between demand and supply in the market, albeit through a financial crises.

"The government must therefore discontinue its interference in the country's economic policy through the Constitution and should rather allow the market related forces to lead the economy in the right direction to create economic growth," Brink said.

Fanie Brink - Independent Agricultural Economist

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