Comment to Fin24 on Mining Charter economic impact

I commented to Carin Smith at Fin24 on the impact of South Africa’s new mining charter yesterday, in this article.

Economist Chris Becker is of the view that the new Mining Charter will mean that once global commodity prices and demand do eventually recover, South Africa will not benefit as much as it otherwise would have.

Other countries that are making it easier to invest in mining, like Argentina, are therefore likely to outperform SA on this front.

“I also suspect the local procurement law will put the existing mining services industry under tremendous pressure and lead to a shrinkage in this sector, making it even harder for mines to operate in the country,” said Becker.

“A vibrant and competitive mining services and suppliers industry is necessary to keep prices and services competitive and increase ownership, but property rights restrictions in this industry are likely to be a hindrance on this front.”

My fear is that this policy has been telegraphed for many, many months and is firmly in line with the ANC’s policy strategy as communicated in ANC policy conference documents since 2007. This suggests that the redistribution of property with racial quotas will not end with the mines. It’s all about executing the second phase of the National Democratic Revolution.

Exclusive Interview With The Daily Bell

I did an exclusive interview with The Daily Bell last week that was published yesterday.


Chris Becker’s Austrian Perspective on South Africa, Gold and the Ludwig von Mises Institute

Sunday, June 23, 2013 – With Anthony Wile

Here’s a snippet.

Daily Bell: We previously interviewed South African analyst Leon Louw on South Africa, who runs the Free Market Foundation in South Africa, and we’ll ask you some of the same questions we asked him. He was remarkably positive about South Africa and its future, especially if it adopts free-market reforms. Are you similarly positive?

Chris Becker: I would be if the South African government was indeed adopting free-market reforms. But it isn’t. This government continues to introduce policies and legislation that restricts personal choice and liberty, inching the country more toward socialism than away from it. The minister of trade and industry, Rob Davies, is a sitting member of the South Africa Communist Party, while the minister of finance, Pravin Gordhan, used to be a member of the SACP. Other key ministries are littered with Communist Party members or sympathizers. The pervasive state ethos is socialist with ‘red ideals’ clearly pushing the country in that direction, which leaves me less optimistic than Mr Louw.

That said, I am positive about the fact that the ANC government is inefficient and disorganized, enabling the private sector to flourish in parallel to public utilities that can’t serve the public’s wants. We’ve seen huge growth in private education, private security and private medical industries in recent years, without which we would have seen rapidly declining living standards of South Africans. In a micro sense this inefficient and disorganized state leaves the space for quite a lot of personal liberty and allows people to get on with things outside of government control. With this strong central planning and regulatory ethos, if the government could actually follow through with its grand plans, South Africa would be a very unfree place. I call it ‘dangerous efficiency.’


We talk more about South Africa and whether we are headed toward a Zimbabwe style collapse, the long-term Africa play, a gold standard for Africa, and about the Ludwig von Mises Institute SA, among many other things.

Read the full interview here. 

Is Stats SA’s Inflation Rate Relevant To Consumers?

My take on the consumer price index, in a letter to the editor of Business Day published today.


GAVIN Keeton’s column (Why consumer inflation feels higher than it is, March 4), refers.

Prof Keeton points out that the basket of goods consumers buy each month is not the same as the one Statistics South Africa measures and tracks to calculate inflation.

He is quite correct. Statistics South Africa measures and tracks some 70,000 price points to calculate price inflation each month. I’m prepared to bet that no South African consumer bought 70,000 different consumer goods and services last month.

Perhaps these consumers buy 70,000 goods and services through the course of a lifetime, but certainly not each and every year, even less so each and every month. Thus, the consumer price index is irrelevant to most consumers, no matter what statisticians or economists say.

Prof Keeton to a large degree exemplifies the central planning mindset that has overcome the intellectual elites.

These folk essentially tell individuals that if they are experiencing a different reality to the one purported by “official” government statistics, those individuals are wrong. This obscures the fact that price inflation affects various people differently.

Prices increase in a lagged response to new money and credit that is injected into the economy. The first receivers of the newly printed money (government, bankers, wealthy and creditworthy businesses and individuals) get to spend it before prices have risen.

The last receivers of the newly printed money (pensioners, labourers, those who lack access to credit) only get to spend it after prices have risen. The former grow wealthier in the inflation process than the latter, and income inequality rises.

This rippling, uneven effect of inflation is known as the Cantillon effect. The distribution of gains and losses can change with each inflation cycle. Some win, some lose, but in every instance, many lose.

We should be moving away from thinking about the economy as a blob of activity by looking at one-dimensional figures such as the consumer price index.

By giving this practically irrelevant inflation rate such high importance in central planning, policy makers and their economist apologists serve to obscure much of what is really going on beneath the surface.

Chris Becker

Economist, ETM Analytics (Pty) Ltd

Response To A Criticism Of My Inflation-Social Unrest Research

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!

Proof That High Inflation Leads to More Public Violence

By Ciaran Ryan

NEW research appears to show a direct link between inflation and social violence. In the months before the Marikana massacre, in which more than 30 miners died, there was a spike in nondiscretionary inflation — the inflation the poor experience — from 3% to more than 10%. The same is true of the xenophobic attacks in 2008. Just before these attacks, nondiscretionary inflation surged to 20%. The recent violence in Sasolburg was also preceded by an acceleration in inflation.

Chris Becker, an economist with ETM Analytics, which produced the research, says SA could be headed for a world of trouble based on recent trends in the inflation rate experienced by the poor.

The consumer price index (CPI) averaged 5,6% last year, while average nondiscretionary inflation was 6,1%, spiking to 10,3% in October. The difference between the two inflation rates may appear marginal, but it is the volatility of nondiscretionary inflation that seems to be causing the trouble.

Read the rest.

Revolution Is Coming To A Country Near You

My research is quoted at length by Ciaran Ryan in a article published today.

Revolution Is Coming to a Country Near You

by Ciaran Ryan

What do Syria, Egypt, Jordan, Morocco and Algeria all have in common?

Apart from violent street protests or outright revolution, they are the world’s most profligate printers of money.

The Johannesburg-based and Austrian-leaning economic research house ETM Analytics recently put out some research that looks at the economic triggers behind social upheaval. Rather than looking at the more obvious political causes of violent revolution, the research shows that those countries with the money printing presses in overdrive are also those experiencing – or about to experience – massive social tension.

Read the rest here.