20th century AD

Social Research, Fall, 2005 by Vishnu Padayachee

In a recent intervention, summarizing 10 years of economic reform in South Africa, we have suggested that:

   To date, economic policy in post-apartheid South Africa has
   been characterized by a focus on getting "macroeconomic
   balances right"--a precondition government and its allies
   have argued, for the inflow of foreign capital that is needed
   to boost low domestic savings, and so generate growth,
   employment and (over time) a more equitable distribution
   of income and wealth. Policy interventions involving a more
   direct role for the post-apartheid state at either the macro-or
   microeconomic level have been eschewed, in favor of
   an essentially neo-liberal approach geared to getting prices
   right and the expectation that this will lead to markets
   working for all. While notable success has been achieved
   in respect of key macroeconomic balances these remain
   vulnerable to volatile global conditions. Furthermore, real
   economy outcomes have been even less impressive (Carter
   et al, 2004: 16).

The adoption of new approaches to budget planning, management, and organization, including the adoption since 1997-1998 of the Medium Term Expenditure Framework, the enactment in 1999 of the Public Finance Management Act (which imposed tight controls over financial management at public institutions), and other factors has resulted in remarkable achievements on the fiscal policy front, judged in terms of the broad targets set. Between 1994 and 1996 the average budget deficit was 4.7 percent of GDP and government debt was approaching 50 percent. In the period between 1997 and 2000, the average budget deficit fell to 2.5 percent of GDP, with decreases in both the public debt and the cost of borrowing. (National Treasury, 2004). Since 1999, the budget deficit has been kept to under 3 percent, which is in part a consequence of the dramatic improvement in revenue collection. It fell to 1.1 percent in 2003.

Since September 2003, the central bank has been inside the target range of inflation (3 to 6 percent) and in January 2005, it was reported that the average headline inflation rate for 2004 stood at 1.2 percent, the lowest since 1958 (Business Day, January 27, 2005). The CPIX fell to a low of 4.3 percent in 2004. The central bank can claim other important successes, including establishing an environment that has led to the strengthening and relative stability of the rand. According to the bank's governor:

   You might recall that in 1998 we had a negative net open
   foreign currency position of some $23 billion. That was a
   difficult time for us at the Bank. Through some carefully
   planned processes, we have eliminated the negative net
   open foreign currency position and now we have some positive
   $14.4 billion in our gross gold and foreign exchange
   reserve account. The building of reserves is seen as fundamental
   to the stability of the foreign exchange market
   (Mboweni, 2004).

But questions continue to be raised about whether or not South African real interest rates are still too high, and hence unsupportive of new capital investment, growth, and employment. Supporters of lower interest rates range from populist proponents of a "cheap money" policy to small and medium business interests that have been traditionally starved of capital because of the peculiar, hybrid nature of the South African financial system (see MERG, 1993, chap. 8). Monetary policy interventions work through the repo rate (on government bonds) but some have argued that a lower prime rate will raise consumption and investment, and hence growth and employment.