Opinionista Dirk De Vos 8 October 2019

Our economic house is on fire – what are we going to save from the ashes?

In its current weakened economic state, South Africa will fall hard in whatever form the next global economic crisis emerges. It is hard to identify what the next crisis will be, but we do know that these do happen.

It is widely known that Finance Minister Tito Mboweni’s economic policy plan, published outside the regular structures of the Tripartite Alliance, while supported in principle within the ANC’s National Executive Committee, is facing heavy opposition both within the ANC and its alliance partners.

That the plan faces such intense opposition from the left, including labour is, of course, not at all surprising. Key elements of the plan such as labour market reforms and privatising or disposing of non-performing state-owned enterprises (SoEs), especially Eskom, and more private sector involvement in the provision of public services, were always going to be contentious.

Predictably, the pushback from the left within Tripartite Alliance structures and outside them, along with a lack of leadership on the part of the president, is succeeding. The ANC seems to take the view that some parts of the plan that are not all that contentious would be implemented, but not the real meat of it.

The most interesting part of Mboweni’s plan is not its contents as much as that a plan like it was even published in the first place. But spending a year as head of National Treasury looking at the declining prospects and intervening here and there to provide emergency funding for crippled (but bloated) SoEs, especially Eskom, would have been difficult. Having to work with colleagues (or comrades) who lack the appreciation of the deep problems the country faces must be a lonely task. Serving under a president of the country and the ruling party who appears unwilling to assert his authority and bent on seeking non-existent consensus would surely make things even lonelier.

The economy is in a terrible state. Economic growth has been persistently anaemic, below population growth, poverty levels are creeping up, as is inequality, tax revenues are below expectations and the national debt at over R3-trillion is now at over 60% of GDP, perhaps over 70% if the debt of SoEs is brought to account. South Africa has the highest unemployment in the world and its level of youth unemployment is over 60% and it is getting worse as more firms retrench.

A large and expensive state sector which diverts spending away from essential infrastructure and towards paying salaries continues to lose the capacity to do even the basics of what is expected of them. In a sense, South Africa runs two separate social grants systems. One is directed at as many as 17 million of the poorest in our society and another far more generous one via the salaries paid to far too many of our public servants. Consider this: 40% of government revenue is spent contracting out its functions, creating a vast class of tenderpreneurs. State capacity to do anything, much less play a leading role in the economy, already long in decline, has been further shredded by what we now call State Capture.

To call what we see now as “policy paralysis” is incorrect. Instead, what we really have is a continuation of the hodgepodge of failed policies inherited from our past.

One way to judge the merits of the Mboweni plan is to consider the alternatives, particularly those suggested by the left. Unfortunately, there is not much going on here. From what one can discern, these policy proposals amount to recommending departure from existing “neoliberal” economic policy: the lowering of interest rates to facilitate further borrowing and to use that additional debt to increase demand in the economy and to fund massive (always massive) investments by a reinvigorated state in infrastructure, especially social infrastructure, as well as additional subsidies to the poor. More debt shouldn’t be a problem, it is claimed, because it is simply money we owe ourselves.

These proposals are fantasy. To call existing policy neoliberal is obviously absurd. Over the past decade, state expenditure has grown faster than the underlying economy every year and larger than budgeted deficits have increased national debt threefold.

What appears not to be fully appreciated is the ultra-accommodative global monetary policy since the 2009 financial crisis. Interest rates in developed countries have been kept close to zero and in some jurisdictions have dipped below that. The result has been a massive expansion of debt everywhere including in South Africa, which can offer at least some positive yield to creditors.

While it might appear that all this debt is just money we owe ourselves, the reality is different. The wealthy are able to borrow to invest in assets while the poor continue to borrow to consume. The wealthy get the benefit of low borrowing rates while the poor continue to pay higher rates. The debt we owe ourselves is more about the money owed by the privileged to other groups.

One result is increasing inequality between owners of capital (whose asset values have been boosted by cheap money) and regular earners and the poor who also suffer from far higher inflation in the goods and services that they typically have to buy to get by.

Greater inequality is one of the major factors driving the emergence of several populist movements (both on the left and right) around the world. The election of Donald Trump as the president of the US is the obvious example. There are very many others.

Just how our severely weakened state machinery could in any way be in a position to lead a massive investment drive, when it has already chosen to prefer paying increased public salaries at the expense of budgeted investments in critical infrastructure, and when the investments made do not represent value for money, is anyone’s guess.

Global economic growth, driven on by increased globalisation, is already in retreat. There is now the real possibility of trade wars between the major economies. The left may welcome this development as a break from the so-called Washington Consensus, but for a relatively open economy like South Africa, there would be painful adjustments. Consider the free trade agreement we have with the EU: Brexit will have a significant impact on South Africa’s major trading partners and source of foreign investment. An unanswered question: does South Africa keep the quantities of tariff-free goods that can be exported to the EU should Brexit occur, or is this adjusted downward to account for the share exported to the UK prior to Brexit? How would a SA-UK trade deal make up the difference? If so, how long would it take to negotiate a deal with a country whose leadership is apparently oblivious to how trade deals actually work?

In its current weakened economic state, South Africa will fall hard in whatever form the next global economic crisis emerges. It is hard to identify what the next crisis will be, but we do know that these do happen. We no longer have the shock absorbers we once had and could rely upon in 2008/9.

Mboweni’s plan clearly identifies the painful adjustments that will need to be made, no matter how unpalatable these may seem, but it does give South Africa a fair shake at retaining a large measure of economic policy-making sovereignty – provided the global economy does not itself go into reverse.

Supporters of the Mboweni plan, including the Finance Minister himself, are given to warn that if we fail to make the necessary painful adjustments, we will find ourselves at the door on the IMF and be subject to the terms they might impose on us in return for their standby funding.

The reality is probably worse than that. Going cap in hand to the IMF would clearly signal a complete failure of the ANC-led government and would severely weaken its political appeal and perhaps spell the end of the movement as a coherent political force. Everything possible will be done to avoid this eventuality.

What is everything in this context? Well, it means lurching from one emergency to another. Economic policy, if you can call it that, becomes “what can be done to temporarily solve this crisis by the end of the month?” This is not that different to that awful question: imagine your house is burning down and you still have some time to rescue what is truly valuable to you. What do you rescue and what do you reconcile yourself with being lost in the blaze?

Obviously, this is unacceptable – and undemocratic. Citizens should at least know beforehand where they stand on the priority list, even if just to allow them to make their own contingency plans or to mobilise and state their case. Surely it is unacceptable to find out that one has been sacrificed on whatever contingencies apply at any point in time?

So, what of the duty of the left in all this? The 2019 national elections resulted in an overwhelming majority for explicitly left-leaning policies (even if the choices voters made are ascribed to other issues). On the face of it then, the current government was elected based on the stated economic policies of the ANC. That is, unarguably, the current democratic mandate.

It is cowardly (at best) to either reject the Mboweni plan out of hand or to suggest it forces some sort of false dichotomy. For the left, South Africa is well into the territory of having to make hard decisions. It is critical that there is some honest engagement on what these hard decisions ought to be if South Africa is to remain captain of its own ship, however leaky. DM

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