Money’s Worth

Originally published in the Informanté newspaper on Thursday, 18 February, 2016.

Yesterday, the Bank of Namibia raised its repo rate by 25 basis points, or 0.25%. This means that interest rates for loans across the board should rise by 0.25%, and borrowers across the country have to adjust their expectations based on this. But what is the Bank of Namibia? Why do they have the right to control money flowing out of our pockets?

The easy way to answer this, is simply to state that the Bank of Namibia is a central bank, and it derives its authority from our constitution – Chapter 17, Article 128. But that is what is called a mathematician’s answer – entirely accurate, but entirely useless.

As with most institutions in the modern age, central banks originated from the last great empire – the British Empire. Back in the 1690’s, the Kingdom of England was involved in a war with France, and King William III’s government found it difficult to procure funds for this war. Credit of a government, up until that point, was tied to the reigning monarch, and different ones had different levels of fiscal responsibility. Monarchs are notorious for not wanting to relinquish authority until they have no other choice, and so too here. 

Up until that point, the printing of currency was under the sole authority of the king, which is why he was having credit issues. Lenders did not want to lend money to a king who would just print more currency, and thus devalue the money they lent to him. Thus, the Bank of England was born, to which was entrusted not only the accounts of all of government, but also the exclusive right to issue bank notes. When the Bank of Namibia was established this was one of the responsibilities it gained.

Initially, all of the money printed by the bank was backed by gold, but the first cracks in this system appeared in 1797, when a bank run to convert paper money into gold occurred. The Bank of England suspended conversion into gold, and in the analysis of the bank run afterwards, it was resolved that the central bank should not only act to stabilize the currency, but also act as a lender of last resort for other banks. And so the final few functions normally attributed to central banks was born.

As wars proliferated, so did central banks, as kings and presidents were unable raise the necessary debt to sustain their war efforts. But central banks survived the wars, and in peacetime they grew to serve an important function. After all, stabilizing the currency is of great importance for economic development – and although it was originally meant in terms of foreign exchange, central banks increasingly saw the need to stabilize price levels, or inflation. 

Inflation, in a sense, is the result of the printing of money. After all, money is a claim to goods and services. If we have the same amount of goods and services available, but more money was printed, a greater ‘share’ of this money would be required to acquire the same goods and services. If money were printed recklessly and in excess of economic production, the value of money would fall rather quickly, and we’d have high inflation. In extreme cases, such as that of Zimbabwe, when the money printing reaches such levels that you get hyperinflation, people lose faith in their currency, and no longer transact in it.

This is quite important, because while as previously mentioned money could in the past only be printed provided it was backed by gold, that is no longer the case. Until 1971, this was still broadly true, but after US president Richard Nixon suspended the convertibility of the US dollar into gold, no country was willing to do so any more. 

Our money, right now, is backed by our faith in the money being able to be exchanged for goods and services. You trust that that N$10 note you have can buy goods and services to that value, and when you hand it over, it will be accepted. But without control, that faith could be shattered, and the Namibian Dollar could go the route of the Zimbabwean one.

That is why the Bank of Namibia has a mandate to ensure inflation remains in the range of 3% to 6%. Well enough above zero that we are not in danger of sliding into deflation, small enough that it can be reliably modelled for, and not disruptive to the general economy. It is also why the Bank of Namibia is independent from government, so that it can focus on this mandate without interference, and without the executive influencing policy. 

But where other central banks have a bit more policy options, the Bank of Namibia has only a few due to the currency peg to the South African Rand. And its main policy instrument is thus the Repo Rate. After all, most money creation these days happens via commercial banks, who extend credit. This is via fractional reserve banking, a topic for another day. But suffice it to say that by increasing the cost at which bank can lend from the central bank, the Bank of Namibia thus reduces the amount of credit commercial banks can extend, thus reducing the money in circulation. By reducing money in circulation, there is less money chasing the same amount of goods and services, and inflation subsides, ceteris paribus. 

With inflation in January having peaked at 5.3%, there is certainly currently upward pressure on inflation, and it seems a measure of inflation control is needed right now. After all, if you ‘spare the interest rate,’ you spoil the nation…

To Constitute A Nation

Originally published in the Informanté newspaper on Thursday, 11 February, 2016.

With Constitution Day just behind us, it is perhaps time that we examine the features of the document that not only defines our country and its government, but has come to define us as the individuals we are, and as the nation we’ve become. 

Our constitution was written in a time of strife, with the liberation struggle still fresh in the minds of the Constituent Assembly – and yet it was written in a language of peace. Starting with a blanket amnesty for both sides of the struggle to allow all exiles to return home, and thus create a representative Constituent Assembly, the Constitution was constructed as a forward looking document. One that would encourage unity and nation-building, rather than recrimination and division.

Yet to see what makes it special, it is necessary to look back, and see where it’s basic principles originated. After all, the constitution claims we have “the right of the individual to life, liberty and the pursuit of happiness, regardless of race, colour, ethnic origin, sex, religion, creed or social or economic status;” and that “said rights are most effectively maintained and protected in a democratic society, where the government is responsible to freely elected representatives of the people, operating under a sovereign constitution and a free and independent judiciary.” These ideas were not quite as prevalent even just a 100 years ago.

Democracy, in fact, started way back in 508 BCE, in Athens, Greece. But it was a bit different from our democracy today. As a direct democracy, all eligible Athenian citizens were members of the legislative assembly that made laws. Strangely, judicial and executive functions of the government were allocated to citizens by lottery.  And, of course, eligible citizens did not include women, slaves, foreigners, anyone who did not own land and of course, men under 20. Cleisthenes codified their laws into the first democratic constitution. 

It was in the subsequent Roman Republic that that our form of representative democracy first appeared. With representatives from the Patricians and the Plebeians becoming Senators and serving in the Senate, the first forms of representative democracy emerged. In 450 BCE the Romans codified their laws into a constitution known as the Twelve Tables, and formalized Roman law, which still influences our judicial system to this day.  

Democracy soldiered on, throughout the ages, constantly being usurped by those who would wield absolute power over a nation. But in 1776, a group of colonies declared independence from the British Empire, and to prevent the peoples of these colonies from losing their hard fought power to a ruler again, they enacted the first modern constitution in 1789. It is from the United States’ Declaration of Independence that our constitution referenced the rights of “Life, Liberty and the pursuit of Happiness.”

But still, not everyone could vote. Universal male suffrage, whereby all adult males could vote, came only a short while after the US constitution was ratified, but from a radically different place. The First French Republic, established in 1792, was the first example, though tragically short lived – replaced by Napoleon’s French Empire. His empire’s Napoleonic Code also influenced laws worldwide. Only in 1893, barely 123 years ago, did universal suffrage (men as well as women) saunter onto the world stage, when it was first implemented by New Zealand. It spread, slowly but surely, to other democracies, with the last to grant suffrage to female voters being Switzerland, in 1990. 

But as democracy took hold over the world, subjects under absolute rulers became restless. For example, the Parliament of the United Kingdom, from which our own parliament derives its name, was originally established as an advisory body to a king with absolute power. But over the years, it had expanded and restricted the king’s power – most notably first with the Magna Carta of 1215 CE. But after the English Civil War, and the restoration of the monarchy after the Glorious Revolution of 1688, Parliament increasingly became the method whereby the legitimacy of a government of the king was determined. 

Throughout the 18^th and 19^th century, the power of the king was gradually diminished, and parliament emerged as the ultimate authority. And as the British Empire expanded across the world, the concept of representative democracy was spread as well. But since this form of democracy originated from an absolute rule regime, it had inherited a flaw from that regime as well. The concept of parliamentary sovereignty. 

In essence, this gives parliament absolute authority over all of government. Parliament can make laws concerning everything, and cannot bind future parliaments by its laws. No judge can overrule acts of parliament. This means that the current parliament of the United Kingdom can rescind any right or protection granted to its citizens by previous parliaments. I trust the danger of this is clear.

When the time therefore came for the Constituent Assembly to construct the basis of what would form our nation, they already had very clear examples to emulate and pitfalls to avoid. Instead of a sovereign parliament, we have a government split into executive, legislative and executive branches. Universal suffrage was implemented from day one. And while our constitution can be amended so as to enable it to remain a living document like the United States Constitution, we elected to entrench the basic rights of our citizens in Article 131, which states: “No repeal or amendment of any of the provisions of Chapter 3 hereof, in so far as such repeal or amendment diminishes or detracts from the fundamental rights and freedoms contained and defined in that Chapter, shall be permissible under this Constitution, and no such purported repeal or amendment shall be valid or have any force or effect.”

I highly recommend that every citizen at least once avails him or herself of the opportunity to read our constitution. If you need more background, there is no more informative work that details its construction than “State Formation in Namibia: Promoting Democracy and Good Governance” by His Excellency Dr Hage Geingob – his doctoral thesis. 

No structure built can stand for long if it does not have a solid foundation. The same is true for a nation. And as structural engineers will tell you, no one can extend and built atop an existing structure without first examining its foundations to see if it is strong enough to support it. The same is true of a nation. That is what Constitution Day is all about. If we want to continue to build a strong and proud nation, we need to know the foundations it is built upon, or we shall surely fail.

Into The Valley Of Death

Originally published in the Informanté newspaper on Thursday, 4 February, 2016.

In 1958, economist William Phillips, a New Zealander, published a paper titled ‘The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom.’ It was an unwieldy title for a rather simple relationship that he discovered in the economy of the United Kingdom, and with some more research by Paul Samuelson and Robert Solow, his discovery eventually became known as the Phillips curve.

What Phillips discovered in his data, it seemed, was an inverse relationship between inflation and unemployment – higher inflation resulted in lower unemployment, and vice versa. But while the data did indeed show this, any student of African economies would by now be able to point out that this vastly simplifies this relationship, and common sense nowadays shows this is not true. 

It was not even a decade before this ‘Phillips curve myth’ was exposed for what it was. During the 1970’s inflation skyrocketed in developed nations and unemployment soared, in direct contradiction to what the Phillips curve predicted. Developed economies entered into a recession, and economic theories that depended on the Phillips curve could not offer a solution. But does this not sound eerily familiar?

In South Africa, growth forecasts have been cut time and time again. The latest by the IMF predicts just a 0.7% growth for the former regional powerhouse. With strikes increasing in frequency and with electricity supply issues, industrial development is stalling, and alongside it, employment opportunities. Coupled with the deteriorating Rand, the South African economy is again starting to experience strong inflationary pressures, which resulted in the South African Reserve Bank recently increasing its repo rate to attempt to head it off.

Luckily, we’re no longer dependent on the ‘Phillips Curve’ economists. Unfortunately, that does not make us as much wiser as we would have hoped. 

Inflation, for instance, generally refers to the increase in the price of goods. But seen economically, it can also be seen as a reduction in the purchasing power of currency. There is only X amount of goods that can be bought with Y amount of money. If the amount of money increases, but the amount of goods remains the same, you’ll need more money to buy the same amount of goods.

To control inflation, then, the Reserve Bank needs to reduce the amount of money – and so, it increases the cost of borrowing money. By increasing interest rates, money that would instead be used to buy goods and services, is now used to service debt. Money is taken out of circulation, and inflation is kept under control.

But economic growth is measured by the amount of goods and services produced and consumed… So with more money being used to service debt, and less applied to buying goods and services, economic growth slows – which is not what we want! Especially not in a potential recession! 

The solution to this, naturally, is to substitute private spending with government spending. Or it would be, were it not for the fact that government spending is usually funded by issuing debt. And with the international ratings agencies already concerned with South Africa’s ability to repay its debt, with a potential ratings downgrade to junk already on the cards, it is just not possible. 

It seems South Africa is suffering from the failure of a different kind of Phillips Curve. Constrained by previous government policies is such a way that a fiscal stimulus is impossible, South Africa seems trapped into either allowing growth and rampant inflation (which will swallow that growth whole) or containing inflation at the cost of stagnation. 

It thus becomes tempting to look back at those developed economies and try and apply their solution to the stagflation problem here. Unfortunately, while the inviolability of the Phillip Curve was dealt a critical blow by stagflation, Phillips did correctly identify a relationship between unemployment and inflation, albeit only in the short-term.

In the United States, for example, Paul Volcker aggressively targeted inflation by raising interest rates, which successfully curbed inflation at the cost of high unemployment rates and a temporarily worsened recession.  While this certainly remain an option for the South African Reserve Bank, in the current South African political climate an increase in unemployment would only serve to exacerbate tensions with the government, and might cost the country what little political stability it has left.

There might be a different course to recovery though. In certain cases, growth stagnation can be caused by excessive regulation of labour and goods markets. It seems reasonable to assume that relaxing a regulatory regime could do the opposite. With government fiscal stimulus out of the question, perhaps a private stimulus is needed. Suppose the government of South Africa instead aggressively cuts the red tape that is strangling its culture of entrepreneurship, and allows it to blossom. Perhaps South Africa can kick-start an ‘entrepreneurial’ stimulus to counteract its recessionary malaise, and lead the BRICS nations into a new golden age. Then perhaps it can crawl through the jaws of death, back from the mouth of hell…