Dr Iraj Abedian comments on whether drastic action needed to resurrect SA's ailing economy.

Bruce Whitfield:
Dr Iraj Abedian is the chief executive and chief economist at Pan African Investment and Research, Rudi van der Merwe from Standard Financial Markets market commentator this evening and Iraj, we have just seen so much negative news this week and we do need some perspective on it please because on Tuesday we get a first quarter growth number at 2.1 percent, yesterday we get consumer price inflation figures of 10.4 percent, today we get producer price inflation numbers of 12.4 percent and added into the mix is the Reserve Bank Governor who at a function last night says 200-basis-points I have been speaking to my people and they agree. And that sends the living daylights out of us.

Dr Iraj Abedian:
The last one was a bit of a sledgehammer approach, uncalled for, but the perspective is that we are not alone. There is no single economy at the moment that is not subjected to the same inflationary forces, we have had a prolonged cycle of dis-inflationary prices and that we know cannot last and three factors have contributed to a turn of the cycle. One we all know is oil and energy more generally, the second one food, and the third one is the end of cheap labour from China and India and that has been part and we haven't got time to go into the details of it and you have 10 years or 15 years of high growth in India and China, the standard of living goes up, the technology gets upgraded and the cost of labour has to go up and of course the food which is a major one is not also seasonal as many economists argue it is structural in the sense that today as opposed to six or seven years ago we have four times more rich equal to the average American, rich disposable income, who want to eat and they can afford it and the price is not really that important for them. For the rest of us it is but for 200 million new Chinese with average income more than Americans and about 300 million Indians who has got more or less the same income as Americans.

Bruce Whitfield:
Suddenly the supplies of beef and chicken aren’t adequate.

Dr Iraj Abedian:
Fish, salmon, maize, rice, everything and remember when economies grow from poor to developing to rich their eating habits change therefore we see quite comfortably in the next 10 years because this is a structural change agriculture globally is going to struggle to meet the demands.

Bruce Whitfield:
And you have got the United Nations Development Programme today saying the madness of turning food into fuel has also got to be constrained because here you have got first world countries taking food out of poor countries’ mouths to make petrol for their cars.

Dr Iraj Abedian:
I think that is one madness which we can come back to but for me more of a madness is the inability of political leaders at the WTO to sort out the agriculture stuff so that Africa can begin to produce food, so that Latin America can produce food and part of Asia can. Food can not come from China, will never come from Europe no matter how much they subsidise it and therefore we have got to come to a different sense of the global economy and integration. That is the perspective as far as I understand it.

Bruce Whitfield:
Where does that leave us in South Africa today where we have very clearly got a problem but we have seen the results from Foschini today, they were diabolical, we have seen results from Mr price yesterday which were marginally better, Standard Bank with its second profit warning in three months yesterday showing that the consumer in South Africa is overstretched and is in serious trouble and we are at a point where probably a lot of people are starting to come under threat of losing assets.

Dr Iraj Abedian:
Of course asset values have to adjust, we have all said it, in front of this microphone every commentator has said corrections will happen but at the same time that correction happens repricing of assets is happening, agriculture is being repriced, land is being repriced as opposed to IT, finance, and resources are being repriced so we have two processes happening here, portfolios are getting adjusted and individuals have got to get used to a different type of expectation. Where are we, we are at a cycle where I think we have another 24 months of adjustments happening, interest rates or no interest rates. It is completely irrelevant what the reserve bankers do, the reserve bankers can kill the economy but they cannot revive it. When adjustments happen historically we can study it when this type of massive relative pricing of assets occur you have got to allow the system to, by system I mean supply, we have got to allow the supply agriculture to meet the demand. We have got to allow investment in oil and substitute energy and so on to catch up with this massive demand.

Bruce Whitfield:
Let me bring Rudi van der Merwe in here as well because one of the arguments is why you have to kill inflation is because inflation will kill the economy a lot quicker than higher interest rates will and that is the reality that the Reserve Bank has to face.

Rudi van der Merwe:
Unfortunately Bruce the price pressures are so broad just at the moment and I think if one actually looks at the basket that makes up that CPIX is measured against there is very few of those items individually even if you exclude food and oil from it that aren't running well ahead of the Reserve Bank's target rates at the moment. I think in the same breath though Iraj is quite right there are some structural adjustments that need to take place.

Bruce Whitfield:
In English, a structural adjustment, we have got to get used to the fact that our house prices aren't going to go up by 40 percent a year for argument's sake.

Dr Iraj Abedian:
But the other structural adjustment is that we have to allow supply to catch up. We have got to allow the supply of food to catch up with the demand that’s structural, we have got to allow labour wages and salaries to adjust so structural adjustment are not just about what we are used to in the past 10 years and my concern is that at the moment we treat this inflation as if it is driven by consumer exuberance that is what Greenspan used to say, it is not, this consumer exuberance doesn't exist. Retailers are suffering…

Bruce Whitfield:
So what is the point of raising interest rates because that is what the Reserve Bank Governor is threatening to do?

Dr Iraj Abedian:
The Reserve Bank it is really a sense of desperation, it is not rational thinking, the Reserve Bank and monetary policy all the textbooks that we have read and taught says interest rates can only contain the demand side of the economy. As Rudi mentioned the pressures are broad-based, it is all across and it is on the supply-side. None of those pressures are demand driven that we can control with interest rates. So what should we do? Yes interest rates are important to contain expectations of price rises in other words to put it in human language put pressure on the margin of retailers and wholesalers, get the bankers to think a bit slow, not big numbers, that it can do but can it increase supply of food – no. Here governments have to come to part.

Bruce Whitfield:
We have got a problem.

Dr Iraj Abedian:
We have a problem and that is a problem of leadership. Right across the globe there is a deficit of political leadership and technical leadership and we have left it to the central bankers to do and they have only one weapon - interest rates.

Bruce Whitfield:
Should we have inflation targeting?

Dr Iraj Abedian:
We should but any inflation targeting there is an escape clause, there are times that we should invoke that.

Bruce Whitfield:
Should we be doing that now?

Dr Iraj Abedian:
Absolutely, we should have done it nine months ago.

Bruce Whitfield:
Dr Iraj Abedian, thank you very much indeed, he is the chief economist and CEO at Pan African Investment and Research and also to Rudi van der Merwe who is from Standard Financial Markets.