The pandemic’s economic devastation has created a rare opportunity for a New Deal in South Africa
DAILY MAVERICK / 28 APRIL 2020 - 18.01 / RAVI NAIDOO
Five initiatives that are crucial to any New Deal are already pencilled into the Covid-19 economic package. They need to be taken further.
The coronavirus pandemic is the biggest global crisis in a generation. Over one-third of the world is in lockdown, global stocks have fallen over 30%, and over 3,3 billion people have been affected by full or partial workplace closures.
The United Nations calls it humanity’s “gravest test” since the Second World War and in the same manner that that war ended the reign of the Colonial Empires and triggered the ‘American Century’, so too will Covid-19 set new conditions for how “Generation Lockdown” will live life and view the world.
For South Africa, however, this new crisis could be something of a silver lining. Even before Covid-19, the country was in deep trouble, having wilfully missed its chance to remake itself after the end of apartheid in 1994. Covid-19 just may offer an opportunity to make a fresh start to address the economic divide that sits at the heart of many of our ills as a nation.
At the time of writing, Covid-19 confirmed cases in South Africa were under 4,000 but increasing fast. Based on pretty scary projections, the government has initiated what is regarded as one of the most “ruthlessly efficient fights” against the pandemic. The first phase in the government’s multi-phase programme has been to declare the pandemic a national disaster and institute a countrywide lockdown.
Even if our unlikely hopes of escaping the health consequences of the pandemic come to pass, we will not escape its economic consequences. It has been estimated that the lockdown is costing the country about R13-billion per day. The lockdown and the global economic slowdown, in total, will cause South Africa’s economy to contract by 5,8% of GDP this year, according to the World Bank. The Reserve Bank’s estimate is even more gloomy, at 6,1%. Based on those estimates, this will be the worst economic contraction in the country’s history.
While necessary from a health strategy perspective, it is clear that a large proportion of the population simply cannot afford to be locked down. South Africa is officially the most unequal country in the world with a Gini coefficient of 0,63 (where the richest 1% own 71% of the country’s wealth). For the poor in the townships, with no income-generating assets to sustain them, a lockdown raises a trade-off between going out to work and possibly contracting Covid-19 or staying at home and starving.
The obvious measure is to assist the poor to comply with the lockdown through food aid. However, as any honest appraisal of these charity efforts will conclude, these measures are necessary but patently inadequate.
Thus, President Cyril Ramaphosa’s announcement of a massive social relief and economic support package of R500-billion (equivalent to 10% of GDP) is crucial. The quantum has exceeded expectations, though it amounts to a combination of new, existing, and ‘in-kind’ money. Of the R500-billion, R130-billion is from reprioritised expenditure within the budget, and R20-billion comes from loans from global institutions (including the IMF), with the remaining R350-billion coming in the form of tax cuts (R70-billion), interest rate cuts (R80-billion), and loan guarantees (R200-billion).
Of the re-prioritised expenditure, R50-billion will go to existing social grant recipients over six months and R40-billion from the UIF as income support payments for workers whose employers are not able to pay their wages. There is also a small allocation to assist SMEs and spaza shop owners.
While necessary and bold, especially given the dire state of public finances, this expenditure is short-term focused and will do little to address the long-term economic vulnerabilities of poor communities.
Before the lockdown, South Africa’s economic growth of barely 1% was among the lowest in the world, public sector salaries tripled in ten years, and government debt ballooned from 27,8% of GDP in 2008 to 62,2% in 2019. As a result, our credit rating is downgraded deep into junk status.
And, of course, unemployment was at 29% in 2019, among the highest in the world.
By comparison, during their Great Depression, unemployment in the United States peaked at 24.9%, and in fact, was far below 20% for most of those years. In South Africa, by comparison, unemployment rates have exceeded 20% for the past 30 years! So it’s as if we have been stuck in a Great Depression for the past three decades. It is hardly any wonder then that South Africa has suffered the social ills it has.
Thus, pre-Covid-19, South Africa’s growth path was not even remotely sustainable. And to be honest, few people really believed it was.
While post-1994 there was progress achieved in specific areas (mainly rights, access to services and roll-out of social security), there has been limited movement away from the underlying structure of the apartheid economy. Simply put, the vast majority of South Africa’s people have too little by way of income-generating assets. They were forcibly dispossessed of these assets during apartheid and little actual redress has happened since. Most people’s reality has remained a hand-to-mouth existence and hence their ability to cope with any disruption in trading incomes (such as in a lockdown) is practically zero.
So we should be thankful that this invisible virus is beginning to make our skewed economic structure visible. The interconnectedness of life in the suburbs, townships and rural areas is becoming more obvious. This crisis offers a chance for South Africans, particularly the elites, to more personally associate with the merits of a New Deal, addressing many of the long-term economic vulnerabilities that the coronavirus is beginning to so brutally expose.
In the 21st century, where we anticipate repeated global crises, the extent of the economic divide in South Africa represents an unacceptable risk. The president acknowledged this when he called for steps to “ignite inclusive economic growth” through a “compact for radical economic transformation”.
Where do we start?
Five initiatives that are crucial to any New Deal are already pencilled into the Covid-19 economic package, and need to be taken further.
First, we need a much more active system to fund and support SMEs. This will promote economic growth and ensure that resources flow down into local communities. It has been proven the world over that by supporting more small businesses, both through providing more funding and enabling more market access, a country creates economic vibrancy and jobs. Almost 10 years ago, the National Planning Commission accepted this fact and estimated that most of the country’s new jobs would come from the creation of 49,000 new SMEs. This means more aggressive measures to open up the economy for small businesses to get more and bigger contracts, and graduate into the large corporates of tomorrow.
When we factor in the ever-present apartheid legacy, it is obvious that support is needed particularly for those SMEs owned by people from townships and underprivileged communities. While there has been much criticism of government using broad-based black ownership as a criterion when offering support to small businesses, the incontrovertible fact is that black people have weaker balance sheets and less access to formal markets to generate successful businesses.
Indeed, this crucial “missing segment” (small black-owned businesses) was a puzzle that the Harvard University team researching the South African economy mused about. So, if hard choices must be made, black owners of small businesses must be given preferential access to available public funds. Remember, there is over seven trillion rand in private sector investment funds in South Africa, which far exceeds anything government makes available as its contribution to small business.
Second, we need to pressure large corporates to become good corporate citizens and any bailouts to corporates must be contingent on them proving that they in fact are. After the bailout scam in the US in 2008, when public resources were literally transferred straight into the balance sheets of large corporates, countries are starting to consider more sensible approaches. For example, Denmark and Poland are refusing to let companies registered in offshore tax havens access financial aid from their coronavirus bailout packages.
And considering that our national requirements are more pressing than those of a rich Denmark, we should go further.
Indeed, in the process of a government-funded bailout, a corporate is asking for a capital injection from the taxpayer. It is akin to issuing shares. As such, if a South African corporate is asking for a bailout, what is the quid pro quo for the state and taxpayer? It is not enough that the company continues to survive, and return to the life it had before the crisis. As a country, we need more from it. Corporates in distress, that receive bailouts, should commit to five-year development programmes equivalent to what a private equity investor would require if they bailed out a troubled firm – with the difference that the requirements are in this case for the public good.
Third, we must build on the existing social grant infrastructure and modernise it into a universal basic income grant system. Indeed, the government decision, widely supported, to channel money to households via the existing social grant system confirms an important point: social grants remain the best way to reach the poorest households.
However, countries are also looking at designing their social grant systems in intelligent and forward-looking ways. Finland, for example, is experimenting with Universal Basic Income (UBI), where citizens get a monthly stipend, not because they are poor but because they are Finnish. Their argument is this: as the world of work changes, more people will have non-full time jobs. The UBI just gives people a means to cope when their incomes are unstable. The tax system is adjusted to ‘claw back’ the UBI grant from people that are making a lot of money. And so it becomes a progressive tax that is relatively easy to administer.
In South Africa, we have a substantial social grant system (costing 4% of GDP) but with severe limitations. It goes to pensioners and children, but not to working-age people. Further, it requires expensive and inefficient means-testing supposedly to screen out the ‘undeserving poor’ but ends up forcing people to choose between a guaranteed small grant or looking for paid work.
This is an illogical approach since we want people to look for jobs; the grant should simply be a means to ensure they can pay for food, clothes and transport (to search for that job). Hence it must be possible to both get a small grant and remain active in the job market. We can do this through spreading the existing social grant budget of R200-billion across a wider population, while fixing the overall grant budget as a percentage of GDP. And, yes, it will need a national agreement to make sure the poor are better off in net terms.
Fourth, the state needs to get into a fit condition to play its developmental role. It has been refreshing to see how Ramaphosa was able to move with speed in responding to Covid-19. However, part of the reason for the speed is that ability to cut through red tape and bureaucracy through the use of disaster management regulations. The emergency legislation allowed him to speed up normal government processes tenfold.
Imagine how much more effective South Africa would have been if we treated the ‘usual’ massive unemployment crisis in this manner, as a national emergency? Perhaps the difference is that Covid-19 threatens the rich and middle classes?
The lesson is that with both the political will and less red tape, it is possible for the state to undertake brisk and substantial measures to fast-track economic reform and employment promotion.
Clearly the state also needs to free up resources to address long-term vulnerabilities and economic reforms. If the political will had been there, say in 2006, this would have been a much easier discussion. Now heavily indebted and with poor credit ratings, the state will have to substantially downsize its cost structure. No doubt any funds freed up will have to go towards debt repayment (including for payment of the Covid-19 emergency bill). However, if the cuts are strategic enough to remove a lot of the waste and duplication, the state could carve out enough funding to kickstart its own contribution to a meaningful economic reform programme.
Fifth, no matter how deep the state delves into its constrained resources, this will pale in comparison to the capital available in the private sector. Simply put, no action of the state will bear fruit if it is not followed promptly by the private sector.
Forging a new social compact for radical economic transformation, as the president puts it, or, in fact, any reasonable and agreed inclusive growth strategy, is crucial.
The reality is that the private sector has never bought into the substance of the state’s programme to transform the country. This has been the failure of the post-1994 economic agenda in South Africa. Internationally, economic models have only worked where the state and the private sector acted in concert, through varying combinations of choice and compulsion – whereas in South Africa collective action in the economy has been an abject failure. Partly this is due to the failure of the post-1994 state to present a unified and coherent agenda, with the state internally divided among different political factions.
Hence, continuing the collective ‘War Room’ of Covid-19, the government will need to extend that to a War Room for inclusive economic growth. Its goals should be to systematically adopt evidence-based initiatives that can generate economic growth and move us away from being the most unequal country in the world.
And, yes, weekly televised press conferences by the president updating the nation on progress to create a more equal society would be nice, too.
In short, the Covid-19 crisis may be doing us a favour. It is just a mild harbinger of what is to come as we move into the 21st century. It is time for us to rethink and reset our growth path as a country.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER