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How long will SA Inc hold on to Reaganomics?

The Congress of South African Trade Unions (Cosatu) may have a measure of unlikely sympathy from Investec, one of the country’s champions of private capital, after the trade union federation called for Reserve Bank governor Tito Mboweni to be replaced.

While Investec has not gone so far as to call for a new governor to replace the economically conservative Mboweni, whose contract expires in August, this wealth manager has along with the left-leaning Cosatu again called for more relaxed monetary policy. Investec Private Client Securities chief strategist Brian Kantor repeated these views in Business Day (June 4), saying concerns that lower interest rates would be unduly inflationary were misplaced. Moreover, Kantor argued that the Reserve Bank should go further than simply dropping interest rates: it should pump cash into the banking system in a bid to get banks lending again. He also called for action to reverse recent rand strength, which has made exports uncompetitive.

Of course Investec does not acquire its views on interest rates and the currency from a socialist cell in one of its underground parking lots: just look at the luxury staff cars parked there every day.

It comes more from the Far Eastern growth model, where low borrowing costs and weak currencies have successfully been used to spur investment in export industries. According to Investec’s argument the ability for economic growth to accelerate beyond the speed limit imposed by the current model outweighs the downside of resultant higher inflation, a view Cosatu shares. However, Investec and Cosatu no doubt disagree vehemently on labour flexibility. Cheap labour also helped build the
Far East.

In his consensus-seeking State of the Nation address President Jacob Zuma said absolutely nothing about abandoning government’s inflation-fighting policy. Indeed Zuma said nothing contentious in his speech. Any statement by president on interest rate policy would have drawn criticism so he played it safe.

The UK and US have long abandoned conservative monetary and fiscal policy to fight the recession.

This ironically leaves the South African government as one of the most prominent administrations in the world to hang on to remnants of Thatcherism or Reaganomics over the recession. There is fairly broad agreement that the West acted correctly to keep the banking system intact but the jury is still out on the merit of all the extra cash pumped into the economies (we will know the answer in about five years). Back in
Pretoria, with Mboweni’s contract up and a confusing potpourri of cabinet ministers responsible for the economy, there is a perception that the contestation for economic policy is yet to be totally settled.

To date Zuma has continued to back the economic policies of former president Thabo Mbeki and indeed the ruling African National Congress criticised the trade union movement for protesting outside the Reserve Bank. But with Zuma in a powerful position now with high approval ratings among a diverse array of interest groups, he may now have the political space to reveal his intentions for economic policy. A scenario where the businesses continue to shed jobs will make it easier for him to be less conservative with monetary policy and the state coffers.