President Cyril Ramaphosa’s announcement of a plan to get SA out of its worst post-apartheid economic crisis was his most important speech. It will set the tone for the election in 2019 and his first term in office.
He had two choices: to change course and implement a real stimulus plan to revive the economy and put it on a path towards rapid growth and job creation or to double down on the austerity policies that will deepen the economic crisis.
Instead, the president presented an old salad — structural reforms and austerity — that was tossed in a new dressing of his masterful delivery and drizzled with investment banking buzzwords such as "blended finance" and "quasi-equity". It was also a remix of former finance minister Malusi Gigaba’s long-forgotten 14-point recovery plan that he launched in July 2017 and his budget speech, minus the quotes from US hip hop star Kendrick Lamar.
There are three macroeconomic policy tools that can boost a country’s GDP growth in the short term. They are: interest rates and the exchange rate (monetary policy), and government spending (fiscal policy).
Heterodox economists bring attention to a wider range of microeconomic policy tools that can be used to achieve macroeconomic policy objectives. Modern Monetary Theory (MMT) economists break down the artificial separation between monetary and fiscal policy. A central bank can finance government spending.
The danger of a single narrative is that there is only one view — the neoliberal (or neoclassical) view — that totally dominates debates on the economy in SA.
There are four components of GDP. They are consumption, investment, government spending and net exports. Lower interest rates can increase the liquidity of households and firms and stimulate consumption spending. They can also induce firms to increase investment. Increased government spending adds to GDP. But different types of spending have different fiscal multipliers. A rand spent on construction, increases GDP by R1.90c, according to National Treasury. Internationally, corporate and income tax cuts have multipliers of about 0.4. A weaker exchange rate, which boosts exports and curbs imports, can improve a country’s net exports. During the second quarter of 2018, the SA domestic economy plunged by 3.6%. But a rebound in net exports due to the weaker rand limited the decline in GDP to just 0.7%.
A fiscal stimulus refers to monetary and fiscal policies — lower interest rates and higher government spending — that are implemented to kickstart an economy during a recession. It also refers to an injection of new money into the economy. Its size is measured as a percentage of GDP. In November 2008, in response to the global financial crisis, China announced a $586bn fiscal stimulus programme that was worth about 12.5% of GDP. In February 2009, US President Barack Obama signed a $787bn stimulus package that was worth about 5% of GDP. In designing stimulus packages, countries consider the "bang for the buck" for each dollar of spend and the speed in which the policies can have an impact on the economy. Since there are implementation lags for both monetary and fiscal policies, tax measures are also included.
The government’s recovery plan ticks all the boxes of what the ratings agencies and investment bankers had demanded. But there is nothing in it for 9.6 million unemployed and the 30 million who live in poverty.
Structural (or microeconomic) reforms work on the supply side of the economy. This school of thought has its roots in supply-side economics, which used to be a fringe group on the extreme right that believed in deregulation and low taxes.
Narrowly defined, structural reforms refer to measures that are designed to improve the functioning of labour and product markets. These include making it easier to hire and fire workers, increasing competition and reducing red tape. In SA the term has been also used to call for reforms to the governance of state-owned companies and the education system to improve productivity of workers.
However, according to the IMF, "Most reforms are likely to make only a small near-term contribution to the ongoing economic recovery, as it takes time for the gains to materialise." This means that they cannot, on their own, get an economy out of a recession in the short to medium term. The IMF also concedes that some of the structural reforms (those relating to the labour market) could have a short-term cost. They require complementary macroeconomic policies, including fiscal stimulus, to offset their contractionary impact. As a result, such structural reforms do not usually form part of stimulus packages.
Ramaphosa’s recovery plan is long on structural reforms and short on macroeconomic policy tools to kickstart the economy as his party had advised him in a statement last week.
There are two other problems with the plan.
• First, it is not a stimulus package. It does not have a monetary stimulus. The government should have suspended the inflation target and provided the Reserve Bank with an escape clause to focus on growth until the country has an acceptable growth rate.
It does not have a fiscal stimulus since it involves the "reprioritisation of spending within the current fiscal framework". However, the current framework includes austerity measures (tax increases and expenditure cuts) of R63bn during this year. This is equivalent to about 1.3% of GDP. You cannot have fiscal stimulus within the context of an austerity budget. That is an oxymoron. With more austerity, Ramaphosa will go to the next election with more than 10 million unemployed South Africans.
• Second, the recovery plan is based on a neoliberal view of the determinants of investment. According to this view, all we need is business confidence and policy certainty. For example, investment will resume if there is policy certainty in the mining sector.
Increased business confidence will offset the negative impact of austerity. But economists have debunked the myth of expansionary austerity. Nobel Prize winner Paul Krugman says the view that a "confidence fairy" can counter the negative impact of austerity is a zombie idea. The Keynesian, heterodox and MMT view is that investment is a function of income. Seen through this lens, the lack of investment in mining is because of a lack of foreign demand for our minerals and metals, especially platinum. There are also geological issues that have contributed to a five-decade decline in gold. A new mining charter will make no difference.
Therefore, investment responds with a lag to rising demand. Private investment follows economic growth. It does not kickstart the economy. As Stephanie Kelton, an economist who advised former US democratic presidential candidate Bernie Sanders, says: "Capitalism runs on sales. In survey after survey, we find that the number one reason businesses are slow to hire and invest in new plant and equipment is a lack of demand for the things they produce. Businesses hire and invest when they’re swamped with customers."
The only way to stimulate demand is through expansionary monetary and fiscal policies.
If we look at the economy only through the lens of the dominant single narrative there is no alternative to structural reforms and austerity.
No matter how much worse things get — as they will — you have to add a different dressing to the same meal.
However, if we consider other approaches to addressing the economic crisis, there are numerous alternatives that will allow SA to implement a real stimulus that will revive the economy. The government’s recovery plan ticks all the boxes of what the ratings agencies and investment bankers had demanded. But there is nothing in it for 9.6 million unemployed and the 30 million who live in poverty.
The longer real change is deferred, the deeper the suffering and disproportionate sacrifice of the most vulnerable in our society, most of whom are ANC voters.
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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