This has been a terrible week for economic news. Yesterday we found out that the South African economy is growing at a sluggish 2.1%. Today we found out that consumer inflation has reached 10.4%. Independently, slow growth and high inflation would be bad, but to have both at the same time is disastrous.

Some of this is due to factors we can’t control, like oil prices and global financial problems. Some of it is due to unforeseen (well, not really) factors, like power cuts. The biggest problem, however, is our macroeconomic policy. Until now, the government has grown the economy by stimulating consumer demand. It has used BEE to create a large black middle-class, regulated wages to keep them artificially high, cut income taxes, and kept interest rates low. This encouraged people to borrow and spend, which sent property prices soaring, and led to rapid growth in the retail sector and the car industry, among others.

Unfortunately, there’s a limit to what can be achieved with increased consumer spending. Eventually there either has to be a corresponding increase in production, or the economy will start to experience a yawning trade deficit and rising inflation. This is exactly what has happened in South Africa. It has been evident for several years that the free-and-easy strategy of high-debt, consumer-driven economic growth is no longer feasible. We’re increasingly seeing a situation where money going into the demand side of the economy creates virtually no stimulus at all, and is simply converted directly into inflation. Yet the government’s macroeconomic policies have hardly changed. The Reserve Bank has shifted its monetary strategy from demand-side stimulus to inflation-fighting; thankfully, we have not bought into Cosatu’s (and Robert Mugabe’s) suicidal idea that inflation doesn’t matter. Yet the government as a whole has been in disarray, unable to accept that the old strategy no longer works.

The only solution to this dilemma is to stimulate the supply side of the economy. Simply put, South Africa needs to produce more stuff. This in turn requires structural reforms to improve productivity, bring more people into the formal workforce, alleviate the skills shortage, create a better work ethic and harness technology more effectively. In principle this may seem uncontroversial, but in practice many of the constraints on supply-side growth were created by the government, and removing them will be politically unpalatable. Necessary reforms include lowering the tax burden on companies, removing the current regulatory red tape (including racial quotas), and ensuring that businesses have a reliable energy supply. Most importantly, it is necessary to remove the labour regulations that are good for the currently-employed, but have trapped vast numbers of workers in the informal sector. There is no excuse for getting this wrong: the Asian Tigers, Brazil, Turkey, China and India have already created a successful model for developing countries to emulate. We know what the right policies are; we just need the political will to implement them.

Alternatively, we could deal with the impending economic crisis the same way we’ve dealt with the energy crisis, rising xenophobia, and the political crisis in Zimbabwe: ignore the problem until it becomes catastrophic, and then adopt a series of belated half-measures.