Posted by: michaeldavidpower | November 17, 2009

Of economic ostriches

One of my pet peeves is the woeful state of economics in the South African business community. It is not just that we are overrun by what Paul Krugman acerbically calls “Up-down” economists – inflation was up, interest rates were down etc – but that we are subjected to their narrow-minded insights on a daily basis. They need to get out a bit and particularly go to Asia.

What follows is a Business Day Op-Ed piece that I wrote last month describing the state of Real World economics in South Africa by celebrating the fact that, despite the desert-like features of the South African economic landscape, it is inhabited by a few noble species!

I had almost given up all hope. So sure was I that South Africa had become an economic Etosha, virtually devoid of economists who had any real grasp of the enormity of the changes currently sweeping our world, that I was thinking of abandoning my campaign to wake up South Africa’s policy makers to the critical role played by the exchange rate in the formation of economic policy for a developing country faced with high unemployment.

Try as I have done to stir things up, many economists in our private sector and even academia have – like flocks of Oudtshoorn’s most famous residents – resolutely hidden their heads in the sand whilst all around them radical changes, both in the world of economics and the world economy itself, have transformed the environment in which we live. How Sir Arthur Lewis – the black St Lucian Nobel Prize winner for Economics whose life work highlighted the critical role played by exchange rates in preparing a developing country for economic take-off – must be turning in his grave!

But then on Wednesday, a battalion of economists revealed themselves in your pages arguing broadly the point I have tried to make for a decade. There is little in their article with which I would disagree. In fact I felt that its central intent was not so much to prescribe policy but rather also to wake up our policy makers from their benign (which is now in danger of becoming malign) neglect of the value of the Rand. In so doing, I sense these Op-Ed writers’ aim was to stop our country from sleep-walking into an economic nightmare… as if 25% unemployment and negative GDP growth were not a nightmare enough already.

Part of the problem we South Africans face – and it is a huge part, revealed daily in the warblings of our electronic media and the scribblings of its printed equivalent – is that we have a very restricted view of the world. Too many South Africans in financial circles still believe that the world is simply the Western bit of it (but not all; hats off to the likes of Standard Bank and Naspers for breaking the mould here.)

Our Old Guard is by no means alone; even CNBC and Bloomberg persist with broadcasting the canard that we are in the midst of a global financial crisis. We are not; the financial crisis is overwhelmingly a Western phenomenon: Asia was buffeted for a quarter but now has almost forgotten the name Lehman so busy are they re-focussing on economic growth. This year China will grow 8.5% – yes, Eight Point Five Per Cent: crisis, what crisis? And those coal truck economies that have hitched themselves unequivocally to the Chinese locomotive are also saying sayonara to the rest of us. Look at Brazil and the rest of South America. Or even – dare I say it – Australia.

Yes, our over-worn excuse is that our narrow world-view is inherited from our peculiar history. Time to get over it, South Africa. Hasn’t one of the central points of the past fifteen years been that that history has thankfully past? Time to wake up to a new world that is composed of both West and East. Even if we might have not have recognised it yet, most of the rest of our continent is well ahead of us in this regard, with some African nations leaving us spluttering in their dust.

So how should South Africa start thinking differently? Let’s start with the value of the Rand. There are cross-rates other than the US Dollar, the Pound and the Euro to which we, as South African economists if not FX traders, should pay much closer attention. Take the Rand versus the Renminbi. Over 2009, our currency has appreciated over 20% against the Chinese currency. “So what?” I hear our feathered friends squawk. Tell me: does it seem at all sensible that our currency should APPRECIATE by 20% against that of our leading trade partner when their GDP is growing at 8.5% and ours is contracting? Now you see what I have been saying…  Wow! Isn’t it amazing how revealing a new perspective can be, even for those who seek to block out the light of the sun rising in the East?

It is not just that in looking at facts from new perspectives that new worlds are revealed. We need to look at the economic theory we have run our country by too, virtually all of which has been imported from the West. How ironic then that most Western economic theory is now in such a mess. Does anyone still claim that the file called “conventional wisdom” has anything left in it? Actually I do; but not much!

When Hurricane Lehman hit the Atlantic Basin, for all the fiery preaching the West has regularly directed at the rest of us, when it came to both monetary and fiscal policy, they then went and broke every rule in their book. Negative real interest rates? Tick! Irresponsibly high deficit spending? Tick! (Is 14% of GDP per annum high enough?) Near unlimited money supply expansion? Tick! Widespread nationalization of the financial sector? Tick! Tick! Tick!

And what did we then hear from the so-called ‘independent’ enforcers of Washington DC, the IMF and World Bank? Did we hear stern warnings to the US about the need to avoid an uncontrolled devaluation as was directed by them at Argentina in 2001? Hardly a whisper. Or admonishments to the UK about the dangers of over-loose fiscal policies in the way Asia was castigated in 1997 and 1998? Barely a murmur. (Perhaps the prudence of these two multilaterals really only extends to not lecturing their pay-masters.)

Meanwhile, the economic vision we now have of the West can hardly fill any thinking economist with pride. As we watch a debt-laden, demographically-hamstrung Leviathan stumble half-blind out of the wasteland of Chicago-style monetarism only to fall head first into in the quicksand of what even Keynes’s greatest fan, Joan Robinson, once savaged as “bastard Keynesianism”, surely even our own ostriches must realise their role models are nought but fallen angels?

So what lessons have we learned, if any, from the past year? I would sincerely hope that recent events – and especially noting who has come through them debilitated and who re-invigorated – might have taught us one thing above all: to think for ourselves, to devise a set of economic policies that works for us, South Africa. And if there is a second lesson to be learned, I would volunteer it to be that, in devising this set of “Made In South Africa” policies, the last thing we should abandon is economic common sense, a good portion of which is simply the prudence of not consuming everything today.

That said, with that Sword of Damocles still hanging over our national heads – 25% unemployment – the “do nothing” that is implicit in the “more of the same” approach is surely not the right way to proceed, not least when that ‘same’ is largely what got the West into the quagmire it finds itself wallowing in today.

So, when faced with suggestions of new economic ideas that South Africa might consider, if the only thing I hear is ostriches squawking the same old tired bankrupt conventional economic wisdom that we have heard squawked far too frequently before, it is perhaps understandable why my hope was – until recently – in such short supply. And then along comes the Op-Ed in your Wednesday paper and my cup of hope is replenished, nay overflowing. Why? Because I am reminded that not all South African economists are from Oudtshoorn.

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