Coen Welsh | Aug 9, 2017 | 0
Now is the time to rethink the entire economic model
By now, every person tracking our economy knows we have had a very hard landing. From a growth rate of over 6% in 2014, to a revised 5.2% in 2015, to an estimated 1.6% in 2016, the economy has fallen off a cliff.
With two negative quarters already confirmed for 2016, that is indeed a very hard landing.
The Namibian economy now displays a close resemblence to the South African economy of the apartheid years. Following the staggering 6% annual growth rates of the mid-sixties, the SA economy became beset with political problems throughout the seventies culminating in massive stimulus in the eighties, just to keep liquidity at a functional level.
The result was growth rates between 3.5% and 3.8% in some years, interspersed by catastrophic years when the economy easily shrank by more than 1% in a single year. And the South African economy was already the biggest in Africa by far, even during the apartheid years.
But the incessant borrowing from rogue lenders and the continuous inflation of the money supply, took its toll on growth rates, and through run-away inflation in particular. Of course, this had to be offset with exorbitant interest rates, which is the reason why the older generation does not flinch at a prime rate of more than 10%. They remember too well the years when prime was a cool 24% and inflation was running in the order of 20%. Four price increases per year for new vehicles was the norm then, and there was not a single sector where prices could be set for a year, or where a budget was valid for 12 months. Nope, 3 months max, with smaller incremental adjustments in between as conditions demanded.
The underlying reason for both the run-away interest rates and the almost hyper-inflation, was the pariah status of the South African government. It is therefore safe to say that the economic problems were political in nature. But there were still many lenders willing to lend but at penalising rates. South Africa had no other option. It had to borrow, and it had to maintain liquidity. So started a prolonged series of almost a decade of substantial budget deficits. Adding spice to this nasty scenario was the government’s hold on capital markets.
The South African government had a tight grip on the economy through absolute capital controls. When investors’ funds came into the market, they were not allowed to leave, or repatriation was only permitted after an arduous fight with the South African Reserve Bank for so-called special permission to service import obligations. Remember, South Africa had to import most of its fuel which placed a huge burden on foreign reserves, which at one point, were negative.
There was also the misunderstood Financial Rand. This weird financial concoction was to entice investors for it turned every real one Rand that entered the system into three. This helped solve liquidity problems, but when large manufacturers like the big Japanese automakers wanted to repatriate profits, the reverse principle applied, and profits were diluted by a factor of three. The natural outcome was ever-increasing vehicle prices to make up for the diluted profits. The consumer experienced this as inflation.
It has become time that we sit down and rethink our entire economic strategy. First, I believe we need to get rid of the communist thinking and rhetoric. If we want real prosperity, the government must exit the economy and start doing what it is supposed to do – operate as a regulator and an enabler, not a market participant.
Second, we need to be honest with ourselves and with those we try so hard to draw as investors. If we continue to drive our liquidity on borrowed funds to accomplish all sorts of social targets which should be the function of the private sector, we are only perpetuating principles that are fundamentally communist.
The Namibian economy has a natural in-built capacity to grow at a comfortable 4% per annum without much direct sovereign stimulus. But for this to be realised, laws and policies must favour private sector investment.
There is nothing wrong with a little economic push from the government’s side, but then a keen eye must be kept on deficits and on government debt. This is easier said than done because not only has the government grown itself into the economy, it has also fostered a pervasive way of thinking where most people believe the government has a right to be the economy.
It does not, unless it wants to be China or Russia, but then we have to accept the inevitable outcome that economic growth will always be a function of government participation and that entrepreneurs will not see the fruit of their endeavours unless they do business with the government.
There are only so many development dollars available. If the larger slice of these end up in the pockets of those few individuals that benefits from the government’s very successful BRR policies, we will continue to be an unequal country. In short, we will continue to be a communist state where the majority is poor as hell and only a small oligarchic minority enjoys the good life.
Granted, it helps to keep telling the world we are fighting poverty but if the real outcomes are substantially different from what we claim we try to accomplish, then what is the use of building the Namibian house.