LETTER: Quantitative easing cannot be used as policy tool to drive development in SA
It is naïve to confuse a structural transformation problem with a stabilisation problem
SA’s recent debates over macroeconomic policy miss the point. With the recent 3.2% quarter on quarter contraction of GDP, the economy's poor growth is indeed worrying and underscores a need to rethink economic policy in the country.
But identification of this fact only gets us so far. The proposed solutions regarding quantitative easing to drive development, widely attributed by the media to ANC secretary-general Ace Magashule this week, have dubious underpinnings. The same could be said for Duma Gqubule’s recent piece in Business Day (“Governor must stay in his lane and accept debate about the Bank”), where he seemed to argue in favour of the need for expansionary fiscal and monetary policies à la modern money theory in SA.
It should be acknowledged that the quantitative easing led by the central banks of advanced economies as a policy response to the Great Recession has been a useful force for stabilisation. However, there are several problems with the idea that something approximating quantitative easing can be used as a central policy tool to drive development in SA.
First and foremost, there is a problem with the diagnostic aspect of this idea. In the sense used within classical development theory, SA is a “dual-economy”. As such, the principal growth challenge regards the structural transformation of the economy, through promoting growth of the “modern” sector. This challenge is fundamentally distinct from the growth challenge mature economies have faced when attempting to balance the vagaries of business cycles.
It would hence be naïve to confuse a structural transformation problem with a stabilisation problem. In the case of the latter problem, conventional and unconventional aggregate demand policies such as expansionary fiscal policies and quantitative easing may be an appropriate solution, but in the case of the former, the same justification may not exist.
Stabilisation policy may be relevant to the short-run growth issues, but long-run development is a different kettle of fish. Stimulating sufficient modern-sector investment may be more of a supply-side than demand-side problem (that is, a problem of how to stimulate the profitability of modern-sector firms).
This argument should not be mistaken for “orthodox” opposition to state intervention in the economy; indeed, it is compatible with recognition of the importance of the state in administering industrial policies that promote modern sector activity and was recognised by prominent heterodox macroeconomists during the height of the Keynesian era.
It is, however, a caution against the simplistic transplantation of macroeconomic arguments relevant for advanced economies to developing economies, considering important differences regarding the available amount of policy space, their key economic objectives and structural features.
It would be a mistake to try to use expansionary aggregate demand policy, conventional or unconventional, to try to drive long-run development and structural transformation.