Friday, March 31, 2017

Pravin Gordhan; good riddance

Pravin Gordhan was a terrible finance minister and deserved to be fired.

For the record, several other ministers were also fired and each one of them thoroughly deserved it too, but none caused as much uproar as Gordhan. This shows that even the average South African is able to appreciate the value of government's contribution to sports, for example, relative to the importance of managing our tax money. The complete disregard for those other former ministers says something encouraging about their positions and how the public perceive their value.

What is disturbing in all of this, is that so many people are outraged at Gordhan being fired, now sing his praises and are demanding he be reinstated. Please, no. This country has had quite enough damage done to it already, thank you very much.

Pray tell, I hear you say, why then did the Rand depreciate so badly following his axing ? If Gordhan was really so terrible, then surely the Rand should have strengthened in the wake of his exit ? Well, no... because the market is not reacting to Gordhan being fired as such, it is in fact reacting to Gordhan being replaced. There is a subtle but important difference.

However bad Gordhan was, the market apparently expects Zuma to replace him with someone who is substantially worse. In the case of Van Rooyen, this was obvious. Now, the possibility of Gordhan being replaced by a better finance minister appears to be so remote, that nobody has even mentioned the possibility. Simply being fired is enough to do damage, because the assumption is that his replacement will be worse.

Of course we know who is replacing him already, so there is not much room left for such speculation, but it was clear even before he was sacked that nobody thought there was anyone better in the running for the position and so the Rand tanked, as was widely expected. That does not make Gordhan a good minister of finance though - only a less bad one than his replacement.

What makes Gordhan such a bad minister of finance ? Well, let's look at what a good minister of finance should do. It is quite simple, really. He should;

1. Ensure that the Treasury has all the checks and balances, controls, audits, workflows and processes needed to ensure controlled and legitimate spending throughout government.

2. Be fiscally responsible; balance the budget, sustain credible fiscal policy, pay off government debt and contain spending so that it does not exceed income.

3. Promote the five macro-economic goals (growth, price stability, exchange rate stability, full employment and equity), insofar as those can be supported by fiscal policy.

4. Stay away from monetary policy; that is the domain of the governor of the Reserve Bank. In other words, leave the money supply and interest rates to SARB.

5. For bonus points, emulate highly effective countries like Canada, Sweden, Hong Kong and others who are in the top 20 most economically free countries (as per the economic freedom index, since we know that economic freedom is the primary factor in performance).

So how did Gordhan fair on these tasks ? Rather poorly, to say the least:

1. Corruption is rampant. One cannot put all the blame on the minister of finance, of course, but he is in the best position of all to cut funding for suspicious and irresponsible spenders within government. He is the guy who should say; "Not a cent more out of Treasury for your department, until you bring me independently audited books.". At the very least.

2. Trevor Manual was particularly good at fiscal responsibility. Despite huge pressure immediately following the 1994 election to build houses, provide schooling and a host of other demands, Manual proceeded to pay off all the debts incurred by the previous regime, thereby eliminating the burden on the young democracy of interest payment on loans it did not take. That was a smart move.

He also consistently balanced the budget and kept spending under control, relative to income. Gordhan did exactly the opposite, frequently allowing spending to exceed income by miles and increasing government debt substantially, so that a large part of our tax money is again going towards paying interest on loans (or bonds).

3. By far the best way to promote growth, is to reduce the size and scope of government. However, Gordhan thinks that government should control everything and that spending is a Good Thing. It does not particularly matter to him what kind of spending, as long as taxpayers are being sucked dry and the money is being spent by government rather than the people.

An unfair allegation ? Go to 08:18 in his 2012 budget speech and see him actually ask for applause after announcing that government now controls a third of the formal economy. That was just the start. It is well known that socialism killed more people in the previous century than disease, yet here he is flaunting a substantial move towards socialism through an increase in government control over the economy. Tsk, tsk.

4. The reason I mention staying away from monetary policy, is because Gordhan did so indirectly. He seemingly believes that the economy can be managed through fiscal policy. By this, I mean that economic fluctuations can be counteracted by changes in taxation and spending rather than (or in addition to) changes in interest rates and money supply.

They can to some extent, but the lead time to seeing their impact on the economy is so long (months) that it is a bit like controlling a car which only turns an hour after you have turned the steering wheel. By the time you see the effect of your actions, you've long passed the turn.

Monetary policy is much faster (hours) and much more effective. By trying to manage economic cycles, unemployment, price stability and so on through fiscal policy, the minister of finance is simply making the job of the reserve bank governor more difficult. He is in fact achieving instability and uncertainty through it. He should rather keep spending and taxation low and stable, so that SARB can deal with stability through monetary policy.

5. Gordhan's zeal to control ever increasing quantities of the economy has contributed to moving South Africa down the economic freedom index from approximately 40th place at the end of Manual's term to about 100th place currently.

This is just as significant, if not more so, than the country's widely publicized credit rating. In fact, a downgrade in the credit rating will only have some minor impacts on certain foreign investments - a rather small part of the economy - for a fairly short period of time, until a new normal is reached.

Economic freedom, on the other hand, has an enormous and lasting impact. For example, every point on the economic freedom index corresponds to roughly ten thousand US dollars of income per person per year. Increased taxes and escalated government spending under Gordhan has dropped us several points on that scale, thus costing each one of us (particularly the poor) tens of thousands of dollars per year, each.

We don't need Gordhan to be reinstated. We need him to be replaced with someone better. Someone who can do a few very simple things, despite political pressure to the contrary. And there I must hand one thing to Gordhan; he does have balls. He was predictable in his resolve to do bad things, despite enormous pressure to do evil things.