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Let's get Africa moving

IT IS some time since I have written a column for Fin24. I have been drafting a book and a revolutionary new course in macro-economic design for an international organisation. The design of the big economy influences how it behaves and also how it can be managed. That is the task of central banks like the South African Reserve Bank, the US Federal Reserve and the Bank of England, to name just three; and the Treasury and regulators.

It is a new syllabus for macro-economists and policy makers around the world, and is starting to be recognised as something of significant value. That is also what a second-year student in Russia, who studies finance and risk management, wrote in his essay. He got a good mark.

He was given the task of writing an essay on macro-economic design. The only website of that name is mine. He was asked to read mine and eight other websites.

He contacted me and chatted on Skype, as well as contacting three of my co-directors as listed on the website.

He took special interest in my simple-to-understand general equations for lending. The following page on actuarial maths assumes that the reader is competent at that kind of financial mathematics. It goes further.

What do the maths and the testing prove? They prove, as far as is practical (without putting it into practice), that there is a better way to lend money.

More jobs for South Africa

If South Africa were to give it a test run, the government would find that it could restart the housing sector and build many more homes, creating many more jobs right now.

Turkey has already started testing a simpler model - the one which I published in 1974. It uses a wages index to determine how much must be repaid each year. The difference between that one and my best one is that the latter allows borrowers to reduce the burden of the repayments every year.

It is as if the loan had a fixed interest rate and that average wages were rising at 4% p.a., so easing the cost burden over time. If we do it this way, a typical single income loan might be around 3.5 years of the borrower's income. The repayments would look something like this:


Buying might cost less than rental after 12 years or so, and property prices would be more stable.

The system can be shown to be more competitive, cheaper to administer, and with lower interest rates.

Macro-economic design also covers other things

 - It shows that index-linked lending, preserving purchasing power, is not enough to offset the falling value of money. You lose out and someone who has borrowed your money, like a government, makes a profit unless they pay enough interest on top to close the gap - after tax.

 - It shows that commerce could invest more of the money which they borrow and so they could start more ambitious enterprises at less cost, even with reduced tax relief.

 - Consequently net tax revenues would rise, even if they gave more tax relief on savings interest. (Tax should not be paid nor tax relief given on the part of the interest which restores the value of a savings or a loan account after money has fallen in value. A net revenue boost would follow.)

 - It shows that if governments themselves were to borrow in this new way, they would save a lot of money. And savings could keep their value, boosting confidence.

On the currency issue it shows that we need to go back to having two markets for the currency - one for trade whose exchange rate would then be fairly stable. This would enable around half of all businesses to do their cost studies without having to make a huge allowance for currency price instability.

READ: SA’s biggest constraint to business growth

That would save a lot of money, reduce prices, boost confidence (again) and allow central banks to manage interest rates without worrying about the exchange rate. Inflation would be easier to manage. Why did South Africa abandon that? Another discussion for another time.

On the management side there is a lot of new thinking going on around the world. It is not doing as well as it should. If we enact all of the above reforms, net tax revenues would rise and the task of managing the economy could be much simpler and very much more effective.

I can write about that next time.

* Edward Ingram is a leading thinker on the world stage of  macro-economic design and has written a series of essays for Fin24.

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