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Between a Rock and a Hard Place

Between a Rock and a Hard Place
Between a Rock and a Hard Place
Phillips Curve

Desmond P Van Heerden

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 Namibia, growth has stalled over the last two years. Economists cannot predict when we will emerge from this recession – this from a country that managed 5%+ growth for over a decade. With politicians paying more attention to issues such as land claims rather than job creation, industrial development is stalling, and alongside it, employment opportunities. Coupled with the deteriorating currency, the Namibian economy had experienced strong inflationary pressures during 2017, which resulted in the Bank of Namibia maintaining its repo rate at its current level to head it off, rather than decreasing it to assist growth.

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 Bank of Namibia 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 our current 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 funded by issuing debt. And with the international ratings agencies already concerned with Namibia’s ability to repay its debt, with our ratings having been downgraded to junk already, it is just not possible.

It seems Namibia is suffering from the failure of a different kind of Phillips Curve. Constrained by previous government policies in such a way that a fiscal stimulus is impossible, Namibia 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 Bank of Namibia, in the current Namibian political climate an increase in unemployment would only serve to exacerbate tensions, and might cost us the political stability we have so carefully built-up since independence.

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 Namibia instead aggressively cuts the red tape that is strangling our culture of entrepreneurship, and allows it to blossom. Perhaps Namibia can kick-start an ‘entrepreneurial’ stimulus to counteract its recessionary malaise, and lead the SADC nations into a new golden age. After nine quarters of negative economic growth, the time has come for us to try something – anything – new to restart this floundering economy.

Desmond P van Heerden, HonsBComm (Stell) is the Chief Analytics Officer of Trustco Group Holdings Ltd. Previous articles available online at http://toi.hopto.org/. He can be contacted at DesmondV@tgh.na

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