In the United States (US), government data last week showed that the annual increase in the Consumer Price Index (CPI) had slowed slightly in August to 8.3%, but that prices continued to rise month-on-month, increasing by 0.1%. The US and other developed economies have been battling historically high price increases for months, owing to extremely high energy and food bills. This has been caused to a large extent by supply constraints after economies reopened following their coronavirus pandemic lockdowns, and in the wake of Russia’s invasion of Ukraine. It is, however, concerning that core CPI, which excludes volatile energy and food prices, is also rapidly accelerating. In the US, core CPI rose 6.3% when measured against a year ago, higher than the 5.9% seen in June and July.

Wall Street shares plunged following the news, with the Dow Jones Industrial Average losing nearly 1 300 points and the S&P 500 falling 4.3%. The news also dashed hopes of a slowdown in the US Federal Reserve’s (Fed’s) campaign of increasing interest rates to cool down the overheating economy. Until now, the Fed has already instituted two consecutive 0.75% hikes, and there are widespread expectations that it will make a similarly-sized increase at its meeting next week.

Overall, the US economy seems resilient even though economic data has been mixed. Applications for US unemployment insurance fell for a fifth consecutive week, suggesting that the demand for workers remains healthy despite an uncertain economic outlook. Retail sales unexpectedly rose in August, but the prior month’s figure was sharply revised lower. Factory production also rose slightly in August while total industrial production, including mining and utilities, fell.

The price of gold fell to its lowest level since April 2020 amid expectations of more aggressive interest-rate hikes by the US Fed. In total, the price has slid almost 8.8% this year as the Fed aggressively increased interest rates, which diminishes the appeal of assets that bear no interest. A strong US dollar is also usually not good news for commodities like gold that are priced in dollars, because a stronger dollar means that commodities become relatively more expensive everywhere outside of the US. Meanwhile, Chinese growth has slowed so sharply that several major banks did not even think that a 3% expansion is achievable this year. This could further dampen the demand for gold jewellery from the world’s biggest consumer of this precious metal.

In South Africa (SA), retail sales volumes were up 8.6% in July compared with a year ago, when SA was gripped by civil unrest in KwaZulu-Natal and Gauteng. Year-to-date retail sales volumes are 2.9% higher compared with the same period in 2021. This is welcome news because consumer discretionary incomes have come under pressure, owing to rising interest rates and a higher cost of living. Resilience in consumer spending has been underpinned by robust growth in non-labour income, a continued drawdown in respect of savings accumulated during lockdown, as well as an increase in the use of credit.

There are many rumours going around again about how bad our economy will perform this year, and possibly in the years to come. Many South Africans blame a variety of aspects for this poor performance. If your political convictions lean to the right in South Africa (SA), you have the more erroneous view that government can do a better job than the market when it comes to allocating scarce resources. Your answer to the current low economic growth environment is, therefore, to nationalise resources. However, history shows that, when countries force their populations into this direction, they seldomly put their citizens in a better position. Even in those isolated cases where resource nationalisation leads to the widespread improvement of livelihoods, it does so at the cost of individual freedom, something that South Africans cannot stomach. If, on the other hand, your political convictions lean to the left, you have the less erroneous view that we are underperforming because government has ruined the economy: A free-market approach is not always better but, in this case, it is the lesser of two evils. It is true that government ruined our economy through their unhealthy direct involvement (such as Eskom, state capture, and corruption), which stems from unhealthy policy (wealth redistribution rather than wealth creation), which stems from not having accountable leaders (we all know their names). For this reason, we tend to focus on government when we consider economic performance. Because it all starts, and ends, with government. And, to a large extent, the private sector is only a price-taker in SA.

Government is by far the largest player in SA and, just based on their sheer size, their voice carries the most weight. If you consider government in its totality, including state-owned enterprises, government can represent anywhere between 35% and 40% of the South African economy. But what makes the influence of government so much greater is its ability to dictate policy; it sets the rules that everyone must play by. In this way, government not only influences the economy as its largest participator, but it also impacts everything and everyone else by regulating what the rest are allowed to do, and how they are allowed to do it, or not. So, if policy is unhealthy, everything else will be unhealthy too.

Unfortunately, the South African government has, over time, started to believe the lie that they can create a larger economy by redistributing more. But how is it possible to create more pies by slicing the same pie into smaller pieces? Redistributive policies, such as broad-based black economic empowerment (B-BBEE), can, therefore, at best, lead to social development, but not to economic development. Social development is like handing out fish (or grants): It can only feed someone for a day (or a month), but it creates dependency and places an unrealistic burden on the economic fibre of a country. This is because, over time, more people become more dependent and hungrier, that is, more demanding, and we go from wanting grants to wanting free tertiary education too. Economic development, on the other hand, teaches people how to fish, that is, it creates jobs by increasing the size of the pie or by creating more pies. Economic development thus forces society to become more accountable, not more dependent.

Redistribution cannot create jobs, otherwise unemployment in SA would have improved from the 1994 low of around 22%, and not have deteriorated to 34% where it is currently. Redistribution kept out of check eventually drives a country into the poverty trap. The reason for this is because redistributive policies, such as B-BBEE and policies that protect employees at the cost of employers, cause resources to be allocated sub-optimally. And wherever resources are not optimally allocated, inefficiencies arise, and if inefficiencies compound over three decades, a country falls into the kind of lower-for-longer economic growth trap that SA is currently in.

So, what do we need? We need more accountable leaders in the private and the public sectors. Leaders who can implement policies that create wealth. Leaders who can be held accountable. Leaders who are chosen based on merit. Because of their size and influence, it all starts, and ends, with government.