Johannesburg - Former Federal Reserve chairperson between 1987 and 2006, Dr Alan Greenspan, noted that "there are concerns" about South Africa's outlook because of, for example, instabilities causing the power problem and elections next year.
"There are fundamental problems that have to be resolved before you get large [foreign investment] flows," he said, saying, though, that this was not just isolated in SA, but that many other countries faced similar concerns.
He added that while he has been fascinated by SA's peaceful transition, problems do exist and it will be a disservice to the poor if free markets are not allowed to flow.
"It has been a fascination how the SA transition has been pulled off in such a peaceful manner, and Nelson Mandela has got to be proud that a significant clash was avoided,' said Greenspan.
"But problems exist and there is no choice but to open up the markets," he said, adding that over-regulation and altering the flow for political or social reasons would have negative repercussions, not least among the poor.
Greenspan was talking via a satellite feed at a Radio 702 investment event in Sandton.
Greenspan said that market economies over the generations had seen a large increase in standards of living, and increases in per capita real incomes in the past twenty years had pulled everybody up.
"There are differences in income redistribution, but these distributions are increasing all the time," he said.
He concluded by saying that it was far more beneficial to the mass of the population to encourage free markets, else a disservice was done to those with the greatest need in a society.
Difficult, unstable situation
Greenspan hinted on Tuesday that with the
significant pressures coming from oil and food beginning to filter into the wage structure, it was important for SA's central bank to lean against higher prices.
"Low inflation is what creates long-term sustainable economic growth and unless one moves ahead of the curve and prevents the inflation genie from emerging from the bottle, you have a very difficult, unstable situation, and the evidence suggests it is far better to attack inflation in the early stages like now than to wait for it to emerge, as we in the US learnt to our chagrin the 1970s," he said.
He said that it did not matter whether people considered higher inflation the result of endogenous issues or not, the price increases were real and unless the central bank "leans against them" and prevented them from taking on a fuller impact, "you will get a highly unstable inflationary environment".
Hedging bets
On inflation targeting, Greenspan hedged his bets, saying he had argued against it in the US, but if it helped bring down prices, it was good.
He noted that his concern was the ambiguity that arose when it was at the upper edge of the target - does it indicate that it has peaked, or is it a prelude to going through the target.
Greenspan added that it was far easier to implement the policy in a dis-inflationary environment than now, when there was the question of stagflation.
Greenspan added that while recent central bank actions have reduced the probability of a severe recession, the global economy is in for a "very sluggish period" over the next year.
Complex environment
"A rebound is not in the immediate outlook," he added.
"At the moment the data suggests we (the US) are on the brink of a recession. I have said the probabilities are greater than 50:50. In retrospect we will look back and declare it a recession," he said.
"Whether it is definable as recession, I am not sure anyone knows, but clearly there is a very sluggish period ahead," he said.
Greenspan said the current environment is the most complex he has seen since World War Two, although he has noted some improvement since the recent central bank actions to alleviate the problems.
Of concern, Greenspan said there was no clear evidence that a long-term structural oil price high had been reached.
"I don't know where it is. We're a long way from a resolution of this. With a large component of speculative demand we are going to have a highly volatile oil price," noted Greenspan.
Greenspan said the key now was getting through the housing price decline in the US, as homes were the ultimate collateral behind residence-backed mortgages.
"We won't see closure for a good number of months and perhaps into next year, but we do seem to have eliminated the most difficult problems of liquidity," he concluded.
- I-Net Bridge