Grant McDermott a friend and PhD economics candidate writes on his blog regarding the attributions to my research in Business Day earlier this week that:
“In contrast, the singular premise of the above BD article seems to be that food hikes — and subsequent violence — are entirely the fault of “delinquent” monetary policy.” [clb note: bold my emphasis]
I think he may have missed two important paragraphs in the BD article. We not only look at food prices as a trigger for subsequent violence, but non-discretionary goods price inflation. Non-discretionary goods include the following – quoting article:
Nondiscretionary inflation hits the poor hardest. It is more volatile than the CPI, which is smoothed by the inclusion of items such as mortgage and technology costs. Taking these discretionary or luxury costs out of the calculation, ETM came up with what it calls nondiscretionary inflation.
The goods that are included in the nondiscretionary goods basket are foodstuffs (bread and cereal, meat, vegetables, clothing), household costs (owner’s equivalent rent, water and electricity), healthcare and medical aid, vehicles, transport, communication and education. “These goods we consider to be the nondiscretionary or nonnegotiable expenses of most households. Ironically, it is on these goods and services that low-income households spend most of their incomes,” says Becker.”
So no, it is not only a focus on food prices. It’s kind of a big oversight. Moving to the next part of Grant’s claim that my research links only food “hikes” and subsequent violence to “delinquent” monetary policy, note Ciaran quotes me as saying:
“There may be legitimate political grievances, but the trigger for social conflict appears to be inflation. The poor see their meagre incomes being eaten by rising costs of basic essentials, and this very quickly leads to the kind of violence we have seen in Sasolburg, Marikana and the Western Cape farm strikes,” says Becker. [clb note: bold my emphasis]
I clearly mention political grievances as one structural underlying variable that places certain countries at greater risk of unrest than others. So clearly I don’t only believe social unrest is “entirely the cause of “delinquent” monetary policy.” I don’t mention the other variables I monitor, as we like to keep that IP internal and provide insights generated off that to clients. But a key factor that brings underlying unrest to a boil – that is the catalyst or trigger for the ultimate flare-up of unrest and violence – is the acceleration of non-discretionary price inflation (in other words the decline of real wages of the aggrieved parties).
Grant also writes:
One might blanch at the definitive description (i.e. “proof”) given to an in-house research document that, as far as I can tell, is unscrutinised by outside review.
Also note in the above passage I say the trigger “appears” to be inflation. Grant should pick up from that I have not claimed to find a “proof” between the inflation and unrest (even though we have a solid predictive and analytic framework to understand the links). Grant seems to have gotten stuck at the article title, and didn’t read what I said.
Grant then writes that “I find it striking that this particular article makes no mention whatsoever of the real factors that have been driving high food prices in recent years.” Of course, prices are formed not only owing to monetary policy and the value of the currency unit, but also real supply/demand factors. That’s very basic economics. However, real supply or demand shocks reflect in prices, and these are picked up in final prices and hence in the non-discretionary inflation rate we track. A major driver of rising food prices last year was the US drought. Electricity price inflation in SA largely thanks to Eskom, etc.
But that raises an important point to my research that is not quoted by Ciaran Ryan in BD.
When the Reserve Bank targets an inflation rate of 6%, it cannot control which prices rise and which fall in the price inflation process. This is because they are not good predictors of real supply/demand shocks. The prices that have for years been rising at a rate faster than headline CPI are those included in ETM’s non-discretionary inflation rate – whether it be because of real shocks, government shocks, or monetary policy shocks (or any other “shocks” you can come up with!). This is a major problem that can result from targeting an overall CPI inflation rate while workers tend to only get CPI-related wage increases, while they spend most of their income on items that receive a relatively small weighting in the CPI, which then can – and does – fuel social unrest.
To illustrate, I quote data from the ‘official’ Stats SA CPI for December:
Cereals prices +7.3% y/y
Schooling +8.5% y/y
Water +9.1% y/y
Vegetables +9.4% y/y
Electricity +10.3% y/y
Public transport +15.5% y/y
These are major spending components for low income and low middle income groups. These costs are climbing much faster than the official headline CPI inflation rate. My argument is that if the SARB did not set out to create an inflation rate of 6% per year, but instead stuck to its constitutional mandate to maintain a stable Rand in the interest of sustainable growth (which I believe to be maintaining a stable exchange rate of the Rand against a basket of commodities NOT against other weakening paper monies), low income groups would see their purchasing power increase from year to year. They may be content with receiving no salary increases! Would there be so much aggression come strike season, if workers saw their purchasing power increasing on an unchanged salary? Would there even be a strike season?
As for the other claim Grant makes, being that I have not “cracked” the problem of what caused the Arab spring that “stymied” so many others: ETM has predicted much of the unrest ahead of the fact. These insights and predictions are reserved for paying clients. As far as analysis of the causes of the Arab spring goes, and where the next global pressure points may be, it is not for peer-review as he’d like to see it, but for sale!
