Cosatu challenged on inflation

TWO of South Africa’s top economists on Monday challenged Cosatu over its role in the angry debate around inflation targeting.

The union has opposed the Reserve Bank’s three to six per cent inflation target range and has also criticised the concept of inflation targeting.Iraj Abedian, the chief economist of Pan-African Investment Research, said inflation harmed the poor and he was surprised that Cosatu was not prepared to face that reality.And Econometrix chief economist Azar Jammine said Cosatu was ‘remiss’ for not focusing on the real issues around inflation, including poor labour productivity.’But that could threaten its power base,’ he said.Jammine said the decision to keep or scrap inflation targeting was seen by foreign investors as a ‘litmus test’ of South African economic policy direction. If the policy was abandoned it would create the perception that policy makers were ‘soft on inflation’.Jammine pointed out that favourable foreign investor perceptions were vital to the economy because investment was needed to fund infrastructure, raise production capacity and create jobs.Without funds from abroad the recovery would take longer and, when it came, growth would not be strong enough to meaningfully reduce the unemployment rate, which is now more than 23 per cent.The naming on Sunday of Gill Marcus to succeed Tito Mboweni as Reserve Bank governor in November raised Cosatu’s hopes that she would at least apply the policy more flexibly. Cosatu congratulated ‘Comrade Gill Marcus’ on her appointment and said it trusted she would be guided by ‘the spirit of Polokwane’.Mboweni was criticised for attempting to keep inflation within the target range, because high interest rates caused hardship to householders.But Abedian said growth and job creation would be eroded, and the poor would suffer, if the target ceiling was raised from six per cent to 10 per cent.The reason was that real purchasing power is destroyed by rising prices. Abedian said the underlying causes of inflation were often overlooked.’Politicians, trade unionists and some economists don’t want to be confused by the facts,’ he said bluntly.He identified the essential problem as ‘production costs which are influenced by labour productivity, the cost structures of public utilities and the scope for collusion and price- fixing in the economy’.But he said these issues were lost in the debate over inflation targeting.While Cosatu is hoping that Marcus will take a less determined stand against inflation, the markets are not expecting her to be ‘soft’ on price rises.The rand firmed on Monday as the exchange rate fell below R8 to the US currency, closing at R7,9245 from R8,0912 on Friday. It also gained ground against the euro and the pound.Jeff Gable, Absa Capital’s head of research, said rand stability showed the appointment was seen in a positive light.Ian Cruickshanks, Nedbank Capital’s head of strategic research, said the announcement had removed market uncertainty. And he said Marcus’s background, which included three years as deputy finance minister, inspired confidence.- Business Report