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The calculus of risk has shifted to the economy – what is to be done?      


Ravi Naidoo is a National Planning Commissioner and the chairperson of its economy workstream. He writes in his personal capacity.

Massive economic change is now inevitable. The only question is whether we actively shape it to our advantage – or passively allow it to become a full-blown disaster.         

 While it began as a health crisis, the coronavirus (Covid-19) crisis is set to cause the biggest economic contraction in South African history. The calculus of risk has shifted from a health crisis to an economic crisis, and the government needs to adapt its approach accordingly.

The critical issue is the timeline. South Africa could possibly hold out for a short period (with sufficient social solidarity initiatives) until treatments or some other healthcare “solution” is found, say within 3-6 months. But the reality appears to be that a vaccine or treatment is not expected for 18-24 months, if at all. And there is no possibility that South Africa can maintain a lockdown (socially and economically) for anywhere near that length of time. So our strategic choice is to prepare for a marathon, not a sprint. Hence, even from a health strategy perspective, we must pay attention to how we generate and manage our economic resources for a drawn-out battle.

The lockdown implemented since March was necessary but also immensely damaging – temporarily closing 46% of businesses with 85% of the open businesses operating below-normal turnover. If we maintain this lockdown for a year, the economy will contract by half and utterly collapse.

Even if we lift all or most of the lockdown soon, the economy will contract by more than the initial estimate of 6.5% in 2020; some estimates now put a contraction at closer to 17%. The dire predictions for business closures and job losses (the “best case” is one million) will see a dramatic reduction in tax collections, and will reduce the ability of government to fund public services.

The secondary impact of such a severe economic contraction will manifest in poverty, hunger, social disorder – and ultimately higher mortality rates, too. This is why paying attention to the economy cannot be seen as neglecting the health implications.  

There is no doubt that President Cyril Ramaphosa was correct to put South Africa into lockdown for six weeks from late March, as this bought invaluable time to get the health system as ready as it is ever likely to get. But now that is done. Nothing good will come from extending the lockdown.

In any event, people, out of necessity and desperation, will simply ignore any extension of a strict lockdown. It would, therefore, be better for government credibility if it got ahead of the problem and lifted the lockdown, allowing many businesses and livelihoods to be saved.

But then what?

First, we need to assist distressed businesses and households. This would include emergency loan and grant funding to keep small businesses alive. There also needs to be a programme for larger businesses, but this must be kept separate so as not to crowd out support for the small businesses. For households, the focus on providing social grants to the poor can be supplemented by the provision of vouchers to enable the poor to buy their essentials. There is a deal to be made (say, over the next 6-12 months) to link the demand of the poor to the supply of these local businesses, creating a virtuous cycle in the local economy.

Second, we need to fast-track a series of interventions that can boost investor confidence whilst laying the groundwork for future economic growth. And these must be things that government can do rapidly (yes, there is such a thing).  

For instance, the government has it within its power to unlock the renewables industry. It would be a massive boost to the economy if the government simply gave the go-ahead for the next rounds of the renewable programme to proceed. This would simultaneously reduce the Eskom risk and create space for private sector investors.

Another productivity and investment booster just waiting for government action is the 5G spectrum auction. For years, the country has been waiting for the government to get this process going. As 5G is introduced, this will bring more bandwidth capacity into the economy, propelling productivity improvements across the economy. Moreover, the government could negotiate a deal with the winning bidders to connect rural, township, and other development priority areas.

Economic growth is also held back by housing and title deed regulations. A particular obstacle has been the restriction on the resale of subsidised houses, which has only suppressed the value of these properties. Further, the poor cannot access title deeds in townships – meaning they cannot use their properties as collateral. This is a massive opportunity to add billions to the poorest households, again needing government regulatory change.

Rounding off an initial list of fast-track measures is growth funding for small businesses (not to be confused with emergency loans mentioned above). In the normal course of an economy, small businesses need easy access to credit. South Africa, however, has one of the worst records of bank financing for small businesses. Indeed, despite a voluntary Financial Sector Code, commercial banks have failed to implement their commitments in almost 10 years (banks have met just 5% of their inclusive growth R100-billion commitment). In exchange for helping banks now, the government could enforce the requirements of the Financial Sector Code, thus boosting small businesses.  

What is attractive about most of the measures is that implementation will come from the private sector, unlocked by government and regulatory changes. We do not need to wait to create a “capable state” before we make progress.

Third, the government has a critical role to play in facilitating and de-risking the financing of the economic strategy. It does not require that the government must pay for everything directly. It just has to ensure that the war chest is raised from the private sector and international lenders.

In raising a war chest, the government can start by putting its own contribution into the pot. Where can the government get this money from? Lots of options here, but my suggestion is that government slim down from its grossly bloated size, where it expanded rapidly in the period 2009-2017. With an annual government budget of almost R2-trillion (about R1.7-trillion after interest payments), who will bet against the potential for finding large savings? Most likely an independent zero-based budget exercise will unearth at least 10% of annual savings (about R170-billion a year). 

Of course, we can also approach international financiers (such as the New Development Bank or Green Climate Fund, especially for green and renewable sector funding) or even the International Monetary Fund. There is no reason why the Reserve Bank cannot do more to buy government bonds. All of this could comfortably bring in a further R500-billion for strategic programmes.

However, of crucial importance is the relationship between South Africa’s economic strategy and the approximately R5-trillion in retirement funds (a little-known fact is that South Africa has one of the largest retirement fund industries in the world). These funds look for long-term investments that will benefit pensioners – as such, it is common in international experience for these funds to be incorporated into national economic strategies. Of course, having government officials prescribe exactly what the funds must invest in will be a bad idea. But surely there is an agreement to be reached on how workers and retirees (via their fund managers) and the government can co-invest for the common purpose of long-term growth and prosperity in South Africa.

To further reduce the risk to retirement funds in any such joint initiative, the government could put in, say, the first 10% as risk capital (that is, take any first losses) and also commit to clearing the regulatory path for investments. This would be a perfect win-win arrangement.

In fact, if the retirement fund industry agrees to back a future vision for South Africa, the government would have no need to set up a Sovereign Wealth Fund – it should rather offer more funding and support to the existing industry.  

Fourth, given that a “New Deal” obviously requires a degree of negotiation between the government and relevant stakeholders, how will we succeed now when previous negotiations failed? Indeed, South Africa has tried and failed at economic policy for decades – which is why we remain with some of the world’s worst inequality, unemployment, and low growth.

The reason for the historic failure cannot simply be the oft-repeated lack of a capable state (since many interventions will really be driven by the private, and not the public sector).  

It is more that the entire way in which economic negotiations have been conducted since the 1990s is simply wrong.

In the 1990s, economic negotiations involved a wide range of diverse stakeholders. This was more to ensure transparency of the process (this succeeded) and create a high-level consensus (this was an abject failure). An overly diverse and disagreeable group of parties only makes negotiations slower and meaningful agreement unlikely.

In 2020 there is little merit in such an approach. The central participants in successful investment agreements, as is the case anywhere in the world, must be government (representing citizens) and business (representing shareholders). If a negotiation does not meet its objectives, the government stands to lose an election and shareholders stand to lose their investment. The rule must be that participants to a negotiation must be essential for the quid pro quo that benefits society. If a party is not required for or cannot make commitments necessary for implementation, they are not essential to that agreement process. There are other ways to make a negotiation process transparent than adding additional and non-essential parties to an already complex negotiation.  

Trade unions or “community” constituencies would be central negotiators in certain agreements, too. For example, trade unions would be central to negotiations related to the investment of workers’ retirement funds.

Apart from the wrong parties being at the table, the weakness with the previous attempts is that the agreements were non-binding and voluntary (as in the case of the Financial Sector Code mentioned earlier). The South African experience of self-policing social compacts (including the many “job summits” and their hundreds of commitments) is that without verification and enforcement mechanisms to ensure parties adhere to agreements, the agreements are worthless. Hence, the country has suffered through an exhausting and dispiriting series of talk-shops and fake agreements. But imagine what would happen if the ministers and CEOs of relevant parties were held personally liable for any wilful breach of their social compact commitments?  

Our economy is going to change before our eyes. This is our New Deal moment, whether we like it or not. DM


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