As Finance Minister Tito Mboweni prepares to deliver the medium term policy statement on Wednesday, we must critique the country’s current macroeconomic institutions, policies and their performances.
Many people suggest that these institutions are at the root cause of the economic problems in our country.
A recent study by the Bureau for Economic Research highlighted that policy uncertainty and mismanagement of the economy are key contributors to poor performance.
This has led to a decline in business and consumer confidence and explains this economic malaise.
However, it is also important to look at the macroeconomic policy framework.
For far too long, South Africa has focused mainly on pursuing macro stability as the priority. Such an approach is not adequate for growth and development.
There is a need to look into a fresh approach to macroeconomic management.
Otherwise we will not be able to re-orientate our economy towards redistribution, let alone the ability to limit the effects of the domestic currency fluctuations.
South Africa’s post-apartheid macroeconomic framework can be best described as being “orthodox”.
At the heart of this framework, is a fiscal policy that mostly involves frequent reductions in public expenditure and a tight monetary policy whose main thrust has been interest rates manipulation.
To illustrate, the Institute for Economic Justice reports that within a three-year period between 2016/2017 and 2018/2019 average annual growth in government expenditure was 0.3 % whereas the population of the country grew by 1.6 %.
This shows a fall in per capita expenditure.
Furthermore, in 2017/18 public expenditure on economic affairs, housing, agriculture, and defence all fell by -3 %, -2 %, -3.6 and -0.4% respectively.
Given the much-publicised bad state of public finances (expanding budget deficit), perhaps, the austerity stance taken by the government has had a contribution to this given that total expenditure equals total income for national budget.
Monetary policy, through the persistent raising of interest rates with the objective of reducing the money supply and depressing demand, has also caused a contraction to the economy.
Inflation targeting has been a mainstay of monetary policy since the year 1999 and inflation in South Africa, like in most developing economies, has been mainly caused by cost-push factors hence the excessive use of inflation targeting albeit with constraints on output growth.
The contractionary effect of these policies has been antithetical to employment and growth prospects of the country and this could not be more enunciated than by the unemployment rate which has risen from 22% in 2008 to 27.2 in 2018%.
These policy packages could be justified in the first two decades of democracy with their desired outcome of “sound macro fundamentals” such as a stable macroeconomic environment in order to attract foreign direct investment.
And many people still argue for the maintenance of these policy packages, given that public finances are in similar position to what they were in the early years of democracy.
However, it must be borne in mind that there is tension between pursuing macroeconomic stability and aggressively seeking growth and development.
I contend that the country is in a greater need for growth and has to use suitable macroeconomic tools that aggressively pursue growth and development.
The ANC at its 2012 conference resolved that: “South Africa requires a flexible monetary policy regime, aligned with objectives of the second phase of the transition. Without sacrificing price stability, monetary policy should also take into account other objectives such as employment creation and economic growth. In this regard, the government should engage with the new wisdom developing on macroeconomic policy around the world in response to past failures and the global failures.”
This signalled a realisation in ANC policy circles that conventional macroeconomic policy had not done enough to achieve developmental needs such as economic growth and employment creation and there needed to be a paradigm shift in macroeconomic policy.
Sadly, like most ANC resolutions, this one did not find its way into being government policy and remains a resolution of the conference.
What then becomes an appropriate macroeconomic policy?
South Africa cannot achieve its development goals of inclusive growth and job creation with contractionary macroeconomic policies.
Any policy change has to increase aggregate demand and support supply capacity if it is to achieve economic development.
Studies elsewhere have shown that altering macroeconomic policies to support expansion may result in high inflation but overall output growth fares better.
This also addresses the purpose of price stability because output growth is inherently deflationary.
In addition to its mandate on financial stability, the monetary policy of the country must drive credit creation directly to productive sectors of the economy and other growth-enhancing activities however this can only be predicted by a change in the mandate of the South African Reserve Bank.
If the need to review macroeconomic policies is to be accepted it will require a radical shift in mind-set in institutions like the National Treasury and the Reserve Bank.
Thus far, no agency has been shown by policymakers to challenge the conventional macroeconomic policies even though calls have been made before by social partners such as Cosatu and independent think tanks.
It is with a hope that South Africa considers moving away from the comfort of orthodoxy which hasn’t delivered on most, if not all, of its promises.
• Hlumelo Ncopo is a master’s student at the University of KwaZulu-Natal. He is studying an MCom in local economic development.