ALL of us have had doctors, usually when we first left home, who prescribed aspirin for any ill that plagued us, whether it was a minor flu, a broken leg or stomach ulcers.
That reflexive reaction to any ill, without a serious attempt to analyse the underlying problem, does little to restore confidence, and may kill the patient.
The Reserve Bank's response to the current surge in inflation makes it look like this kind of third-rate medical practitioner. Whatever the cause of price rises, the Bank looks grave and prescribes an interest-rate hike. Yet SA faces a crisis, not of inflation, but of slow growth, rising unemployment and poverty.
Every increase in the interest rate prolongs that crisis.
It is clear that this year, at least, the prescription has nothing to do with the underlying disease. Higher interest rates hold down inflation by controlling domestic demand, slowing borrowing for consumption and investment.
But the current price hikes do not result from excessive domestic demand. Indeed, stagnant domestic demand has contributed to slow growth and job losses.
It is well known that the rapid depreciation of the rand is the main factor behind the current inflationary climate. In response, maize prices have risen to equal those of imports leading to soaring food prices, and a spurt in inflation rate. In May, food prices rose 14%, versus 7% for other goods and services.
In these circumstances, it is particularly odd that some commentators, inside and outside the Reserve Bank, have called for wage restraint as a response to inflation. True, if wages go up in response to inflation that results from devaluation, an inflation-devaluation spiral may result. But that does not mean the cycle can or should be broken by asking the poor to bear most of the pain.
Since food prices are the main cause of the rise in inflation, the poor are already worst hit, because food absorbs at least a third of their total spending.
Indeed, neither the headline CPI nor CPIX adequately reflects price increases for the majority of South Africans. In May, inflation for the lowest income group ran at 11,5%, compared with 9% for headline CPI. For most wage earners, who earn between R1500 and R5000 a month, the relevant CPI stood at 10%.
Where food prices drive inflation, holding wage settlements below inflation will only worsen poverty, hunger and inequality. Data show that every employed South African supports many more unemployed. Already, more than a fifth of SA's children show signs of stunting due to malnutrition. Further reducing the incomes of working people just when the cost of food is soaring would impose an unacceptable human and economic price for lower inflation.
Instead of sweeping measures to control domestic demand we should focus on the specific causes of inflation. In the current situation, we need to understand how we can restrain food price increases the single most important cause of inflation today. This does not mean price controls, which are usually hard to police and maintain.
Ultimately, agricultural policy must focus on food security, especially by enhancing maize production. More immediately, we need to understand why we are paying import-parity prices when we are self-sufficient in maize.
We need to explore the impact of the futures market and retail chains on consumer prices. As a minimum, shops should have to pass the VAT zero rating on basic foods like brown bread on to consumers, rather than simply pocketing the difference.
In the longer run, we need to address the real causes, and not rely on interest-rate policy alone. Ideally, inflation should be fought by raising productivity and, in the case of external shocks, developing targeted responses. If we continually depress domestic demand without reducing inflation, we risk stagflation.
The underlying problem is a built-in mismatch between the policy instruments and its targets. The Reserve Bank is charged with attaining inflation targets, but it has only the blunt instrument of interest rate hikes to achieve that aim. That is why, when the inflation target of 3% – 6% was introduced in 2000, the Congress of SA Trade Unions cautioned that it could lead to perverse responses to external shocks.
SA cannot afford the social and economic costs of trading off economic development against inflation. We must find ways to hold down inflation through measures that support growth and employment creation. We can no longer afford to keep prescribing interest rates to deal with external shocks, at a huge cost to society and the poor.
This article was written by Neva Makgetla, of Cosatu and appeared in Business Day, 21 June 2002 Makgetla is economist for the Congress of SA Trade Unions