A feasible growth strategy is needed to defeat populism
SA’s fight against the contagion will fail if its root causes are not addressed by long-term policies, writes Fuad Cassim
The populist contagion sweeping some of the most advanced countries is seeping through to key emerging markets, including SA. This undermines the coherence of economic policy, as well as confidence in it. Policy stability, certainty and consistency are at risk if we do not arrest the trend towards populism. This has only been partially accomplished in SA.
Populists are not ideological, but they are antipluralist, do not respect the democratic process and take a position that is based on opposing established elites in politics and business. This is not necessarily a bad thing, since they do raise the right questions about burning issues. However, populists tend to provide the wrong answers. The economic policies they pursue will be short-term, but short-term gains will incur long-term costs.
A historical perspective is instructive. In 1991, two economists — Rudi Dornbusch and Sebastián Edwards — edited a book of studies on macroeconomic populism in Latin America. The key argument Dornbusch and Edwards put forward is that the initial conditions that allow populism to surface have to do with widespread public dissatisfaction.
We are witnessing the disempowered using the vote to express their discontent with an economic system they see as being designed ... to hurt them.
When the economy remains stagnant for an extended period with a high level of inequality, the appeal for a radically different economic strategy gains momentum. In the first phase, populist policies produce higher growth and a rise in wages, because of government spending and more state intervention in the economy. In the short term, it can appear that these policies are working and producing the desired result.
Despite these short-term effects, the economy’s growth potential may then start to deteriorate, and bottlenecks begin to surface. Populist leaders continue along the same path, with the result that a country begins to decline. Investment drops; capital flight begins to take place; and the negative effects start hurting those who were supposed to benefit. Ordinary citizens are now of the view that the economic system is rigged in favour of elites who are not accountable. Thus, we are witnessing the disempowered using the vote to express their discontent with an economic system they see as being designed not to include them but rather to hurt them.
While many South Africans are hopeful and waiting to see a post-election reform agenda, SA is pregnant with its own internal drift towards populist approaches in economic policy. Populist policies in SA are manifested on a significant number of issues, such as immigration and xenophobia, land, free higher education, debt intervention, central bank independence, and public sector wages (fiscal populism). Most of these issues have direct financial implications. In so far as debt intervention is concerned, South African consumers are highly indebted — almost 10-million consumers have impaired credit records. This is a significant voting constituency.
The National Credit Amendment Bill aims to facilitate debt forgiveness. This has a political logic, but is dangerous for the financial industry in that it hastens the trend towards populism. While on the one hand it will alleviate consumer debt and maximise votes, in the longer term it gives politicians an instrument to directly intervene in the credit process. In the long term it can alter credit flows away from a segment of the consumer debt market. While citizens are losing faith in the economic system to generate prosperity, politicians respond with legislation that makes credit easy.
More fundamentally, the bill creates the conditions for easy credit. This represents an easy way to meet the challenge of rising inequality through the credit channel. The more difficult task is to address inequality through structural reforms that might hurt some in the short term but will be more beneficial in generating growth and prosperity in the long term.
Similarly, the debate on the independence of the SA Reserve Bank, especially as this affects inflation targeting, is an attempt at giving politicians more discretionary power to manipulate interest rates to enhance their popularity with voters. This trend is evident in advanced and emerging economies, starting with the US Federal Reserve, the Reserve Bank of India, the Central Bank of Turkey and our own Bank.
Sound monetary policy requires thinking for the long term and cannot simply be subordinated to the political business cycle. The electoral cycle is short-term, but building an economy with strong institutional capability is a long-term process. An independent central bank should insulate monetary policy from the extremes of political influence. State capture has made it evident what damage political influence can have.
The issue of immigration or xenophobia can be seen in the same light. It gives myopic politicians the chance to sow division and blame outsiders for domestic problems, such as failure to provide services. The long-term problem is to encourage the flow of skills. This can be achieved in the short term by encouraging the entry of skilled labour to enhance productivity growth in the economy.
Current populism in the US and Europe advances a toxic xenophobia. In essence, the populists have generated racial divisions by promoting anti-immigration policies.
The recent national trauma of state capture should serve as a lesson. That lesson is that we should be vigilant when we give more power to politicians and vested interests with deep pockets. The variables shaping our political economy are negative ones. Bad politics shapes a negative economic outcome. Good economics requires good politics. Our economy is relatively open, but our politics is local and fractious. The tussle between reformists and looters is real and ongoing. Polarised governments are rarely able to deliver desirable outcomes such as decent growth.
Economic policy inaction will further intensify the drift towards populism, with the result that a higher growth trajectory will become more elusive. Populists place emphasis on instant gratification. They promise far more than they can deliver.
What SA requires is a feasible growth strategy, and the longer we delay the necessary reforms the greater the probability of populism entrenching itself.
• Cassim is an economist at the Banking Association SA