Covid-19

COVID-19

An economic framework for reopening businesses

(Photo by Gallo Images / Alet Pretorius)

The current regulations governing the economy under lockdown are inappropriate – we need a framework that fits the nature and dynamics of the South African economy.

There are two broad certainties under current lockdown conditions. If we immediately abandon any form of control over the pandemic and open up the economy in an unfettered manner, cases of Covid-19 transmission will go through the roof, deaths will multiply, the hospital services will be overwhelmed as happened in Italy, and livelihoods will dramatically suffer.

On the other hand, the longer the current form of lockdown persists the greater will be the dire impact on economic performance with highly destructive effects on businesses, workers and ordinary citizens. Many small- and medium-sized enterprises will collapse, workers will be laid off, unemployment will spike, household income will shrink, debts will accumulate, government revenue collection will drop through the floor, and the black-market economy will flourish, benefiting criminals and some politicians. 

When trying to deal with these polarities we have to avoid simple binary oppositions. So I should make it clear the limitations of what I am covering here. I am assuming that the health requirements of testing, contact tracing, and isolation are effectively put in place by provincial and national health departments. If we do not manage that then it may not matter whether we lock down or open up the economy. 

My focus is simply on the economic framework driving the regulations governing how business activity should take place. Some form of restrictions on economic activity have to take place, but we also have to maximise the ability of firms and workers to generate income. The state can only facilitate a reshaping of market relations, it cannot act as a substitute for it. What would be the appropriate economic decision-making methodology which would achieve this? 

The government’s current regulatory economic framework, with specific rules governing the transition from Level 5 downwards, is inherently problematic. It is based on identifying sectors to gradually open up, focusing on essential and non-essential products that can be manufactured and sold, and even specifying the percentage capacity and employment for enterprises under each level. 

But we do not have a Soviet-style planned economy where the state is charged with trying to ensure an alignment between productive supply from sectors on the one hand, and distribution of products to citizens on the other. Our economy is inherently dissimilar, and the structure of production and consumption is utterly different from a command economy. The South African state does NOT control sectoral production specifying what products can be produced in what quantities. Its responsibility is NOT to align consumer demand to products that are available, and it is utterly incapable of matching supply and demand. This is not only because it clearly doesn’t have the institutional capability to even attempt it, but because it is completely inappropriate for our government to even try to do so. 

It therefore makes no sense for the government to design a lockdown framework of economic regulations based on sectors, capacity utilisation, employment levels, and products to be sold to consumers, as a mechanism to govern economic activity under different levels of lockdown. The more detailed and complicated the regulations are forced to become, the greater the levels of inconsistency that will necessarily prevail. The result is an increase in irrational regulatory decisions and public confusion, exacerbating the populace’s perplexity and irritation, thereby increasing the momentum driving citizens towards non-compliance.

Sectoral targeting of this nature also presumes common production platforms and activities taking place within firms across the sector, ignoring differences of size or levels of production complexity or logistic requirements for delivery to other links within the value chain or differences in customer demands or who they are supplying and what these requirements are. All these differ enormously within a sector, especially between large and small firms, and are considerations that need to be taken into account in attempting to minimise the spread of the virus. Agglomerating all firms with a sector together also ignores greater similarities that small- and medium-sized firms may have with other such sized firms across different sectors. The net result is that small and medium-sized firms are likely to be severely disadvantaged in the regulatory framework the government has adopted. 

Government has also not defined the principles, nor the knowledge base, underlying the classification of what economic activities can occur in the different levels, nor the principles governing transitioning from one level to the other. As a consequence, the current framework of regulations do not empower firms to make the necessary and requisite decisions. They are disempowering and create operational confusion. Many small and medium enterprises have no clear idea whether the sectoral determinations under Level 4 allow them to return to work. 

Let me set out one example from the small business community involved in providing knowledge or advisory or financial or technical, etc, services in the economy. These enterprises cannot easily locate their operations within the current sectoral regulations governing Level 4. Hence, the operational decisions they have to make are arbitrary and often have little relationship to whether they are contributing to the social transmission of the virus. As a result, their staff stays at home. Sometimes working, sometimes not, but definitely at a lower level of productivity. Sometimes earning a salary, sometimes not. 

Management tries to keep the business afloat, delivering whatever outputs they can, hoping their invoices will get paid. Others beg their clients for time extensions, but that simply increases the cash-flow crunch. Some of these small businesses will survive, but some will not, and the tragedy is that the economic outcome if they fail will have little to do with the real aim of the lockdown, that of slowing social transmission. 

A good policy targets the source of the problem. Targeting sectors and products and specifying firm capacity levels is a very blunt way to do so. It also discriminates against firms in other sectors that may have equal or lower risks of accelerating the spread of the virus. In short, the current policy is blunt when it should be precise. It is overly complicated when it should be easy to understand and guide decision making. It is discriminatory when it should be protective of the more vulnerable firms in the economy. Consequently, it is creating confusion and frustration and will be ineffective in achieving its desired outcome. 

The fact that the current command economy approach is problematic does not mean that we should forget about trying to slow the rate of infection and flatten the curve. It does not mean that the government should not be setting in place a regulatory economic framework to transition the process of opening up the economy whilst also attempting to slow the spread of the virus. But we need to set out mechanisms that fit the nature of our economy whilst maximising economic activity, altering the current skewed bias towards benefiting large firms and retailers, providing as much space as possible for small and medium-size firms/shops to keep afloat, and increasing the earning capacity of workers. 

How should we think this through? We need to break away from a framework based on sectors and products. It is not the product that transmits the virus; not the kettles nor the perfumes nor any other products in the shops which we are restricted from purchasing that transmit the virus. It is the manner in which workers interact in the production thereof, and the way in which the firm interacts with consumers and buyers that determine the likelihood, scope and scale of the virus spread. It is the different forms of behavioural interaction – social, personal, and economic activity – between human beings that magnifies viral transmission. Some activities such as social distancing limit or slow down the transmission of the virus. Others exacerbate its transmission. These activities should be the focus, the lens, governing a regulatory economic framework for opening up the economy. 

Government should be focusing our attention on activities cutting across greater economic activity, rather than a complicated maze focused on regulating sectors or products. The economic framework should simply concentrate on shaping activities of staff and customers in the economic space. The regulations would then be simple and clear. They should state that these activities within the enterprise are necessary to engage in economic activity – for example, mandatory social distancing, wearing of masks, washing of hands, frequent desanitising of common property, temperature screening of staff. If the enterprise ensures that it is able to comply, then it can open, manufacture whatever products it is focused on based on solicited orders, sell whatever products are available, provide whichever service is its economic focus, and employ the appropriate number of staff and workers required. If these requirements cannot be met, then it cannot engage in business. If some of its business activities can meet them but others cannot, then it has to stop doing what cannot comply and only do what can. 

By focusing on the nature of the activities the onus is shifted to the enterprise, empowering management and workers to make the requisite decisions. Government can then focus its own activities in a much simpler and clearer manner. If the government discovers that the activities taking place within a firm do not comply, then the law should take its course. The enterprise should be stopped from operating, and the owners subject to heavy legal sanction. 

Although it is not my remit here, the same regulatory principles could be adopted for social activities that citizens engage in. The virus is not transmitted at certain times, nor in certain spaces and places. It is likewise not when and where activities take place but the form and manner of interaction that determine the spread of the virus. 

If this methodology is followed then a broad range of economic activities could be opened up and the movement between levels become easily comprehensible. The process of law enforcement would be greatly simplified. Arbitrariness would be severely constrained. Confusion would be eradicated or at least substantially limited. Small and medium-sized enterprises across a range of economic endeavours would be able to operate. I have some tentative suggestions as to how this could be applied but it is not up to me or a minister or a government bureaucrat to substitute for the firms themselves figuring out how to apply the basic activity rules to their operations as they would quickly morph into directives. The thrust of what I am suggesting is that the government simply needs to set out a basic framework with clear principles and let enterprises work out how to implement them and comply with them. 

One thing we do know is that people have an amazing ability to be innovative when their backs are to the wall. What government can do is set the rules in a clear and implementable manner, police them effectively, and let those within the enterprises figure out innovative ways of complying so that they can start producing, offering a service, employing some staff, and halting the slide towards the economic precipice. DM

Mike Morris is Emeritus Professor in the Policy Research in International Services and Manufacturing (PRISM) Unit and the School of Economics, University of Cape Town. He has a wealth of experience working with firms to become internationally competitive. 

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