The South African Civil Society Information Service

Failing the Poor: Their Double Inflation Burden

By Saliem Fakir · 5 May 2008

To say that inflation targeting as a monetary policy instrument has reached a dead end, is an understatement. It was Jeremy Cronin, the South African Communist Party (SACP) leader, who poignantly noted that perhaps the Governor of the Reserve Bank, Tito Mboweni, was overdoing things and that a new vision for economic stimulation is long overdue.

Cronin, the SACP and COSATU have for a long time been told to shut up by the Mbeki camp but have of late become more vocal and strident following the ANC's Polokwane Conference.

It's good to know that there is more openness to economic debates. Post-Polokwane, there appears to be an unequivocal shift towards the left. However, one could argue that this shift is constrained by uncertainty about the degree of the leftward tilt. A paucity of ideas about how to fix the economy, so that it caters for the growing numbers of unemployed and the underclass, still prevails.

The Reserve Bank has resorted to its old penchant of playing around with the interest rates to try and fix overspending, while the Treasury has plans to boost economic growth by throwing large sums of money at infrastructure programmes. The jury is still out on whether these projects stand to benefit the poor or whether the money will be funelled into grandstanding projects such as the 2010 Soccer World Cup. There is great desperation to keep growth rates high.

But the real debate remains, growth for who? How can the poor be made to reap more benefits than has been the case so far?

Increasing the interest rate does cool things down, but it also makes the poor worse off, as the rich who have benefitted enormously from the growth boom always have sufficient savings and investments to accommodate the downward cycles in the economy.

This is not so for the poor, who are already stretched, as income earnings capacity always lags behind inflationary trends. The situation is worse still for those who are informally employed or have no work at all, relying on social grants and other forms of giving to survive. Their fate looks ever more dismal.

South Africa has one of the world’s largest social welfare grants schemes – 12.4 million people are beneficiaries of the grant. Grants have been an important substitute for zero income prospects in a jobless growth situation for second economy entrants. However, social grants too, are subject to inflationary degradation to the extent that with time, their impact on livelihoods decreases bit by bit.

In the time of low inflation and upbeat economic prospects, this may not have affected households that much, but in times of increasing inflation, the way social grants are used comes under pressure – they help little in making a dent on poverty.

Central Banks have a role to play in the economic wilderness, but in a world of liberalised economies all they can do is to cool or heat up the economy - not run them. The markets are expected to respond in ways that lead to equilibrium.

Inflation targeting, in any case, favours the moneyed class because economic growth models are predicated on the idea that those with investment decisions and clout, technical and management expertise, respond best when there is an incentive to do so – when there is cheap money around they get to work. They do get to work, but for themselves.

South Africa’s economic growth was built on a decade of cheap money and those times are over by all accounts. Cheap money stimulated investment in commodities and allowed a growing new middle class to incur a buying binge on the back of a hefty and easy to access debt.

We have had a decade of boom, boosted by consumption and a commodity demand cycle largely as a result of the hunger for resources from high growth economies such as China and India.

The first is deliberate, increase debt through cheap credit, so people can buy goods and this stimulates production; the second is a matter of luck: we are just lucky to be richly endowed with natural resources for which demand is outstripping supply.

But being endowed with natural resources can often come at the expense of investment in more solid economic foundations – as this year will show, we too will have caught the dreaded Dutch disease.

But the whole absurdity of inflation targeting is often demonstrated by things we cannot control – most notably, the behaviour of international markets from which we are not immune.

It also points to how vulnerable the economy is when you have overconfidently relied on one set of economic policies and tools, when in fact, these should have been broadened, so as to reduce risk and vulnerability.

Who would have predicted changing fortunes in the world – the subprime crises that impacted on the dollar price; the $100/barrel price for oil which will keep climbing; and the doubling of global prices for staple crops fuelled by high demand for protein in the east and a use of surplus grains and other crops for biofuels.

Volatility in these areas suggest that other sorts of interventions are required. But how is this hurting the poor?

On average food inflation stood at 13.4 % by January this year, against a consumer price index of 9.4%. At face value, it doesn't look that steep, until one takes a closer look.

If you were to take food prices on an individual basis, then the figure for bread is a 27% increase since 2006, maize meal a 28% increase, meat prices on average have increased by 34%, and milk by 29.45%. These are all essential food items for households. Suddenly, the 13% becomes a 30%.

The International Food Policy Research Institute based in Washington argues that food prices are unlikely to decline and that maize prices could increase by 72%.

We must add to this picture the prices of two other essential items: transport fuel and energy costs. In the two years from 2006 to 2008, fuel prices saw a percentage increase of 53.92%, and paraffin increased by a whopping 64% since 2006.

The predilection for economic growth has led to energy crises. This is not without a cost to the consumer. First consumers were left thinking they could bear a 14.5% price hike in electricity tariffs but Eskom wants to increase that to 53%. This is more than likely to put electricity supply out of reach of the poor. Alternativley, they simply will have to pay double the price that they are paying now.

Cronin was not off the mark – inflation targeting works if you have too much of a debt cycle and irresponsible consumption patterns from those who are self-employed, super-rich, and middle class.

They are, in any case always in an advantageous position because they can cut the luxuries and live by the basics during lean times. Their earning capacity is significantly more than the lower wage worker.

Discretionary income is expected to decline from 15% in 2006 to probably about 8.9% this year. It will not hurt the upper income brackets like it will the lower-middle and low-income brackets.

Some CEOs and top ranking managers in corporations, parastatals or government departments earn on average 300% more than the ordinary worker. They are always ahead of the inflation curve but the ordinary wage earner constantly fights to keep up with the inflation rate.

Things have changed. Where once a minimalist approach to state intervention was the norm, more intervention may be required, particularly in areas such as food prices and transport cost. Together they constitute 50% of the household spending basket.

The burden of a double inflationary attack reduces the capabilities of the poor. They invest less in nutritious food, on health and education. Over the long-term, opportunities within the broader economy declines and the poverty trap deepens. The poor will feel more and more abandoned and their hopes will be shattered. 

A new state led economic paradigm is due and certain interventions resisted for ideological reasons will have to be resurrected.

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