Mariam Isa
9 July 2009
Johannesburg — RIGID inflation targeting by central banks was partly to blame for the global financial crisis, Nobel prize-winning economist Joseph Stiglitz said in Johannesburg yesterday.
Decisions by central banks to focus on low inflation led to many taking their eye off the ball, which was financial stability, he said.
"I am very strongly opposed to rigid inflation targeting," he told reporters before delivering a lecture at Wits University.
"The crisis is partly a result of central banks' focus on inflation -- they lost the thread of financial stability and growth."
Stiglitz's remarks will be music to the ears of trade unions and the South African Communist Party, which want inflation targeting to be scrapped.
The government has said it is "open to debate" but will keep the policy in place. SA's framework cannot be seen as "rigid" -- the Reserve Bank cut lending rates by 4,5 percentage points since December, in the face of inflation well above its 3%-6% target range.
Stiglitz is a professor at Columbia University in the US, a former senior World Bank vice- president and critic of "free-market" economics and globalisation management. The World Bank fired him in 2000 for disagreeing with some of its policies.
Inflation should not be ignored, but it was "absurd" to put the burden of economic adjustment on this indicator, he said.
In his lecture, Stiglitz said: "There was an idea that low inflation was necessary and sufficient for strong and stable economic growth. What a nonsense idea, and it was adopted by many governments."
Stiglitz declined to speculate on what might be an "acceptable" inflation rate for SA, but said it was important for small and open economies to consider the effect of commodity and administered prices, which would not respond to interest rates.
SA's main inflation rate has breached its target for more than two years, and rose 8% in the year to May. The Bank cited stubborn inflation when it kept interest rates steady last month, surprising markets after they had priced in another reduction.
Stiglitz said it would make sense to accept higher inflation in a crisis, but it was not desirable to build inflation into high wages, which is the case in SA, with unions demanding double-digit pay hikes.
The global crisis, which has led to the worst recession since the 1930s, should be seen as a political and economic failure, he said, calling US rescue attempts "another form of American corporate welfarism".
But Stiglitz said market economics was central to a "successful economy". He was "pessimistic" about expectations of global economic recovery next year. The "free- fall" in the pace of decline might end, or turn positive, but employment was unlikely to be back at acceptable levels by next year.
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