By Redge Nkosi
The staggering economic transformation of Asia from the poorest continent in the world in the 1960s to the centre of global commerce and industry today cannot be explained without examining the extraordinary role of its countries’ reserve banks.
The interventionist approaches taken by certain reserve banks in pursuit of national interests (including growth, employment, output, industrialisation, and economic security) was so elaborately deliberate that recently it prompted the United Nations Conference on Trade and Development (Unctad), the UN’s International Labour Organisation (ILO) and numerous other institutions, to urge developing countries to abandon their misguided fixation with inflation targeting and (re)turn to developmental central banking, with job creation and growth as added objectives.
Self-respecting central bankers, especially those in developing economies, influenced by national interests only, have recently taken it upon themselves to go beyond the failed inflation targeting.
According to the recently departed governor of the Bank of Bangladesh (Reserve Bank), economist Professor Atiur Rahman: “Bank of Bangladesh deliberately shunned the minimalist orthodoxy of inflation targeting as the sole legitimate objective of the central bank.”
Uninterested in the rhetoric of whether a mandate is enshrined in the constitution or in some statute – a useless emphasis repeated ad-nauseam in South Africa – Governor Rahman simply shunned inflation targeting in service of national interests, which would otherwise have been at risk had he been welded to inflation targeting.
Rahman has promoted pro-poor and small and medium enterprises financing since taking the helm in 2009, including mandating lower interest rates for farmers, women enterprises and small, medium and micro-sized enterprises.
“Attention to the adequacy of financing for crops, vegetables, dairy, poultry and fishery has yielded substantial output gains in these areas, including self-sufficiency in rice and exportable surplus in many agricultural produces,” said Rahman.
The ILO’s independent study on the Bangladesh Reserve Bank observed that “Bank of Bangladesh has adequate reasons to engage in multiple mandates”. Bangladesh is a least-developed economy, with multiple economic challenges as those afflicting South Africa. Expectedly, with the intervention of the reserve bank, Bangladesh gross domestic product is racing towards that of the moribund South African economy.
There is absolutely nothing unique about either Bank of Bangladesh or Rahman. They are among a long list of Asian central banks and governors who had proven that the rejection of advice from or rejection of capture by the International Monetary Fund and the World Bank has admirable positive national interest outcomes. Japan, the Tigers and today China have so much to show for that.
Reiterating how he supported his economy during the crisis, Governor Rahman, “took the newly created money with bullock carts to the ground and impacted real economy both from demand and supply sides. In the process, not only the domestic demand has been upheld, but also the supply chains remain robust. The end result has been the desired stability of the economy with expected growth process remaining in motion without enhancing inflationary pressure”.
The very act of taking and directing money in bullock carts to the ground (SMMEs, women enterprises, farmers etc), pulled inflation down to 5% from 12%, while pushing the economy to around 6% growth.
If inflation targeting was shunned by Rahman, and indeed others, including the highly successful China, what then did they use, or do they use, in controlling inflation?
Before responding to the above question, it bears repeating that for both practical policy and academic purposes, this author is on record for insisting that the primary monetary policy tool is the reserve bank balance sheet, and not the “interest rate policy" practised by the SA Reserve Bank (SARB). Moreover, and more importantly, it is the asset side and not the liability side as traditionally emphasised in academic monetary economics.
The SARB’s interest rate policy has no record of use as a job creation or growth alone tool. It is only a stabilisation tool, with growth and employment and other real variables being automatic by-products. Even for its stabilisation purpose, it has produced only financialisation and deindustrialisation as its main outcomes.
Therefore, the lazy phrasing “monetary policy alone cannot do the heavy lifting” may be true for the “interest rate policy" of the SARB, but not for monetary policy.
Consistent with my assertion above, it is the reserve bank balance sheet (asset side) monetary policy that was deployed to produce the economic miracles in Germany, Japan, the Tigers, and currently Bangladesh and China. This was also true in the US, Canada and Europe during their development phase.
Contrast the many proud and successful experiences of Asians with the dismally failed South African approach, exemplified by the stance in the speech of Lesetja Kganyago, the Reserve Bank Governor, at Wits University on November 1.
Kganyago, seeking to influence the ANC elective conference outcomes, sought to justify the failed inflation targeting as a “proven framework”.
His point of entry in justifying a clearly-proven failed framework was through appeal to the authority of the sophistry of the unsettled Phillips Curve argument.
In English, Phillips Curve theory says there is a stable inverse relationship between unemployment and inflation. Meaning the higher the inflation, the lower the unemployment. Kganyago disputes the existence of this relationship and as such both monetary and fiscal measures cannot cure the unemployment we face in South Africa. Solutions lie elsewhere, he claims, pointing to structural reforms.
This is despite the results of their own modelling rejecting their empty propaganda that structural reforms will bring about economic salvation.
The SARB, as with many institutions and economists, apply a version of the Phillips Curve that uses the output gap, instead of the “expectations-augmented" Phillips Curve. Here, Kganyago appears to elevate the output gap version.
While the idea of the output gap as raised by Kganyago is conceptually sound, the devil is in the standard estimation methods or rather the measurement phase and how ideology distorts the calibration of terms and then imposes pernicious policy interventions using the distorted calibrations as a (faux) authority.
Average analysts are often oblivious to the way economic technocrats in neoliberal institutions such as the SARB have perverted the idea of output gaps and others to bias policy towards austerity.
The bias does not stop at austerity. They go further, as Kganyago did in his speech, to artificially separate the so-called “structural” determinants from “cyclical” ones, claiming the former is invariant to fiscal interventions, and then redefine the mass unemployment as “structural”.
The phrase “structural unemployment” then gives them the licence to claim, as Kganyago did, that macroeconomic policies have little to offer in creating jobs and growth, thus absolving himself and his inflation targeting framework from the blame of poor growth and high unemployment.
Hence you also heard in the recent mid-term Budget speech that fiscal policy is ineffective and cannot grow the economy and create jobs. So what cures structural unemployment and growth then? He says look somewhere else, not the SARB and its inflation targeting framework.
Their final destination is structural reforms, the very reforms their models show won't grow the economy, but nonetheless insist they must be done. Dismembering, selling and private financing state-owned enterprises of their choice. Deregulating, including privatising water and related public services. In their twisted economic logic, these will cure structural unemployment and bring about growth.
Indeed, by justifying the failed “inflation targeting” through appeal to the authority of the sophistry of the Phillips Curve theory, they give a perceived “technical” imprimatur to a series of highly pernicious microeconomic policies destroying the economy.
Aware of the chicanery around the output gaps and the economic devastation caused by the sophistry, one senior economist at the Institute of International Finance, a former Goldman Sachs and IMF employee, started a campaign to discredit the devious use of output gaps. The campaign is called CANOO (Campaign Against Nonsense Output Gaps).
It is thus not idle talk that Unctad, ILO and many others warn against fixation on inflation targeting. And that Governor Rahman and other successful central bankers, including those of China, deliberately shun inflation must be a wake call for South Africa.
I call, as I have called before, for a complete overhaul of the defunct macroeconomic framework imposed on this land and urgent removal of those defending this neoliberal framework.
Therefore, ANC members attending the elective conference should choose between the destruction of their country or serving national interests by having additional mandates to the reserve bank.
Redge Nkosi is an executive director and research head for money, banking and macroeconomics at Firstsource Money, and current & founding executive board member of the London-based Monetary Reform International.
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