It is easy to see why grassroots ANC members, frustrated by stubbornly high and rising unemployment after a decade of slow growth, want to impose a jobs mandate on the Reserve Bank. Their belief is that if the Bank is compelled to target a rate of employment, and not just inflation, it will be forced to allow a bit more inflation in exchange for more growth and jobs.
To the uninformed, the trade-off is as simple as that. If only it were, but there are no shortcuts to prosperity. The danger in believing that if the Bank would just cut rates all would be well is that it shifts attention from the far harder reforms required to get growth going — such as fixing Eskom and curtailing corruption.
Unfortunately, conferring a dual mandate on the Bank will not solve SA’s low-growth, high-unemployment problem. It could even make it worse. The problem is that while lowering interest rates may achieve a little more growth in the short term, running loose monetary policy in a country like SA will, after a while, result in permanently higher inflation and interest rates. This would be bad for growth, poverty and inequality.
It is especially nonsensical for the central bank of a country where unemployment is largely structural and requires approaches far beyond the toolkit of the monetary authorities. Job creation in SA is impeded by things other than aggregate demand. Yes, slow growth has made unemployment worse over the past decade, but even when economic growth averaged 5% for five years from the mid- to late 2000s, SA’s unemployment rate failed to dip below 20%.
This is because in SA job creation is impeded by factors such as the mismatch between the skills demanded by the modern economy and those conferred by the education system. Our inflexible labour market regime also makes it costly to employ low-skilled workers, especially young, entry-level ones.
The government has been slow to tackle these and other binding constraints — such as weak energy security, excessive red tape and the tottering logistics network — that make it costly and inefficient to do business in SA. This is why growth has slowed over the past decade, not because the Bank has choked the economy with high interest rates.
This helps explain why the growth effects of an interest rate cut are so small. The Bank estimates that if it cuts rates by 25 basis points, in the absence of other economic reforms growth will only be about 0.1 percentage point higher a year later.
Moreover, the job intensity of SA’s growth is far less than it used to be. In 2008, if economic activity grew 1% employment grew about 0.62%. However, by 2018 each percentage point improvement in growth boosted employment just 0.37%.
Bank governor Lesetja Kganyago has argued against a jobs mandate, stressing repeatedly that “permanently impacting on employment levels requires approaches that have nothing to do with monetary policy”. The claim that more expansionary monetary policy would solve SA’s unemployment problem is simply “an empty promise, backed up by little more than ideology and wishful thinking”, he told an audience at the Wits School of Governance late in 2022.
What’s more, he believes the current global inflation problem was partly caused by some central banks’ drive to achieve job targets, resulting in too aggressive use of quantitative easing and negative real rates even as the pandemic began to unwind. Kganyago argues that the best way for the Bank to contribute to growth is to focus on delivering stable, low inflation by maintaining the inflation targeting framework — an approach flexible enough to ensure it already considers growth and unemployment when making monetary policy decisions.
Fortunately, technocrats in the government understand this all too well. Their influence and that of outside policy experts and business, as well as the disciplining effect of the markets, should ensure sanity prevails. At least, I hope so.
• Bisseker is a Financial Mail assistant editor.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.