Inflation as an obstacle to job creation in South Africa

Abstract

The trade-off between unemployment and inflation, suggested by empirical evidence both overseas and also in South Africa, has important implications for economic policy. If it can be relied upon, it suggests that it is within the power of governments to determine what the consequences of specified policy initiatives will be for either variable, given the direct effect of policy on the other. In recent years, however, the trade-off appears to have undergone a subtle change. While it continues to be evident in the short run, its dependability in the long run has become more suspect. Indeed, in the more industrialised countries, the evidence suggests that it breaks down altogether, indicating an absence of long-run money illusion. An interesting revelation of research in South Africa is that this breakdown has begun to manifest itself here too, so that the advantages of Keynesian-type reflationary policies may be shorter-lived and less than might have been the case in earlier years. The problem of the rise in unemployment in South Africa is particularly serious because of the connection in this country between unemployment and social and political instability. The problem, however, is more than just a cyclical one. In the long run, only growth in the real economy greater than the growth of population will prevent unemployment from becoming overwhelming, and this gives growth a higher ranking in the determination of policy priorities. The article draws attention to the negative correlation that has emerged between growth in production volume and inflation in South Africa and argues that a reduction in inflation here may have become a precondition for improved real economic performance and, hence, job creation itself in the long run. This is a contradiction of a conventional wisdom upon which the formulation of economic policy continues very largely to rest.