the ideas i have discussed today. first, rich countries don ’ t make rich people. if your development strategy is to return the wealth of the country to the people, you don ’ t have a development strategy. real, lasting wealth is about knowhow, not natural resources. second, if you hear someone urging stimulus and going for growth, ask how they plan on dealing with the macroeconomic constraints. what ’ s the plan for inflation? how are they going to meet the import bill to avoid a balance of payments crisis? if they don ’ t have a serious answer, they aren ’ t serious. if they do have a serious answer, expect it to include policies like inflation targeting, a floating exchange rate and measures for keeping the fiscus solvent. these things cannot be ignored. south africa ’ s stimulus and recovery package does take these into account. third, acute challenges of inequality, poverty and unemployment are not reasons to gamble on macroeconomic stability. south africa ’ s social challenges mean we need to be extra careful about managing the system carefully so it doesn ’ t blow up – not that we need to run the system as hot as we can get it and hope for the best. finally, don ’ t ignore populists completely. they are very good at tapping into social frustrations – in a way, they are uncannily good instruments for detecting where society is hurting most. they aren ’ t very good at economics, so their ideas routinely end in disaster, but that doesn ’ t mean they are altogether foolish. rather, they are a reminder to better informed, more responsible people that things have to change. we cannot just say the populist path will end in disaster. it will. but we still have to point out another path. you cannot just be against populism – you need to be for something too. we need to talk about how we are going to get back to real and sustainable growth in south africa. thank you.

. the argument is that more spending will make people better off. more demand encourages more supply, meaning more jobs and more investment. it ’ s supposed to be a virtuous circle. so the government starts spending money – as much as possible. it borrows from people ’ s pension funds. it borrows from the central bank and demands it buys its debt – which means printing money. it spends the foreign exchange reserves. and at first sight, it works. as scholars of populism have noted, the immediate consequence of these policies tends to be an economic boom. people who warn that populism is a disaster will look foolish. there is more growth and big wage increases and more jobs. but it doesn ’ t last. time and time again, the boom turns to bust. inflation shoots up and growth collapses. some populists realise their strategy has failed and change course. others put their countries through even greater pain. during the 1950s, the argentine president juan peron effectively aborted his populist programme when inflation neared 50 %. 2 in peru, alan garcia abandoned his stimulus programme in 1988, with inflation well over 1000 %. 3 in venezuela, inflation is expected to reach one million percent this year, 4 and people are fleeing the country to find food, but the policy direction still hasn ’ t changed. what is it about the populist recipe that goes wrong? the literature focuses on two kinds of constraints : inflation and the balance of payments. now these are things populists probably don ’ t see coming. they don ’ t understand the causes of inflation very well. and they may not even know what the balance of payments is. but these are powerful forces, and ignoring them doesn ’ t mean they will leave you alone. the inflation problem is fairly simple. if a government wants to stimulate demand, it will want low interest rates, and it will demand that the central bank print money to buy its bonds. this extra money does a couple of things. it raises demand, and with the economy running hot, firms and workers put up their prices. it causes the exchange rate to depreciate. and because people see the government is printing money, they start to put a lot of time and effort into figuring out where inflation is going, and raising their prices to keep ahead of it. this process then gets worse over time. in the first year, you get a fair amount of growth and a bit more inflation. in the second year