Category Archives: inflation

Economic growth during and after Apartheid and the real problem with 1%

I read a letter from Pali Lehohla on news24 this weekend. Lehohla, the head of StatsSA, disagreed with a report by DaMina Advisors on economic growth in South Africa during and post the apartheid era.

To paraphrase Lehohla, he disagreed with their methodology, their data and their values and ethics:

First, I need to engage the author on methods. Second, I address the facts. Third, I focus on the morality of political systems and, finally, I question the integrity of the luminaries of DaMina and ask them to come clean.

This wasn’t data I had looked at before, but some of Lehohla’s criticisms seemed valid. Using nominal GDP growth data is close to meaningless over periods of different inflation.

Second, the methodology of interpreting economic growth should use real growth instead of nominal growth because this carries with it differing inflation rates. This is to standardise the rates across high and low inflation periods.

I haven’t confirmed the DaMina calculations, but the labels in their table do say “current USD prices” which suggests they have used nominal data. It’s little wonder any period including the 1970s looks great from a nominal growth perspective with nominal USD GDP growth in 1973 and 1974 being 34% and 23%, compared to real growth of 2.2% and 3.8%. The high inflation of the 1970s arising from oil shocks and breakdown of the gold standard distorts this analysis completely.

Lehohla’s other complaint is also important, but less straightforward to my mind –

The methods that underpin any comparison for a given country cannot be based on a currency other than that of the country concerned. The reason is that exchange-rate fluctuations exaggerate the changes beyond what they actually are.

Two problems here – one is that purchasing power adjusted GDP indices are not typically available going far back in history. The other is that if one is using real GDP, the worst of the problems of currency fluctuations are already ironed out. (The worst, certainly not all and it would still be a factor that should be analysed rather than completely overlooked.)

I was disappointed that neither piece mentioned anything at all about real GDP per capita. Does it really matter how much more we produce as a country if the income per person is declining? Income inequality aside, important as it is, more GDP per capita means more earning power per person, more income per person, more things per person. It is a far more useful measure of prosperity for a country, and particularly for comparing economic growth across countries with different population growth rates.

My own analysis, based on World Bank data (available from 1960 to 2013)

real GDP growth (annual %) real GDP per capita growth (annual %)
1961-1969 6.1% 3.5%
1970-1979 3.2% 1.0%
1980-1989 2.2% -0.3%
1990-1999 1.4% -0.8%
2000-2009 3.6% 2.0%
2010-2013 2.7% 1.1%
1961-1990 3.6% 1.2%
1971-1990 2.4% 0.1%
1991-2010 2.6% 1.3%
1991-2013 2.6% 0.8%

 

I’ve put these numbers out without much analysis. However, it’s pretty clear that on the most sensible measure (real GDP per capita) over the periods the DaMina study considered, post-apartheid growth has been better than during the 1971-1990 period of Apartheid.

The conclusion is reversed if one includes the 1960s Apartheid economy and the latest data to 2013, the picture is reversed on both measures.

This, above all else, should talk to the dangers of selecting data to suit the outcome.

This analysis doesn’t talk to the impact of the gold standard, the low cost of gold mining closer to the surface than it is now, the technological catch-up South Africa should have benefited from more in the past, the impact of international sanctions and expenditure on the old SADF and who knows what else. There are much big monsters lurking there that I am not equipped to begin to analyse.

My overall conclusion? The Apartheid days were not “economically better” even without ignoring the millions of lives damaged. Unfortunately, our economic growth has for decades been too low to progress our economy to provide a better life for all.

Here is the problem:

1961-2013 1961-2013
Real GDP growth Real per capita GDP growth
South Africa 3.2% 1.0%
Kenya 4.6% 1.3%
Brazil 4.3% 2.3%
USA 3.1% 2.0%

Despite the theory of “Convergence“, the US has had double South Africa’s per capita GDP growth for over five decades.  Real GDP per capita increased by 72% in South Africa over the entire period from 1960 to 2013, which sounds impressive until you realise that the US managed 189%. That is more than 2.5x our growth Brazil has done even better at 237%. “Even Kenya” outperformed us over this period.

1% per annum real per capita GDP growth is just not good enough.

European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Is credit extension in SA out of control?

Unsecured credit explosion? Sure. Concerns about abuses and sustainability in this sector? Absolutely.

But is overall domestic credit extension out of control? Are real interest rates negative? Is the global economy strong and steaming ahead?

The answer to all these questions is “no”. Here is a graph produced from public reservebank data.

Credit extension is recovering after a precipitous decline after 2007, but is still below long run averages
Total credit extension is hardly out of control.

Eskom, inflation and early onset dementia

Everyone has totally lost the plot.

The proportion of people who speak sense has declined to the lowest level recorded since ever.

“If Eskom puts up its prices too high we’ll have higher inflation. Inflation is bad therefore Eskom shouldn’t put up electricity prices so much.”

Oh really? What happens to the cost of producing electricity when Eskom puts up its prices by 16% rather than 8%? Nothing. Well actually the cost goes down, but then I’m being sneaky – raising the price will reduce consumption, which in turn will decrease the total amount of electricity produced, thus reducing the aggregate cost of electricity production. Yes, it’s sneaky because we all knew I meant the “cost per unit” of electricity.

But wait, if we consume less electricity, Eskom presumably would have to use less gas-turbine powered emergency and oh-so-very-expensive sources of electricity to fill in at peak times. So just maybe the cost per unit of electricity would go down if Eskom were allowed to raise it’s prices by 16% and not 8%.

Another good way to lower inflation would be for government to add a 1% subsidy on everything this year. Everything will be 1% cheaper because you mail (fax?) your receipts to Pravin and Government will mail you a postal order for 1% of the value back in.  Instantly effective prices are 1% lower and inflation is more under control.

Hell, why stop at 1%? Let’s have a 2% reduction.  And a further 2% next year and so on.

Gold ain’t happening yet

Paulson and Soros still think Gold is a buy, adding to their stakes as the price declines. It’s also not very brave of me to blog about this now as gold has declined when for much of the financial crisis it was increasing in price. I’ve been watching other things.

The idea that the gold price must increase because of massive monetary easing reflects a broken understanding of the economy and a liquidity trap. The money isn’t going anywhere. It is being hoarded in bank vaults. Very few people want to borrow, and aside from banks buying up gold with their excess cash (which would effectively be a massive speculative prop-trading bet on the direction of the gold price) there are few reasons for gold to be spiking massively.

One possibility is the simple safety argument. If you don’t know where else to put your money, put it into gold because it’s gold and it’s safe. Except why should gold be safe? The price swings all over the place like many commodities, but unlike most commodities it has limited industrial uses. Gold arguably has very little intrinsic value.

I’m not saying gold is going to tank. I really don’t know.  I also don’t think anybody else really has a good idea of where the gold price is going to and much of the speculation is by people who think it’s going to rise. Therefore it may have been overbought already (whatever that means when it comes to gold, that is).

Hyperinflation is not here. Gold price increases are not guaranteed. If your entire investment view is centered on monetary policy giving rise to massive inflation, you’re in for a painful ride.

(The one risk that does remain is that when the economy starts turning, and I’m thinking maybe as far away as 5 or 10 years out, if the liquidity isn’t quickly pulled back, we might have high inflation and increases in gold prices. I don’t see this as a major part of the view of current gold bugs. There are too many ifs and too much time and far too much uncertainty.)