20th century AD

Social Research, Fall, 2005 by Vishnu Padayachee

Michie (2005) reflects on the longstanding controversy about the inflation-unemployment trade off--which is implicit in some of the South African policy debate--,and makes the important observation that reductions in unemployment should not inevitably be associated with a rise in the rate of inflation. He sets out the standard neoclassical mechanism on this, including the effect through NAIRU-type processes, and sets this argument against other recent evidence about the relationship between unemployment, wage growth, and productivity. His conclusion is "that there is no reason to suppose that achieving lower unemployment would lead to inflation. That will depend on the behavior of a number of other economic variables, including the 'bargaining' and 'feasible' wage levels. Lower unemployment might even be associated with lower inflation [my emphasis]. The key issue is whether the economy's productive capacity is expanded in line with increased employment, with the necessary levels of investment in new infrastructure, capital investment, R&D and training" (Michie, 2005: 15). He is supportive of public works program in this context (including in the South African case), especially those involving productive infrastructure, arguing that they create "the conditions for higher productivity over the medium and longer term, hence alleviating the danger of inflationary pressures at the same time as creating the conditions for higher levels of employment and hence lower unemployment" (25).

The democratic South African government has placed great store on getting macroeconomic balances (especially government finances) right, partly in order to restructure spending to achieve more sustainable improvements in service delivery, but also because of the perceived beneficial effect on global investor sentiment and the cost of borrowing. Let us look briefly at these two areas.

First, the government has over the last 10 years achieved notable success in terms of abolishing the system of apartheid and has made some progress in extending health care and infrastructure in crucial areas (water, sanitation, housing). It appears to be increasingly focusing on effective delivery and targeted social and infrastructural spending in recent years, arguing that this is now possible having established a more sustainable macroeconomic foundation for such expansion. A great deal of emphasis is being placed on getting local government, the agent of much of this delivery, prepared for this by improving its finances and the quality and capabilities of its bureaucracy. In his 2005 state of the nation address, the president spoke of the R180 billion worth of infrastructure plans related to transport logistics, electricity and water resources, and of the government's approval of a new Skills Development Strategy for the period 2005-2010, which will cost R21.9 billion.

Second, the government has achieved huge success in improving the country's global financial standing. One way of looking at this is through the changes in the sovereign credit rating by 4 different global rating agencies since 1994. Moody's and Standard and Poor's gave South Africa a rating before the end of the first year of democratic government, and in that year a $750 million foreign bond issue was successfully issued. While Moody's" (Baa3) is an investment grade, Standard and Poor's only raised its ratings to an investment grade (BBB-) in 2000 (4 years after GEAR). Its rating (it would appear) was checked because of concerns about growth and employment, much to the treasury's annoyance. (National Treasury, Press Statement March 6, 1998). Spreads on the EMBIG (SA), J.P. Morgan's Emerging Market Bond Index Global sub-index for South Africa, which reached a record high of 757 basis points above US treasuries in September 1998 (following the Russian and Brazilian crises at the time), fell steadily afterward, and sharply after Moody's decision to place South Africa on a rating watch late in 2004. (2) The new rating (Baa1) was confirmed early in 2005. (SARB, 2005). The South African EMBIG in early 2005 stood at under 100 basis points, and although the spread for all emerging market economies (EMEs) also fell over this period, South Africa's appears to have outperformed most other EMEs on this subindex. In fact, "officials from the National Treasury have had calls recently from bond players for the government to issue a 50-year bond. This is the kind of ultra-long-dated bond countries like France and Germany issue. Investors normally wouldn't even contemplate paper of this maturity from an emerging market. So the calls reflect a remarkable degree of confidence by market players in SA [South Africa], and its fiscal management" (Business Day, February 24, 2005.)