Response by Deputy Governor of the South African Reserve Bank
By XP Guma
29 September 2010
Dick Forslund and Mazibuko Jara’s article (Inflation targeting retards economic growth, September 20) refers. Permit me to respond, briefly.
First, the authors state that “it is completely legitimate for workers to fight for wage increases in excess of inflation” because if they don’t do this, employers will get an increasing share of the value produced. This outcome, they allege, will keep inequality as it is — at best. At worst, it will actually deepen economic inequality.
Ignore, for a moment, the meaning of “economic” inequality but ask the question, to which workers do Messrs Forslund and Jara refer? Those who have been retained throughout this period; those who are currently employed; or those who would have been employed had wage settlements been aligned more closely with improvements (or declines) in labour productivity at the margin?
The facts are incontrovertible. A number of jobs have been shed. Fewer workers are employed in 2010 than were employed in 2005.
In September 2005, there were 13- million employed: at present there are 12,7-million employed.
Those who have retained their jobs together with those who would have been taken into employment at the renegotiated wage rates are the gainers. The newly unemployed, and those who might have secured employment had “economic” imperatives been adhered to, are demonstrably worse off, as is the country as a whole, on account of the dead-weight loss which has been occasioned by allocative inefficiency. All this in an environment of relative stability with inflation reverting to annual rates which are consonant with the inflation target!
Second, Messrs Forslund and Jara assert that “the role of monetary policy must be to ensure that there is sufficient demand to maintain a non- accelerating inflation rate of capacity utilisation…”
This is not a novel proposition, having antecedents in the debates in Latin America in the 1960s. Roberto de Oliveira Campos noted that the only possible contribution(s) of inflation to growth derives from the assumption that the pressure of inflationary demand will permit a fuller utilisation of manpower (labour) and resources.
Arthur Lewis (1963) taught us to be careful; to distinguish between self- liquidating and spiral inflation, the first being permissive of the attainment of a limited set of policy objectives — including the altering, permanently, of the distribution of the flow of income: the latter being a political phenomenon, arising from tensions in the society.
Inflation targeting accommodates income redistribution during the business cycle, facilitates rational or longer-term decision making by all decision-making economic units, and enhances the prospects for sustained economic growth. It does this by establishing an inflation “norm”, a nominal magnitude which lifts the veil from and enhances the allocative efficiency of real phenomena.
For this reason, inflation targeting facilitates — it does not retard — sustainable economic growth.
Other policies, including labour market and fiscal policies, may better be assigned to the achievement of other objectives.
Dr XP Guma
Senior deputy governor, South African Reserve Bank
READ the original article by Dick Forslund and Mazibuko Jara – Source: http://www.businessday.co.za/
