A thousand years ago, a Chinese official wrote in a policy memorandum: “The country has become like a broken-down dwelling: fix the main beam, and the corner gives way; repair the rafters, and the ridgepole falls down. Though you prop it up and support it so it barely survives, how can you have time to compass your circles, square your angles, and make a proper plan?”
South Africans are all being asked to play their part right now. Now it is time for those who make economic policy to play theirs. If they do not, the efforts of all the rest will be in vain. There will not be an economy on the other side of this, or it will fall into a depression in short order.
A depression will mean a 10%+ permanent fall in tax revenue. It means an immediate 10% increase in our debt to GDP ratio. It means health budgets cut hard in two years. It means permanent junk. It means millions more falling into poverty, unlikely to escape it again, and subject to all the elevated risks of mortality that come with it. It means forms of politics that will make the Zuma years seem a wistful memory.
How do we escape that fate? First, the economy must be kept as intact as possible through the lockdown. The open letter from many economists provides the ingredients. The priorities must be direct cash grants to vulnerable individuals; low-cost, guaranteed loans to businesses; payment holidays for those in need; and most of all, heavy investment in the frontline health battle against the virus, without sacrificing people suffering other diseases such as TB.
On the other side, the macroeconomy will need immediate and radical surgery. One enormous risk is that the Reserve Bank (SARB) might tighten interest rates or unwind its programmes too soon. It was early tightening in 1929-1930 that turned a sharp US recession into the Great Depression. If SARB does this, raising interest rates and withdrawing liquidity just as people are trying to get back on their feet, the effect will be catastrophic.
The best means to avoid this will be to reinterpret the bank’s mandate to target what is called “nominal GDP growth”. A weaker alternative would be to follow the US Federal Reserve’s lead in declaring that the inflation target is “symmetric”, ie, the last 12 months of below-midpoint inflation, plus the coming months of severely low inflation, will be compensated by allowing the economy to run hot in a recovery phase. The alternative, if SARB raises too early, will be a long collapse in domestic demand, the risk of deflation in all non-healthcare and non-administered prices, and escalating solvency problems among borrowers, then among the banks.
Significantly looser monetary policy for enough time will also provide a window of opportunity for resolving our fiscal mess. If spending is frozen in current rands for many years while inflation runs a little over target and growth picks up, then the local currency debt-to-GDP ratio can drop quite quickly. That can be done even with growth in health spending and grants, those being taken from a wage bill kept flat in unit prices (ie, no raises) and declines in volume (deep retrenchments among management), alongside the final shutting down or privatisation of many a state-owned enterprise.
The scale of the shift would have to be significant and locked in, but delivered over time. Civil servants are the one category of people who know they will be paid in the next months (and should receive no mortgage or other payment holidays as a result). They will be the one reliable source of demand when the lockdown ends. But a surplus net of existing debt payments will be necessary within two to three years. Funding a deficit of any size while monetary policy is running loose will be a recipe for an uncontrolled debt spiral, a collapse of confidence in the bond market, and worse outcomes to follow.
Let monetary policy run loose. Tighten fiscal policy. But above all, get growth going. This will be no time for repeating consultant nonsense about the Fourth Industrial Revolution, living in fantasy worlds about the South African state’s capacity, or tinkering at the margins with a tax cut here or there.
The whole of Treasury’s wishlist of reforms amounts to a hill of beans, in their own estimate. The tax code must be rethought from the bottom up to incentivise, hard, household and corporate investment. Electricity must be fixed, immediately, whatever the cost to coal sector jobs. Bank regulations must be adjusted to halt the pushing of one unsecured loan after another. The whole vast consultant feeding scheme of failing innovation and SME support programmes must be transformed into direct grants for township entrepreneurs.
The list is long, and urgent, but policymakers are at home. They cannot sit in meetings, or procure consultants. They have the time to generate plans that can be put into action as soon as possible. They must play their part, as they are asking the country to do.
Little will be possible without a state that is far more energetic and capable than we have seen for the last two years. It is clear by now that tinkering will not achieve that. Over the last 20 years we have tried performance management systems (targets and ratings and bonuses); civil service schools; recruitment changes; and much else. A whole class of consultants earns a good living off such tinkering. It has yielded nothing.
Similarly, changing parties made no difference to Joburg or Pretoria. Some will say we should recruit more “young talent”. China tried that for a while and shut the programme down two years ago. “We found it just produced people who could talk well but had no substance”. Judge for yourself if any current youth commentators in South Africa would change that evaluation.
But in the last few weeks, the state has become more capable, if still not capable enough. It grew more capable because of fear. So the question becomes: How do we make the state as afraid of failure as it is of this virus?
That would require deeper changes. We might use an idea circulating in Europe at the moment, of “citizen assemblies”– ordinary people randomly selected in a representative sample of the population and paid to deliberate for a month or more on a specific topic. Ours could be formed in every municipality and deliberate, with the support of experts, on whether or not to cut the pay of every civil servant and politician by a third for that year.
Or we could annually ask 2% of the country, slanted to the poor, “Is your life better than last year?” If the result comes out negative, pay gets cut, hard. At the margin, extremely negative outcomes could trigger civil or criminal prosecution. Conversely, strongly positive results could lead to bonuses and promotions. There are likely many other ideas, but at the core must be this: not to replace one complacent, lethargic elite with another, through some electoral or other reform; but to make any elite in power fear failure the way it fears this virus.
Needless to say, making reforms that deep work– and, more generally, navigating a way out of this storm – will place a burden on all of us. We will have to dispense with the voices and dead ideas and dead arguments that have led us to a place where a single disaster may cause ruin.
Readers and viewers must build the ability to weigh ideas and hold talking heads accountable. They must seek out that which is endorsed by reality, not waved through by friends in offices and editorial staff. The old factional and ideological arguments have led to a broken down dwelling, and will not fix it. Middle-class audiences – not just policymakers – will have to find ways to thoroughly encounter the lived experience of the majority of the country.
We will have to build a deliberative democracy that can guide reconstruction and development after this crisis. We must remember that the poor have borne the worst of the suffering for this lockdown, and will bear the worst of whatever follows, and we should not increase their burdens any further without compensating them for it. As Aristotle once observed, “The easiest way to turn a democracy into a de facto oligarchy is to not pay people to participate.”
The odds may not be good, even if those whose job it is to mint new nonsense and turn it into lavish salaries are already using phrases like “the new normal” or saying “we will not be the same again”. People in offices thinking themselves significant can and will revert to the normal way of doing things if not forced to do otherwise.
The signs are already ominous – the Reserve Bank has produced an absurdly optimistic forecast for the economy, likely as a preemptive justification to tighten early. National Treasury is talking of a R2-trillion infrastructure programme – to be delivered by a state that has taken two years to allocate some spectrum. The left, of course, will fund it with workers’ pensions, then demand raising the corporate income tax, and otherwise spend the next 20 years, as the last 20, blaming the IMF for its ineffectiveness. A handful of inconsequential reforms will be passed, it will be said that the time is too delicate for fundamental governance changes, and the same old and young commentators will spill the same things onto the same screens.
Meanwhile, the corner will be giving way and the ridgepole falling down.
It must be hoped that is wrong. Perhaps we will not spend the next six months writing and reading editorials with titles like, “The Ramaphosa administration showed it can act in the Covid crisis, it is about to act on the economy”.
Perhaps policymakers and commentators will play their part, and, if they do not, perhaps the body politic will finally lose patience and force changes to both our public discussion and our governance. Then this crisis really will yield a new dawn. If not, as an old Russian saying has it: “The worst is yet to come”. DM