Most conspiracy theories amuse me. I don’t put much store in them. I prefer to look at evidence. But there is no way of making sense of the latest noises coming out of the Treasury except to conclude that there may be a deliberate plan to collapse the economy and hand over the running of the country to the IMF.
How else can one explain the Treasury’s talk of austerity and structural reforms in the midst of the country’s worst depression in a century, which has seen 3-million people lose their jobs between February and April, according to the national income dynamics study’s coronavirus rapid mobile survey? The Treasury will only tell us in October, during the medium-term budget policy statement, which reforms it is proposing. By then more people will have lost their jobs.
The supplementary budget will drip-feed a patient that is in ICU with only R36bn in 2020 and then pull away the life support over the next two years as austerity measures worth R250bn are implemented. With state-owned companies falling like dominoes, the crisis will spread to every metro and municipality, and other public entities such as universities. There will be no money to pay employees and suppliers. Public services will collapse.
Therefore, as University of Johannesburg economist Ilan Strauss says, talk of structural reforms in the midst of a depression is like telling an ICU patient who needs a life-saving intervention about the need to exercise and have a healthy diet. Structural reforms refer to measures to improve the supply (or production) side of the economy by removing institutional and regulatory impediments to the functioning of free markets.
They are supposed to increase potential — as opposed to actual — growth. However, the average SA factory already had spare capacity of about 19% before the lockdown, according to Stats SA. Calling for structural reforms in the wake of the country’s largest collapse of demand in a century will only result in more spare capacity and deflation. The economy needs more aggregate demand or spending. Structural reforms are irrelevant at this moment.
In a paper called The Elusive Promise of Structural Reform, Harvard economist Dani Rodrik says a serious look at the vast experience with privatisation, deregulation and liberalisation since the 1980s — in Latin America, post-socialist economies and Asia in particular — would have produced much less optimism about the benefits of these reforms.
“That experience suggests that structural reform yields growth only over the longer term, at best. More often than not the short-term effects are negative. One meta study of 46 different research papers on post-socialist economies found that the effect of structural reform was varied across the board. The modal estimate of the impact was statistically insignificant, meaning that it was impossible to conclude with any confidence whether the effects were positive or negative.”
The IMF has come to the same conclusion. It says the effects of structural reforms are surprisingly difficult to pin down empirically. “Most reforms are likely to only make a small near-term contribution to the ongoing economic recovery, as it takes time for the gains to materialise.” Some of the reforms could have a short-term cost.
The Treasury’s economic strategy, which was released in October 2019, said the benefits from its own proposed structural reforms were marginal and would take many years to materialise. They would only add an average of 0.8 of a percentage point to potential GDP growth (of 1.5%) and create 142,000 jobs during the first three years.
Over the past decade the Treasury has been talking about a changing list of structural reforms, which were supposed to grow the economy. But the gains have been elusive. Why should they succeed this time? If the consensus is that structural reforms could have a negative effect on the economy in the short term, why are they even on the table during a time of deep national crisis?
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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