South Africa’s Stagflation Problem

As a testament to how global this blog is becoming, yesterday there was a big discussion at a South Korean website (gasengi.com) over my article about the crumbling Swedish welfare state. Unfortunately, I do not speak or read Korean so I can only guess what the discussion was about, but I would imagine that there is a debate in Korea over the country’s heavy dependency on exports and leftist demands for a welfare state.

Let’s hope the Koreans are smart enough to stay away from full-scale European-style entitlement systems.

And let’s hope others make the same decision. The welfare state and its ideological demagogues are a global movement, and we who prefer freedom and prosperity to statism and industrial poverty must answer them on a global basis. This is why it is important that we keep an eye on what is going on around the world, and thanks to our new-found readership in Korea (and, actually, in Australia!) I am adding new countries to my to-analyze list.

Today, though, we return to South Africa. If there is one place in the world where socialism has had a chance to prove itself in a post-Soviet era, it is on the southern edge of the African continent. I recently noted that the socialists in ANC have failed their country, and even failed at what they should be experts on: socialism. Their failure is now reaching such a magnitude that there is a fair chance they may actually lose power at some point.

This begs the question what will happen to South Africa if another party, ostensibly less radical, would get a shot at running the country. The ANC has carefully driven the economy into the ditch, doing virtually everything wrong and nothing right. Unemployment is at frightening levels, especially among blacks, and there are persistent voices warning that inflation is invading the South African economy. The combination, known as stagflation, is a macroeconomic venom wherever it shows its ugly face.

Lisa Steyn writes for the Mail and Guardian:

The risk of stagflation has pitted the Reserve Bank and the government against each other over who is to blame and what solutions might be able to pull South Africa back from the brink. From as early as April, when the International Monetary Fund slashed South Africa’s economic growth forecast for 2014 to 3.3% from 4.1%, Reserve Bank governor Gill Marcus warned that the country faced the risk of stagflation – when an economy experiences slow growth, rising prices and increasing unemployment. She has since become progessively vocal about her concerns as the government’s perceived lack of action continues and inertia begins to set in in the economy.

The reason why the ANC government is not doing anything is that they don’t know what to do. All they know how to do is try to redistribute a shrinking cake among a growing population. This is typical for socialists: they believe that the size of the economy is exogenous – either static or determined by factors no economic policy can control – and that therefore you can redistribute income and wealth without any negative repercussions for the economy as a whole.

This is of course a bunch of nonsense. High taxes discourage work, high entitlements discourage work, and work discouragement means less or no economic growth. Everyone loses.

With two decades of vengeful redistribution policies, the ANC has really set the stage for an economic disaster in South Africa. Lisa Steyn does not mince her words:

Marcus’s criticisms include the need for labour-market reform, a suggestion that has not gone down well with the ANC’s alliance partner, trade union federation Cosatu. Nor is the suggestion politically expedient with elections scheduled for mid-2014. Things have only continued to get worse as the global economy shows little signs of recovery: the eurozone is projected to retract by 0.6% in 2013, the United States is growing at 1.8% and even China’s economy is slowing. South Africa’s gross domestic product (GDP) forecast has been revised down to 2% for the year, unemployment reached 25.6% in the second quarter of 2013 and inflation is in the upper end of its target band of 3% to 6%, which it is expected to breach soon.

I have said before that I am a bit mystified by the South African inflation numbers. The economy is growing slowly, which means that the normal transmission mechanisms for newly printed money into the real sector are sluggish. Banks are not pumping the new money supply out to consumers or businesses at a pace that should create a high-inflation environment. This is, e.g., why the U.S. economy is currently not experiencing any threat of high inflation.

More likely, the South African inflation is coming from a government that is using money supply to pay for part of its spending, primarily entitlements. Work-free income funded by newly minted taxes is an under-estimated inflationary transmission mechanism, but there is evidence that it causes inflation. Venezuela under de facto dictator Hugo Chavez is a good example; Argentina under incompetent president Cristina Kirchner is another.

Once inflation sets in at rates closer to ten than five percent, the economy is in real trouble. Even if governmetn stops printing money like a mad dog, inflation becomes a self-fulfilling prophecy. Businesses and families develop a habit of expecting inflation – and to the extent they can they roll those expectations into their contracts with others.

The combination of this with very high unemployment is purely toxic. Lisa Steyn again:

Experts say the risk of stagflation is a real concern. “We are not there yet but we are knocking on the door,” said Chris Gilmour, investment analyst at Absa Investments. David Shapiro of Sasfin said: “The big question is where to from here?” Our three economic drivers – mining, manufacturing and credit – are under pressure … Stagflation is a worry.”

She then goes on to describe how the ANC regime responded to the global recession by doing everything it could to continue big government spending. This only cemented the problem of an over-bloated, fiscally obese welfare state trying to live off an ailing private sector.

According to Steyn, some people actually see this for what it is and call for the right kind of solutions:

the Reserve Bank … is calling for courageous structural reform. Notably, the bank’s frustration with government policy was expressed in two recent speeches, one delivered by Marcus at a labour law conference on July 31 and the other by the deputy governor of the bank, Francois Groepe, at a Unisa economics seminar on August 5. In her speech, Marcus said that monetary policy could only provide short- to medium-term relief and was not a substitute for necessary structural reforms.

In other words, permanent cuts in government spending and deregulation of labor markets. Each of those suggestions is enough to give a socialist a headache, and the combination is unthinkable to any defender of the welfare state. On the contrary, a government like the ANC regime considers money printing a permanent source of income. Chavez in Venezuela was a master at this, setting up a double-currency model (without formally minting two currencies) in an attempt to disguise his money printing.

But more importantly, printing money was the way the Soviet regime paid for its expenditures whenever its five-year plans failed (which they always did). As a result, the economy was in a permanent state of shortage on almost everything a consumer could want. The money printing method for paying for government expenses is deeply embedded in Marxist economics, which is why the Soviets used it – and why the ANC regime sees no problem with it.

This does not stop economists from trying to make the point. Lisa Steyn explains:

Groepe made no bones about what he thought about the government’s headway: “In general, South Africa has not made sufficient progress in tackling our many constraints … [our] track record in implementing the microeconomic reforms required to achieve structural change has been patchy.” Alternative ideas from both the governor and her deputy include: Labour market reforms that enable a more efficient movement of workers from one sector to another; A greater focus on growing labour-intensive sectors, including mining and agriculture; Importing skilled workers: “It is estimated that for each high-skilled immigrant that comes into the country, between four and eight low-skilled jobs are created,” Marcus said; To introduce greater links for pay and performance, which would not require a change in the law; Addressing South Africa’s poor export performance and diversifying the economy to create more jobs;

They also add suggestions for tax cuts or tax breaks, which rounds off a pretty compelling package. However, they could have abstained from proposing:

The government should expand and strengthen the quality of its public services, including the social wage, to enable low-skilled workers to live meaningful lives

This goes against any attempt at expanding economic freedom and curtailing government spending. The best way to make sure low-skill workers never get any jobs is to price them out of the market. This idea is even more dinosauric given the tense situation that the South African economy finds itself in today.

Most of the proposals from the Reserve Bank for reforms to the South African economy are entirely workable and make a good package. They would constitute a reasonable counter-strategy toward stagflation, but would probably ultimately fail. To secure success in keeping stagflation at bay the South African government would have to take a hard look at their own welfare-state policies. Only a limited government can secure the success of the private sector – and avoid entitlement-driven inflation.

These points are especially important for any politicians planning to challenge the ANC in next year’s elections.