Economic lessons from the pandemic – Reserve Bank governor

South Africa still lives with the economic shocks that followed the pandemic. Labour, services and goods markets were subjected to severe dislocation and strain, prices have surged and debt levels remain very high. What are the economic lessons we learned?

Lesetja Kganyago, Governor of the South African Reserve Bank, said on Thursday that the pandemic shocks impacted widely on economic growth, industrial sectors, job creation and household incomes.

He was giving a guest lecture at the faculty of economic and management sciences at the University of the Free State on monetary policy and inequality: the post-pandemic experience.

Drawing on some high-level lessons from the pandemic for the economy, Kganyago said the first lesson is that while we live in a world characterised by large economic shocks that must be offset with policy, we need to be more aware of their long-term consequences.

ALSO READ: World Bank suggests trade policy reforms for SA – report

Pandemic needed large fiscal and monetary responses

“There is no question that the pandemic needed large fiscal and monetary responses, but where there is little policy space, policy must be agile to avoid problems that emerge. In the wake of the pandemic, globally, debt is now too high, inflation has been high and persistent and these had further negative effects on economic growth and inequality.

“Not being agile with policy has cost us dearly, as very modest global economic growth forecasts suggest. If you do not build buffers before a crisis, you can deliver much less stimulus when the emergency arrives.”

He pointed out that the quality of stimulus is also more limited because the benefits of policy support in a fragile macroeconomy are diluted by side effects, such as larger risk premiums and capital outflows.

“This means you need the discipline, in ordinary times, to strengthen your buffers, rather than doing everything you can get away with and simply hoping nothing goes wrong. Something will go wrong. There are always crises.”

ALSO READ: Reserve Bank governor warns of new era of economic challenges

We must keep worrying about inflation

Secondly, Kganyago said inflation is a very serious problem. “Over the past decade, both inflation rates and interest rates were low in many major economies. During this time, many people, including central bankers, stopped worrying much about inflation.

“They worried about deflation. They worried about other interesting subjects separate from their core missions. The post-pandemic surge in inflation came as a big surprise. But what we have learnt should be no surprise. People strongly dislike high inflation and much prefer price stability.”

Earlier in his speech, Kganyago pointed out that inflation is especially damaging to incomes and worsens inequality. “The starkly negative effects of inflation tend to emerge suddenly, but the reality is that the effect of inflation on incomes, economic growth and inequality are not always obvious.

“The channels where it operates can be short- and long-term, with differential impacts across society. In South Africa’s own experience, we have seen them playing themselves out through the composition of the consumption basket, through credit responses and interest rates and via the real exchange rate.”

ALSO READ: GNU partners to influence foreign investment, jobs, economic growth in SA, says economist

Faster macroeconomic responses

Kganyago said the third lesson learnt was that macroeconomic policy responses to shocks must be adjusted faster as unintended and long-term costs start to emerge. “It should not have taken the global community two years to realise that a massive supply contraction, combined with sustained and even larger demand expansion through debt issuance, would be hugely inflationary and carry other negative economic and social costs.

“Part of the challenge here is that we are wired to focus on the short-term at the expense of the long-term. We forget that keeping inflation low and stable supports growth in the medium to long run.”

Nonetheless, he said, there have been examples of better policy. “Many emerging markets managed the post-pandemic inflation surge more effectively than others and returned to growth more rapidly. In South Africa, improved policy credibility and communication allowed for effective inflation management with smaller policy rate increases compared to what was required in other countries.”

ALSO READ: Repo rate remains unchanged at 8.25%

Central banks cannot be the only game in town

The final lesson he said, was that central banks cannot be the only game in town. “There is only so much that can be achieved with monetary policy. We cannot deliver all the social progress we all desire. We can create a base for it; we can help navigate the economy through crises; but not more.

“We are often encouraged to do more, but I think this fundamentally speaks to the limitations of our state capacity. Changing interest rates is certainly easier than improving education, managing urbanisation or ending load shedding.

“Our inequality problem is really about chronic skill and geographical mismatches and product market structures and labour markets that are designed to protect insiders. Tackling these issues will not be easy, but it is here where the real solutions lie, not with monetary policy.”

ALSO READ: Richest 1% amassed $42 trillion over past decade – 34 times more than the poorest half made

This is how we will stop inequality

Kganyago said what really matters for inequality is economic growth, job creation and productivity growth. “These outcomes occur when markets function effectively, when the costs of economic activity are clear and stable and when essential public services and network industries work to reduce the cost of economic activity.

“Inefficiencies or failures in these areas can be likened to a negative supply shock, similar to the pandemic restrictions, but slower-moving, more insidious and more damaging.”

He warned that in the wake of the pandemic, South Africa’s homegrown supply constraints continue to drive up inflation. “Our flexible inflation-targeting framework helps us to see through the temporary inflation effects, but not the permanent ones.

“The upshot is that if we want better growth and less inequality, significant improvements in our supply environment are necessary. This will create the space for monetary policy to play a more supportive, enabling and appropriate role in achieving economic progress.”