The South African Reserve Bank, by increasing interest rates, is wrongly implementing monetary policy as if the country is operating under normal conditions, not the reality of state failure, infrastructure collapse and runaway corruption, which have distorted the economy, broken businesses, and plunged families into hardship.
State failure, infrastructure collapse and runaway corruption not only increase inflation, but represent additional “interest rate” hikes for businesses, families, and individuals.
Essentially, an argument could be made that ordinary South Africans are paying higher interest rates than the official ones to pay for state capture, incompetence, and mismanagement. This means that conventional monetary policy to tackle inflation is wholly inappropriate and only hammers the economy, businesses, and households already under severe strain.
State failure, such as the lack of public services, lack of reliable water, and power outages, increases the costs of doing business and household costs. It increases inflation.
Many South Africans have to buy alternative “public” services — private security, private healthcare and private education. This again represents additional “interest rate” hikes.
Runaway administrative prices — the prices of products, services and utilities set by state-owned entities, municipalities, and government departments — also increase inflation. Administrative prices are either set directly by government entities or are strongly influenced by them, rather than by market forces. In normal markets, the price and quantity of products or services, are set by the mechanisms of demand and supply.
The business model of SOEs, municipalities and government departments is to recover losses from corruption, mismanagement, and incompetence by increasing prices rather than increasing efficiency and productivity — or cutting the corruption, incompetence, and mismanagement.
Public servants every year demand above inflation wage increases, but with little increase in public service delivery. Such outsize wage increases also push up inflation
Goods and services are often provided by government entities through monopolies and customers have no alternative source for cheaper or better quality products. The government entities can thus set prices at arbitrary levels, even if the quality of the products and services are poor.
Price increases by failing state-owned entities and municipalities for sub-standard services such as water, power and rail increase costs for businesses, public institutions such as schools, and households. This pushes up inflation.
Public servants demand above inflation wage increases every year with little increase in public service delivery. Such outsize wage increases also push up inflation.
South Africa is experiencing public infrastructure failure across the country because of a lack of maintenance, corruption in which dodgy politically-connected companies are gifted tenders, and the deployment of cadres without the necessary technical skills to look after public assets.
Broken rail networks, crumbling roads, and creaky ports push up costs for South Africa’s exporters, making their prices uncompetitive.
Companies, miners, and farmers who want to remain in business have no choice, in the absence of a working state, but to price in the additional costs. This adds to inflation.
The central bank sets the official interest rate. However, the informal interest rates, determined by prices set by state entities, formal and non-formal financial institutions, and businesses, are often much higher than the official rate.
The poor invariably pay the most when inflation and interest rates are high. Financial institutions, businesses and informal lenders often charge the poor far more than the official interest rate.
The Reserve Bank is one of the most credible, honest, and competent state institutions in the country, one which every South African can rightly be proud of. It may have to change its conventional role and monetary tools in the face of state failure, infrastructure collapse and state capture, which make the economy abnormal.
For example, it must intervene to get SOEs, municipalities and state departments to put a cap on administrative prices — and for these state entities to prioritise efficiencies, honesty, and competency. The Bank has the power to compel public and private companies not to charge exploitive prices. It can call in financial institutions, retailers, and private “public” service players — such as private hospitals, private schools and private security — to insist they do not increase prices excessively and so push up inflation and the unofficial “interest rate” levels.
•William Gumede is associate professor, School of Governance, University of the Witwatersrand, and author of Restless Nation: Making Sense of Troubled Times (Tafelberg)
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.